For anyone struggling with more debt than they can afford to repay, filing bankruptcy could be an excellent way to clear any unmanageable debts. If you are wondering ‘what are the pros and cons of bankruptcy?’, we’ve listed a summary for you below. Bankruptcy is a form of debt relief that is often viewed as a last resort for people facing unmanageable debt. While it can provide relief, it also has significant consequences. If you’re considering this option, understanding the advantages and disadvantages can help you to make an informed decision. In this guide, we’ll explore the pros and cons of bankruptcy to help you assess if it’s the right step for your financial future.
What is bankruptcy?
Bankruptcy is a legal process that allows individuals or businesses to either eliminate or restructure their debts when they cannot repay them. In Canada, personal bankruptcy is governed by the Bankruptcy and Insolvency Act (BIA) and managed by Licensed Insolvency Trustees (LITs), the only professionals in Canada legally able to file all forms of debt relief. Bankruptcy is intended to offer a fresh start, but it also comes with various obligations and long-term consequences.
Pros of filing bankruptcy
There are a number of advantages of filing bankruptcy, including keeping creditors at bay and clearing debts that you’re unable to afford. Here are the pros of filing bankruptcy:
Debt relief
The primary reason for filing bankruptcy is to gain debt relief. Bankruptcy can eliminate most unsecured debts, including credit card debts and payday loans. Once you’re legally discharged from bankruptcy, you are cleared of any debt you filed as part of your bankruptcy. This means you can begin a fresh financial start, free from overwhelming debt. Learn more about the types of debt covered by bankruptcy.
Protection from creditors
Filing bankruptcy automatically generates a stay of proceedings. A stay of proceedings essentially stops creditors from collecting from you, putting a halt to any collection calls, wage garnishments, and legal actions. This is a huge relief for many debtors who can finally gain peace of mind and instead focus on rebuilding their finances without being harassed by creditors.Â
Affordable monthly payments
Bankruptcy can be more affordable than other debt repayment methods. Your payments in bankruptcy are based on your income, family size, and other expenses, allowing you to maintain a basic standard of living. In Canada, if your income is above a certain threshold, you may need to make surplus income payments, which increase the cost of your bankruptcy but still offer debt relief.
Financial counselling opportunities
Bankruptcy requires you to complete two financial counselling sessions with a Licensed Insolvency Trustee (LIT), which can help you learn money management skills, budgeting, and strategies to avoid future financial trouble. These sessions aim to help you get back on track and regain control over your finances.
Possibility of a shorter process
A first-time bankruptcy in Canada can be discharged in as little as nine months if you meet certain income requirements and fulfil your duties. This quick process allows you to move on and start rebuilding your credit sooner.
Cons of filing bankruptcy
The disadvantages of filing bankruptcy should also be considered before moving ahead with the process. A reputable Licensed Insolvency Trustee will review your unique circumstances and recommend the best path of action for you. Here are the cons of filing bankruptcy:
Impact on credit score
Bankruptcy can have a significant impact on your credit score, which can make it more challenging to obtain credit, rent an apartment, or secure certain types of employment. In Canada, a first bankruptcy remains on your credit report for six years after discharge, while a second bankruptcy stays for 14 years.
Loss of assets
Depending on your situation and province, you may lose certain assets in bankruptcy, such as valuable personal items, investments, or property. In some cases, you can keep specific exempt assets like a basic car, clothing, and tools for work. Your Licensed Insolvency Trustee can explain which assets may be exempt in your province. At Spergel, we can help you to retain whatever is possible when you file bankruptcy.
Non-dischargeable debts
Bankruptcy doesn’t eliminate all types of debt. Certain obligations, such as student loans (if less than seven years old), child support, alimony, and court-imposed fines, cannot be discharged through bankruptcy. This means you may still have financial responsibilities even after your other debts are forgiven.
Surplus income payments
If your income exceeds a government-set threshold, you will be required to make surplus income payments, which can extend your bankruptcy and increase its cost. These payments are based on your income, and the more you earn above the threshold, the more you will need to pay, potentially making bankruptcy more burdensome.
Public record
Bankruptcy is a public process, which means that anyone can access your bankruptcy filing in public records. While most people are unlikely to search for this information, the knowledge that your financial difficulties are on record may be a concern for some individuals.
Alternatives to bankruptcy
If you’re uncertain about filing for bankruptcy, there are alternatives that may help you regain control of your finances:
- Consumer proposal: this is a formal agreement with your creditors to pay back a portion of your debt over a specified period. A Licensed Insolvency Trustee can negotiate on your behalf, allowing you to avoid some of the more severe consequences of bankruptcy. At Spergel, we can often reduce the debts in a consumer proposal by up to 80%.
- Debt consolidation: this involves combining your debts into a single loan with a lower interest rate. Debt consolidation loans can simplify payments but may not be an option if your credit is already damaged.
- Debt management plan: through a credit counselling agency, you can establish a structured plan to repay your debt over time. While it won’t reduce the amount owed, it may help you avoid the need for bankruptcy.
Is bankruptcy right for you?
For many Canadians, the pros of filing bankruptcy outweigh the cons. If you’re looking to stop a wage garnishment or collection agency calls, it may be the right choice for you. The best thing to do is speak to a trusted Licensed Insolvency Trustee who can provide valuable insights and help you determine the best path forward. They can guide you through the bankruptcy process or suggest other viable options, such as a consumer proposal, tailored to your financial situation.
If you have questions on the pros and cons of bankruptcy, or have concerns about overwhelming debt, book a free consultation with Spergel. Our experienced Licensed Insolvency Trustees have been helping Canadians become debt free for over thirty years.Â
