As you consider the various debt relief options available to you in Canada, it is important not to misunderstand the costs associated with each of them. For example, it can be quite easy to think that there is no cost to personal bankruptcy because everyone knows that a successful bankruptcy wipes away all your consumer debt, thereby releasing you from expenses that you would otherwise be required to pay.
The truth is you should never take a step as serious as filing for bankruptcy without an accurate understanding of its true costs. Contrary to what many believe, there are costs that you will incur for bankruptcy in Canada. These costs are both personal and financial.
The Personal Costs of Bankruptcy
Although there are some significant financial costs to bankruptcy, you should first consider some of the personal costs:
• Time—Filling out bankruptcy paperwork and keeping up with your bankruptcy trustee can take a good deal of time.
• Contracts and Agreements—Because your creditworthiness is all but destroyed for seven years in a bankruptcy, it will be hard to find new loans or even do things like rent an apartment at an affordable rate from those who see your credit report.
• Service—You cannot serve as a company director while you are in bankruptcy.
The Financial Costs of Bankruptcy
The financial costs of bankruptcy can be quite significant. Your consumer debt will be discharged in a successful bankruptcy, but getting to that point will require you to pay costs that are not associated with other debt relief options such as debt consolidation, debt settlement, or consumer credit counselling. These costs fall into three major categories.
When you file for bankruptcy, your bankruptcy trustee will set up a trust into which you must deposit your property. There are exemptions that allow you to keep some of what you own so that you are not left absolutely penniless, but if you have assets of any significant worth, you will have to hand them over. Assets you may have to surrender, depending on your province or territory of residence, include jewelry, home equity, motor vehicles, excess household furnishings and more.
Base Contribution Cost
Bankruptcy trustees charge their clients a monthly base contribution cost during the bankruptcy process. This covers administrative overhead, paperwork and the other costs of running a business. The cost is necessary because licensed bankruptcy trustees do not receive government funding or funds from your creditors. The average base contribution cost in Canada is about $200 a month, but yours may be higher if your income is significant or you own your own business.
Surplus Income Cost
Canadian bankruptcy law establishes an upper limit to your income while you are in bankruptcy. The amount you earn above and beyond this limit is known as surplus income, and you will be required to pay it to your bankruptcy trust via your bankruptcy trustee. Your trustee determines the surplus income you must pay, but it generally consists of any income over and above what you actually require to live on. There is a $200 buffer that keeps surplus income payments from kicking in until you earn $200 more than your surplus income threshold. You will submit tax documents and pay stubs to your trustee on a regular basis so that surplus income can be calculated, and having to pay surplus income can extend your bankruptcy by up to twelve months past the average nine-month bankruptcy period.
Other Lower Cost Debt Options
If bankruptcy is not the only possible way to get out of your debt problem, then another debt relief option may be more appropriate for you. Debt relief programs have saved many people from paying the high costs of bankruptcy. Fill out the debt relief form for more information on debt relief programs.