Facing financial challenges can be overwhelming, and for many, the thought of bankruptcy court adds extra anxiety. However, bankruptcy isn’t the only option, and it’s possible to avoid bankruptcy court altogether by exploring alternatives that can help you regain control of your finances. In fact, in 2022, consumer proposals accounted for 75.5% of all consumer insolvencies, a significant increase from 69.5% in 2021, showing a growing appetite for this form of debt relief in Canada. In this article, we’ll walk you through practical strategies to avoid bankruptcy court, allowing you to resolve your debt issues without the stress of legal proceedings.
What is bankruptcy court?
In Canada, we have a separate court system for addressing bankruptcy issues. If you are currently bankrupt and know that a court hearing will be held to apply for your bankruptcy discharge, you can rest assured that you won’t be bumping into any criminals at your hearing. Bankruptcy court is where a judge oversees the legal process of filing for bankruptcy, including reviewing your financial situation and determining how your debts will be handled. Your Licensed Insolvency Trustee will attend the hearing with you and you won’t have to face the court alone. While bankruptcy can offer a fresh financial start, it involves court appearances and significant consequences, such as a lasting impact on your credit score. For individuals or businesses seeking to avoid the legal complexities of bankruptcy court, there are alternative debt relief options that can help settle your debts in a less stressful way.
Does every bankruptcy go to court?
Not all bankruptcies end with a court hearing. In fact, the majority of bankruptcies don’t see the inside of a courtroom. Most bankruptcies end with what is called an automatic discharge, where a final document is issued confirming all debt included in the bankruptcy is officially ‘discharged’ and must be written off by your creditors.To obtain an automatic discharge, the bankrupt person must complete a set of duties to the satisfaction of the Licensed Insolvency Trustee.. Your trustee must oppose your discharge if he or she cannot justify to the court that all duties have been completed during the initial bankruptcy period. Here are the general duties required of a bankrupt person:
- Make all required payments to the estate
- Attend two mandatory counselling sessions
- Submit monthly income and expense reports, with pay stubs and receipts for specific expenses
- Report all assets to the trustee and provide any/all requested documentation to help value them
- Stay in contact with your trustee and keep your contact information up to date
- Provide information required to file your pre-bankruptcy and post-bankruptcy tax returns
Other reasons for bankruptcy court
Not completing your duties during the first 9 months of bankruptcy is a common reason for a hearing. Some bankruptcies go to court because a creditor chooses to oppose their discharge. Some may have been bankrupt more than twice in the past.Any creditor can oppose a bankruptcy discharge if they have reasonable grounds and take on the legal expense. Here are a few common reasons that creditors may oppose your bankruptcy discharge:
- High tax debt owed to Canada Revenue Agency. If you owe more than $200,000 and this represents at least 75% of your debt, the CRA may request court.
- Professional student loans. If you have borrowed money for professional studies such as to attend law school or medical school, some banks may choose to oppose your bankruptcy.
- Proof of fraudulent activity. When fraud is a concern for a creditor, they may choose to ask the court to allow their debt to stand outside of your bankruptcy, making their debt remain collectible even after your discharge.
How to avoid bankruptcy court
Here are some of our recommended strategies to avoid bankruptcy court.
Consider a consumer proposal
A consumer proposal is one of the most effective alternatives to bankruptcy. It’s a formal arrangement negotiated with your creditors to repay a portion of your debts over a fixed period of time, typically up to five years. It can reduce your debts by up to 80%. Unlike bankruptcy, a consumer proposal does not involve the courts, and you can keep your assets, such as your home or car, during the repayment process. A Spergel Licensed Insolvency Trustee can help you craft a consumer proposal that your creditors are more likely to accept. Many Canadians prefer this option because it provides debt relief without the severe consequences of bankruptcy, such as losing property or appearing in court.
Benefits of a consumer proposal
- Avoid bankruptcy court and legal proceedings.
- Maintain ownership of assets like your home and vehicle.
- Halt interest on your debts immediately.
- Make manageable monthly payments that fit your budget.
- A less significant impact on your credit score compared to bankruptcy.
Negotiate directly with creditors
If your debt is not yet overwhelming, debt negotiation might be an option. Many creditors are willing to work out a repayment plan to avoid pushing you into bankruptcy, especially if you’ve been consistent with payments in the past. You can negotiate to:
- Reduce your total debt.
- Lower interest rates.
- Set up a more affordable payment schedule.
Creditors typically prefer to recover some portion of the debt rather than force you into bankruptcy, where they might receive little or nothing.
Explore debt consolidation
Debt consolidation allows you to combine multiple high-interest debts, such as credit card bills or personal loans, into one lower-interest loan. This makes your debt more manageable and easier to pay off. By reducing your overall interest rate, you can avoid falling further behind on payments and prevent the need for more drastic debt relief measures like bankruptcy. Consolidating your debts also helps you simplify your financial obligations by creating a single monthly payment rather than managing multiple due dates and amounts.
Create a budget and cut unnecessary expenses
Sometimes avoiding bankruptcy can be as simple as reviewing your finances and making tough decisions about spending. A comprehensive budget allows you to see exactly where your money is going and identify areas where you can cut back. This can help free up funds for paying down debt.
Start by:
- Prioritizing essential expenses like housing, food, and utilities.
- Cutting non-essential spending, such as dining out, entertainment, or luxury purchases.
- Redirecting the saved money toward your debt payments.
Seek financial counselling
Professional financial counselling can help you gain a clear understanding of your financial situation and the best way to approach your debts. A Licensed Insolvency Trustee can offer advice on budgeting, negotiating with creditors, and managing debt in ways that help you avoid bankruptcy court. With their guidance, you can explore debt relief options suited to your specific needs.
Use assets to settle debts
If you have valuable assets that aren’t essential to your everyday life, such as investment properties or luxury items, you may be able to liquidate these assets to pay off your debts. This could prevent you from needing to file for bankruptcy while allowing you to maintain financial stability. Selling non-essential assets can help reduce your overall debt load and may give you the funds needed to settle with creditors or pay off loans.
Avoid taking on new debt
While dealing with existing debt, it’s important to avoid accumulating new debt. Taking on more debt, especially high-interest credit, can exacerbate your financial problems and push you closer to bankruptcy. Focus on managing your current obligations and resist the temptation to use credit cards or take out new loans.
Seek legal protection with a Licensed Insolvency Trustee
If you’re struggling to keep up with your debts, contacting a Licensed Insolvency Trustee at Spergel can provide the legal protection you need. A LIT can help you explore various debt relief options, including consumer proposals, and ensure you avoid bankruptcy court.
Why choose a Licensed Insolvency Trustee?
- They are federally regulated debt professionals.
- They can stop collection calls and wage garnishments immediately.
- They provide free consultations to assess your financial situation.
How to avoid bankruptcy court in Canada: FAQs
Here are some of the most commonly asked questions when it comes to avoiding bankruptcy court:
How do you avoid bankruptcy in Canada?
To avoid bankruptcy in Canada, consider exploring alternatives like a consumer proposal, which allows you to negotiate lower payments with creditors while keeping your assets. You can also try debt consolidation, where you combine multiple debts into one manageable loan with a lower interest rate. Another option is debt negotiation, working directly with creditors to reduce your balance or set up a more affordable payment plan. Additionally, creating a budget, cutting unnecessary expenses, and seeking financial counselling can help you regain control of your finances before considering bankruptcy.
How do you stop bankruptcy proceedings?
To stop bankruptcy proceedings, you can file a consumer proposal, which halts the bankruptcy process and offers a way to negotiate debt repayment with your creditors. Another option is to repay the outstanding debts or come to a settlement with your creditors directly. It’s also possible to apply for a stay of proceedings through the court, which temporarily halts creditor actions, giving you time to explore other debt relief options. Consulting with a Licensed Insolvency Trustee can help guide you through the available strategies to stop bankruptcy proceedings.
How do I get discharged from bankruptcy in Canada?
To get discharged from bankruptcy in Canada, you must complete all the required duties outlined by your Licensed Insolvency Trustee. These typically include attending two financial counselling sessions, making all necessary payments, and providing tax information and monthly income reports. Once these duties are fulfilled, you may qualify for an automatic discharge, which typically occurs after 9 months for a first-time bankruptcy with no surplus income. If complications arise, such as objections from creditors or incomplete duties, a court hearing may be necessary to approve your discharge.
Avoiding bankruptcy court is possible with the right approach and assistance. Whether you choose a consumer proposal, negotiate with creditors, or consolidate your debts, you can find relief from financial stress without the court’s involvement. If you’re considering your options or need advice, reach out to Spergel today for a free consultation.