Most of us have a preconceived notion of what declaring bankruptcy signifies. It may have something to do with being lazy, irresponsible or dishonest. But in reality, the majority of Canadians that file for bankruptcy do so because their economic circumstances have changed.
In this podcast, Licensed Insolvency Trustee, Derek Chase answers some of the most frequently asked questions about bankruptcy:
- Who will find out?
- Will my employer have to know?
- How will it affect my credit score and for how long?
- What debts are not covered in a bankruptcy?
- What are the other options I should be considering?
Today’s attitudes have shifted due to the change in the economic conditions in our country. There is no shame in using this legal procedure to deal with unmanageable debt. Bankruptcy should be a strategic decision rather than a stigma.
Read the Transcript
Welcome to the Debt Matters podcast where we help Canadians find solutions to their debt with Licensed Insolvency Trustees from right across Canada. I’m Wayne Kay.
On the show today we’re going to be talking about Bankruptcy and the whole stigma around that. To help out my guests today, Derek Chase from Derek Chase & Associates in Campbell River, British Columbia. Good morning, Derek. How are you?
Derek Chase 0:26
Morning, Wayne, I’m fantastic. How are you doing?
Terrific. So when we talk about the stigma of Bankruptcy – this is something that I’ve heard a lot of people talk about when it comes to debt problems. They’ll say, Well, at least I didn’t declare Bankruptcy. There’s kind of this stigma around it. Why is that?
Derek Chase 0:44
It’s a good question. I think it’s just something that is never a goal that you set out to accomplish or something that you want to do. And therefore, it really should be the last option that you take. And that’s one important reason to explore your options to see if there’s any other possible way to get relief from your debts.
But at the end of the day, sometimes a Bankruptcy filing can be the most practical thing to do to reset your finances. It’s federal law, it’s available coast to coast, and it’s something to evaluate, at least, as far as the stigma that comes with it. Certainly, if you have another choice, it’s good to look hard at those other choices, too.
But a lot of people don’t know what somebody’s personal money relationship is or what they’re going through. So it’s not like this is broadcast anywhere – that you are going through Bankruptcy.
Derek Chase 1:36
That’s true, it can be a very private matter. In fact, people ask me who’s going to know about this, if I do a Bankruptcy filing? I say very few people. It’s going to be myself as Trustee, it’s going to be the federal government, and it’s going to be the creditors that you have. And within that bubble, that’s it typically. It’s very rare these days that you see any advertisements in the newspaper for a Bankruptcy filing. There’s very specific circumstances where that has to happen.
For the vast majority of Bankruptcy filings across Canada, there is no publication and it’s just a private matter, the creditors, the person, the federal government, and the Trustee.
Was that a thing in the past?
Derek Chase 2:20
You know, I don’t know the history of that – as far as how far back that rule might have changed. But certainly now, if you see an advertisement in the newspaper it mainly relates to a company situation, or perhaps a personal situation where there’s greater than $15,000 of assets that are free and clear that the Trustee needs to handle. It’s just not a common thing that you see these days.
Right. Do you have to inform the employer? Because I’m sure a lot of people wonder, you know, will the employer know about this?
Derek Chase 2:54
Yes, that’s another common question that we get when we’re initially talking with people. And again, the vast majority of times, I would say, No, the employer doesn’t have to know. There are some rare circumstances where that can come into play.
For example, say that the person is getting a garnish and they want that garnish to stop right away. Once the Bankruptcy is in place, then we can reach out to the employer and the creditor and get that garnish to stop immediately. So I’m not saying that the employer would know, but that is quite rare. And so in general, I’m pretty comfortable to say that your employer won’t know if you get protection through a Bankruptcy filing.
I guess going back to basics. When you talk about a Bankruptcy, what exactly does that mean?
Derek Chase 3:48
Bankruptcy is a legal process that gives you protection from your creditors and allows the honest but unfortunate person fresh start with their finances. So it puts up a wall between you and your creditors. And then you start to head towards getting what’s called a discharge from Bankruptcy. And at that point, the majority of debts are legally extinguished once you obtain your discharge. It’s a way to reset your finances.
Okay, so once you declare Bankruptcy, no longer do you have to pay the debts?
Derek Chase 4:24
That’s correct. Yes, the debts are stayed or put on hold.
And then how long does that last? What happens to your credits and all that information?
Derek Chase 4:36
It will stay on your credit history. There’s no doubt about that. It is scheduled to purge automatically from your credit history, six years from your discharge date.
Now, a lot of Bankruptcies start off and then run for a nine month period, at which time a person gets their discharge. And then from that discharge date, another six years would elapse before it would come off your credit history. So that combination of six years and nine months gets you pretty darn close to the common reference of seven years.
Now, once you get your discharge, you can apply for credit. In fact, you can apply for credit right after a Bankruptcy starts. It doesn’t mean you can’t get credit in the future. It’s just one factor that lenders will look at when deciding whether or not to give you credit.
So there are options to rebuild. But I would imagine if you were in the situation where you are declaring Bankruptcy, your credit is pretty much shocked by that point anyway,
Derek Chase 5:39
It is, but you’d be surprised. Sometimes lenders are quite aggressive, and especially if a person has good cash flow from their work and is trying to become their next lender. We constantly see people getting requests for different credit products presented to them. Or if they’re wanting to go for a car loan, that’s another one that we see people getting access to – a car loan. However, you do have to be very careful as to what interest rate you’re paying in that setting.
The interest rating – oftentimes I’ve heard them say, you know what – we can just run a quick credit check to find out what your rate is.
Derek Chase 6:19
Your credit history, your credit score, it will factor into what sort of interest rate you might have to pay. The higher the risk that you are perceived, the higher the interest rate that you would have to pay. So a credit score is definitely a factor in determining what sort of loan you’re able to qualify for.
Is there a permanent record of this? Or is it after seven years, it’s pretty much you get a clean slate and get to start over?
Derek Chase 6:48
The federal government is very good at keeping records and the Office of the Superintendent of Bankruptcy, who is the part of the federal government that protects the integrity of the insolvency system, is tasked with keeping track of prior filings.
So as far as that label is a permanent record – that sounds like a bad thing. But it’s just the fact that you’ve made a Bankruptcy filing. They keep track of that, and they keep track if you’ve got your discharge.
One of the reasons for that is sometimes, for whatever turn of events, people end up doing a second Bankruptcy filing sometime down the road. It could be 20 years later. The law says in order for you to be eligible to file Bankruptcy for a second time, you have to have completed the first one. And therefore there’s that record search – a record available to see so the Trustee can see whether or not the first Bankruptcy was completely discharged.
I should add to that Wayne, that you have to search for that – it’s not something that’s readily available for the general public to see and there’s a cost you have to pay to search out that information. So it’s not like it’s an easy thing to see, there’s a fee to see it. And you have to really know where you’re looking to find it.
Are bankruptcies more common now than they were 20 years ago – 30 years ago, or vice versa?
Derek Chase 8:21
Well, certainly in the last five or so years Consumer Proposals are the thing that’s grown dramatically in popularity to reset your finances and get that relief – and therefore the amount of personal Bankruptcy filings is falling. If you go back 20 or 30 years, I would say yes, there are more Bankruptcies than there were 30 years ago. Okay. I can’t point to the statistics on that – but I’m pretty confident saying that.
Right. So I’m just wondering, is that stigma as bad as it used to be?
Derek Chase 8:56
No, I would say it’s not. I would say that it’s more of a case that a Bankruptcy filing is like a financial tool. It’s a tool to accomplish something much like a person would choose between a wrench and a screwdriver. It’s a tool to change a situation. And, there’ve been some pretty significant business moguls that people would point to and say, Oh, look at the success they’ve had. But, you know, they’ve used the Bankruptcy tool to deal with different situations that didn’t work out the way they’ve wanted to. So I would say that the stigma in general has fallen dramatically from, say, the 1950s or 60s.
It’s funny that you brought up the business moguls because there’s quite a few that have declared Bankruptcy. Is Bankruptcy for a corporation completely different than for an individual?
Derek Chase 9:54
It is in a lot of ways. In the basic ways. The Trustee is taking control of assets that aren’t otherwise exempt or encumbered by a secured creditor, and dealing with them on behalf of the unsecured creditors.
But a big part of the administration and how Bankruptcy flows is, is quite different. There’s a variety of differences there. But the general concept about safeguarding the assets and then realizing the assets that aren’t exempt is the same between the two situations.
Can we talk about what is not covered through Bankruptcy? Are there certain debts that you cannot declare Bankruptcy on?
Derek Chase 10:39
There’s a couple different ways you can look at that. You can do a Bankruptcy filing and get protection from your unsecured creditors, and continue on with your secured creditors, such as your mortgage or your car loan. We see that quite regularly, depending on the amount of equity in that house or car. It is possible to continue with that secured loan. So in a sense, you’re not declaring Bankruptcy on that.
So what does that look like?
Derek Chase 11:08
Well, let’s say, for example, for a car loan – you just continue to make your car payment. You continue to make that car loan payment, and there’s no interruption there. And the lenders seem fine with that. Because they don’t make money by repossessing a car, they make money by accumulating or receiving the interest income on that loan. So they seem to be quite happy allowing a person to continue to pay their car loan, even if they’ve made a Bankruptcy filing.
Okay, good to know. And mortgages – it just doesn’t depend on how much equity they have in house?
Derek Chase 11:43
For sure. In the last four or five years, there’s been this tremendous run up in real estate prices. But not too long ago, we were seeing settings where the house’s value is very close to the mortgage balance. And in that case, there is no net realisation there, and therefore a person could continue on with that mortgage payment and retain their house if they wanted to.
On the other side of the coin, if a person didn’t want to keep the house or didn’t want to keep the car, then a Bankruptcy protects them from a fall out there as well.
Okay, and what about student loans and stuff like that? Is that also covered through Bankruptcy?
Derek Chase 12:25
There are a handful of different debts that survive Bankruptcy, so you still put them down as a debt. But once you get your discharge, that debt still exists – section 178 of the Bankruptcy and Insolvency Act, and certainly student loans are one of them.
Student loans are – the basic rule is you have to be out of school for seven years before a student loan will be automatically discharged. And that can be modified slightly, if a person would take the steps to apply to court for a shorter period of time. But the basic rule there is seven years.
Another debt that can survive the Bankruptcy process is support payment arrears. And support payment arrears – the only way to really change that is back through the court. So there are a handful of different types of debt that can survive the Bankruptcy process.
Okay, that’s good to know. And anything else we need to know regarding the stigma and heads up regarding Bankruptcies?
Derek Chase 13:30
Yes, I think the stigma is far, far less than it used to be. And I think people should really just go into a meeting and get information about it and compare it to the other options. Then make a decision about how the future months are going to look like. Are the months in the future going to be better for me than where I am now? Or what do they look like when you slot in each different option that’s going to be available – because there can be some pretty expensive months if you went into a consolidation loan, for example, that still had a very high payment. So it’s a process. You need to ask questions, you need to get information. But I wouldn’t discount Bankruptcy filing just because of a stigma. It can very often be the most practical way to go.
I think one thing we are all learning through this podcast is that it’s really important to talk with a Licensed Insolvency Trustee about the options. There’s quite a few different options available to people who do get into trouble with financial debt.
Derek Chase 14:36
Oh, absolutely. And specifically, what does the cash flow look like? What do my payments look like going into the future and it can be very dramatic there. So it is a worthwhile meeting and most Trustees across the country will offer a free initial consultation. So take advantage of that.
Terrific. Well Derek, thanks very much for all the great information.
Derek Chase 15:00
You’re more than welcome.
And of course you can go to the website bankruptcytrusteebc.ca to learn more about Derek and his team.
That’s it for today’s episode of the Debt Matters podcast. Just make sure you subscribe wherever you get your favorite podcast from. And of course, for more information, you can always check out debt matters.ca.
Thanks very much for listening.
About Derek Chase
Derek Chase is a Licensed Insolvency Trustee in British Columbia. He has been helping individuals and corporations restructure their debt since 1997. His areas of practice include personal and corporate insolvency including Consumer Proposals and Bankruptcy. The best part of his work is to be able to witness lives change for the better when the heavy burden of unmanageable debt is lifted.