When to Declare Personal Bankruptcy?

Personal bankruptcy is a solution that may seem serious, but it is sometimes necessary in order to get your finances back on track. Before making a decision, it is advisable to get informed while carefully assessing your situation. When is the right time to declare bankruptcy, and what are the warning signs that it may be time to consider it?

What is personal bankruptcy

Personal bankruptcy is a legal solution provided by the Bankruptcy and Insolvency Act that allows a person with too much debt to wipe out the majority of their debts and start afresh. It is aimed at individuals who can no longer meet their financial obligations and for whom other options are no longer viable.

This process must be administered by a licensed insolvency trustee, the only professional recognized by the federal government to oversee a bankruptcy or consumer proposal. The trustee acts as an intermediary between you and your creditors, while ensuring that the procedure complies with the legal rules.

It's important to distinguish bankruptcy from a consumer proposal. While bankruptcy can result in the liquidation of certain assets and has a heavier impact on your credit rating (R9 rating), a consumer proposal allows you to reduce or spread out your payments while keeping your assets, with a slightly less severe credit rating (R7).

Warning signs of personal bankruptcy

There are several signs that may indicate personal bankruptcy. Here are the main ones.

1. Incessant calls and pressure from creditors

If your creditors or collection agencies call you regularly to demand payment, this is a clear sign that your situation has become worrying. Personal bankruptcy puts an immediate end to these pressures by suspending all recourse.

2. Inability to repay debts and loans

When your minimum payments on credit cards, loans or lines of credit exceed your actual ability to repay, it may be time to consider bankruptcy. Bankruptcy offers a legal solution for wiping out the majority of your debts and starting afresh.

3. Use one credit card to pay another

If you have to take on new debts to cover old ones, your debt is probably out of control. This spiral is a frequent indicator that insolvency proceedings, such as bankruptcy, should be considered.

4. Late payments on mortgage, rent or car loans

When priority debts such as your home or car can no longer be paid on time, your financial stability is compromised. Bankruptcy can provide a framework for managing your obligations while protecting certain essential assets.

5. Attachment of wages or legal proceedings in progress

If your creditors start legal proceedings or garnish your wages, it becomes urgent to act. Personal bankruptcy, administered by a licensed insolvency trustee, immediately suspends these measures and gives you a respite to rebuild your finances.

The consequences of personal bankruptcy

Property and assets

In a personal bankruptcy, certain assets may be liquidated in order to partially repay your creditors. However, the law protects a number of essential assets, such as part of the value of your home, your furniture, your work tools and your RRSPs held for more than 12 months. So you don't lose everything: some assets are exempt from seizure so that you can maintain a minimum level of stability.

On credit rating

Personal bankruptcy results in an R9 rating, the worst credit rating, which remains on file for 6 to 7 years after discharge (and longer in the event of repeated bankruptcy). This can restrict access to new loans or credit, but does not prevent the gradual rebuilding of your financial history.

Daily life

Going bankrupt also entails certain obligations: surrender of your credit cards, compulsory follow-up with the trustee, budget consultation sessions and strict management of your finances. Your budget will have to be adapted to your actual income, which may mean some short-term constraints. However, these efforts are necessary if you are to benefit from a fresh financial start and reduce the stress associated with debt.

A new start is possible

Personal bankruptcy is a legal solution that allows you to put an end to unsustainable debts and make a fresh start. Although it has certain consequences for credit and assets, it offers immediate relief from the pressure of creditors and legal proceedings.

At Mallette, our Licensed Insolvency Trustee guide individuals and businesses through this process with humanity and transparency. With our expertise and local presence throughout Quebec, we help you assess your options and choose the best solution to restore your financial stability.