When
dealing with debt problems
,
bankruptcy
is often seen as an option of last resort. While it can provide a fresh financial start and be a viable option for some people, it is not a practical option for others. In fact, there are clear circumstances when
will either be ineffective, impossible or detrimental for someone’s long-term goals. If you think you may need to declare bankruptcy, here are some things to consider.
Bankruptcy won’t discharge all types of debt
Bankruptcy can give relief from unsecured debts, but secured debts such as a car loan or mortgage will survive a bankruptcy. This means that, depending on the asset exclusions that apply in the province in which you live, there is a chance you might be able to
or
if you go bankrupt.
Student loan debt that is less than seven years old, child support or alimony payments and arrears, court ordered fines and restitutions, as well as debts resulting from fraudulent activities are all typically excluded from the filing process. In addition, overpayments from the government, such as Employment Insurance, may also survive.
Before you file for bankruptcy, a
licensed insolvency trustee
(LIT) will review which of your debts can or cannot be included and explain any possible exceptions. This information will help you decide whether going bankrupt is the
for you.
Joint debts in a bankruptcy
Filing bankruptcy relieves you of many unsecured debts, but it does not remove obligations for joint borrowers and anyone who co-signed or guaranteed your debts who is not filing for bankruptcy. This means that if you go bankrupt, co-signers and
are still responsible for the full amount left owing. For this reason, many people decide against declaring bankruptcy because they worry that shifting their obligations to a close friend or family member could strain an important relationship.
High income, expensive assets may point to other options
When someone earns a high income or
owns significant assets
, bankruptcy is often
not a viable or sensible choice
because the process is intended for people who truly have no capacity to repay what they owe.
A bankrupt person is allowed to keep only a set amount of income based on their household’s size. Anything above that threshold is considered
and a portion of it must be paid to creditors each month. For higher income earners, these surplus payments can make bankruptcy substantially more expensive than other
and extend the time to obtain discharge to the maximum allowed under the Bankruptcy and Insolvency Act.
The same principle applies to assets. Each province and territory allows a bankrupt person to keep only certain exempt property up to specific values. Anything above those limits can be sold by the Trustee to repay creditors. While it is sometimes possible to buy back non-exempt assets, doing so can present additional financial challenges.
When a person with strong earnings or valuable property declares bankruptcy, they often end up repaying a large portion of what they owe, which is something they may have been able to do without filing. The difference is that bankruptcy layers on additional consequences, including the potential loss of assets, a
public record of the insolvency
and a more significant long-term impact to their
.
For individuals in this situation, a structured repayment plan through a non-profit credit counselling organization is typically far more practical. It allows someone to retain their assets, negotiate an affordable settlement or payment arrangement with creditors and avoid the financial constraints and lifestyle limitations that come with bankruptcy.
A
may be another option. It could allow someone to buy back their assets with more affordable payments, but it results in a public record, just like bankruptcy does.
Bankruptcy can affect professional licences and self-employment
When working in a regulated field or position of trust such as in banking, finance, legal professions, certain licensed trades or any role requiring bonding or security clearance, an undischarged bankruptcy can affect both current and future employment. Self-employed individuals may also need to disclose their insolvency to clients, which can complicate business relationships and undermine confidence.
Alternate debt relief options do not pose the same risks to someone’s professional or business standing, so it is important to seek guidance from a LIT or your profession’s licensing body to understand how bankruptcy may affect your ability to earn an income in your chosen career.
Bankruptcy comes at a cost
Bankruptcy can be cost prohibitive not only for those with a high income or substantial assets, but also for people who earn very little. If someone’s income falls below the surplus income guidelines or their income is truly modest, bankruptcy may offer no meaningful benefit and may not be necessary at all.
Beyond the practical considerations, there are moral and emotional costs to weigh too. A
for the debtor means creditors must write off all or part of what is owed, and many people struggle with the feeling that they have walked away from their obligations.
In Canada, there are fortunately many ways to deal with debt, and the best option depends on your individual circumstances. If you are
, contact a non-profit credit counsellor in your area to help review all of your options, without judgment or bias. With reliable information and a realistic plan, you can move forward with confidence and regain your peace of mind.
Mary Castillo is a Saskatoon-based credit counsellor at Credit Counselling Society, a non-profit organization that has helped Canadians manage debt since 1996.
