Ask the Expert: What you need to know about filing for bankruptcy

More Canadians are unable to keep up with their bills and are turning to bankruptcy. (Getty Images) (gpointstudio via Getty Images)

With nearly everything costing more, more Canadians are unable to keep up with their bills and are turning to bankruptcy.

“Nowadays, second-time (bankruptcy) is very common,” Mary-Ann Marriott, a licensed insolvency trustee with Allan Marshall and Associates, said in an interview with Yahoo Finance Canada. “Third’s becoming common and we've seen a few four and five times going through bankruptcy.”

A recent report from the Canadian Association of Insolvency and Restructuring Professionals found 30,471 Canadians filed for consumer insolvencies in the third quarter, up 17.8 per cent compared to last year. Recent data from Equifax Canada show the average Canadian is dealing with $21,131 of non-mortgage debt.

When should you file for insolvency?

Michael Braga, senior vice-president at BDO Canada, says people who are dealing with debt for more than a year and have not seen their balances drop should start thinking about taking more drastic action. Additionally, those people missing payments or not opening their bills when they arrive should also consider insolvency.

“These are all early warning signs,” he said. “If you're using credit to finance your everyday living expenses, because there just isn't enough paycheque at the end of the month to go through the necessities, it's time to come in and start talking to somebody.”

Marriott says there isn’t a magic number insolvency trustees look for when advising someone through the bankruptcy process, but being unable to pay off debts is the top warning sign.

“Where I think it makes sense for someone to reach out is when they see the writing on the wall,” she said. “They're making minimum payments only, things are at their limit, they're struggling, there's not really enough money. Often times, that’s not when they reach out.”

What does the process look like?

The bankruptcy process is fairly straightforward, but it can take some time to complete.

Marriott says once someone meets with a licensed insolvency trustee, they assess their finances to see if the client is a candidate for insolvency. If they are, the client must sign some paperwork that blocks creditors from taking further action and then the process of declaring bankruptcy begins.

“Generally speaking, it's a minimum of nine months for them to get through the bankruptcy, but it can be upwards of three to four years or more, depending on certain circumstances for the individual,” she said.

Reach out early, as other options exist

Braga says it’s imperative that people struggling to pay their bills reach out to an expert as soon as possible, as initial consultations are often free and can provide the client with a strategy to tackle the debt.

“Most Canadians right now who are struggling financially, there's a sense of shame that prevents them from reaching out for help,” he said. “By the time somebody understands that they have a problem to the point where they actually seek help, what we're seeing is that timeline can be anywhere from six to 18 months and … the more you wait, the more your debt accumulates, and then the options become fewer and fewer.”

If someone reaches out to a licensed insolvency trustee early enough, options can include financing the debt or budgeting for the debt. A consumer proposal could also be an option, which is essentially a settlement with the creditors to pay a portion of the debt.

“We work out that settlement arrangement, we put it in writing, everybody agrees to it, and it needs to be completed,” Marriott said.

Speaking to an expert early can also help ensure the person isn’t taking drastic action on their own, such as taking out RRSPs or other assets to pay the debts, while payday loans can often worsen the situation.

“I caution people to actually get advice before doing that, because if it's not going to solve your debt situation, it may not be in your best interest to actually go ahead and start collapsing some of those assets,” Braga said.

Be on the lookout for debt-relief scams

Waiting to speak to someone can also increase the stress of the situation and make people desperate for a resolution, which can cause them to become vulnerable to debt-relief scams.

The Office of the Superintendent of Bankruptcy and the Canadian Association of Insolvency and Restructuring Professionals recently issued a warning about these scams, which falsely promise insolvency options, but are not licensed to handle the process.

The organizations warned Canadians to keep an eye out for promises that seem too good to be true, plans that require upfront payment, unnecessary fees, advice to cut communication with creditors and online-only services.

Insolvency is not financially ruinous

While many people may think insolvency can take years to recover from and lead to additional hurdles later in life, both experts suggest it is not as financially ruinous as some might think.

“By the time someone comes to us, they've already damaged their credit because they're missing payments, things have gone into collections, and their credit score’s dropping, if not bottomed out,” Marriott said.

“If you do nothing, you're never going to change that and your credit score is going to continue to tank or stay low, but by doing a bankruptcy or proposal, you're actually stopping that so that you can start to repair the damage that's been done.”

Ben Cousins is a freelance journalist based in Toronto. Follow him on Twitter @cousins_ben.

Download the Yahoo Finance app, available for Apple and Android.