Potential perils, pitfalls and consequences of bankruptcy

Are you considering filing for bankruptcy? Before you make any decisions here are the potential perils, pitfalls and consequences if you choose to go that route.
According to the Canada Revenue Agency, bankruptcy is “a legal process performed by Industry Canada under the Bankruptcy and Insolvency Act, by which you may be discharged from most of your debts."

Bankruptcy is a last resort remedy to free yourself of debt that has become impossible to repay. To do this, you must make a deal with a trustee. He or she will sell all of your possessions and assets in order to pay your debts, for a fee.

Certain debts and specific liabilities cannot be eliminated by bankruptcy, such as court imposed fines or child support.

Bankruptcy can be declared when the burden of your debts has become too large; if you have several accounts in collection; if you cannot make your payments and have exhausted all other means available to you to manage your debt. Bankruptcy has serious and far reaching consequences and is far from a desirable option.

You can cut your spending and increase your income; unfortunately this may not always be possible. You can try to reach an agreement with your creditors, sell your assets, consolidate your debts with a loan or file a consumer proposal. You may also register for a consolidation order known as an Orderly Payment of Debt Program. Quebec residents have a similar legal proceeding known as a voluntary deposit program (Lacombe Act).

Consumer proposals are becoming increasingly popular. They provide a way to reduce one’s debt ratio without going bankrupt, and offer protection from foreclosures while allowing you to keep your belongings.

The one advantage with bankruptcy is that it sends you back to square one and you get to start over from scratch, often without debt. This is a second chance; but the consequences are significant. You will be stripped of your belongings and you will be labelled as "bankrupt" in your credit file. That will make it very difficult to obtain any credit over the next six to seven years following bankruptcy. It will be very difficult to acquire goods and services, housing, a line of credit, etc. Even after you straighten out your situation, some institutions will refuse credit to people who have declared bankruptcy.

You must first and foremost wait to be discharged from bankruptcy, which usually takes nine months. During this period, all assets acquired by the bankrupt person will be transferred to the trustee.

Then you go back to square one. You need to improve your credit profile by taking certain steps:

• Create a budget and stick to it;
• Start saving;
• Pay all your bills on time;
• Get a guaranteed secured credit card and pay it in full each month.

Educate yourself and think hard about the consequences of bankruptcy before deciding to file. There are other options and a light at the end of your tunnel.