Bankruptcy can be a scary word when it comes to solving your debt problems.
This legal proceeding is available to individuals who are unable to repay their outstanding debts but it’s no secret that there are many myths out there that make the process seem frightening and confusing.
Before you balk at the idea of filing for bankruptcy, continue reading as we dispel ten popular myths about bankruptcy in Alberta:
1. Bankruptcy is an Easy Way Out
Filing for bankruptcy is not a cure-all for your financial problems. Yes, it can eliminate most of your debts and eventually fix your credit, but bankruptcy is recorded on your credit bureau report and stays there for over 6 years.
Additionally, during the period of time it takes to complete the bankruptcy and have your debts discharged, the bankruptcy trustees have total control of your finances. This means you will have to surrender your credit cards, report your income and living expenses, and send them copies of your pay stubs.
During a bankruptcy, it is also very difficult to obtain credit and start improving your credit score.
Overall, filing for bankruptcy can be an emotional experience. It should only be done when absolutely necessary.
2. Anyone Can File for Bankruptcy
Bankruptcy is not the right solution for everyone. Doing so involves costs and fees so choosing to file for bankruptcy depends entirely on your income level and the assets you own – and can become an expensive endeavor.
However, bankruptcy is not the only solution when you run into financial trouble. There are other programs available to help you deal with your debt.
3. Filing for Bankruptcy is Free
As mentioned above, there are costs and fees associated with filing for bankruptcy. The trustees that handle your bankruptcy have to get paid – typically through the money that’s freed up from the liquidation of your assets.
There’s no flat rate for filing bankruptcy so it’s important to speak with a professional trustee regarding the costs and fees.
Along with paying the fees, and until you are discharged from the bankruptcy, a portion of your earnings above a certain threshold (also known as “surplus income”) may be turned over to the trustee to distribute to the creditors.
4. Bankruptcy Clears All of Your Debts
Many people believe that bankruptcy will clear all of their debts but this is not true. There are some debts that cannot be discharged in bankruptcy such as:
- Mortgages
- Car loans
- Alimony
- Spousal and child support
- Court fines
- Claims (arising from assault, for example)
- Student loans (unless you have been out of school for 5-7 years)
These are known as “secured debts” and cannot be eliminated through bankruptcy.
5. You Can Max Out Your Credit Then File for Bankruptcy
A dangerous myth about bankruptcy is that you can make large purchases and max out your credit cards then file for bankruptcy and make it all go away.
This can jeopardize working with a bankruptcy trustee and creditors may reject your application to be discharged from their bankruptcy due to these purchases and habits.
Bankruptcy is best left for situations where you’ve run into trouble with debts you were at one time able to handle.
6. Bankruptcy is for Poor People
Financial problems can happen to anyone. From high-income earners to low-income individuals, anyone can run into trouble with their debt.
In fact, the more you earn, the more likely you have a lot of debt. The more debt you have, the higher your risk of running into financial issues.
Bankruptcy is a legal process that does not discriminate between wage classes. It is there for anyone who is not able to pay their obligations.
7. When You Claim Bankruptcy You’ll Lose Everything
A huge people have when it comes to claiming bankruptcy is that they will lose everything in the process: their car, their home, their possessions, etc.
Bankruptcy exemptions vary by province but, in Alberta, you are allowed to keep the following:
- Food, clothing, and household furnishings
- One motor vehicle (up to $5,000)
- Your home (up to $40,000)
- Social allowance, disability benefits, and widow’s pension
- RRSPs, RESPs, and pensions
One guaranteed exemption from bankruptcy with no limits in Alberta is medical and dental aids.
8. Bankruptcy Will Destroy Your Credit Rating
It’s true that creditors don’t like seeing a bankruptcy notation on your credit file but not being able to keep up with your debts and dealing with collection agencies is going to damage your credit rating anyway.
So will bankruptcy destroy your credit rating? Not entirely. Your credit score will drop significantly but you can begin to rebuild your credit.
It will take time before you can get approved for a credit card or loan but it is possible to start borrowing money again even while there is a bankruptcy on your credit file. You will have to start with a smaller credit product such as a credit card with a low limit.
9. Filing for Bankruptcy Will Affect Your Spouse
Bankruptcy filing is specific to the individual filing it. This means that if you claim bankruptcy, your spouse’s credit will not be affected – as long as they didn’t guarantee or co-sign for any of your debts.
Alternatively, filing bankruptcy means that only your debts will be discharged, not the debts of your spouse.
10. Bankruptcy is the Only Way Out
While bankruptcy is sometimes the best option in dealing with debt issues, there are other programs available that may be better suited to your specific situation.
In Alberta, you can also seek relief via debt management programs, consumer proposals, and debt consolidation.
Is Bankruptcy Right For You?
With so many available options when it comes to tackling your debt issues, choosing the right one is important to restore the health of your finances.
If you are interested in finding out more about bankruptcy, or other alternatives, we invite you to speak with one of our licensed credit counselors to best plan out your next steps.
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