BANKRUPTCY FILINGS CANADA: THE SENSELESS TOP 12 MISTAKES TO AVOID WHEN CONSIDERING FILING FOR BANKRUPTCY

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Bankruptcy filings Canada introduction

It’s not easy to admit that you’re in over your head with debt.  One way Canadians can fix their debt problems is through bankruptcy filings Canada.   Availing yourself of an insolvency process can feel like an enormous weight off your shoulders.  Unfortunately, that relief is often short-lived if did one or more of the things you should not do before taking the plunge into the bankruptcy process.

In this Brandon’s Blog, I discuss the common bankruptcy mistakes people make before they seek the advice of a licensed insolvency trustee (formerly called a bankruptcy trustee) (Trustee).  Stay away from these common mistakes and you should have a much easier time returning to a solvent and stress-free life.

What should you not do before filing bankruptcy?

If you’re considering filing for bankruptcy, be aware that there are some things you should not do, and others you should do, to protect yourself and your assets. The bankruptcy filings Canada mistakes I am going to explain in this Brandon’s Blog are:

• Trying to hide assets from your creditors:
  • Transferring assets to a third party (such as a family member or friend).
  • Disposing of assets, for example, by giving them away or selling them for far below their fair market value.
  • Failing to declare all of your assets or all of your liabilities on your sworn Statement of Affairs under penalty of perjury.
• Staying clear of loading up on credit card debt or other unsecured debts.
• Paying off family debts a short period of time before declaring bankruptcy.
• Waiting too long to consult with a Trustee.
• Taking extra taxes out of your paycheque.
• Cashing in or making early withdrawals from retirement accounts.
• Refinancing your mortgage or increasing lines of credit against your real estate to settle unsecured financial obligations.
• Keeping debt that you cannot afford to.
• Making the wrong type of filing.

By avoiding the things you should not do, you will be the honest but unfortunate debtor.  That is the type of person that the Canadian bankruptcy law is meant to help.

Common mistakes:  Trying to hide assets

If you’re thinking about declaring bankruptcy because you’re overwhelmed by your debt, it’s important to know that you cannot hide assets from creditors during the bankruptcy process. There are a number of ways people try to do this.

The most common ones in bankruptcy filings Canada are:

• Transferring assets to a third party (such as a family member or friend) on the eve of bankruptcy.
• Disposing of assets, for example, by giving them away or selling them for far below their fair market value.
• Failing to declare all of your assets or all of your liabilities on your sworn Statement of Affairs.

It’s also important to understand that if you choose to hide assets from the court and your creditors, it’s likely that they’ll find out—and they will not be happy when they do!

Transfers of assets or disposing of them for less than fair value is caught under the category of transfers at undervalue.  The Trustee can attack any transfers at undervalue and will be successful in getting a judgement against the party you made the transfer to. 

A transfer at undervalue is defined in section 2 of the Bankruptcy and Insolvency Act (Canada) (BIA) as disposing of property or providing services for which either no value is obtained by the debtor/bankrupt or for which the value gotten by the debtor/bankrupt is obviously less than the fair market value of the consideration handed over by the debtor.  You certainly won’t be doing your friend or family member any favours by having done this.

Bankruptcy filings Canada:  Debtor trying to hide assets usually doesn’t work and could be counterproductive due to exemption categories

Failing to declare assets may or may not work.  If you are caught, again, this spells trouble.  The Trustee is required to perform an investigation and many times there are tell-tale signs that not all assets have been declared.  I have many times found when reviewing a bankrupt’s bank statements, regular automatic withdrawals for life insurance, yet no life insurance policy or CSV in a life insurance policy was declared.  The same goes for vehicle insurance premiums. 

Contrary to popular belief, many times when a person tries to scam the bankruptcy filings Canada system, it is not a very sophisticated one.  In fact, most times they are just plain dumb and the person is exposed.

The irony is that if they listed all of their assets, the ones they tried to hide may very well have fit under one of their bankruptcy exemptions.  Perhaps the insurance policy was a term life policy, so it had no CSV.  Or, when the policy was first taken out, the person designated a spouse or child as their designated beneficiary. 

In that case, the entire CSV or the proceeds from the life insurance policy if the bankrupt died, would be exempt from seizure by the Trustee.  The same is true with a vehicle.  Perhaps their equity in the vehicle would fit under their bankruptcy exemption;  either in its own right or after taking into account any loan secured against the vehicle.

So with the possibility of no loss of the asset due to a bankruptcy exemption, the person has committed a bankruptcy offence.  Or, the asset involved in the transfer under value could have been saved in some way if the debtor had only made full disclosure to the Trustee before filing.  Many times we can help a person perform a successful restructuring consumer proposal and keep their assets, rather than losing them in bankruptcy.  It is possible to avoid bankruptcy and not commit a bankruptcy offence just by being open and honest and getting good advice ahead of time.

Common mistakes:  Do Not Incur Any Additional Debts like maxing out credit cards before filing bankruptcy

You’re probably already knee-deep in debt and have been for quite some time. Maybe you’ve tried to get out from under it by yourself but it just hasn’t worked. It doesn’t mean you’re a bad person, it just means you need a fresh start, and that’s what a Trustee can do for you. If you’re thinking about filing any type of bankruptcy under the BIA, the first thing you need to do is stop incurring new debt.

The last thing you need is more debt and more debt collectors calling you.  As well, you may very well be committing a bankruptcy offence, especially if you take on the new debt within 3 months of the date of bankruptcy.  You were probably insolvent at that time, and taking on more debt, under those circumstances, is a bankruptcy offence. 

What are the ramifications?  Your Trustee will have to oppose your discharge and the creditor(s) who realize that their debt was further run up when you knew, or ought to have known, that you were going bankrupt will also oppose.

So especially as a first-time bankrupt, instead of possibly going through the bankruptcy process unscathed and discharged in as early as 9 months, you will be undischarged bankrupt perhaps for years and then face the potential of harsh repayment conditions in order to get a bankruptcy discharge.  It really isn’t worth it.

Common Bankruptcy mistakes:  Do Not Repay Relatives or Insiders

The BIA is a federal law that governs bankruptcy and insolvency in Canada. This Act is a comprehensive piece of legislation that is meant to protect both creditors and debtors while providing the tools needed for a debtor to start over with a clean slate.

Bankruptcy filings Canada are administered under the Canadian bankruptcy law has rules and regulations regarding how you can file and proceed with a bankruptcy application.  One of them is that you are not allowed on the eve of bankruptcy to prefer any of your creditors by repaying some, but not others. No one, and especially, your relatives and insiders, should be repaid right before you are declaring bankruptcy.

The Trustee is required to review your financial history including looking at your bank statements and will no doubt find the preference payments.  Making preference payments is a bankruptcy offence and will negatively affect your ability to get a discharge from bankruptcy.

Bankruptcy filings Canada:  Waiting too long for consultations with Trustees

The question of whether or not you should file for bankruptcy is a difficult one and should be taken seriously. If you’ve just received a notice of civil action from a creditor, or if you’re worried about your upcoming income tax bill, it is time to speak with an experienced Canadian Trustee to discuss your options.

Before you jump into filing bankruptcy, however, it’s important to take a step back and consider the consequences. It may be that filing for bankruptcy is the wrong move for you.  If you meet with a Trustee at the first sign of trouble, rather than waiting until you are up against the time crunch of an impending deadline, the Trustee may be able to recommend other options for you. 

One of those options is filing a consumer proposal to successfully perform a government-approved debt settlement plan and avoid bankruptcy.  The earlier you consult with a Trustee, the more options and flexibility you have.

Huge bankruptcy mistake:  Taking extra taxes out of your paycheque

When people do bankruptcy filings Canada, they have more financial obligations than your typical income can manage. Among the reductions from your gross pay is the income tax. It’s unpreventable. When you apply for bankruptcy, one of your financial obligations is probably income tax debt owed to Canada Revenue Agency (CRA).

Just how much in added income tax deductions can you stand not to get in your take-home pay when you are currently insolvent? Most likely none. It is more important to have the cash to pay for rent and food.

So should you take extra taxes out of your paycheque before filing bankruptcy? I say no.

A mistake in bankruptcy:  Cashing in or making early withdrawals from retirement accounts

The last thing you want to do in advance of bankruptcy is to cash in a retirement account such as your RRSP.  In fact, doing so could cost you dearly.  Here’s what you need to know.  In a word, “no.”  That’s the answer to the question of whether debtors should take money out of their retirement account to pay bills.  And it’s the best advice for anyone, but particularly for people who are in the throes of bankruptcy filings Canada. 

There are three main reasons for this.  First, if you have set up your RRSP with your spouse or child as the beneficiary, then in Ontario, your RRSP is exempt from seizure.  There is an RRSP issue when it comes to bankruptcy.  Any contributions you made within 12 months of filing for bankruptcy must be paid into your bankruptcy estate.  You don’t need to withdraw those funds from your RRSP to do so.  You just need to make the payments into your bankruptcy estate.  The source of those funds do not have to be from the RRSP.

Second, when you cash in all or a portion of your RRSP, income tax must be deducted at source.  So you lose a significant amount off the top.  What you are left with may not be enough to fully repay all your debts and help you avoid falling back into unmanageable debt in the future.

Third, you probably will never have enough working years left to make enough contributions back into a retirement plan to make up for what you have lost.  You will be sacrificing further retirement payment plan payments when you did not need to cash in your plan in the first place.

Fortunately, your retirement funds are generally protected from loss in bankruptcy.  So, why ask for this kind of trouble?

Bankruptcy filings Canada:  What debts are not wiped out through bankruptcy?

Unsecured debt is a financial term that describes any loan, credit card or other debt that is not secured against collateral. In other words, it is debt that is not backed by an underlying asset that can be seized in the event of a default. 

That means that if you don’t repay the debt – or if you decide to use the money for something else – there is no asset for the creditor to come after.  Bankruptcy is a remedy available to the debtor to discharge unsecured debt.

A common misconception is that bankruptcy will result in a loss of the home you’ve worked so hard for; this is not necessarily so. The Trustee is entitled to the debtor’s equity in the home.  Not the home itself.  There is a difference.

It should be noted that the courts do not allow you to intentionally strip yourself of your assets. However, it is possible to strip yourself of these assets by making a bad decision in the midst of your financial crisis. If you refinanced your mortgages or increased lines of credit against your real estate to settle unsecured financial obligations, this is a mistake of bankruptcy.

First, the Trustee and your creditors will want to know what you did with any spare cash that you received coming out of the refinancing.  As I described above, trying to hide assets is not a smart strategy. 

Second, you have now turned unsecured debt into secured debt.  The unsecured debt could have been settled for less than 100 cents on the dollar through a consumer proposal or discharged in bankruptcy.  Now it is debt that cannot be compromised;  it can only be repaid in full. 

Third, what if your income in the future is not enough to make the necessary payments on this secured debt?  Now you are at risk of having your home seized, notwithstanding you received your discharge from bankruptcy filings Canada.

Fourth, perhaps the refinancing should have been done in conjunction with advice from the Trustee, so, it could be used in part to fund a consumer proposal.  By having done the refinancing and spending the money before filing, you have now lost that opportunity.

So having that secured debt in bankruptcy was not a smart move.  It was a big mistake.

Bankruptcy filings Canada:  Not sufficiently exploring self-help options

It’s all too easy to get into debt, but if you catch things early, it’s also easy to get out from under it. All it takes is a realistic plan for paying off your debts, and a commitment to sticking to it. If you can do that, you’ll be surprised how quickly your debt can disappear.

The first step is to figure out what you owe – and to whom. If you owe money to several creditors, you’ll need to prioritize them. The most likely to accept a deal are those that are smaller and charge a reasonable interest rate. You may be surprised at how many deals you can cut.

Speak to your accountant, your lawyer, your financial adviser and even a Trustee.  You may find that your situation is not as bad as you thought and through some careful analysis, planning, budgeting and behaviour changes, you can eliminate your debt using a self-help remedy.

There are many unscrupulous debt-settlement or debt-relief companies who try to scare you and then after they do, they make all sorts of great-sounding promises that they will not be able to keep.  the reality is that they just want to snag you so you can pay them high fees to do what you can do on your own.  Do not fall for their tricks.

If everyone made sure that they fully explored all their self-help options first, many could avoid bankruptcy filings Canada altogether.

Bankruptcy filings Canada:  Making the wrong type of filing

If you have reached a point where you feel you can no longer control your finances, one of the first things you should do is consult a Trustee. Making the wrong type of bankruptcy filing is a big mistake and will only make the situation worse, but with the right advice, it is easy to find the right solution.

The most common type of personal insolvency filing is a consumer proposal. A consumer proposal allows you to work out a payment plan with your creditors that you can actually afford. This allows you to eliminate all your debt without filing bankruptcy.  In a no-cost initial consultation with a Trustee, you will discuss what is the right type of filing for your situation.

Bankruptcy filings Canada summary

I hope that you found the question posed in this bankruptcy filings Canada Brandon Blog.  If you are concerned because you or your business are dealing with substantial debt challenges and you assume bankruptcy is your only option, call me. It is not your fault that you remain in this way. You have actually been only shown the old ways to try to deal with financial issues. These old ways do not work anymore.

The Ira Smith Team utilizes new modern-day ways to get you out of your debt difficulties while avoiding bankruptcy. We can get you the relief you need and so deserve.

The tension put upon you is big. We know your discomfort factors. We will check out your entire situation and design a new approach that is as unique as you and your problems; financial and emotional. We will take the weight off of your shoulders and blow away the dark cloud hanging over you. We will design a debt settlement strategy for you. We know that we can help you now.

We understand that people and businesses facing financial issues need a realistic lifeline. There is no “one solution fits all” method with theIra Smith Team. Not everyone has to file bankruptcy in Canada. The majority of our clients never do. We help many people and companies stay clear of bankruptcy.

That is why we can establish a new restructuring procedure for paying down debt that will be built just for you. It will be as one-of-a-kind as the economic issues and discomfort you are encountering. If any one of these seems familiar to you and you are serious about getting the solution you need, contact the Ira Smith Trustee & Receiver Inc. group today.

Call us now for a no-cost consultation.

We will get you or your business back up driving to healthy and balanced trouble-free operations and get rid of the discomfort factors in your life, Starting Over, Starting Now.

We hope that you and your family are safe, healthy and secure during this coronavirus pandemic.

Ira Smith Trustee & Receiver Inc. is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting.