Did you know that the average Canadian household owes close to $1.78 for every dollar earned?
It’s no wonder debt is a financial issue for Canadians, with many of them facing owing amounts so high that there is no hope of paying it off.
If you find yourself in this type of financial crisis, bankruptcy is an option for clearing your debts. However, it comes with certain obligations you are expected to fulfill.
What is Bankruptcy?
Bankruptcy is a legal process for individuals who seek relief from some or all debts when they cannot repay these debts to creditors.
Filing for bankruptcy requires a licensed insolvency trustee, who files the bankruptcy and sends a notice of bankruptcy to the creditors.
The creditors then cannot proceed with any lawsuits, garnishes or payment requests.
After filing for bankruptcy, you are eligible for discharge from the trustees after 9 months. However, the bankruptcy itself remains on your credit report for at least 6 years.
What Happens After My Bankruptcy is Filed?
Once the bankruptcy is filed, you are required to fulfill a few obligations with the trustee.
Your responsibility during the bankruptcy includes:
- Sending your trustee proof of your income and a monthly budget once a month.
- Notifying your trustee of any changes with your work or income.
- Attending 2 credit counselling sessions. During these sessions, a credit counsellor will guide you through budgeting and money management techniques.
- Making monthly bankruptcy payments to the trustee.
During this time, you can expect to no longer have to deal with creditor calls. When your bankruptcy is filed by the trustee, an “automatic stay” is forwarded to the creditors.
An automatic stay indicates to the creditors that they are not allowed to take collection action against you.
What Should I Do After I File Bankruptcy?
Once your bankruptcy is discharged, you will no longer be required to deal with the trustees.
However, although your obligations to the trustee are compete, there are measures you can take to protect yourself from future bankruptcy and rebuild credit.
1. Check Your Credit Reports
Even though filing for bankruptcy clears your debts, you want to make sure nothing was missed on your credit report before beginning to reestablish credit.
About 3 to 6 months after your discharge from bankruptcy, you should check your credit report.
This is not the same as checking your credit score, which you can do for free now through most bank’s websites and apps.
According to Canada.ca, you can order a copy of your credit report through Equifax Canada and Transunion Canada without affecting your credit score.
2. Start a Budget
The reason bankruptcy proceedings require you to attend credit counseling is to try to prevent a bankruptcy from happening in the future.
You should continue what you learned from the credit counseling even after your bankruptcy is discharged.
Additionally, before you begin to build credit again, you want to make sure you can afford payments on a credit card.
Healthy financial habits will help you avoid a future bankruptcy as well as help you rebuild your credit quickly.
3. Build New Credit
Although the bankruptcy remains on your credit report for a minimum of 6 years, you can begin to build credit again immediately after your discharge.
While some financial institutions will deny you credit due to your bankruptcy, many lenders will look at you as if you have never had credit before, since bankruptcy essentially clears your credit status.
In order to reestablish credit, you should begin with a low limit secured credit card. Secured credit cards, as opposed to prepaid cards, offers you revolving credit.
This means that you can borrow against the card as long as you keep the balanced paid. Secured credit cards require a security deposit.
Be sure to use the card responsibly and only spend what you can afford to pay off each month.
Is Bankruptcy the Right Option For You?
Whether bankruptcy is the right choice for you or there is another viable option to help with your debt, you should speak with a professional accountant to ensure you are heading down the right financial path.
Contact our experts at Liu & Associates for more information about bankruptcy and other debt-solving options.