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The True Cost of Bankruptcy

We are all about partnerships at Momentum. We know that we cannot do everything and that many of the people in our community have knowledge and expertise that we can learn from. It is in the spirit of learning from our community members that we present the following blog post from guest blogger Douglas Hoyes, Founder & Trustee of Hoyes, Michalos & Associates.
If you would like to learn how to manage your money and avoid bankruptcy join us for FREE Money Management workshops on Monday evenings or Tuesday afternoons.

Bankruptcy is a relatively simple process. You meet with a licensed bankruptcy trustee who will first help you decide if bankruptcy is really necessary. During this consultation, almost everyone has the same set of questions, which we’ll answer below:

  • How much will bankruptcy cost?
  • Do I lose everything?
  • How long will bankruptcy last?
  • Do I have to pay the trustee a fee?
How Much Will Bankruptcy Cost?

There are two things that determine how much your bankruptcy will cost:
1. Your total household income and family size
Bankruptcy is based on the premise that the more you earn, the more you pay. The technical term is surplus income. What this sometimes complicated calculation actually means is that you get to keep a portion of your income for living expenses. The amount you keep is preset by the Canadian government.

  • If you earn anything over this amount, you have to pay half of that “surplus” into your bankruptcy.
  • If you don’t earn enough to bring you over the threshold, you keep your entire income except for a minimum monthly payment set by the trustee to cover the administration costs of your bankruptcy.

2. What non-exempt assets you own
Just like the government knows you need to keep a certain amount of money to live on, they also know bankruptcy should not be so harmful that it takes all of your assets.  Because of this, both the federal and provincial government have set up certain “exemptions” for what assets must be surrendered to your trustee. The exemptions vary by province, but generally you can keep most personal belongings and furnishings and an inexpensive car. In all provinces, most RRSP savings (except those you made in the last year) are yours to keep as well. Your trustee will tell you what assets you keep.
Anything not exempt must be surrendered for the benefit of your creditors. So if you own a home with equity, you may have to pay extra to your trustee. Again, it varies by province. You will also lose your tax refund for the year of bankruptcy, and for all prior years that you have not yet received.
If you have a lot of expensive assets that may be affected by bankruptcy, you should talk to your trustee about a consumer proposal. A proposal allows you to make a payment deal with your creditors and keep your assets.

How Long Does Bankruptcy Last?

The minimum length of time for a first time bankruptcy is nine months. This time may be extended for two reasons:

  • You have surplus income. If you do, your bankruptcy is automatically extended to 21 months.
  • You do not complete your duties, which include reporting your income and expenses each month, making payments and attending two credit counselling sessions.

Unless you have high income, you can receive your discharge and be free of debt in as little as nine months. If you would like to understand more about how much bankruptcy will cost, watch this short video.

How Does the Trustee Get Paid?

In most cases, you will be required to make a monthly contribution toward the cost of administering your bankruptcy based on your income, and you will surrender certain assets as noted above. Your trustee is paid a fee from these funds in your estate, as legislated under the Bankruptcy and Insolvency Act.
There are no extra fees, and no up-front fees. In effect, the creditors pay the cost of administering the bankruptcy.
As you can see, the true cost of bankruptcy varies by person based on what they make and what they own. For most, however, the cost is much less than the monthly minimum payments they are currently making on their debt, and it is much less than the cost of struggling to repay all of your debt, plus interest, over many years.


About the Author

Doug Hoyes has extensive experience resolving financial issues for Canadian citizens. A Licensed Bankruptcy Trustee and co-founder of Hoyes, Michalos & Associates, he is also a Chartered Professional Accountant (CPA), Chartered Insolvency and Restructuring Professional and Business Valuator. He regularly comments on a variety of TV, radio and other media outlets on topics surrounding bankruptcy and writes a column for the Huffington Post. Hoyes has been a Licensed Trustee since 1995 and has testified before the Canadian Senate’s Banking, Trade and Commerce Committee in 2008.

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