Having trouble making ends meet? You're not alone.
Canadians are declaring bankruptcy at an alarming rate. In April 2009, more than 106,000 people and businesses caved under the burden of their debts, according to the Office of the Superintendent of Bankruptcy Canada. That's up 21 per cent — from just under 88,000 — from the same month in 2008.
For every month from January to April 2009, more consumers have declared bankruptcy than from the corresponding month a year earlier.
However, the news isn't quite as grim for businesses. In the 12 months ending in April 2009, 5,872 businesses went under across the country. That's a decline of 6.2 per cent from the preceding 12 months. Business bankruptcies for the first three months of 2009 had dropped by almost 14 per cent from the same period a year earlier.
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As the world fell into deep recession in 2008, Canadians were carrying more debt than ever before. According to a survey by the Certified General Accountants Association of Canada in late May 2009, household debt reached an all-time high in 2008 — $1.3 trillion.
The survey found that 85 per cent of indebted Canadians owed money on their credit cards — and just over a fifth of Canadians who owed money said they were in over their heads and could no longer manage their debt load.
Should you declare bankruptcy?
The road to bankruptcy involves a lot more than waking up one day and realizing you've spent yourself into a financial corner. It's a formal process that will cost you money. And not everyone can do it.
But before you get to that step, you might want to contact a credit counselling service. There are many non-profit credit counselling agencies across the country that will help you work your way through your financial crisis, without declaring bankruptcy. They will negotiate a repayment program with your creditors and help end those constant calls from collection agencies.
If you're too far in the hole, you may have to take the bankruptcy route.
You can't declare bankruptcy unless you are considered insolvent. That can only happen if:
- You are not bankrupt already.
- You owe at least $1,000 and you can't meet your regular payments as they become due.
- Or you wouldn't be able to pay all your debts if all your assets were sold.
If you meet the criteria for being insolvent, there are three options.
- Bankruptcy: Your assets are sold and the money is distributed to the people to whom you owe money.
- Consumer proposal: You make an offer to the people waiting to collect from you. You could offer anything from paying off a percentage of the debt to paying off the whole thing over a longer period.
- Receivership: This happens to companies, not people. It's where a major creditor moves in and takes control of the company's assets.
In order to start the bankruptcy process, you have to meet with a licensed bankruptcy trustee. The trustee will review your financial situation and explain the options available to you — and the consequences each option carries.
Taking the plunge
If you decide to file, you will have to hire a trustee who will help prepare to file the necessary documents. The trustee will charge you a fee, which may come out of the sale of your assets. If you can't afford to pay the trustee, the federal Office of the Superintendent of Bankruptcy will help you find one through its Bankruptcy Assistance Program. You'll still have to pay the trustee, but you'll likely be paying in smaller installments.
You are considered a bankrupt after the trustee files several forms with the Official Receiver. The forms give the trustee the power to dispose of your property to settle your debts.
After the forms are filed and you are officially bankrupt, you might not have to make any more payments to your creditors — unless you get a tax refund, win a lottery, inherit money or start making more money than when you went under.
But you can't hide behind Canada's bankruptcy laws to escape all your debts. If you owe support to your ex-spouse or your children, you'll still be obliged to make those payments, even if your creditors are circling and trying to recover what you owe them. And you can't claim that your student loans have sent you over the edge, if you're still in school or you've been out of school for less than seven years.
You also can't escape debts arising out of fraud, a court award for damages or any court fine.
Normally, first-time bankrupts are discharged from bankruptcy nine months after they file, unless the trustee, a creditor or the Superintendent of Bankruptcy, opposes the discharge.
Once you have been discharged, you're free to try to rebuild your credit rating again. But you will have to tell potential creditors that you were bankrupt. Your credit report will reflect your bankruptcy for up to seven years. If it's your second bankruptcy, it'll be on your file for 14 years. That shouldn't get in the way of you landing a job, unless you have to be bonded.
Canada's bankruptcy rates have remained fairly consistent through the first decade of the 21st century at between 3.1 and 3.4 cases per thousand people. It hasn't been higher than 3.8 cases per thousand people (1997) in more than two decades.
The rate of bankruptcies south of the border has been even higher. That's expected to worsen after the U.S. Mortgage Bankers Association reported that nine per cent of Americans holding a mortgage were either behind in their payments or already in foreclosure.