Before one declares bankruptcy, you might be wondering what the process looks like. In this article, Debt.ca explores what happens after you file for bankruptcy in Canada.
What is bankruptcy?
Bankruptcy is a legal process. The debtor surrenders their property to a licensed insolvency trustee. Individuals enter the bankruptcy procedure to relieve debts that have become unmanageable. The idea is to restart their financial life.
There are actually two types of bankruptcy. The first is chapter 7 bankruptcy or personal bankruptcy. The second is chapter 13 bankruptcy, also referred to as a consumer proposal. Chapter 7 and chapter 13 are references to the United States insolvency process. However, these terms are sometimes used in Canada too.
What can I expect during the bankruptcy process?
In Canadian bankruptcies, you must work with a licensed insolvency trustee (LIT). Only a bankruptcy trustee can file the paperwork required for bankruptcy. During the process, you will meet with a LIT to discuss your circumstances. One of the first things you’ll discuss is whether bankruptcy is the right choice for you. Normally, insolvency is the last option. It’s important to ensure you’re making the correct decision before proceeding.
If you choose to declare bankruptcy, you will complete and sign paperwork with your LIT. Then, the LIT will send your paperwork to the Office of the Superintendent of Bankruptcy. The Superintendent of Bankruptcy will inform the credit bureaus, TransUnion and Equifax. Shortly after, your LIT will send a copy of your bankruptcy file to all your creditors. Any of the lenders you owe money to can file a claim with the LIT.
So far, the process may seem bleak. After your creditors become aware, an immediate stay of proceedings comes into effect. Legally, this means creditors can no longer contact you in an attempt to collect debts which is good news. In addition, they cannot pursue legal action. Secured creditors are an exception, like mortgage lenders. They can still attempt to seize assets put up as security if you still don’t keep up with your payments.
Next, your LIT will file your tax returns up to the date of bankruptcy. If you owe money to the Canada Revenue Agency (CRA), those amounts go into your bankruptcy. If you receive a refund, those amounts will go to the LIT to distribute amongst other creditors.
That’s the process in a nutshell. Keep in mind that you must fulfill specific duties. These may include:
- Attend a meeting with your creditors, if requested
- Make monthly payments of surplus income to your LIT
- Send your LIT proof of income periodically
- Attend credit counselling sessions regarding budgeting and money management
What happens after bankruptcy?
Whenever you receive a Notice of Discharge from your LIT, the bankruptcy process is over. A discharge from bankruptcy officially cancels outstanding debts. At this point, you can begin to rebuild your credit score and financial status. Keep in mind that the bankruptcy proceedings can be longer. Your bankruptcy will remain on your credit report for six years after the date of discharge. Learn more about what you should do after bankruptcy here.
Getting new credit after bankruptcy
Even with a bankruptcy on your report, you may still be able to obtain new credit. Ask your LIT for what happens after bankruptcy. They can suggest ways to building credit before applying. In addition, request general advice on a fresh financial start. The LIT may suggest that you add a personal statement to your credit report.
You can also begin to rebuild your credit. A great starting point is using a secured credit card. These unique credit cards require a cash deposit which is also the credit limit. By paying your credit card bills on time and in full, you can start to rebuild credit. After several months of using a secured credit card, you could apply for a regular credit card. In addition, you can apply for other kinds of debt now that you’ve established some credit history. For example, a car loan or a personal loan. By obtaining new credit and managing it responsibly, you’ll be building credit. Eventually, you can apply for mortgages and other types of big debt.
After bankruptcy, it can be challenging to start from the bottom. Rebuilding healthy credit takes time. Do your best to remain patient, especially when searching for lenders to work with. If you maintain good financial habits, your credit will improve over time.
Getting Help When You Need It
Are you still curious about what happens after bankruptcy? The first step is establishing good financial habits. If you need assistance, it might be a good idea to seek help from a credit counsellor. They can help you with financial habits at any point during bankruptcy. There is no rule as to when you should consult an expert. If you’re worried about your finances, seek counselling sessions.
No matter what your financial situation is, credit counselling may benefit you. It’s never too early or too late to seek help from a trusted expert! Reach out today for a free consultation.
Have questions about bankruptcy or credit counselling? Get answers today.