Knowledge

7 Bankruptcy Facts and Bankruptcy Myths Explained

Can the good times last forever? Every economy experiences the booms and the busts – and, right now, the country is enjoying a modest boom, which, according to the experts, will eventually turn into a bust.

If you have hit hard economic times, you might be thinking about bankruptcy. Well, it’s time to know the bankruptcy facts before you even consider this route. Here are 7 bankruptcy facts and myths explained, debunked, and deciphered:

FACT: In total, Canadians are now over 2 trillion of debt.

Since the financial crisis, when central banks worldwide slashed interest rates to historic lows, consumers started to borrow more, take on monumental levels of debt, and spent millions to service these debts. For the most part, Canadians have been able to handle the record levels of debt – $2 trillion so far – with bankruptcy rates hovering around seven percent. This astronomical figure is an astounding bankruptcy fact!

A lot of this debt comes from the personal debt accumulating among Canadians. According to Harris & Partners Inc, personal bankruptcy is a legal process that was passed under the Bankruptcy and Insolvency Act in Canada. The legislation eliminates all of your debts, but the insolvency must be filed with a Licensed Insolvency Trustee because this professional can oversee if the bankruptcy case is meeting all of the rules and laws by both the debtor and creditor.

FACT: Consumer insolvency filings will begin to rise in 2019

At the end of 2018, the Canadian Association of Insolvency and Restructuring Professionals (CAIRP) issued a dire report, sounding the alarm about how consumer insolvency filings will begin to rise in 2019, thanks to the gradual normalization of interest rates. The group’s internal survey found that 70 percent of licensed bankruptcy experts project to witness insolvency rates increase over the next five years.

“For more than a year, the issue of high consumer debt and rising interest rates have been a growing concern but they haven’t been reflected yet in the number of consumer insolvency filings,” said Chantal Gingras, chair of CAIRP, in a statement. “That’s due to the insolvency time lag that occurs between the point trouble begins and the point at which overextended individuals are forced to begin the debt resolution process.”

This bankruptcy trend may affect both large corporations and small businesses in Canada:

  • Corporate Bankruptcy: A corporate bankruptcy filing is a complicated affair. While corporations are people, they act quite differently from smaller enterprises. So, when a corporation is insolvent and can no longer pay off its debts on the terms and conditions agreed to by both parties, an insolvency declaration is required.
  • Small Business Bankruptcy: No small business ever anticipates to file for insolvency, but the market happens and you did not expect certain conditions to transpire. That said, business bankruptcies do happen, but if the company is established a partnership or sole proprietorship, the bankruptcy becomes a personal bankruptcy. Why? The people are the business.

MYTH: You will lose your property if you’re in debt.

Back in the day, if you failed to repay your debts or you had to file for bankruptcy, the repo men would come to your home and reclaim your possessions, whether it is an ottoman or a baby’s crib. It’s not like that anymore – in other words, you don’t lose your property or your possessions.

Rules and regulations do vary from province to province. For instance, some jurisdictions maintain limits on value of possessions and other areas of the country will allow you to keep equipment necessary for your career as long as they do not top a specified amount.

MYTH: You could be headed for prison if you’re in debt!

What the Dickens? A debtor’s prison is something you would find in a Charles Dickens novel, but you won’t find such a thing in this day and age. Canada does not have a debtor’s prison, so if you can incur an insurmountable level of debt, you will not go to jail.

FACT: You can rebuild your future after recovering from a bankruptcy.

It is widely believed that as soon as you file your bankruptcy that is your life is over. Your credit score will always be subprime, you will never be approved for credit again, and you cannot live a normal life where you can rent apartments or buy property.

That’s not true at all. Your future is definitely not ruined; in fact, it may be better because this is a second chance. Many people have managed to rebuild their futures after recovering from a bankruptcy.

MYTH: All debts are included when you file a bankruptcy.

For the most part, most debts are included in your bankruptcy filing. However, there are certain debts that you will never be able to discharge through the process of insolvency, such as student loans, government debt, alimony and child support, and fines imposed by the courts.

MYTH: You should max out your credit cards before a bankruptcy.

A lot of consumers make the mistake and moral transgression of making several large purchases and maxing out their credit cards just prior to filing for bankruptcy. While this is technically legal, it makes working with a bankruptcy trustee, declaring bankruptcy, and having your application approved harder. Because, remember, these two parties – trustee and creditor – are essential to helping you get discharged from your obligations.

With the rising cost of living and stagnant wages, life is becoming harder. No one ever plans to file for bankruptcy, but life happens. The car breaks down, mortgage payments exceed your income, and your child needs braces. All of these expenses add up over time, impacting your personal finances. When everything becomes too much to bear, and it’s impossible to keep your head above water, insolvency seems like the only way out.

Ronald Ryan

I'm a self-proclaimed science geek and all-around nerd. Useless fun trivia seems to be my forte. If you ever need to hear a good dad joke, I'm your guy!

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