Personal Bankruptcy

“Job loss, illness, separation and divorce are the most common causes of personal bankruptcy,” says Chartered Accountant David Gowling, Vice President of Herpers Chagani Gowling Inc. in Hamilton. “Faced with sudden changes in their circumstances, people may be unable to adjust quickly enough to cope.”

---

Signs that a bankruptcy may be on the horizon include using credit to pay for basic necessities, using one credit card to make payments on another, turning to payday loans and calls from collection agencies. “Most people don’t save before they buy,” says Chartered Accountant Marc Rouleau, a Vice-President with Welch Group Consulting in Ottawa. “Finance companies allow you to finance such things as electronics, furniture and vacations over 12 months or more. Interest rates are usually in the 25-30 per cent range, and collection can get very aggressive if you miss a payment.” There are few restrictions on who can declare personal bankruptcy. “The person needs to be insolvent, have $1,000 in unsecured debt and be a resident of Canada,” explains Gowling. In Canada, only licensed Trustees in Bankruptcy can file personal bankruptcies, and administer the filing of bankruptcy returns. “When you are bankrupt, most assets, federal tax refunds, GST credits and a portion of your income must be turned over to the Trustee,” says Rouleau. “If you don’t have any assets, you must pay a filing fee to the Trustee, which usually runs between $1,500 and $2,000.” Some assets may be exempt from seizure. “In Ontario, you can keep household furnishings worth up to $11,300, personal effects worth up to $5,650, one vehicle worth up to $5,650 and tools of your trade worth up to $11,300,” says Gowling. “If an asset is secured by a loan, such as a mortgage, you can likely arrange with the creditor to maintain the payments on the loan in order to keep the asset.” Other exemptions include certain Registered Retirement Savings Plan assets and life insurance policies. There is a clawback of contributions made in the last 12 months that are at definite risk. And the cash surrender value can often be substantial. The main benefit of declaring bankruptcy is being able to write off all your debts as of the date the bankruptcy is filed. “You can get out from under the debt load and start over,” says Gowling. “Any wage garnishees, except for child support and alimony, are lifted to allow full access to your paycheque. You must also attend counselling sessions to help you adjust your spending.” The downsides include, “losing your assets, bad credit, perhaps having to appear in court or being subjected to a formal examination by a creditor, the courts or the Superintendent of Bankruptcy,” says Rouleau. “There’s also the stigma, as most people find it embarrassing to talk to someone about declaring bankruptcy.” Rouleau advises, “A CA can help you compile a list of your debts and prepare a realistic budget to pinpoint your best option.”