Home Mortgage And Other Property Liens
If you have a lien on the property, such as a home mortgage, you cannot have the mortgage discharged in bankruptcy.
State laws vary, but you can generally keep your home in bankruptcy if you keep making the payments and if you do not have more equity in the home than you are allowed to keep by state law.
What Is Chapter 7 Bankruptcy
Chapter 7 is known as the liquidation bankruptcy because it discharges most of your unsecured debt. That includes , medical bills and personal loans.
Its the quickest, simplest and most common type of bankruptcy. According to the American Bankruptcy Institute , 63% of the 774,940 bankruptcy cases filed in 2019, were Chapter 7.
An even more encouraging bankruptcy statistic: 94.3% of Chapter 7 filings had their debts discharged, meaning forgiven.
You must pass a means test to qualify for Chapter 7 filing. The bankruptcy means test examines financial records, including income, expenses, secured and unsecured debt to determine if your disposable income is below the median income for your state. The means test income level varies from state to state.
You might be forced to sell any non-exempt assets, though several online sites claim that 96% of Chapter 7 filings are no asset cases, meaning there is not enough equity or value in the property for a trustee to sell it and pay off creditors.
Generally, the Chapter 7 process can be completed in four to six months.
How Does Bankruptcy Work
In plain language, this is what happens in personal bankruptcy in Canada: you assign your non-exempt assets to a Licensed Insolvency Trustee in exchange for the elimination of your debts. Certain exemptions that vary by province may allow you to keep some assets such as your home , car, RRSPs, pension plans, furnishings and effects, etc.
As soon as your bankruptcy papers are filed, your creditors are barred from attempting to contact you, and most legal proceedings and garnishments related to your debts will cease. Once you are released from bankruptcy , the debts included in the bankruptcy will be extinguished. Those creditors are legally blocked from approaching you for any further payments.
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Who Can File Bankruptcy
There is more than one type of bankruptcy.
When a person considers bankruptcy, they need to figure out which type of bankruptcy is right for their situation:
- Personal bankruptcy, which is for individual finances
- Small business bankruptcy, which is similar to personal bankruptcy but refers to small and independent service providers, side hustles, and freelancing businesses. A small business is not incorporated, hence bankruptcy would affect the individuals assets just like personal bankruptcy
- Corporate bankruptcy focuses on legal, incorporated entities. In this constellation, the individual assets are protected, and the bankruptcy only affects the businesss assets.
Once youve identified whether your financial situation fits any of the bankruptcy types, you will need to meet other criteria to be able to file bankruptcy in Canada.
Every resident who has been living in Canada for at least a year can file bankruptcy.
You dont need to be a native Canadian resident, but you should have at least a 12 months history of residency in the country.
When it comes to measuring your debts, you should owe a minimum of $1,000 to creditors.
Debts can have a higher value than your assets, or/and you cant pay bills when they are due, regardless of your debt/assets value ratio.
Bankruptcy is a legal process in Canada that can only be administered by a licensed insolvency trustee, LIT.
If You Declare Bankruptcy Do You Still Owe The Cra
Owing money to the CRA can be stressful. There are many ways you can wind up in tax debt, such as not filing your personal income tax returns, failing to pay taxes on business income, HST payments for the self-employed, or inadequate payroll deductions from your employer if you work multiple jobs.
When you owe the CRA money, they charge penalties and interest on unpaid amounts. There is a late filing penalty of 5% plus 1% of your balance owing each month, and the penalty increases if you repeatedly fail to report income. Once you start owing money, it starts to grow, and theres no hiding from it.
If youre afraid that you are going to owe the government money, dont delay filing your taxes. You will only incur harsher penalties and wind up owing more in the end.
The Canada Revenue Agency can garnish your wages, seize your bank accounts, or even register a lien on your home. Given the broad collection powers available to the agency, the sooner you can act on CRA debt, the better. Fortunately, filing bankruptcy or a consumer proposal can stop CRA collection actions.
A common question we hear at David Sklar & Associates is does bankruptcy cover tax debt in Canada? When you , you can include tax debt, but its not the only way to fix the problem! A consumer proposal provides debt relief from unsecured creditors and includes debt forgiveness from CRA as well.
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Dealing With Your Car Loan
If you own a car that you still owe on, youâll have to let the bank and the court know what you want to do with it one one of your bankruptcy forms.
If you want to surrender the car to the lender and discharge the debt, you donât have to do anything other than stop making your payments. The bank will either file request with the bankruptcy court to ask permission to retake the car, or wait until your discharge is granted before picking it up.
If you want to keep the car, you can either reaffirm the loan or redeem the car. If youâre reaffirming your loan, the bank will send you a reaffirmation agreement after your case is filed. You have to complete and sign the agreement and return it to the bank within 45 days from your 341 meeting. The bank files the signed agreement with the court for approval.
To redeem the vehicle you have to file a motion with the court and, once granted, buy the car from the bank for its current value. This gets you out of having to pay the amount left on the loan, but payment has to be made in one lump sum.
Settling Tax Debt With A Consumer Proposal
Is it possible to negotiate or settle their tax debt with CRA through a credit counsellor, debt management plan or your own? The answer is no. As a general rule, the Canada Revenue Agency will not accept less than the full amount owing. If you owe back taxes, and do not want to file for bankruptcy you still have a few options:
- CRA has something called the Fairness Commission where you may apply to have interest and penalties reduced. They cannot, however, reduce the tax payable and they only reduce the interest and penalties if you have a compelling reason why the debt wasnt paid.
- It is possible to object to a tax assessment and if you are unsuccessful in your objection you can file an Appeal with the Tax Court of Canada. This is a very expensive option, requires a tax lawyer and involves making an argument about the application of tax laws to your particular case. If successful the debt is reversed if unsuccessful you will owe the debt, interest, penalties plus the legal bills.
- Your better alternative may be to file a consumer proposal. A is the only federal government or debt settlement program where you can settle your tax debt for less than you owe.
If you owe significant back tax debt it is probably because something went wrong. What you need is a way to clear away the debt. In these cases bankruptcy or a consumer proposal are the solutions most often used as they are relatively inexpensive and they clear away all of your unsecured debt, including your tax debt.
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Complete A Credit Counseling Course
Whether you go it alone or with legal help, youll need to complete a credit counseling course before filing. The course must be from a government-approved organization and completed within 180 days before filing.
The credit counseling course will help you decide whether to seek bankruptcy or choose some other method. The course can be done online, by phone or in person and costs around $50. You may be able to get the cost waived if your income is low enough. Youll get a certificate that you have to show the court.
When The Bankruptcy Order Is Made
The early stages of a bankruptcy are normally handled by an official receiver. An official receiver works for the Insolvency Service and is attached to the court. They will also be your trustee unless an insolvency practitioner is appointed to take over that role. The trustee will realise any assets .
The official receiver will write to you within 2 weeks of the bankruptcy order being made, explaining what you need to know and what you must do.
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How To Start Bankruptcy
After considering all your options, you should start the request process if you decide that bankruptcy is the only way out. First, you need to choose between two different types of bankruptcy: Chapter 7 and 13. You should check both options, their requirements, advantages, and disadvantages before deciding. In the following section, we present to you these two types of bankruptcy.
You May Make Surplus Income Payments
When you file for bankruptcy, you must do the following:
- disclose to the LIT information about all of your assets and liabilities
- advise the LIT of any property that was sold or transferred in the past few years
- surrender all your credit cards to the LIT
- attend the first meeting of creditors
- attend two counselling sessions
- advise the LIT in writing of any address changes
- if required, attend an examination at the Office of the Superintendent of Bankruptcy and
- assist the LIT as needed in administering your estate.
You may be required to make additional payments to your LIT for distribution to your creditors.
In addition to paying the LIT’s fees, you may be required to make additional payments to your LIT for distribution to your creditors. These are called surplus income payments.
Each month during the bankruptcy process, you must submit a copy of your pay stubs and proof of other income to the LIT. The LIT then calculates your surplus income.
Surplus income is the part of your earnings that exceeds the amount of income a family needs to maintain a reasonable standard of living. This amount is set by the OSB annually. The larger your family, the more you are allowed to keep the more you earn, the more you are required to contribute.
In other words, if your household income exceeds the level set by the OSB, then you must make additional payments to your LIT during your bankruptcy.
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So Who Actually Pays For Bankruptcies
The person who files for bankruptcy is typically the one that pays the court filing fee, which partially funds the court system and related aspects of bankruptcy cases. Individuals who earn less than 150% of the federal poverty guidelines can ask to have the fee waived. In that case, the Bankruptcy Court essentially picks up the tab by absorbing all related expenses to ensure the person receives all required services to successfully complete their bankruptcy case. Since that places a significant burden on the courts, fee waivers are only granted when it is clear that the person simply canât afford to pay the filing fee even after the case is filed and debt no longer has to be paid. If your court filing fee is waived you can often obtain a waiver for the credit counseling and debtor education courses as well. Folks who wish to hire a lawyer to help them with their case are responsible for paying the lawyer. Keep in mind, however, that you can file bankruptcy without a lawyer if you canât afford to hire one.
Do The Courts Ever Deny A Chapter 7 Bankruptcy
It can happen. Most individual debtors receive a discharge under Chapter 7.
However, if the courts find that an individual concealed money or other assets, fraudulently transferred assets that should have been used to pay off debts, or otherwise broke the law, the entire bankruptcy case may be denied.
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What Are Government Fines And Penalties
The government can fine or penalize you as long as there is a written law saying it has a right to do so. All levels of government, including the city, county, state, and federal government have such laws in place. Whether called an ordinance, statute, code, or regulation, these laws help society function in a peaceful way by punishing rule breakers. Each law must tell you what you are supposed to do as well as what will happen if you break the law.
A government fine or a penalty is a punishment for doing something wrong. If you do not wear a seatbelt, or if you refuse to cross in the cross walk, you may receive a ticket and have to pay a fee. The fee serves as an incentive for you to do better next time. Similarly, when a police officer gives you a ticket for breaking the speed limit, the fine you must pay is punishment for driving too fast.
What Happens When You Are Declared Bankrupt
A Bankruptcy Inspector from the ISI will serve you with a copy of the Orderof Adjudication and Warrant of Seizure. The Inspector willalso give you a form to complete, requesting various details, which the ISIwill use to contact you and process your bankruptcy.
Your bank accounts will be frozen, except for one current account in whichyou can keep a balance of up to 1,000 for general living expenses.
The ISI will contact all financial institutions and inform them that youhave been made bankrupt.
As soon as your bankruptcy starts, you are free of debt. The OfficialAssignee now owns your assets and administers your estate. Your creditors canno longer seek repayment directly from you. They must deal directly with theOfficial Assignee and all correspondence should be forwarded to him.
You must contribute any surplus income to the Official Assignee.
Your name will appear in the Bankruptcy Register, which is kept in the Office of the Examinerof the High Court. Anyone can check this register.
Read more in the ISIs guide Afteryou are made bankrupt .
The Official Assignee will negotiate an Income Payment Agreement or seek anIncome Payment Order for the surplus of your income over the reasonable livingexpenses for your situation, based on the ISIsguidelines. The agreement or order will last up to 3 years. Act 2015 reduced this period from 5 years, with effect from 29January 2016.)
No deductions will be made from social welfare payments.
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What Only Chapter 13 Bankruptcy Can Do
Chapter 7 and 13 each offer unique solutions to debt problems. The two bankruptcy types work very differently. For instance, how quickly your debt will get wiped out will depend on the chapter you file:
- Chapter 7 bankruptcy. This chapter takes an average of three to four months to complete. Learn more about erasing your debt in Chapter 7 bankruptcy.
- Chapter 13 bankruptcy. If you file for Chapter 13 rather than Chapter 7, you’ll likely have to pay back some portion of your unsecured debts through a three- to five-year repayment plan. However, any unsecured debt balance that remains after completing your repayment plan will be discharged. Find out how to pay off or discharge your debts in Chapter 13 bankruptcy.
Chapter 7 is primarily for low-income filers, and therefore, it won’t help you keep property if you’re behind on payments. But, if you have enough income to pay at least something to creditors, then you’ll be able to take advantage of the additional benefits offered by Chapter 13.
Here are some of the things that Chapter 13 can do.
Stop a mortgage foreclosure. Filing for Chapter 13 bankruptcy will stop a foreclosure and force the lender to accept a plan that will allow you to make up the missed payments over time. To make this plan work, you must demonstrate that you have enough income to pay back payments and remain current on future payments. Learn more about your home and mortgage in Chapter 13 bankruptcy.
Choose Your Type Of Bankruptcy Filing
Bankruptcy protection for individuals comes in a couple of different flavors, each named after a chapter in the Bankruptcy Code. Before pursuing personal bankruptcy, you have to decide whether youll look for relief under Chapter 7 or Chapter 13.
If youve decided to go ahead with filing, you may choose to seek Chapter 7 bankruptcy, the most common type. In a Chapter 7 filing, you voluntarily turn assets over to the bankruptcy court, which sells them and gives the proceeds to your creditors.
Some assets are exempt from this requirement, but this varies according to state law. Exemptions may cover motor vehicles, pensions, clothing, personal jewelry, household goods and appliances and equity in a primary residence.
After creditors receive the proceeds from nonexempt asset sales, debts are discharged. This process can take several months, during which creditors have to stop trying to collect.
Chapter 7 involves whats referred to as a Means Test. Specifically, your income for the last six months needs to be less than the median income in your state. If you earn more than the state median, youll have to choose another type of bankruptcy, likely Chapter 13.
The Chapter 13 bankruptcy process involves setting up a repayment plan to repay your creditors. This type of bankruptcy is more complicated than the discharge granted by Chapter 7, and it also takes longer. Typically the repayment plan lasts three to five years.
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