519-646-2222Bankruptcy; Costs and Consequences
There are two elements to filing for bankruptcy, costs and consequences, in this blog we will discuss both.
Costs.
When filing for bankruptcy there are direct costs, including registration fees, trustee fees, court fees, counselling fees, and in some cases software fees.
The total basic cost of a first-time bankruptcy is around $2,000 assuming the individual does not have “surplus income” and all assets are exempt from seizure.
Surplus Income.
Surplus income is income earned above a threshold value that is set by the Office of the Superintendent of Bankruptcy. When income above that value is earned and after allowing for non-discretionary expense (such as child or spousal support, court fines, medical or work-related expenses) the bankrupt is required to remit half of the amount received above the threshold.
Note: Some income, such as child support or the child tax benefit, is not counted for the purpose of calculating surplus income.
Extension of Time.
When a first-time bankrupt has surplus income, payments will continue for twelve additional months, beyond the initial nine-month administration. A first-time bankrupt who has performed all the required duties is entitled to a discharge (release) from bankruptcy on the expiration of nine months.
A second-time bankrupt will be bankrupt for a period of twenty-four months before becoming eligible for an automatic discharge (assuming timely completion of duties). A third time (or more) bankrupt must attend court in order to obtain a discharge from bankruptcy. The most we have seen in court (not through our office) has been a five-time bankrupt.
If a second time (or more) bankrupt has surplus income they are also subject to a twelve-month extension of time during which their income is monitored, surpluses must be calculated and paid.
Asset Disposition.
It is called an “assignment” into bankruptcy because a person filing for bankruptcy assigns all assets, except exempt assets, to the trustee for sale to raise money to make some restitution to creditors.
Exempt Assets: Some assets are exempted by provincial statutes, usually called an “Execution Act” – protected assets have capped values but generally concern furniture and household goods, clothing, a housing exemption, pensions, RRSPs, Insurance policies, a vehicle and more.
Assets that have values exceeding the allowable exemption are usually re-purchased by the bankrupt, assuming the bankrupt wants to keep the asset. If the bankrupt does not wish to keep the asset, they are still entitled to claim their exemption from the proceeds of sale by the trustee.
Occasionally, some assets have no realizable value, in which case they may be either released to a secured creditor or returned to the bankrupt.
Consequences.
Not all consequences are bad, in fact filing a bankruptcy, while not a joyous occasion brings with it a great deal of relief. The intent of filing a bankruptcy is to allow an honest debtor to escape the burden of excessive debt and return to being a productive member of society.
Credit Report.
Trans Union had reported than about 70% of bankrupts had strong credit reports at the time they filed for bankruptcy. Unfortunately, this does not reflect their true financial position because while payments are up to date they are being made by using one form of credit to pay another.
Consumers often get hung up on the importance of maintaining a high credit score, and others worry about being able to live without access to credit (debt). A positive credit score does not necessarily mean that new debt (credit) will be available there are other considerations such as employment stability and income.
You should check your credit score with the two main reporting agencies, Trans Union and Equifax, at least once a year. A bankruptcy is a public record and will remain on your credit report for at least six years following your discharge.
Access to Credit.
Many bankrupts find that credit (debt) is more available than they anticipate and are able to start rebuilding their access to credit as well as their credit scores even prior to their discharge. Some lenders specifically target this market segment with credit offers, sometime involving paying a small amount as security and usually having a higher-than-average interest rate.
The Bottom Line.
The bottom line is that while filing for bankruptcy should not be a life plan it is a useful legal mechanism to allow people to break free from the stressful burden of excessive debt and allows an opportunity to make a fresh start at an affordable rate.
The caveat is to try to avoid rebuilding debt dependence, live within your means, do not use overdraft protection, avoid using credit cards, stay away from insidious credit lines, HELOCs and when buying a house don’t buy the biggest you can get, buy what you need not what you want!