Category: Bankruptcy Discharge

10 Myths about Bankruptcy

If you are planning to file bankruptcy and are not sure if filing bankruptcy is going to be helpful, you will have to consider the nuances associated with it.  You will have to consider the misconceptions or the myths, which most commonly are associated with bankruptcy.  You will have to do extensive research, talk to bankruptcy attorneys and trustees  and get related advice on insolvency.  Bankruptcy is a complex program.  You need to improve your knowledge before signing any papers  in order to avoid making any mistakes.

True or False

Bankruptcy is a legal process.  It is extremely important for you to be aware of its details.  Before you declare that you are insolvent, you must understand the bankruptcy laws.  Here is a list of myths and truths on the bankruptcy and liquidation process.

• False – You are going to lose your house through bankruptcy filing.

Truth– When you meet with the trustee, a calculation of your equity in your house will be made based on the appraised value of your house and the payout figure of your mortgage.  You will be given the opportunity of paying the equity in your house to the trustee (over time with no interest).  The trustee will distribute this money to your creditors at the end of the bankruptcy.  If you do not want to stay in the house or if there is no equity in the house, your trustee will advise you on turning the house over to your mortgage company at the time you sign the papers to file the Assignment in Bankruptcy.  Any loss suffered by the mortgage company on the subsequent sale of the house will be a debt that is included in your bankruptcy.

• False – You can never qualify for credit in the future if you file bankruptcy.

Truth – Although it is true that it may not be possible to obtain new credit soon after your bankruptcy discharge, it is not true that you can never obtain credit.  You will have to work on improving your credit score before you apply for new credit.  Bankruptcy has a negative effect on your credit, but you can obtain new credit after the discharge.  However, you will have to demonstrate to your creditors that you are capable of paying your bills on time if they grant you credit.

• False – None of your tax debts can be discharged in bankruptcy.

Truth – You can discharge the income tax debts through bankruptcy.  Although you cannot discharge all types of debts, income taxes can still be discharged.  It is important for you to know this and consider your options under this provision.  If your tax debt is very high in relation to your other debts, it may be considered as filing a “tax driven bankruptcy” which may effect your discharge.

• False – Bankruptcy can be filed only once in a lifetime.

Truth – Bankruptcy can be filed more than once and any number of times you need to.  There is no limit to the number of time you can go on to claim that you are insolvent and cannot pay down your liabilities.  The only limitation is that you must be discharged from your prior bankruptcy before you file the next one.  A second time bankruptcy will take at least 24 months to get discharged.  A third time bankruptcy will require a court hearing to get discharged.

• False – Bankruptcy cannot be your option if you have a job.

Truth – This is a complete misconception that you cannot file bankruptcy if you have a job.  It does not mean that you will have to be literally broke to file bankruptcy.  Your debts must be higher than $1,000, your liabilities must be higher that your assets and you must be incapable of paying your debts as they come due.  Your employer is not even informed that you filed bankruptcy, unless, of course, if your salary is being garnished.  The trustee can stop the garnishee but a letter has to be sent to your employer’s payroll department.

• False – In case of married couples, both will have to file bankruptcy.

Truth – This is one of the other false ideas associated with bankruptcy.  If both of you have debts up to your eyeballs, you both can file bankruptcy.  However, if you are solely responsible for the debts, your spouse need not file bankruptcy.  Being married or living common-law does not make you liable for your partner’s debts.

• False – You will never be able to own a property again.

Truth – If you can improve your credit, you will be able to obtain a mortgage.  If you can take out a mortgage, you will be able to own a home.

• False – Creditors are going to harass you if you file bankruptcy.

Truth – Bankruptcy is a legal process and your creditors and lenders are bound to follow the law.  Creditors are not supposed to harass you because you filed bankruptcy.  If they do, you can file complaints against them.  Bankruptcy is governed by Federal law under the Bankruptcy and Insolvency Act (B.I.A.).

• False – All of your debts can be discharged through bankruptcy.

Truth – Not all of your  debts can be discharged through bankruptcy.  Some debts, such as student loans (under 7 years), child support, alimony, fines or penalties imposed by a court, debts obtained by fraud are the main debts that cannot be discharged by Bankruptcy.  Your trustee will review your specific problems with you before you sign any papers.

• False – If you max out your credit cards and shortly after file bankruptcy, you can get those debts discharged easily through bankruptcy.

Truth – This, if caught, can be considered as fraud and you can be charged under the Criminal Code of Canada.  It is also considered an offence under the Bankruptcy and Insolvency Act which could result in you not being discharged from bankruptcy on time plus the debt surviving the bankruptcy.  The creditor will argue that their entire debt should survive the bankruptcy.  The debtor will argue  that only that portion of the debt that was charged on the card  immediately before filing the bankruptcy should survive.  You will not get a lot of sympathy from a court if it is clear that you maxed out all your credit cards before you filed your bankruptcy.

These are the main truths and myths associated with bankruptcy which you need to be aware of.  The above is not meant to include all truths and myths and may not apply to a specific situation.  We urge you to discuss all specific questions with your trustee or other qualified financial advisor.

Contact Rumanek & Company Ltd. for more information on bankruptcy and debt solutions. Or please fill out the free bankruptcy evaluation form.  Rumanek & Company have been helping individuals and families overcome debt for more than 25 years.  To learn more please visit our YouTube  Channel.