Should You Declare Personal Bankruptcy?
Declaring personal bankruptcy is a decision that should not be entered into lightly. But if your personal debt far exceeds your ability to repay, then it's an option you must consider. Before you decide to declare bankruptcy, you need to know all the facts. Bankruptcy is a process that will legally protect you from actions taken against you by your unsecured creditors, such as seizure of personal property, or garnishment of your wages or other income. However, it will not prevent a secured creditor, such as a bank or mortgage lender, from foreclosing on a mortgaged home or repossessing assets that you have pledged to them as security for loans. In order to retain those pledged assets, you will need to make arrangements for paying the loans made to you by those secured creditors.
How can I decide if filing for bankruptcy is the right decision for me?
There is still a social stigma attached to bankruptcy. Many people see it as a public acknowledgement that they can't handle their finances. But the most common causes of personal bankruptcy are factors beyond the individual's control - losing one's job, unexpected illness or accident resulting in major medical expenses, separation or divorce. If you can't see any way out of your financial crisis, contact a qualified debt counselor to discuss your situation. He/She will help you determine whether there are other options available to you, or whether declaring bankruptcy is your best solution. Depending on where you live, you may be required to attend several sessions with a bankruptcy counselor, and you may be required to meet with a bankruptcy trustee as well. The trustee can give you much more information and advise you what will be required of you, and what you can expect once you've filed for bankruptcy. The trustee will also advise you of what the fees are for administering a bankruptcy.
Which debts are cleared through bankruptcy?
Bankruptcy only wipes out your unsecured debts, such as credit card balances, personal loans, income tax, overdrafts, and the like - but it does not wipe out other tax debts (such as payroll taxes), student loans, or any alimony or child support payments you are required to make. And it will not affect Court-assessed judgments and penalties or debts arising from fraud or other criminal penalties. Secured loans - car loans, mortgages, etc - are not affected by a personal bankruptcy. You must still make arrangement with the lenders to pay these. If you don't, the lender still has the right to foreclose or repossess the property.
Will I lose everything I own if I file personal bankruptcy?
Each jurisdiction has different limits on the dollar value of personal assets which are protected if you go bankrupt, but most also provide for protection of those things that you need in order to live: your principal residence (up to a certain maximum level of equity), furniture (up to a specific value), clothing, health aids, tools required for work, and a vehicle (again, up to a maximum level of equity). If you own more than one vehicle, only one will be exempt.
If you are declaring personal bankruptcy in Canada, there are different levels of exemption under federal and provincial laws. Remember that the exemptions for your home and your vehicle apply to the equity you have in that asset, not the value of the asset. So if your home is worth $400,000 and the amount owing on your mortgage is $250,000, you have $150,000 in equity in the home. In the US, under a Chapter 7 filing you will lose all your assets except those considered necessary for basic living needs. In a Chapter 13 filing, you keep all your assets because you will still pay off your debts - it will just take you longer. In Canada, this type of arrangement is known as a consumer proposal. In both countries, the non-exempt assets are turned over to the bankruptcy trustee, who liquidates them and distributes the proceeds among your creditors. Check with the bankruptcy trustee to find out what the exemptions are in your state, province or territory. These can vary significantly.
What about my bank accounts, pensions, and retirement savings?
In Canada, your bank accounts are NOT exempt. In the US, they may or may not be, depending on the bankruptcy exemptions claimed. Pensions, disability and annuities are exempt as well, to a certain level. Both countries have regulations regarding exemption of retirement savings, which a credit counselor can explain in detail.
What will I be required to do?
- You will need to disclose ALL financial information, including all of your income tax records.
- You will also be required to cancel and destroy all credit cards.
- You must attend all scheduled meetings with credit counsellors, with the bankruptcy trustee, and with your creditors.
- You will be required to file income and expense reports.
- You must make regularly scheduled payments to your creditors, unless you’re filing a Chapter 7 bankruptcy.
- You must keep the bankruptcy trustee advised of any changes in your situation.
- In the United States, you must pass the means test. And within 6 months before filing for Chapter 7 bankruptcy, you must get credit counselling from a government-approved organization.
When can I be discharged from bankruptcy?
It depends on where you live. For instance, in Canada, if you are a first-time bankrupt you will be automatically discharged in nine months PROVIDED that you have met all of your obligations and there is no objection to your discharge by any of your creditors. Otherwise, your discharge will be determined either by mediation or by an application to Bankruptcy Court. Under a Chapter 7 filing in the US, your discharge means that your debts are wiped out. This will typically happen within three months after the trustee makes his/her recommendation to the Court for a discharge, unless any of your creditors object to your discharge. The fact that you filed for bankruptcy will remain on your credit record for 10 years.
What effect will bankruptcy have on my personal credit rating?
Your credit record will contain information regarding the bankruptcy. However, your credit history is only part of the information that banks take into account when assessing you as a credit risk. If, after your bankruptcy, you display an ability to manage and control your finances, and if you continue to meet your financial obligations, this will reflect positively on your record and help restore your credit rating. Keep in mind that no creditor can be forced to give you credit, so it will be totally up to the creditor’s discretion whether to extend you any credit after you have filed for bankruptcy. It’s advisable to just stick to cash and avoid using credit whenever possible.
Are there limitations on who can declare bankruptcy?
Yes. An individual debtor in the US cannot file bankruptcy under Chapter 7 if he or she has maxed out their credit cards with the intention of shortly afterwards becoming a bankrupt, nor can anyone else who is attempting to defraud their creditors through personal bankruptcy. You also cannot file if you have been granted a Chapter 7 discharge within the past 6 years, or if you have completed a Chapter 13 plan.