Bankruptcy: Frequently Asked Questions (FAQs)

Bankruptcy is certainly a viable option when attempting to deal with overwhelming debt. While many believe bankruptcy is the only option available to them there are several options available to them outside of just a Bankruptcy.

In fact, based on our experience when people come in thinking bankruptcy is their only/best option, and after we explain all of their options they often leave understanding there are much better options available to them.

You may be asking yourself can I keep my car if I file bankruptcy? In most situations you are able to retain your vehicle. Nova Scotia has a vehicle exemption of $6,500 for a vehicle. This means if you file a bankruptcy and your vehicle is worth less than $6,500 then you are able to retain it.

Vehicles that have a secured loan against them (a car loan, for example) are also able to be retained and kept as long as the payments on that underlying loan are maintained.

It is a myth that you automatically lose your house if you file a bankruptcy. There are three scenarios that often occur:

1. You have no equity – If you have no equity in your house then you can retain your property as long as you continue to make the payments on the mortgage.
2. You have a little bit of equity, but not enough for other options – In this scenario your cost of filing bankruptcy may increase to compensate for the equity in your property. Only if you cannot afford this additional cost would you need to consider surrendering your property.
3. You have a paid off house – In this option you would typically have other options available for you than bankruptcy.

Equity is usually calculated differently than if you were to sell a property, but not always. This depends greatly on the area, and the LIT through which you file. 

In any case, if you are asking yourself ‘can I keep my house if I file bankruptcy’ and considering filing bankruptcy it is imperative that you consult an unbiased professional.

To put it simply: bankruptcy is the most severe and damaging form of debt relief. An individual’s credit is impacted between 6-14 years from the date of discharge. This is much longer than other options.

Other downsides are:

1. Obtaining credit will be more difficult until you are fully discharged and have fully rebuilt your credit.
2. During your term of bankruptcy the more income you earn, the more you will be potentially required to pay.
3. If you receive any gifts, inheritances, windfalls of money, etc while bankrupt you will most likely lose them.

The repeat rate is also quite high. It is estimated to be approximately 25% within a 10 year window.

There are provincial and federal exemptions that apply to assets when one files a bankruptcy. We have compiled a detailed list in our bankruptcy article in the exempt assets in bankruptcy section.

The main types of debts that cannot be included in a bankruptcy are:

1. Secured debts where you wish to retain an asset,
2. Debts incurred via fraud or other crimes (from lying, cheating, stealing, etc). This would include government programs obtained fraudelently (Ex: An EI overpayment where you applied for EI knowing you weren’t eligible)
3. Debts or amounts payable through matrimonial or child support arrangements.
4. Fines and penalties imposed by a court. (Ex: Traffic & Parking Tickets).

Any cash on hand must be reported to the Trustees. Cash on hand (of any amount) will typically form part of your bankruptcy estate. This means the trustee will most likely want to seize the funds for the benefit of your creditors.

However, some trustee’s will allow you to keep up to the income surplus guideline (included below), or what your average pay is, whichever is greater.

There is no income ‘cut-off’ exactly. Instead, there is a guideline, set by the federal government, that determines what your payments would be. While the formula can get quite complicating, a simplistic version is one half of every dollar you make above the guideline (included below), pro-rated to your percentage of the household income, is what would be payable.

For example, if you make $2,800 and were single you would need to pay one half of  $552 or $276 per month (for 21-36 months).

A Bankruptcy will repeat on your credit report under the Public Record section of your report. The creditors included in your bankruptcy will report as an R9.

Filing a bankruptcy can be a good idea depending on your situation. Typically speaking, bankruptcy is most beneficial when affordability is very low and debt levels are very large.

The major benefit of declaring bankruptcy is that creditors rights to pursue you for the debt cease. This is because of the stay of proceedings that occurs when a bankruptcy is filed.

You do not automatically lose anything. An inventory of all of your assets is taken, usually before you file a bankruptcy. Once this inventory is completed you have the choice of ‘buying back’ your assets from the Trustee. Anything you do not want, or cannot afford to pay to retain is what you would lose.

This could include things such as cars, houses, cash, investments to name a few.

Bankruptcy is a form of debt relief. However, there are many other debt relief programs that exist. These include credit counselling, informal settlements and consumer proposals.

You need to have at least $1,000 in debt. However, we recommend that you complete a full assessment of your situation and determining whether or not a bankruptcy makes sense for your situation. Usually at relatively low debt levels such as $1,000 it doesn’t make sense to declare bankruptcy.

Technically speaking, you do. The funds you pay into your bankruptcy estate are distrubuted by a Trustee to your creditors.

Bankruptcy is hands down the most severe debt relief option that exists. Debt consolidation typically involves obtaining a loan to pay off several creditors.

Before stopping to pay any bills we do recommend speaking to a professional. You do not want to inadvertently cause any issues down the road.