Everything You Need To Know About Declaring Bankruptcy
Out of all the scary financial concepts out there, perhaps the scariest of all is the idea of declaring bankruptcy.
Some instance of bankruptcy is generally always in the headlines in some form or another. Major corporations who mismanage their finances often declare bankruptcy and go into administration. Famous celebrities and business people occasionally have to turn to bankruptcy if they haven’t been paying their taxes legally.
However, bankruptcy isn’t just for the rich, famous, or multinational corporations. Many everyday people may find themselves in the position of considering bankruptcy when they cannot afford to pay their credit cards, mortgages, or bad credit car loans in Scarborough.
So what exactly is bankruptcy and what does it involve?
One a somewhat taboo financial subject, many people are relatively clueless. We’ve put together everything you need to know about this concept in our guide below. Read on to find out more!
What Is Bankruptcy?
First off, let’s discuss what exactly bankruptcy is in terms of your finances.
Bankruptcy, also known as insolvency in Canada, is the legal status applied to individuals and businesses who are no longer able to repay their debts and owe at least $1,000. Generally speaking, consumer bankruptcy proceedings are divided into two legal statuses. The first is being deemed “insolvent”, which means the individual is unable to repay their debts and does not have enough assets, liquid or otherwise, to cover the debts.
An insolvent person typically has two main options once they have received the legal status. The first is to offer their creditors a consumer proposal. This is a proposed schedule for repaying some portion of the amount owed over an extended period of time at a low interest rate. This option allows for a better financial outcome for both parties, as the insolvent person has the opportunity to clear their debts and avoid declaring bankruptcy, and the creditor generally can expect to get more of their money back than if bankruptcy was declared.
The second option is declaring bankruptcy. This can be initiated by the individual, their creditors, or by defaulting on a consumer proposal. Bankruptcy is a different legal status that means the individual has insufficient assets to repay debts and is unlikely to ever have enough to repay what is owed. Once bankruptcy has been declared, all debt collections are frozen, a trustee is appointed who will organise the bankrupt person’s affairs, and negotiations are entered into with creditors. All viable assets will be assessed, their value estimated, and a greatly diminished repayment plan will be enacted that will give some small portion of the money owed back to creditors.
Declaring bankruptcy is a last resort “nuclear option” for consumers, as it can have grave consequences for your financial health for many years to come.
Who Can Declare Bankruptcy?
In Canada, any entity can declare bankruptcy if they are deemed insolvent and likely unable to ever repay their debts without doing so.
This means that bankruptcy is an option for both consumers and businesses, depending on their financial situations. The process of declaring bankruptcy is essentially the same whether you are an individual or a company, and will involve disclosing all of your assets, handing over control of your estate to a trustee, and dividing up repayments across the various creditors you owe money to.
As an individual, you also have the option of submitting a consumer proposal, which will likely be accepted by your creditors as they generally accept they will get back more of their money with a consumer proposal than during bankruptcy proceedings.
What Are The Consequences Of Declaring Bankruptcy?
With bankruptcy considered such a serious option, there are some major consequences to consider before making this move. These include:
Loss of “non-exempt” assets
One of the key elements of bankruptcy proceedings is determining the net value of all of your assets and then liquidating those that can be sold and using the proceeds to pay your creditors.
While what exactly constitutes a “non-exempt” asset vary from province to province, generally you are able to keep your basic household assets. These include your clothes, appliances, furniture, and personal items. Thus, declaring bankruptcy should not mean you are homeless. However, if you have a new car with no balance owing on its financing, or a boat, or a home worth substantially more than what is owing on your mortgage, you can expect to see those go to the trustee for liquidation. You will also lose all of your RRSP contributions over the past 12 months, as well as any tax refund you might have gotten for the year you declared bankruptcy.
Generally speaking, if you have these assets, it is recommended you either sell them yourself and use the proceeds to pay off your debts before needing to declare bankruptcy, or you can submit a consumer proposal in order to retain these assets.
Obligations & Payments
As one might imagine from declaring bankruptcy, you will have certain payments and obligations throughout the duration of your bankruptcy.
The biggest one is having to declare your income to your trustee every month. If receive a raise, bonus, or any other money above the level set by the government, your payments are required to increase. This means if you earn a lot of money, you can expect to pay a lot during your bankruptcy. This is another reason why a consumer proposal is often much preferred to declaring bankruptcy, as there are no such obligations under that kind of arrangement.
Stay of Debts
The one “positive” consequence from declaring bankruptcy is that almost all of your current debts are forgiven and wiped clean.
This includes credit cards, personal loans, payday loans, and even income taxes owed to the CRA. However, there are some debts that will remain. Child support and alimony, court fines, and secured debts will all continue to be owed by you. You can clear the secured debts, such as a mortgage or bad credit car loan in Scarborough, by selling the asset associated with it.
This is the main goal of declaring bankruptcy, and all of the negative consequences can be worth it to some people in order to be relieved of their debts and to stop debtors collecting.
How Does Declaring Bankruptcy Affect Your Credit Score?
Another serious consequence of declaring bankruptcy is its effect on your credit score.
Declaring bankruptcy is the single worst thing that can happen to your credit score. Once you file for bankruptcy, credit bureaus will place a note on your credit file and you will almost automatically be downgraded to the lowest possible credit rating. In Canada, you will be given a ranking of A9, which is the lowest score for a consumer. In terms of the numerical credit score, you will likely be in the 300s. If you are already in the situation of needing to declare bankruptcy, your credit score is likely already pretty low, but it is still something to be aware of.
As with most entries on a credit file, you can expect this to stick around for a while. Your first bankruptcy declaration will remain on your credit file for six years from the date you are declared solvent again. Should you ever have to declare bankruptcy again, the next entry will remain on your file for 14 years. While the mark remains on your credit file, you can only expect to make modest gains in rebuilding your credit score, which means you will need to accept that you won’t get into the good credit score category for many years following bankruptcy declaration.
Can You Recover From Declaring Bankruptcy?
Now that we know what bankruptcy is and the consequences of declaring it, let’s discuss whether it is ever possible to recover from it.
While it might sound like declaring bankruptcy is a financial death sentence, there is actually potential to recover from it. If you take the opportunity to reset your finances, get on top of your repayments, and ensure you do not fall back into bad habits, you are completely capable of rebuilding your score to be excellent. Some things you can do to ensure you are in the best position to begin rebuilding your credit include;
- Maintain a good credit utilization ratio – credit bureaus like to see you using no more than 30% of your available credit at any given point. Try to ensure you are keeping balances to 30% or less, or paying them down to that level as soon as possible.
- Limit new debt – this might sound obvious, but keeping new debt as low as possible is generally a good idea to help improve your credit score following bankruptcy
- Make on time repayments – if you do have revolving or open credit accounts, ensure you are making at least the minimum repayment on or before the due date as this will have the biggest impact on your credit score.
If you develop these good credit habits and maintain them throughout your bankruptcy and after, there is no reason you shouldn’t be able to get into the good or excellent credit range. This will open up many financial doors for your future, including the best interest rates and loan types.
Bad Credit Car Loans In Scarborough
While your credit might not be good for at least 6 years, there are credit options during this time.
A bad credit car loan in Scarborough is an ideal option for people who need a car and a legitimate creditor to make regular, on time repayments to. Scarborough Bad Credit Car Loans is the leading provider of subprime credit car loans in Ontario. We accept any credit level, including those with bankruptcy declarations, and don’t accept “No” for an answer when we negotiate with Canada’s largest banks. We always ensure you are getting the lowest possible interest rate for your credit level, and help you renegotiate your loan after a year to capitalise on any credit score improvements you might have made.
Once you have chosen your new car, we will even deliver it anywhere in Ontario, 100% free! Contact us today and speak with one of our bad credit car loan in Scarborough experts and see how we can get you on the road.