Effects of Bankruptcy

The effects of Bankruptcy can be lasting but aren’t permanent. Before you decide to file, it’s important to understand the impact of bankruptcy on your overall financial health.

How Will Bankruptcy Affect My Credit Report?

There are two factors to consider:

1. How long  you will be in bankruptcy before being discharged:

Is this a first or repeat bankruptcy filing? Depending on your situation, you can be in bankruptcy from as little as 9 months to as long as 36 months. All bankruptcy filings will generate an R9 on your credit report, the worst credit score notation you can get. The longer you are in bankruptcy, the longer it will be before you can begin to reestablish your credit.

2. The reporting credit bureau:

In Canada there are two principal reporting bureaus – Equifax and Trans Union. The largest credit bureau in Canada, Equifax, maintains a bankruptcy notation on your credit report for a period of time from the date of your discharge or last payment.

First Bankruptcies:

  • Equifax: maintains a bankruptcy notation on your credit report for six years from the date of your discharge
  • Trans Union: maintains a bankruptcy notation on your credit report for six to seven years from the date of your discharge, depending on provincial rules

Second Bankruptcies (Both Equifax and Trans Union)

  • Both agencies maintain a bankruptcy notation on your credit report for fourteen years from the date of your discharge.

It’s important to know you cannot take out any new credit while you’re in bankruptcy. However, once discharged, you can begin to rebuild your credit immediately. The best place to start is with a secured credit card.

Will I Lose My Home in a Bankruptcy Filing?

The one drawback to bankruptcy that concerns Canadian citizens the most is asset loss.  No one relishes the thought of surrendering possessions acquired through the years. Of all our possessions, few are treasured more than the homes in which we live. What is the straight truth about losing your home in a Canada bankruptcy?

You can spend hours searching the Internet for help and the answer you will come away with is it depends. It depends on where you live, how much equity you have in the home and your overall financial situation.

For example, Canada’s two largest provinces, Ontario and Quebec, have no exemption allowances for equity in a home. Saskatchewan has an allowance of $34,000 in equity and Alberta’s exemption allowance is $40,000. Does this mean if you live in Ontario and have some equity in your residence that you’ll automatically lose your home? No, it doesn’t. The only way to determine if you will actually lose your home in a bankruptcy filing is to meet with a bankruptcy trustee in your province.

A visit to a trustee can determine the risk of losing your home in bankruptcy. If you are committed to keeping your home at all costs, a trustee might recommend that a consumer proposal is in your best interest. Again, a trustee can help you determine the cost of a proposal compared to the cost of bankruptcy.

Will Bankruptcy Affect My Spouse?

If you are married and considering filing for personal bankruptcy as an individual, both you and your spouse need to know what impact the bankruptcy filing of one partner will have on the other.

Accounts Held by One Spouse

If a husband is filing and has credit card debt from accounts in his name only, the spouse is not responsible for those debts. In addition, the spouse’s credit rating will not be negatively impacted by the filing.

Accounts Held Jointly

If a credit account was established with both partners, it’s considered a joint account and the spouse is legally responsible for the debt.

The Effect of Bankruptcy on Your Household

Individually contracted debt by one spouse does not obligate the other.  However, a bankruptcy filing will have an affect on the household.

In personal bankruptcy, the filer is turning over the management of his or her financial affairs to a licensed bankruptcy trustee.  As part of that process, the filer must report his or her total income to the trustee, who will use that information along with a listing of assets and expenses to determine what monies are available to pay the creditors.

By law, the trustee must include the income of the non-filing spouse in the calculations of total income, assets, and expenses.  While it is possible for the non-filing spouse to refuse to divulge his or her income, there are negative implications here as well.

Surplus Income

The Superintendent of Bankruptcy in Canada has established guidelines for how much of your income you may have to pay to your creditors, based on family size and location.  After the trustee has deducted the guideline amount from your monthly income, any amount over $200 is considered surplus income and a percentage of that will go to your creditors.  If the non-filing spouse does not divulge his or her income, the trustee can only use 50% of the Superintendent’s standard guidelines in calculating any monthly payments to the creditors.

Will people know we filed bankruptcy?

Whenever a person or company files for bankruptcy, it becomes public record. Your creditors will know you’ve filed, and it will stay on your credit report for 7-10 years. Other than that, it is not likely anyone will know you file personal bankruptcy unless you choose to tell them. In most instances, to find out if someone has filed bankruptcy, you have to pay a fee and send a special request to the court.

Will I be able to purchase gifts for my family?

You must report your income to your trustee monthly. If you have surplus income (money leftover that exceeds specific limits set by the government), you will probably have to make monthly payments to your trustee. If you are making payments regularly and reporting income honestly, any money left over is yours to spend or save at your discretion. That could be gifts for your family, home remodels, trips, and so forth.

Will I ever recover from bankruptcy?

For many people, bankruptcy is one of the best things they can do for their finances. Although the effects can be emotionally and financially unpleasant, it provides a fresh financial start. You will be free from debt and constant harassment from creditors. You can start to rebuild your credit right away. You will also take mandatory credit counseling. This will help you learn how to better manage your money and credit so you can avoid debt problems in the future.

For most people, the freedom that bankruptcy provides from debt and creditors is worth it. Prior to filing, ensure you understand the effects of bankruptcy on you and your family. Learn more information about filing bankruptcy, including the costs and steps to file.