Bankruptcy myths and facts: the top misconceptions revealed

Posted on 8 November 2021

Written by Colin Boulton

Bankruptcy is one of the most common forms of debt relief in Canada, offering a much needed fresh financial start for many individuals. While many people understand the concept of bankruptcy, there are a lot of misconceptions around the process and the final results. Often, many Canadians do not know how to file bankruptcy, or indeed what alternatives to bankruptcy there are out there. For this reason, it is important to consult a trusted Licensed Insolvency Trustee to support you through the bankruptcy process. At Spergel, we are often asked various questions around bankruptcy myths and facts. We thought it would be helpful to debunk the most popular bankruptcy myths and facts to help you better understand the bankruptcy process.

Myth: you will lose all your assets during bankruptcy

One of the top bankruptcy myths is around the loss of assets and bankruptcy. While many people think that bankruptcy means you will lose everything, this is not true. In fact, there are exemptions under the Bankruptcy and Insolvency Act, which protect some of your assets. Each province will have its own bankruptcy exemptions, for instance Ontario’s bankruptcy exemptions. If you meet the appropriate criteria, you can keep any non-exempt assets, like a moderately priced car. Your RRSP is also entirely exempt from seizure, other than contributions made in the year prior to bankruptcy. Aside from these exemptions, there are some assets that may need to be considered including the equity in your home. Your equity may be reacquired by making additional contributions during your bankruptcy (over and above the calculated amount to be paid to your Licensed Insolvency Trustee as surplus income). If this does not appeal to you, there is always a consumer proposal to consider as a bankruptcy alternative. A consumer proposal offers much greater flexibility around your assets, enabling you to keep whatever you can. Learn more about filing a consumer proposal and assets.

Myth: the length of your bankruptcy is on your credit report

Another key bankruptcy myth, a first time bankruptcy will in fact remain on your credit report for just seven years regardless of how long you have been bankrupt. This will be recorded following your discharge with both TransUnion and Equifax, the two largest credit reporting agencies in Canada. Learn more about life after bankruptcy. By comparison, a consumer proposal will be on your credit record for just three years after it has been successfully completed. If you were able to complete your proposal immediately (perhaps by borrowing the entire amount due from a friend, family member, or lender), your consumer proposal will remain on your credit record for three years from the date the proposal is paid in full. Learn more about life after consumer proposal. It is important to consider how quickly you want either a bankruptcy or a consumer proposal to be removed from your credit report before choosing a debt relief solution.

Myth: bankruptcy is an easy way out

A common bankruptcy myth is that bankruptcy is a ‘quick fix’ to your money problems, resolving everything by clearing your debt instead of having to work hard to make your repayments. Having helped over 100,000 Canadians gain debt relief here at Spergel, we can confirm that bankruptcy is not an easy way to escape your financial struggles or indeed to fix your credit score. The harsh reality is that bankruptcy is typically a last resort when all other debt relief options have been considered. It can be an overwhelming process that requires the close support of an experienced Licensed Insolvency Trustee. Bankruptcy also has an impact on your credit report. This can make it difficult to get hold of credit, showing that bankruptcy is not quite the easy option that some consider it to be.

Myth: bankruptcy is the only option when you are struggling with your finances

Many people have heard of bankruptcy and not some of its popular alternatives, which is where this bankruptcy myth often comes into play. This could not be further from the truth, however, as there are many debt relief solutions aside from bankruptcy. Filing a consumer proposal is a great alternative that enables you to keep your assets while reducing your debt by up to 80%. A debt consolidation loan is also a helpful way of combining various different debts for simplicity and a reduction in interest rate. Informal methods of debt settlement can work for other individuals, and even credit counselling can provide valuable takeaways to implement for reducing your debt. Ultimately, the form of debt relief you choose is dependent on your unique financial situation. For this reason, you should always consult a reputable Licensed Insolvency Trustee for support and advice on bankruptcy and the many alternative forms of debt relief.

Myth: all debts are included in a bankruptcy

When it comes to bankruptcy myths and facts, a common misconception is that bankruptcy will write off all debts, no matter what they are. Unfortunately, this is not the case. Bankruptcy covers unsecured debt – learn more about debts covered by bankruptcy. Simply put, bankruptcy can resolve any debts that are not associated with specific assets. Secured debt, on the other hand, includes debts like mortgages and car loans. Any pressure you face on your secured debts can, however, often be addressed by tackling any unsecured debts you may have. The best way to address any overwhelming debts you are facing is to book a free consultation with a Licensed Insolvency Trustee. They can review your financial situation and recommend the best form of debt relief for you.

Myth: only broke people go bankrupt

This is a huge bankruptcy myth, and the reality is very different. Financial struggles can confront any of us, no matter what our income or circumstances may be. In fact, often the more income you have, the higher the chance of you accumulating a lot of debt. Certain life events including costly medical bills or divorce can occasionally lead to sudden overwhelming debt and a situation where it is difficult to know what to do next. No matter how bad you may feel your financial situation is, you should remember that there is always a debt relief solution for you. Bankruptcy is a debt relief solution for anyone who needs it, provided you are insolvent and meet the bankruptcy eligibility criteria.

Myth: you can max out all your credit cards and then file bankruptcy

It is a common bankruptcy myth to think that you can go on a huge shopping spree and enjoy various vacations before simply clearing all your debt through filing bankruptcy. The reality is pretty different. Making various large purchases on your credit cards and then going to declare bankruptcy will not be viewed favourably by a bankruptcy trustee. Equally, when it comes to becoming discharged from bankruptcy, your spending behaviour could well affect the decision on your application made by creditors. Both your creditors and Licensed Insolvency Trustee have a huge influence on your overall bankruptcy process, so it is key that you take your application seriously and do not make purchases that you cannot afford.

If you have questions on bankruptcy myths and facts, book a free consultation with one of the experienced Licensed Insolvency Trustees at Spergel. We can assess your suitability for bankruptcy, and perhaps suggest a more appropriate debt relief alternative depending on your unique financial circumstances. The sooner you reach out, the sooner we can help you. You owe it to yourself.


Colin Boulton

Colin Boulton is a Chartered Accountant and Insolvency and Restructuring Professional with over 20 years’ experience as an LIT (Licensed Insolvency Trustee). He is also our resident expert on unemployment and wage garnishments and manages Spergel's offices in Eastern Ontario (including Oshawa, Peterborough, Lindsay, Ajax and Scarborough). When not at the office helping clients cross their debt-free finish lines, Colin enjoys training for and participating in triathlons.

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