Two previous posts had looked at the alternatives to bankruptcy and the process of filing for bankruptcy in Canada. If an individual is forced to file for bankruptcy due to an irreparable financial situation, it is important to understand the implications that the bankruptcy would have on their future. Here are five ways that filing for bankruptcy can impact your life.
1. Credit Rating
As might be evident, the first hit to an officially bankrupt person comes through a demotion to the lowest possible credit rating. Obtaining a credit report in due course will reflect the impact of the bankruptcy filing on the credit history. Obtaining credit after becoming officially bankrupt requires the passage of time, so that the information on the credit report can be removed. It also involves display of financial maturity to prove that lessons have been learned.
2. Employment Income
There are no garnishments against wages in case of bankruptcy but the debtor is required to divulge all income. If the total income is over a certain standard prescribed by the Office of the Superintendent of Bankruptcy, then the bankrupt person will be required to use the excess amount to make payments to the trustee who, in turn, will distribute to creditors.
A typical property such as land, house, car, etc. is a form of secured credit. The lending party (usually, a bank or credit union) has a legal security in the form of the property in question and hence, they are classified as secured creditors. Their rights remain intact and it is better to consult with the trustee to evaluate the specific case.
4. Student Loan
A discharge releases the debtor from their obligation to repay student loans if the bankruptcy filing happens 7 years after the person stopped being a full-time or part-time student. In addition, the government offers Repayment Assistance programs for persons who are on the verge of bankruptcy due to their student loan debt. The plan is typically designed to help the person make affordable payments rather than going for the extreme step of bankruptcy. It is important that the loan is not in default prior to applying for repayment assistance.
The hardship provision is another option that a person could use to avoid filing for bankruptcy. The provision allows for an earlier discharge provided the court can determine and agree that the debtor has displayed prudence by using the student loan money for its rightful purpose, made an effort to complete their education and shown their responsibility by making regular loan payments. In order to be able to use this provision, the person must prove that the current financial hardship they are facing is bound to linger for a long time.
Unless a debt is cosigned for, filing for bankruptcy only impacts (overlooking the emotional factor and marital discord issue) the debtor. If it is joint debt, then a creditor can seek repayment from the spouse (assuming they are in better financial shape). In case of assets owned jointly, the share of the asset belonging to the person filing for bankruptcy may be sold and distributed to creditors. Evidently, if the joint asset is property like a house, the spouse will have to sell the house and take the cash proceeds while the bankrupt person deals with their financial disorder.
There is no escape from a creditor for people who cosign on a loan when the borrower goes bankrupt.
Do you know of other areas where a bankruptcy filing can have an impact? If so, please share in the comments.
About the Author: Clark works in Saskatchewan and has been working to build his (DIY) investment portfolio, structured for an early retirement. He loves reading (and using the lessons learned) about personal finance, technology and minimalism. You can read his other articles here.