Personal bankruptcy: The rules for your last resort

More than 37,000 Canadians filed for personal bankruptcy in the first half of 2013.

That’s down slightly from the last half of 2012 but it does reflect an abnormally high number of bankruptcies since the financial meltdown of 2008. Record consumer debt combined with a tight job market has more and more Canadians who were treading water, calling it quits.

Getting into debt is easy: you spend more than you make. Getting hopelessly into debt involves owing more than you can ever make. In the end, you are just servicing interest charges.

Reasons for filing personal bankruptcy vary but if you are considering throwing in the towel for a new start there are a few things you should know.

Consider all options first

Credit counselling is mandatory for personal bankruptcy so the sooner you get professional help, the better.

A licensed bankruptcy trustee can take you through various steps before and during bankruptcy. The first consultation is usually free but a fee is often included in the settlement. Trustee fees are regulated by the federal government.

In many cases consumer debt can carry interest charges as high as 30 per cent annually on the amount owing. A credit counsellor can help lower regular payments drastically by arranging a low interest consolidation loan with a bank.

All that high-interest debt is paid with that lower-rate consolidation loan. From there a debt-management plan is established based how much you can pay on your debt after day-to-day living expenses.

It’s important to keep in mind it is in the best interest of creditors that you avoid bankruptcy because they would rather get some money, than no money. A credit counsellor can help negotiate a consumer proposal where partial repayments are made.

The credit counsellor can also end wage garnishments and annoying phone calls from creditors and in some cases stop interest charges from accumulating.

The last resort

If the trustee determines bankruptcy is the only alternative, any unsecured debt is wiped out.

During the filing period a complex formula is imposed based on your earnings and necessary expenses.

You automatically lose what are considered “non-exempt assets” such as registered retirement savings plan (RRSP) contributions in the past 12 months, tax refunds and equity in a car or home.

In some cases, bankruptcy can be more expensive than a consumer proposal.

Bankruptcy does not necessarily mean you will lose your home. In some cases filers are given the option of buying back their homes at some point in the future.

Life after bankruptcy

Filing for bankruptcy can put a huge blot on your credit history – but then again – you probably had a bad credit rating before the filing. In the end you will probably be a better credit risk because you don’t have all that debt weighing you down.

That blot will be on your credit rating for a minimum of six years. Repeat filers could carry a bad rating as long as 14 years.

On the bright side, it’s a fresh start. You will be required to keep detailed records of income and expenses while you build a new life.

If you have steady income you can begin repairing your credit rating immediately by applying for a secured credit card, which is backed by a savings account. The money in the account is used as collateral on the credit available with the card. The limit is based on your previous credit history and the amount of money in the account. In other words, you may not have access to the full amount.

Of course, it would be easier to get a debit card and have access to the entire amount. But a secured credit card shows creditors you can control your spending and perhaps one day work up to a conventional credit card.

On the other hand, some people who declare bankruptcy opt to never have a credit card again.