Personal Bankruptcy

Bankruptcy, sometimes also referred to as the “B” word is an option that many people who have a serious financial problem may want to consider.

Bankruptcy doesn’t have to be a scary thing and may not mean that you are going to lose your home or car. When you file for bankruptcy you will make a monthly payment to your trustee until your discharge. During this time you will have to report your income to your trustee each month and will have to participate in 2 credit counselling sessions.

Bankruptcy may be the best thing for you if you have limited income, your assets have limited equity and you can no longer meet or manage your bill payments.

Benefits to Bankruptcy

  • Immediately stops collection actions such as wage garnishments and frozen bank accounts
  • Reduces your monthly payments
  • Provides a single monthly payment
  • Allows you to have a fresh start

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Case Study

  1. Aaron lost his job at the local manufacturing plant and was forced to take a position at the local home improvement store.
  2. Aaron’s net monthly income is now $2,500 per/mo. and he owes $18,000 in outstanding credit cards.
  3. After his monthly living expenses Aaron is no longer left with additional income to pay his credit cards.
  4. In a first-time bankruptcy Aaron would pay his trustee “surplus income” of approximately $280 per/mo. for 21 months and then would be eligible for discharge from bankruptcy.
  5. The total Aaron would pay to his trustee over the 21 months would be $5,880.

What if Aaron’s income was $2,500 per/mo? Then a very important term in bankruptcy would come into play which is “Surplus Income”.

What is Surplus income?

The government has established a list of income levels for households of different sizes. If the household net income exceeds the level set by the government then additional payments must be made to your trustee during your bankruptcy.

During your bankruptcy you will submit a statement of income and expense to your trustee. This statement will be used to determine if you have any surplus income. If your financial situation changes during your bankruptcy and you have surplus income, your payment in bankruptcy will increase and the amount of time that you are in bankruptcy may increase.

  • In many first time bankruptcies when surplus income is NOT present you will have to pay your trustee on a monthly basis for 9 months
  • In a first time bankruptcy when surplus income IS present you will have to pay your trustee for a minimum of 21 months

This is why individuals who have an income or assets with equity in them will often choose to file  a consumer proposal, as the  surplus income requirements present in a bankruptcy in some cases becomes a less attractive option.

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Related blog posts:

When is Declaring Bankruptcy Necessary?

Do you owe the Canada Revenue Agency for Income tax or HST? 

Should I file a Consumer Proposal instead of a personal bankruptcy?

Tips to Avoid Bankruptcy

Advice for Accountants and Lawyers with Clients Facing Insolvency

Application for a Bankruptcy Order by a Creditor – Another Tool in the Litigators Toolbox

Bankruptcy and Insolvency Act Section 38 – Creditors Taking Matters Into Their Own Hands