Just because you want to file for bankruptcy to get a clean financial start, it doesn’t necessarily mean that you can. There are four basic eligibility requirements that you must meet in order to file:
- You must reside in Canada, do business here or at least own Canadian property.
- You must owe at least $1,000
- You must be unable to meet the payment requirements of your debts as they come due.
- Your debts must exceed the total value of your assets
If you meet those four requirements, then you are eligible to declare bankruptcy. If not, then you’ll need to find another solution.
Who decides if I am eligible to file?
Bankruptcy eligibility is determined by a Licensed Insolvency Trustee (LIT). This is the same individual that oversees a consumer proposal filing.
When you contact a Licensed Insolvency Trustee, they provide a free consultation to make sure you meet the minimum indebtedness and other basic requirements. Both consumer proposal and bankruptcy filings require you to owe at least $1,000.
If you meet that requirement, then they will conduct a full review of your liabilities (debts), assets, and budget. They will look at your budget to determine if you can afford to meet the payment requirements on your bills. They also compare your total debt amount to the total value of your assets.
If you can’t pay your bills and owe more than your assets are worth, you are officially declared insolvent. This means you are eligible to file.
If so, the Licensed Insolvency Trustee will oversee the bankruptcy process for you. They set up a trust and oversee the sale of any assets that don’t qualify for an exemption. The proceeds will be used to pay your creditors. Once all your assets are sold, the remaining balances.
Essentially, the LIT is both the gatekeeper and the overseer to your filing. If you’re thinking of filing, then your first step is to find and contact a Licensed Insolvency Trustee.
Understanding bankruptcy eligibility requirements
You don’t need to be a Canadian citizen to file bankruptcy in Canada. You simply need to meet any one of the three following criteria:
- Reside in Canada
- Do business in Canada
- Own property in Canada
Canadians living abroad and permanent residents can both file for bankruptcy.
This requirement is straightforward and most people looking for debt help immediately meet it. Total up all your balances on any loans, lines of credit (LOCs) and credit cards that you have. If the total is above $1,000, then you meet this criterion.
The third requirement is where some people may start failing to meet the eligibility requirements. The Licensed Insolvency Trustee will look closely at your budget. If you can’t afford to meet the monthly obligations on your debt, then the trustee will rule that you have insufficient income.
However, just because you’re living paycheque-to-paycheque, it doesn’t necessarily mean that the trustee will agree that you can’t afford to pay your bills. If you have a range of discretionary expenses (wants) in your budget that you could cut, then you may not meet this requirement.
The final requirement is where things become the most complicated. The Licensed Insolvency Trustee will compare the total value of your assets to your total amount of debt. If the value of the assets you have exceeds your debt, you won’t qualify. You must owe more than you can afford to repay if you sold everything.
What to do if you don’t qualify for bankruptcy
Asset value is a big consideration for bankruptcy, but it doesn’t apply when you file a consumer proposal. If you don’t qualify for bankruptcy because you don’t meet the asset value requirement, the Licensed Insolvency Trustee may recommend a consumer proposal.
For this solution, the Trustee determines how much of your debt you can reasonably afford to repay. Then they set up a repayment plan that both you and your creditors must adhere to. As with bankruptcy, you will only repay a portion of what you owe. Then your remaining balances will be discharged.
Exploring other options before you contact a trustee
Before you decide to contact a Licensed Insolvency Trustee, you should exhaust all your other options for relief. You don’t want to risk the liquidation of your assets in bankruptcy or face the high fees of a consumer proposal unless it’s absolutely necessary.
Make sure you’ve considered all these options first:
Debt consolidation and credit counselling both provide you with the means to pay back everything you owe in a more efficient way by minimizing interest. Debt settlement allows you to get out of debt for less than what you owe, similar to a consumer proposal. However, instead of letting a trustee decide what you can afford to pay, a private settlement company works on your behalf to get you out of debt for the least amount possible.Understand your options
Key questions to ask
Would lower payments provide relief?
A key qualification requirement of bankruptcy is that you are unable to afford your debt payments. However, a key consideration before you file should be whether lowering your payments would allow you to regain stability.
All three of the solutions mentioned above could lower your monthly payments. Depending on your situation, the monthly cost savings could be significant.
- Debt consolidation loans often lower your monthly payments, particularly if you choose the maximum term for the loan.
- Debt management plans through a credit counselling agency typically reduce an eligible consumer’s total monthly payments by 30-50 percent.
- In the right circumstances, debt settlement programs can reduce a consumer’s monthly payments by up to half.
Are interest charges really the issue?
Another key consideration is whether your debts are really the problem or if it’s the interest charges that apply to them. Particularly with credit cards, APR can be 20% or higher. At that high of a rate, at least two-thirds of every minimum payment you make goes to cover accrued monthly interest charges.
As a result, even though you make payments diligently, you never seem to get anywhere. By lowering or eliminating the APR applied to your debt, you may be able to pay off your debt.
- A debt consolidation loan could provide a lower fixed interest rate. If you have good credit, you may be able to cut your interest rate by half. Instead of paying over 20 percent, you would pay around 10 percent.
- With a debt management plan, the credit counselling agency contacts your creditors and arranges to reduce or eliminate the interest rates applied to your debt. In some cases, consumer’s rates are eliminated completely, allowing them to focus wholly on paying off the debt.
Then you have debt settlement, which ignores interest charges entirely. These programs focus on paying back a percentage of the principal (the actual debt you owe). This makes interest charges essentially irrelevant.
How much would bankruptcy set you back?
The final consideration before you decide bankruptcy is the best choice for you is to consider what you would potentially lose by filing. Your two biggest concerns should be your assets and your credit score.
- Bankruptcy will liquidate any assets that you have which don’t qualify for an exemption. So, if your home and vehicles don’t fall below a certain value, they would be sold by the Licensed Insolvency Trustee. If you have assets that you need to protect, it’s in your best interest to find a different solution if you can.
- There’s also the credit damage caused by bankruptcy. A bankruptcy discharge will result in the most negative of all credit penalties in your report – and R9 penalty for discharging your debt. This remains for six years from the date of final discharge. Solutions like consolidation can help you avoid credit damage entirely, while solutions like credit counselling result in a lesser R7 penalty that only lasts for two years from the date you complete the program.