As ‘perfect storm’ pushes more to the brink, here’s what to know about bankruptcy

With Canadians’ debt on the riseas they deal with surging pricesand interest rates, experts say many people are in the dark about the insolvency process, even though it could help those in dire straits get a clean slate.

The mounting pressure is on display in consumer insolvency numbers, which rose significantly in the second quarter, according to the Office of the Superintendent of Bankruptcy. Meanwhile, the Canadian Association of Insolvency and Restructuring Professionalssaid in August that it expects consumer insolvencies will surpass pre-pandemic averages later this year.

“It’s an absolute perfect storm,” said Scott Terrio, manager of consumer insolvency at licensed insolvency trustee firm Hoyes, Michalos & Associates Inc.

He’s worried more Canadians are finding themselves on the brink — and don’t know where to turn.

In the second quarter of 2023, total credit card balances hit an all-time high of $107.4 billion, according to Equifax Canada. Total consumer debt reached $2.4 trillion.

With more Canadians likely needing help with their debt, Terrio and other experts say there are misunderstandings about the bankruptcy process.

Under bankruptcy, a person is discharged from some or all of their debts under a legal settlement, explained Sandra Fry, a credit counsellor with the Credit Counselling Society. If their monthly income is below a certain threshold, bankruptcy is a nine-month process and the only costs are legal fees, she said.

The threshold is set by the Office of the Superintendent of Bankruptcy annually. For 2023, it varies between $2,543 and $6,729 depending on the family size.

If the debtor’s income is above that threshold, or rises above it during the bankruptcy process, the debtor has to pay some of their debt back over 21 months, said Fry.

Whether it’s nine or 21 months, once the process is over, they’re free from those debts. The bankruptcy will show on their credit history for six or seven years after they’re discharged, depending on the province, according to the Financial Consumer Agency of Canada. If it’s not their first bankruptcy, it stays on their report for 14 years.

It will also impact their credit score, and show up on the Court of King’s Bench registry, which can have a negative effect on some professions and in areas like sponsoring immigration, Fry said.

But bankruptcy isn’t the only option, said Terrio.

“We actually don’t do very many bankruptcies. Ninety per cent of our files are consumer proposals, which is a legal alternative to bankruptcy,” he said.

Under a consumer proposal, you’ll pay a larger portion of your debt back than you would under bankruptcy, explained Fry, usually over five years.

This will be on your credit history for either three years after you finish paying your debts, or six years after you sign the proposal, whichever is sooner, according to the Financial Consumer Agency of Canada.

It will also negatively impact your credit score, but less so than a bankruptcy, Fry said.

In a consumer proposal, you have to offer the creditors more than they would have received if you filed bankruptcy, said Terrio — usually between 20 and 30 per cent of the debt.

“They’re waiting longer, but it’s also a decent deal for them. Because if they say no to the proposal, and you go bankrupt, they’re going to get less.”

One of the main differences between a bankruptcy and a consumer proposal is that the latter doesn’t involve your assets, said André Bolduc, chair of CAIRP and a licensed insolvency trustee.

But many people hold the misconception that if they choose bankruptcy, they will lose all their assets, which isn’t true, he said.

When it comes to your home, for example, it’s dependent on how much equity is tied up in it. If there’s none, or the equity is below a certain exemption threshold that varies by province, you can go through bankruptcy while keeping your home and continuing to pay the mortgage, said Bolduc. If that’s not the case, you’ll likely want to choose a proposal instead, he said.

There are exemptions for other assets as well, such as vehicles and registered savings plans, said Bolduc. These exemptions also vary by province.

Many people may not realize that they’re on the precipice, as they’re paying their minimums on a large amount of debt and maintaining a good credit score, said Terrio. But all it takes is one major change, such as a layoff, for the house of cards to fall. That’s why it’s important to map out what your “worst case” scenario looks like, he said.

“You’d be surprised what people realize when they actually put it on paper.”

When it’s time to evaluate your options, only licensed insolvency trustees can actually take you through a bankruptcy or consumer proposal, said Bolduc. They can also go through other options outside of the insolvency process, and may refer you to a credit counselling organization, he added.

However, you can also start at a non-profit credit counselling organization to evaluate your options, said Fry. If a bankruptcy or proposal is what’s best, they can recommend a licensed insolvency trustee, she said.

Credit counsellors can also help you negotiate with individual creditors to try and lower your interest rates, said Fry.

This will not be legally binding, and will impact your credit score and ability to get new credit. But it won’t be in the public record, and the organization will also require you to participate in financial education, said Fry.

One of the biggest pitfalls Bolduc sees are people not consulting someone early enough about their debt, often because they’re ashamed. His message to those people is that they haven’t failed, and they’re not alone.

“The comment I get the most from people I meet is … ‘I should have come to see you sooner, and this was not as bad as I thought.’”

This report by The Canadian Press was first published Sept. 21, 2023.

Rosa Saba, The Canadian Press