As you consider various debt relief options available to you, it’s important to factor in the cost associated with each of them. For example, it can be easy to think that there would be no cost to filing for personal bankruptcy because it’s designed to release you from your financial obligations. Why would you be required to pay for a solution that you’re using because you can’t afford to pay your bills?
In reality, there is a range of costs associated with going bankrupt. It’s critical to understand the total cost of bankruptcy before you decide to file.
How much does it cost to file for bankruptcy?
Initially, there is no upfront cost in filing for bankruptcy. Your initial consultation with a Licensed Insolvency Trustee is free. The Trustee will evaluate your finances and make a recommendation on filing a consumer proposal or bankruptcy free of charge.
If you decide to proceed and file based on the Trustee’s recommendation, then you will begin to incur costs.
The financial costs of bankruptcy
Base contribution cost
The first bankruptcy cost covers administrative fees and expenses, as well as paying the Licensed Insolvency Trustee for their time. This is known as the base contribution cost. For a first-time filing, the minimum cost is $1,800, broken into 9 monthly installments of $200.
However, in some cases, the base contribution cost may be higher – $1,800 is the minimum you can expect to pay.
Surplus income cost
The second cost of bankruptcy only applies if you exceed the threshold for surplus income by more than $200. The Canadian government essentially says that you only need a certain amount of income to live while you file for bankruptcy.
If you earn more than $200 over the surplus income threshold set by the government, then you will be required to pay surplus income costs. This also extends the time it takes to file for bankruptcy. Instead of 9 months, a first bankruptcy takes 21 months. For a second bankruptcy, the time is extended from 24 months to 36.
The Office of the Superintendent of Bankruptcy sets the surplus income limit each year. Family size is also a factor – a larger family has a higher surplus income threshold. Basically, you can keep more of your income if you have a larger family.
Your Licensed Insolvency Trustee will tell you how much you’ll be expected to pay. You must regularly submit tax documents and pay stubs to the bankruptcy trustee to verify your income during your filing.
The final cost of bankruptcy is based on the value of any assets that you have. Assets that don’t qualify for an exemption will be liquidated during your bankruptcy. That means that the trustee oversees the sale of these assets, then uses the funds from the sale to pay your creditors.
Losing your assets is usually one of the key considerations Canadians have when they’re considering bankruptcy. If you have assets that you don’t want to see sold – particularly high-value assets – then you should exhaust all your other options for relief before you decide to file.
The personal costs of bankruptcy
Monetary costs aren’t the only cost associated with filing for bankruptcy. You will face some personal costs as well.
Filing for bankruptcy takes time and there will be certain tasks you’re required to complete during your filing. You must complete paperwork and submit documentation regularly to the trustee. You will need to set aside time to handle these tasks.
Bankruptcy is noted on your Equifax credit report for six years from the date your debts are discharged; it’s noted for six to seven years on your TransUnion report, depending on the province or territory where you live.
You won’t be able to take on new lines of credit while you are going bankrupt. After discharge, you will still struggle to get traditional loans and credit cards. You either won’t get approved or you will face higher interest rates. This means higher costs for borrowing, as well.
You cannot serve as a company director while you are in bankruptcy.Know your options
How do these costs compare to other options?
If you’re concerned about any of the personal or financial costs of bankruptcy, there are other options that you may want to consider. For example, bankruptcy is the only solution that requires you to liquidate assets as you get out of debt.
|Solution||Fees||Asset protection||Credit cost|
|Debt consolidation||A loan origination fee of 1-3% of the loan amount||Yes||None.|
|Credit counselling||Setup and monthly administration fees set by your province or territory (generally lower than other options)||Yes||Noted on your credit report for 2 years from the date you complete the program.|
|Debt settlement||Fee for each debt settled; typically, 2-5% of the original debt amount settled||Yes||Noted in your credit report for at least 6 years from the date of discharge|
|Consumer proposal||$1,500 filing fee plus 20% of future payments||Yes||Noted in your credit report for three years from the date of discharge|
|Bankruptcy||$1,800 minimum base contribution cost, plus surplus income costs||No||Noted in your credit report for six-seven years from the date of discharge|