Many people who feel overwhelmed by their debt situation consider bankruptcy. But what is it, and what are the consequences?
Bankruptcy is a legal process performed under the Bankruptcy and Insolvency Act. When you declare bankruptcy, you assign your assets to a licensed trustee in bankruptcy. The trustee uses these assets to pay as much as possible to your creditors. In most cases, you are discharged at the end of a certain period of time, and the remaining debts are cleared.
When you declare bankruptcy, most of your assets, up to certain exemption levels, go towards paying your debts. Secured creditors can exclude themselves from the process, so if any of your property is securing a loan, it may be at risk of being seized unless you can negotiate an agreement. If you earn over a certain amount, you may be required to pay some of your wages to your trustee to help pay your creditors during the bankruptcy process. Bankruptcy will stay on your credit history for six years.
Keep in mind that some debts are not cleared by bankruptcy, including spousal or child support, court fines or penalties and debts arising from certain types of fraud. In general, student loans cannot be discharged through bankruptcy until you have been out of school for seven years (five years with a special application to the court).
If you are considering bankruptcy, the first step is to make sure you have examined all of your other options. Can you re-work your budget? Dispose of assets? Consolidate your debts? Negotiate with your creditors? Participate in an organized repayment program?
Consider contacting a non-profit credit counselling service such as the Credit Counselling Society 1-888-527-8999 to discuss the possibilities.
Amy Taylor is the co-ordinator of the Kootenay Boundary Credit Clinic, a project of Castlegar & District Community Services. The Clinic provides free information and workshops about debt, credit and money management. Call 1-877-565-0013 or go to www.kbcredit.org for more information.