BankruptcyThe problem with debt is that it often gets much worse before it gets better. If you’re in really deep, you’ll struggle to make ends meet, creditors may begin harassing you and you’ll begin to wonder if you’ll ever be able to turn things around. But no matter how bad things get, people tend to cringe at the mention of the B-word. And by that I mean bankruptcy. Fresh Start is around the corner.

The truth is that bankruptcy isn’t a financial bogeyman you need to run away from and avoid at all costs. In fact, sometimes it’s a reasonable and wise choice that’ll help you turn your financial life around.

Wait … but isn’t bankruptcy really bad for my financial future?

Well, that depends. Bankruptcy certainly has some pretty serious financial consequences, the most serious of which is the impact it’ll have on your credit score. That can mean trouble buying a car, getting a mortgage, or even renting an apartment or finding a job for up to six years after filing. However, if you’re about to lose your home or your car, your utilities are being disconnected and you’re being threatened by creditors, well, you don’t have that much to lose. And let’s face it, at this point in the game, your credit score probably isn’t worth bragging about anyway.

Of course perhaps the biggest reason many people are hesitant to file for bankruptcy is a sense of shame that they’ve lost control of their finances. Bankruptcy can feel like giving up. In reality, however, bankruptcy is a financial choice and while it has its drawbacks, those negative effects may not hold a candle to what’ll happen if you don’t deal with your debt problem. It’s also important to know that bankruptcy isn’t an easy out.

Bankruptcy: Give a Little, Get a Little

So what happens when you file for bankruptcy? It isn’t just a matter of sitting back and watching your debt disappear. Just as with any other debt reduction strategy, bankruptcy involves making some financial sacrifices; in order to enjoy the benefits of bankruptcy, debtors have to give a few things up.

What You Give: Your Assets

When you file for bankruptcy in Canada, you surrender your assets in exchange for debt forgiveness. And yes, chances are if you have a lot of assets, most of them will have to be surrendered to the courts, which will use them to repay your creditors. However, each province provides exemptions, allowing filers to keep modest amounts of furniture, clothing, a car (as long as there isn’t too much equity in it) and possibly even some home equity. Your RRSPs and RRIFs are usually safe too.

What You Get: Debt Forgiveness

In general, filing for bankruptcy will allow you to discharge your unsecured debts, such as credit card debt, lines of credit and other loans. It will also protect you from collection action, lawsuits from your creditors and wage garnishment. That can mean not just financial relief, but a reprieve from creditor harassment.

What You Give: Your Money

If you’ve been thinking that bankruptcy’s a free pass, think again: It literally costs money to file for bankruptcy in Canada. Bankruptcy trustees don’t work for free, and are usually paid about $1500 from the money that’s freed up from the liquidation of your assets.

What You Get: The Help of a Bankruptcy Trustee and Credit Counselor

When you file for bankruptcy, a bankruptcy trustee is appointed to you. Trustees are highly trained and educated debt consultants, and they can help you navigate bankruptcy, your creditors and your future financial life. Because they can act as debt counselors, they are able to help provide the advice and skills you’ll need to get out of debt – and to make the most of your fresh start. They can even help you negotiate debt settlements that’ll help you avoid bankruptcy altogether.

What You Give: Your Financial Freedom

During the nine-to-21-month period it takes to complete a bankruptcy in Canada, you’ll have to turn your financial life over to your bankruptcy trustee. That means surrendering your credit cards and many of your assets, attending credit counseling sessions and even reporting your household income and expenses to your trustees each and every month.

What You Get: A Clean Slate

If bankruptcy turns out to be the best solution for you, know that bankruptcy laws were designed to help people get out from under crushing debt and start again. It won’t be easy, but if that’s what it takes to get you on your feet, it can mean a fresh start – and a better financial life.

Bankruptcy Fresh Start

In order to ensure that bankruptcy really provides a fresh start, you have to make a commitment to doing it right, and that means taking steps to ensure that you won’t go down the same path again. After all, bankruptcy is a difficult and painful process. Even if it’s better than the other alternatives available to you, it’s not something you want to do more than once. When you file for bankruptcy, get to work immediately to create a budget and avoid more debt. Once your bankruptcy is complete, it’s time to start saving money and working to rebuild your damaged credit score. Your bankruptcy trustee can help you learn more about personal finance and provide resources to help you develop the skills you need to lead a new, more stable financial life. Bankruptcy can erase your debts and wipe the slate clean. What happens after that is up to you.

About - David was initially drawn to accountancy because he was ‘good with numbers’. He has been an insolvency professional since 1993. Soon after he began to work with debt issues he discovered that the most satisfying part of his role was the ability to make a positive difference in other people’s lives. It is the person, not the numbers that continues to guide his approach toward helping others deal with debt issues.