Dealing with debt – myths and misinformation

When it comes to dealing with debt, there is a lot of misinformation on the Internet about what happens in a consumer insolvency. These myths range from what debts are included in a bankruptcy to the fees of the Licensed Insolvency Trustee (“LIT”) to legal actions and so forth.

If you want to know what happens in a consumer insolvency, there are only two sources for the facts, the LIT or the Office of the Superintendent of Bankruptcy.  Why anyone would listen to someone who isn’t ether of those makes little sense, however, there are those firms out there who purport to be experts but have little or no training in insolvency matters.

The following table is to get the facts and put some of those myths to rest.

Myth

Fact

The LIT only works for and represents the creditors. An LIT doesn’t work on your creditor’s behalf. This is one of the biggest myths surrounding who the LIT works for. The LIT makes sure that both your rights, as the debtor, and the creditor’s rights are respected. We ensure that the process is fair for all involved and that everyone follows the rules.
If I go bankrupt, I will lose everything.Many personal assets, pensions and, to a certain extent, items like tools of trade, a vehicle and home are exempt from seizure. That means they are protected from your creditors.

Each province and territory is responsible for dealing with exempt assets that list the property a bankrupt can keep. In BC that is the Court Order Enforcement Act and in the Yukon Territory it is the Exemptions Act.

The Bankruptcy and Insolvency Act also states that RRSPs and RRIFs are exempt except for any contributions made in the prior twelve months.

Most debtors that file bankruptcy are able to keep all of their assets. The myth that you will lose everything is often perpetuated by debt advisors/credit counsellors as a fear mongering tactic.

As well, certain RRSPs are fully exempt if they are with a life insurance company and have a preferred designated beneficiary. The exemptions for BC can be found here

The exemptions for the Yukon Territory can be found here.

If you own assets that are above the exemptions listed above, you should speak to a Licensed Insolvency Trustee to see what can be done to keep your assets. Most LITs are accommodating in allowing you to redeem any non-exempt portion of your assets.
Income tax and government debt cannot be included in bankruptcy.Income tax and most other Government debts are discharged in bankruptcy. The myth comes from the United States where not all tax debts can be discharged in a bankruptcy.
It costs at least $1,800 to go bankruptThis is one of the most common questions LIT’s get asked and in most cases, it is usually answered by giving a response about fees. If it were only that simple.

There is an extensive article on our website about what it costs to go bankrupt. That article can be found here.

In BC, the basic fee to file a bankruptcy assuming you have no assets and your income is less than the income threshold and you have not been bankrupt before, is less than $1,700, not $1,800. Most LITs will work out a payment plan with you. You do not have to pay in advance.
Everyone including my friends and family will know I filed bankruptcyIn almost all cases the only people who will know about your bankruptcy are you, the LIT, the OSB and your creditors. If you do not tell your friends, they are unlikely to ever find out about your bankruptcy. In most cases there is no ad in the paper and there is no court file.

For almost every personal bankruptcy, creditors are notified electronically about the bankruptcy.

All of this means, that unless you tell them, your friends, co-workers and neighbors are very unlikely to find out about your bankruptcy.
My credit rating will be ruined by going bankrupt.Filing for bankruptcy is recorded on your credit report. However, if you are considering bankruptcy your credit may already be ruined and it cannot get any worse by going bankrupt. Ask yourself, what your credit rating is doing for you. Likely nothing.

Being behind on payments, missing payments, being over the limit on your credit cards, and having debts in collection will also ruin your credit. In fact, going bankrupt will clear your record, which will allow you to rebuild a good credit score, often faster and easier than through other methods.

Here is an except from the Financial Consumer Agency of Canada website about credit reports;

Consumer proposals

A consumer proposal is a legal agreement set up by a licensed insolvency trustee. The trustee creates a proposal for your creditors where they agree to let you pay off a percentage of your debt.
Equifax removes a consumer proposal from your credit report 3 years after you've paid off all of the debts included in the proposal.

TransUnion removes a consumer proposal from your credit report either:
• 3 years after you've paid off all of the debts included in the proposal, or
• 6 years after you sign the proposal (whichever is sooner)

Bankruptcy

Generally, both Equifax and TransUnion remove a bankruptcy from your credit report 6 years after the date you're discharged.

TransUnion removes a bankruptcy from your credit report 7 years after you're discharged in the following provinces:
• New Brunswick
• Newfoundland and Labrador
• Ontario
• Prince Edward Island
• Quebec

If you declare bankruptcy more than once, then the bankruptcies will appear on your credit report for 14 years.
Student loan debt is not covered by bankruptcy.If a person has been out of school for more than seven years prior to bankruptcy, the student loan debt is erased, the same as any other debt.
Bankruptcy will affect my spouse and family.Your debts are your own; however, if you and your spouse have a joint (co-signed) debt, then a creditor can pursue your spouse for repayment

The filing of a consumer proposal or bankruptcy will have little or no effect on your spouse if your spouse is not co-signed on your debt.

Read our article here about how the filing does affect your spouse.
Bankruptcy erases all debts.Most unsecured debt is released in a bankruptcy or consumer proposal. There are a few exceptions to this rule such as student loans, spousal or child support and court fines.

Secured claims such as a car loan or mortgage can only be erased if you are willing to give up the asset.

To learn if your debts will be erased, contact us.
Licensed Insolvency Trustees only administer bankruptcies.Bankruptcy is only one of the options available to deal with debt.

The LITs at Boale, Wood & Company Ltd. work with their clients to find the best solution to their financial situation. This can also include consumer proposals, debt counselling, refinancing, settlement offers, and public education.

Our insolvency laws are designed to give people in financial difficulty a fresh start.  Bankruptcy is only one option available to deal with debt.  But is it the right option.  If you are not sure about where to start, contact us.  We will explore your options and assist provide you with unbiased information about the best course of action.

LITs are the only debt professionals who have a full range of debt relief options and LITs are the only debt professionals who can guarantee protection from your creditors.

Call us.  It’s not too late. (604) 605-3335.