Bankruptcy is one of the most misunderstood financial topics, often surrounded by myths and misconceptions. In Canada, consumer insolvencies in 2024 increased by 11.4% compared to the previous year, consumer bankruptcies increased by 10.8%, and consumer proposals increased by 11.6%. If you’re struggling with debt, misinformation can prevent you from seeking the help you need. As a team of expert Licensed Insolvency Trustees (LITs), Spergel is here to offer expert guidance and clarify the truth about bankruptcy in Canada. In this article, we’re debunking common bankruptcy myths.
Myth 1: Filing for bankruptcy means you lose everything
Truth: Many people believe that bankruptcy means losing all their assets, but that’s not the case. Canadian bankruptcy laws allow you to keep certain exempt assets, which vary by province. In many cases, you may keep:
- A portion of home equity (depending on your province)
- A vehicle up to a certain value
- RRSPs (except for contributions made in the last 12 months)
- Personal belongings and household items up to a set value
Bankruptcy is designed to give you a fresh financial start, not to leave you with nothing.
Myth 2: Bankruptcy permanently ruins your credit
Truth: While bankruptcy does impact your credit, it’s not permanent. A first-time bankruptcy typically stays on your credit report for six years after discharge, but this doesn’t mean you can’t start rebuilding your credit sooner. Many people begin improving their credit score by responsibly using a secured credit card or following a structured repayment plan. Spergel’s Licensed Insolvency Trustees can guide you through credit rebuilding strategies.
Myth 3: You can’t file for bankruptcy if you have a job
Truth: Having a job doesn’t disqualify you from bankruptcy. In fact, many people who file for bankruptcy are employed. However, your income may affect the process. If you earn over a certain amount, you may be required to make surplus income payments, which are additional payments based on government guidelines. Our team at Spergel can help determine if bankruptcy or another debt relief option, such as a consumer proposal, is best for your situation.
Myth 4: Bankruptcy eliminates all debts
Truth: Bankruptcy can discharge most unsecured debts, including credit card debt, payday loans, and personal loans. However, some debts are not eliminated, such as:
- Student loans (unless you’ve been out of school for at least seven years)
- Child support and alimony
- Court-ordered fines and penalties
- Fraudulent debts
It’s essential to speak with a Licensed Insolvency Trustee to understand which debts can and cannot be discharged. At Spergel, we can help you when it comes to debunking common bankruptcy myths.
Myth 5: Bankruptcy is the only option for debt relief
Truth: Bankruptcy is just one of several debt relief solutions. A consumer proposal is a popular alternative that allows you to reduce your debt by up to 80% and make manageable payments without filing for bankruptcy. Other options include debt consolidation and credit counselling. At Spergel, we assess your unique financial situation and recommend the best solution for your needs. If you’re unsure when it comes to debunking common bankruptcy myths, we can help.
Myth 6: Bankruptcy is a sign of financial failure
Truth: Many people feel ashamed about filing for bankruptcy, but it’s a legal process designed to help individuals regain financial stability. Life events such as job loss, medical expenses, or divorce can lead to financial difficulties. Bankruptcy is not a failure – it’s a responsible decision that allows you to move forward with a clean slate.
Myth 7: Bankruptcy takes years to complete
Truth: A first-time bankruptcy in Canada can be completed in as little as 9 months if you meet all obligations and have no surplus income. While a bankruptcy remains on your credit report for several years, the process itself is often much quicker than people expect.
Myth 8: You can file for bankruptcy on your own
Truth: Bankruptcy is a legal process that must be administered by a Licensed Insolvency Trustee (LIT). Only a LIT has the authority to file a bankruptcy or consumer proposal in Canada. Trying to manage unmanageable debt without professional help can lead to more stress and financial missteps.
Myth 9: Bankruptcy affects your spouse’s credit score
Truth: When it comes to debunking common bankruptcy myths, your bankruptcy does not directly affect your spouse’s credit unless they are a co-signer or joint account holder on a loan. If your debts are solely in your name, your spouse’s credit score remains unaffected.
Need expert advice you can trust? Spergel can help
If you’re struggling with debt, don’t let bankruptcy myths hold you back from seeking help. At Spergel, we’ve helped hundreds of thousands of Canadians regain financial stability over the last 35+ years. Our Licensed Insolvency Trustees offer free consultations to explore your options and find the best path to debt relief. Contact us today and take the first step towards financial freedom.
