When it comes to bankruptcy vs default, many Canadians don’t know the difference between them. Many of us carry debt and struggle to pay it fully or on time. Debt is a big responsibility, and failure to keep up with debt payments can be costly. From accrued interest payments, negatively affected credit reports and credit scores, heightened interest rates and even default or bankruptcy, there are consequences for failing to pay your debts.
Luckily, there are relief options available, including debt consolidation and credit counselling. Before considering relief options, it’s important to assess your personal scenario (sometimes with the help of a professional), and become aware of the difference between default and bankruptcy.
What does it mean to default?
Default occurs when you fail to pay your debt. This includes missed payments, late payments, or completely stopped payments. Both individuals and businesses might default on a loan. For example, an individual who stopped paying the balance on their $5,000 credit card debt demonstrates a default. A company that consistently misses payments on their business loan is in default. It’s possible to default on a variety of debt, including:
- Student Loans
- Business Loans
- Auto Loans
Defaults usually occur when a borrower doesn’t bring in enough income to make their loan payments. For example, someone who takes out a large loan to pay for medical bills might not have the income to support the large payments. Default is especially common for borrowers of student loans, as borrowers who default aren’t always necessarily graduates, and thus haven’t always obtained a secure job. Another scenario is a borrower who graduates from post-secondary education, but doesn’t secure high-enough-paying employment to pay their debts.
What is bankruptcy?
Bankruptcy is a legal process that discharges you from your debts, and protects you from legal action from your creditors. Both companies and individuals can file for bankruptcy. Industry Canada carries out the process, while Innovation, Science and Economic Development Canada enforces the Bankruptcy and Insolvency Act.
Individuals must meet a few requirements to be eligible to declare bankruptcy. To qualify for bankruptcy, you must be:
- a resident of Canada;
- unable to pay bills when they’re due; and
- owing more than $1,000.
Bankruptcy is usually a last resort for individuals struggling with debt. While it’s possible to default on a loan without having to declare bankruptcy, most people who declare bankruptcy have already defaulted on multiple loans.
Bankruptcy has harsh repercussions for your credit score initially, and will stay on your credit report for a significant amount of time. But, bankruptcy isn’t something to be ashamed of – it’s often necessary. You might consider bankruptcy if you’re
- consistently missing debt payments;
- paying bills with borrowed money;
- receiving debt collection calls and letters;
- Overwhelmed with debt to the point where your health is affected drastically; and/or
- unable to secure more, secured or unsecured debt from your bank because your current debt is too large.
What are the benefits and drawbacks of declaring bankruptcy?
Consider these pros and cons before declaring bankruptcy.
- Your creditors will forgive most, if not all, of your debt
- You’ll no longer receive debt collection calls
- You’ll feel a sense of relief
- You’ll have a fresh start
- Your credit score will be the lowest it’s ever been, the bankruptcy mark will stay on your credit for at least 6 years
- You’ll need to give up most of your assets to your creditors
- Your bankruptcy will be public record
What happens once you file for bankruptcy?
Innovation, Science and Economic Development Canada gives you access to a License Insolvency Trustee (LIT) who brings you through the bankruptcy process; however, they are also available to discuss your options before filing for bankruptcy.
If you indeed decide to file for bankruptcy, the LIT will help you fill out various forms. Once the trustee submits Form DC905, Bankruptcy Identification Form to the Office of the Superintendent of Bankruptcy Canada, you’ll officially be considered a bankrupt individual.
Once you declare bankruptcy, your trustee will inform your creditors of your filing. Then, the trustee will take responsibility for your assets if you have any, liquidate them, and sell them, or otherwise distribute them amongst your creditors. Assets include but aren’t limited to your car, house, expensive jewellery, or stock investments. There are a few restrictions, however; for example, if you have a Registered Retirement Savings Plan (RRSP), you won’t lose it in bankruptcy. Your trustee will also negotiate a repayment plan with your creditors where possible.
When can I be discharged from bankruptcy?
In many cases, a bankrupt individual will be automatically discharged from bankruptcy in nine months. In some cases however, an individual isn’t automatically discharged. To obtain a discharge, a trustee will recommend that you present a case in court. Bankruptcy courts can grant you absolute or conditional discharge, suspend, or refuse your discharge.
Final Thoughts On Bankruptcy vs Default
So, there’s a significant difference between default and bankruptcy. Defaulting on one loan doesn’t necessarily result in bankruptcy, but bankruptcy is often the result of multiple loan defaults. If you’re struggling with debt, consider a consumer proposal or talking to one of our credit counsellors today.
Related to: Bankruptcy vs Default – The Differences Between Them