Written by Vanessa Santilli on Feb. 27 on CreditCards.ca
If you’re buried under piles of bills and credit card debt, filing for bankruptcy has no doubt crept into your mind. But how do you know if your finances are beyond rescue, and what will happen if you do find yourself facing the dreaded b-word?
There is no specific formula or one-size-fits-all answer for when bankruptcy is suitable, says David Bottom, a Trustee in Bankruptcy based in Westminster, B.C. “When we do an assessment of an individual we look at their creditors, the assets they hold and the exemptions under the Court Order Enforcement Act … their employment type and income and other factors, such as age and medical history.”
Bottom then focuses on the individual’s personal cash flow and ability to service their debt.
“It is more-than-too-often where we see individuals living beyond their means or maxing out their cash flow, where moderate changes in their finances require them to use credit to supplement their income with little ability to repay the debt within a business cycle.”
Not sure whether you fit that description? There are a few other indicators that you might be on the road to bankruptcy:
- Creditor phone calls
- Growing credit card debt
- Use of credit to pay fixed expenses
- Use of payday loans
- Income tax debt
- Maxing out credit cards, and only making minimum payments
The impact of bankruptcy
If you file for bankruptcy, your credit rating will be the very low R9. An R9 rating means “bad debt, placed for collection, moved without giving new address or bankruptcy,” according to Industry Canada’s Office of Consumer Affairs website. The rating stays on your credit report for six years.
The low rating will affect your ability to get a loan, says Andre Bolduc, a Trustee in Bankruptcy and Senior Vice President at BDO Canada Limited.
“It may be necessary to find a secondary lender such as a family member, friend or mortgage broker,” says Bolduc.
Filing for bankruptcy can be emotionally taxing as well. The stress of not being able to pay your bills or having a black mark on your credit report can be a lot for one person to handle.
“That elephant in the room adds insane financial pressure that can be insurmountable,” says Bottom.
And the literal price for bankruptcy?
“For a regular straightforward bankruptcy, the cost ranges between $1,440 to $1,850,” says Bottom.
That money is for a fee, payable to your trustee for their time. It also includes administration services and costs associated with filing the appropriate bankruptcy forms with the court. You may also have to pay extra toward your debts before you are able to obtain a bankruptcy discharge.
If you need to file for bankruptcy but can’t afford the fees, the Office of the Superintendent of Bankruptcy will provide assistance in finding a bankruptcy trustee, who will then be assigned to your case for a reduced fee.
The thin silver lining
In filing for bankruptcy, consumers are able to gain a fresh financial start, says Bottom.
“It can stop high interest payments, garnishments, all of the added stress from creditor’s calls or worries about how to pay their debts.”
You can start rebuilding credit after you receive your bankruptcy discharge, but that shouldn’t be your top priority. “Many individuals — when having to live on a cash basis — learn to live within their means,” he says, adding that this allows them to save and make the adjustments necessary to have a healthy financial life and no longer be relying on debt.
No matter the circumstances, a consumer should always have their full financial situation evaluated before considering bankruptcy, adds Tamara Kelly, director of education at Credit Counselling Services of Atlantic Canada, Inc.
Filing for bankruptcy is likely going to be one of the biggest decisions of your life. Be sure you have the right support.
“Before an individual actually declares bankruptcy, it is advisable to interview more than one licensed trustee in order to find an individual you trust and who understands your situation,” Kelly says.