5 Myths About Bankruptcy
Filing for personal bankruptcy can be a very stressful event due to the stigma and misinformation that surrounds this topic. Bankruptcy is often thought of as something that happens to irresponsible people or those who cannot properly manage their financial affairs. In many instances, this couldn’t be further from the truth. Most bankruptcies are triggered by life events such as marital breakdown, loss of job, illness or decreased income.
Let’s take a moment to debunk some of the most common myths surrounding bankruptcy:
1. If I go bankrupt I’ll lose everything I own.
When individuals file for personal bankruptcy their assets are categorized three ways:
1) Non-exempt assets become part of the bankruptcy estate for distribution to your creditors. Typical examples include RESPs, income tax refunds, recreational vehicles, and equity in financed assets like your home. Generally, you have the option to give-up these assets or make arrangements with the trustee to make payments for them over time.
2) Exempt assets do not become part of the bankruptcy estate and generally include household items and personal effects, a vehicle worth less than $6,500, tools of the trade, locked in pension funds, RRIF’s, or RRSP’s with the exception of net contributions made in the last 12 months. Life insurance policies with a cash surrender value are also typically exempt.
3) Secured assets are those that are encumbered by secured lenders. Examples generally include a mortgaged house or a leased or financed vehicle. Usually, as long as you are able to keep up the payments, you are able to keep these assets.
2. Everyone will know that I went bankrupt.
Most consumer bankruptcy notices are sent directly to the creditors with no notice in the paper. All bankruptcies are public record but there is a fee to access these records. The fact that you filed for bankruptcy will be recorded on your credit bureau, so, if you have authorized someone to access your credit bureau they will know about your bankruptcy. Generally, unless you tell someone you’ve filed for bankruptcy there is little chance they will know.
3. Bankruptcy will ruin my credit rating.
Consumers who file for bankruptcy protection are typically maxed out on their credit limits and struggling to keep up with payments. If your payments are up to date but your debt load continues to go up then it’s only a matter of time before you run into financial difficulties. In many instances, the consumer is past due on payments and has begun to receive late notices and collection calls. In these situations, their credit has already been damaged and will only get worse if no corrective action is taken.
4. If I file for bankruptcy I will never be able to get credit again.
Obtaining credit after a bankruptcy is possible however you have to be aware that your bankruptcy will be visible on your credit report for 7 years after your date of discharge. Rebuilding credit will, therefore, require planning and patience. It’s common to start by obtaining a secured credit card by putting down a deposit equal to the credit limit. By using the card and paying the balance in full each month it will improve your payment history and start to improve your credit rating.
5. Bankruptcy is the only solution.
There are other alternatives to bankruptcy. The most common being a consumer proposal. With the help of a licensed trustee, you make an offer to your creditors to pay them something more than they would receive in bankruptcy. The biggest advantages of a consumer proposal are that your non-exempt assets remain your own, regular payments can be made over a longer period, and the effect on your credit score is less.
Powell Associates Ltd. is a Licensed Insolvency Trustee (LIT) focused on providing debt settlement, proposal and bankruptcy solutions for individuals and businesses. We offer free consultations to review your personal financial situation and practical debt resolution options. Contact us to discuss your situation over the phone or book an appointment to meet us face-to-face in Saint John, Moncton, Fredericton, Charlottetown or Dartmouth - it's your choice.