Debt can take over your days, especially when interest grows faster than you can pay it down. Many people put off filing for bankruptcy because they are not sure what the process involves.
Most of the people we meet arrive with questions about personal bankruptcy, and many of those questions come from things they have heard secondhand. When you claim bankruptcy, a legal stay stops most collection actions against you, and you can keep many of your assets while you work toward being released from your debts.
What Happens Right After You Claim Bankruptcy
Your trustee, a federally licensed professional who oversees the process, files your paperwork with the government. Several protections start as soon as that filing goes through.
How a Stay of Proceedings Stops Collections
A stay of proceedings is a legal pause that prevents most creditors from taking further action to collect from you. Once your creditors receive notice, the stay can stop:
- Collection calls
- Collection letters
- Most creditor lawsuits
- Wage garnishment, usually within 1 to 2 pay periods
A few actions fall outside the stay. Child and spousal support, for example, can still be collected while your bankruptcy is underway.
What Happens to Secured & Unsecured Debts
Unsecured debts are loans with no property, like a house or vehicle, attached to them. Interest on these debts stops on the day your trustee files, so your credit card and payday loan balances no longer grow.
Secured debts work differently because the lender holds a claim on the property. Keep up with your mortgage and car loan payments if you want to keep your home and vehicle.
What Assets You Can Keep in Bankruptcy
Most people keep more than they expect. Your trustee reviews each asset with you before filing, so you know where you stand from the start. Equity is the part of an asset’s value you own outright, after you subtract what you still owe on it. In Alberta, protected assets include:
- Up to $40,000 in home equity
- Up to $5,000 in vehicle equity
- Household furniture and appliances
- Clothing
- Tools you need for your job
Assets Your Trustee May Claim
Some assets go toward paying your creditors. Your trustee may claim:
- Equity above the exemption limits
- RRSP contributions you made in the last 12 months
- Tax refunds for the years before your bankruptcy
- Part of your tax refund for the year you file
If your home or truck holds more equity than the limit allows, you can still keep it by paying your trustee the value above the exemption. In some cases, your trustee may agree to a payment plan for that amount.
How Long Bankruptcy Lasts & What It Costs
Your discharge is the date you are legally released from the debts your bankruptcy covers. After that, creditors cannot collect on those debts. How long you wait depends on your history and income:
- 9 months for a first bankruptcy with no surplus income
- 21 months for a first bankruptcy with surplus income
- 24 months for a second bankruptcy with no surplus income
- 36 months for a second bankruptcy with surplus income
Your monthly payment depends on your household income and family size. If you earn more than the federal threshold for a household like yours, you pay 50% of the amount above that threshold as surplus income. Your first payment is usually due within 30 days of filing.
Your Duties Along the Way
Stay in touch with your trustee until your discharge. Your duties include:
- Attending 2 credit counselling sessions
- Reporting your income and expenses each month
- Letting your trustee know if you change jobs or your pay changes
The counselling sessions cover budgeting and money management. And many people keep using those skills long after their bankruptcy ends.
Which Debts Bankruptcy Can Clear
Bankruptcy can release you from most unsecured debts. If you run a business as a sole proprietor, your business debts count too. Debts bankruptcy can clear include:
- Credit cards
- Lines of credit
- Personal loans
- Payday loans
- Income tax debt
Debts That Remain After Discharge
Some debts stay with you after discharge, so plan for them now:
- Child support
- Spousal support
- Student loans, if you left school less than 7 years ago
- Court fines
- Debts that come from fraud
How Bankruptcy Affects Your Credit Rating
A first bankruptcy shows on your credit report as an R9 rating. That rating stays on your record for 6 to 7 years after discharge, depending on the credit bureau.
Start rebuilding as soon as you can. A secured credit card, which uses a cash deposit as your limit, can help you build a history of on-time payments. Pay every bill on time and keep your balances low, since lenders consider both when they review your file.
Consumer Proposals as an Alternative to Bankruptcy
Bankruptcy is one of several legal options. A consumer proposal lets you repay part of what you owe through an agreement with your creditors, over a period of up to 5 years.
A proposal carries an R7 rating instead of R9. You also keep your assets, no matter how much equity you hold in them, which can matter if you own a home with more equity than the exemption allows. Your trustee can compare both options with you before you decide.
Talk to a Trustee Before You Claim Bankruptcy
You do not have to sort through these choices on your own. A Licensed Insolvency Trustee can review your debts, income and assets with you, then explain which options suit your situation.
Every member of our team has faced hard times of their own, so we understand how heavy debt can feel. Reach out to A.C. Waring & Associates and book a free consultation to talk through your options with us.
