What are the Pros and Cons of Filing Bankruptcy?

Posted on 6 July 2021

Written by Graeme Hamilton

Bankruptcy is a form of debt relief that should be considered carefully – generally speaking, it is a last resort for those struggling with overwhelming debts. When it comes to finding a form of debt relief, your first step should be to speak to an experienced Licensed Insolvency Trustee. They will work with you to discuss your options and any alternatives to bankruptcy that may be more appropriate. 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 filing bankruptcy?’, we have listed a summary for you below.

Pros of filing bankruptcy

There are a number of advantages of filing bankruptcy, including keeping creditors at bay and clearing debts that you are unable to afford. Here are the pros of filing bankruptcy.

Clearance of debt

The primary reason for many to file bankruptcy is to gain debt relief. Once you are 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.

A stay of proceedings

Filing bankruptcy automatically generates a stay of proceedings. A stay of proceedings is a legal requirement that any creditors you owe money to must stop making collection calls, contacting you, or pursuing any legal action against you. As part of this protection, your bankruptcy trustee will instead work with your creditors on your behalf. For many, this is a huge relief.

The end of legal action

While a stay of proceedings ensures creditors are unable to threaten legal action against you, it also stops any ongoing activity. This is applicable to wage garnishments when creditors legally take money from your pay cheques via your employer. Your bankruptcy trustee will be able to stop wage garnishments, except for those from the Family Responsibility Office.

A fresh financial future

Finally being discharged from bankruptcy and gaining clearance from unmanageable debt means you will no longer have financial burden hanging over you. Instead, you are able to focus on saving money, and making regular payments to rebuild your credit. Learn more about life after bankruptcy.

Cons of filing bankruptcy

As with any other form of debt relief, there are some cons of filing bankruptcy. For some, it may be worth looking at bankruptcy alternatives, including a consumer proposal or a debt consolidation loan. Here are the cons of filing bankruptcy.

The cost of bankruptcy

Filing bankruptcy does come at a cost. Bankruptcy fees must be paid depending on your income and assets, and a Licensed Insolvency Trustee will have a cost that is proportionate to this. The greater your income and assets, the greater the cost of your bankruptcy. For this reason, many who find themselves insolvent look to filing a consumer proposal instead.

The loss of non-exempt assets

While it is certainly not the case that you lose everything in bankruptcy, you will need to surrender some non-exempt assets including RRSP contributions for the past year, and any equity on your home over a $10,000 threshold. At Spergel, we can help you to retain whatever possible when you file bankruptcy. Learn more about assets and bankruptcy.

The impact on credit rating

Bankruptcy will be flagged on your credit report. This will remain on your credit report for six years following your discharge from a first-time bankruptcy, and for fourteen years for a subsequent bankruptcy. That said – if you are struggling with overwhelming debts, it is likely that your credit rating is already poor. In fact, bankruptcy can help begin the rebuild. Learn more about life after bankruptcy.

Bankruptcy obligations

In order to become discharged from bankruptcy, there are a number of duties to fulfil. These obligations include informing your bankruptcy trustee of your income on a monthly basis, making frequent payments, going to credit counselling sessions, and sharing information on tax. If you don’t fulfil these obligations, you cannot be discharged from bankruptcy.

Not all debts are covered

Bankruptcy covers almost all unsecured debts, but not secured debts which are those associated with an asset, like a car loan or a mortgage. Bankruptcy therefore cannot discharge debts including alimony, child support, and student loans if you have left education within seven years. Find out more about the debts covered by bankruptcy.

Certain roles will be impacted

If you have a certain form of employment or work in a specific industry, you may need to think twice before declaring bankruptcy. Having a bankruptcy on your credit report could affect roles including the directorship of a company. Equally, if part of your role includes being in charge of money or trust funds, you may find you no longer have employment following a bankruptcy declaration.

Is filing bankruptcy right for you?

For many Canadians, the pros of filing bankruptcy outweigh the cons. If you are looking to stop a wage garnishment or collection agency calls, it may be the right choice for you. If you are simply struggling with unmanageable debt and are unsure of what to do next, a bankruptcy alternative may be more suitable. In fact, a consumer proposal is a popular alternative that offers a pathway to becoming debt free and beginning a fresh financial start. A consumer proposal is particularly ideal for those who wish to keep their assets, too. The best thing to do is speak to a trusted Licensed Insolvency Trustee who can help you on your journey to gaining debt relief.

If you have questions on the pros and cons of filing bankruptcy, or have concerns about overwhelming debt, book a free consultation with Spergel. Our experienced bankruptcy trustees have been helping Canadians become debt free for over thirty years. We will walk you through the advantages and disadvantages of bankruptcy, and the best option for you.

Graeme Hamilton

Graeme Hamilton

Graeme Hamilton is a Chartered Insolvency and Restructuring Professional with over 10 years’ experience as an LIT (Licensed Insolvency Trustee). He is also Spergel's resident expert on bankruptcy and debt relief in the Ontario region. Prior to establishing his career in the insolvency industry, Graeme lived in Cambodia doing volunteer work with NGO's.

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