Bankruptcy Basics: How To File For Bankruptcy
Finances are a tricky business.
Most of us do not learn proper money management skills in our youth, so we end up bumbling through our financial lives. More times than not we end up making some crucial mistakes or even adopting financial habits that are harmful.
These mistakes can be very expensive. As a result, you may find yourself in a financial pit that progressively gets deeper and deeper. When your finances seem hopeless and you don’t see a way out of the debts it may be time to consider bankruptcy.
History of Bankruptcy
Bankruptcy is not a new concept. Some of the earliest recorded evidence of setting rules for settling debts can be seen in ‘The Code of Hammurabi,’ written by King Hammurabi of Babylon 1792-1750 BC. Similar debt rules have been recorded in Ancient Greece and Roman manuscripts.
Bankruptcy has since become a worldwide phenomenon, but the process is different in each country.
Bankruptcy is an insolvency proceeding made possible by the Bankruptcy and Insolvency Act that is overseen by the Office of the Superintendent of Bankruptcy. It is a process for debtors who are in financial distress, and it is designed to give people a fresh financial start.
Filing for bankruptcy wipes away the majority of your unsecured debts in exchange for some of your assets and surplus income. In this way, the process is fair to both debtor and creditor.
The government of Canada requires that all insolvencies be administered by a Licensed Insolvency Trustee or LIT for short. Insolvencies include bankruptcies, consumer proposals, and division one proposals. As a result, your first step when considering bankruptcy is to have a consultation with a LIT.
A LIT is a debt professional that can advise you and provide you with the debt relief strategy that works best for your life. When you visit a LIT to file for bankruptcy, there are a few things you can expect.
Process of bankruptcy
Here is a quick timeline overview of what happens during a bankruptcy:
1. Debt Assessment;
2. Assignment – Signing your bankruptcy papers;
3. Filing papers with the government – Trustee sends notice to Creditor within five days of the Assignment;
4. Complete Bankruptcy Duties;
- First Counselling Session within first 60 days. The Act requires a person to attend two counselling sessions;
- Mediation (only if needed) You may be required to pay surplus income;
- Second Counselling Session within 210 days (7 months);
- Trustee’s Report (Section 170) 8 months – Either recommending you to be discharged or objecting to your discharge;
- Mediation – Process by which you ask for the surplus income you are required to pay to be mediated. You can use this if you disagree with the amount;
5. Receive Your Certificate of Discharge
- AUTOMATIC DISCHARGE – 9 months 1st time bankrupt with no surplus income;
- AUTOMATIC DISCHARGE – 21 months 1st time with surplus;
- AUTOMATIC DISCHARGE – 24 months Repeat bankrupt with no excess;
- AUTOMATIC DISCHARGE – 36 months Repeat bankrupt with surplus;
- Trustee Discharge
The first step of the bankruptcy process is to consult with a LIT who will assess your debt situation. Your LIT will analyze your debts and let you know which solutions are available for you, including bankruptcy and several alternatives like consumer proposals and division one proposals.
There are a few things you should bring to your first meeting:
- Personal information;
- List of creditors you owe; and a
- List of your assets.
Sign Your Bankruptcy Papers
In Canada, for each bankruptcy you must sign at least two forms:
- Assignment – Here you state that you’re handing over your assets to the bankruptcy trustee to distribute to your creditors.
- Statement of Affairs – This form lists your assets, liabilities, income, and expenses.
In addition to your paperwork, your bankruptcy trustee will have you answer a series of questions about your family life, employment, and assets.
LIT Files Papers With The Government
Your LIT will then file your signed forms on your behalf to the government by submitting them to the Official Receiver. While your LIT files your documents for you, you are still responsible for making sure that all of the information that you provided is accurate. Make sure that you keep copies of all of your notices and bankruptcy documents.
Once your documents have been filed, you are legally bankrupt and the process cannot be reversed without a court order.
Complete Bankruptcy Duties
Every person who goes through bankruptcy must complete bankruptcy duties as outlined in Appendix 1 of the Bankruptcy and Insolvency Act. Both the debtor and the trustee have tasks they must achieve:
Personal Bankruptcy Duties
- Disclose all your property assets followed by the delivery of any assets deemed non-exempt to your LIT.
- Surrender all your credit cards to your LIT so that they can be canceled.
- Provide your LIT with any documents they request. This may include: forms, insurance policies, bank statements, and tax returns.
- Report your monthly household income.
- Surrender your surplus income and make all your required payments.
- Attend both your mandatory credit counseling sessions.
- Attend every scheduled meeting with your creditors or examination with your Official Receiver.
Credit Counseling Sessions
Each debtor must complete two credit counseling sessions during the nine or more months of the bankruptcy proceedings.
The first session must be administered within 10 – 30 days from the date of insolvency. In this session, you will cover consumer and credit information such as:
- Money management.
- Spending and shopping habits.
- Warning signs of financial difficulties.
- Obtaining and using credit.
The second session must be administered within 60 – 210 days from the insolvency date. During your second session, you will identify the causes of your initial debt and identify tools that will help you stay out of debt:
- A review of the topics covered in the previous session.
- Identify the factors that contributed to the debt.
- Identify your financial habits.
- Provide you with resources that may assist you in maintaining stable finances.
- Create recommendations and a financial plan of action.
Bankruptcy Trustee Duties
Your LIT has certain tasks and duties they are obligated to complete on your behalf:
- Assess your debts to analyze your debt situation and identify your options.
- Prepare and file your bankruptcy forms, including an Assessment Certificate, a Statement of Affairs, a Monthly Statement of Income and Expense and a Bankruptcy Assignment.
- Deal with creditors on your behalf to collect, review and approve all claims to your creditors.
- Perform administrative duties such as collecting payments, distributing funds to creditors and ensuring that you complete all of your duties.
- Issue discharge at the end of your bankruptcy proceedings. Your trustee will apply for your discharge and in turn, issue your Certificate of Discharge.
If you do not complete these duties or you provide fraudulent information you will not be eligible for an automatic discharge.
Receive Your Certificate of Discharge
A bankruptcy discharge is an official court document that permanently eliminates your debts. Receiving these papers means that you are legally released from your qualifying debts. In most cases, if your bankruptcy doesn’t have any special circumstances, it will be automatically discharged in nine months.
There are four different types of bankruptcy discharge:
- Automatic discharge: When you have completed all of your duties and you have no conditions. This discharge has no court hearing.
- Order of absolute discharge: This discharge requires a court hearing and relieves you of debts incurred before declaring bankruptcy.
- Order of conditional discharge: This discharge also requires a court hearing. The debtor must adhere to the conditions that the court has placed before they can achieve discharge.
- Order of suspended bankruptcy discharge: This results from a delayed bankruptcy that can only be discharged by a certain date, by order of the courts.
Some special circumstances that cause delays include opposition by the creditor or the trustee.
Your bankruptcy may be opposed for any of the following reasons:
- You failed to repay the agreed surplus income.
- You should have filed a consumer proposal, but instead claimed bankruptcy.
- You failed to complete your two counseling sessions.
- A creditor reports unusual or excessive transactions prior to bankruptcy.
- Your bankruptcy was due to gambling.
If your bankruptcy is in fact opposed, you will have a hearing in bankruptcy court where a judge may require a longer bankruptcy period, or have you make additional payments.
Another source of delay is a discharge with conditions. Lastly, if you have a surplus income of more than $200 a month your discharge will be extended to 21 months.
In the US
In the United States, bankruptcy is used to help a debtor discard or create a strategy to repay their debts. The process starts when a debtor files bankruptcy with the U.S. bankruptcy court. This can be done by the individual debtor. Debtors may file as individuals, as spouses or as a corporation.
There are a few different types of bankruptcy:
Chapter 7 – Liquidation proceeding available to both individuals and businesses. Non-exempt assets are sold and the earnings distributed to creditors.
Chapter 9 – Bankruptcy proceedings for municipalities
Chapter 11 – Reorganization of debts available to both individuals and businesses while they continue to operate. The vast majority of applicants for this chapter are businesses since it requires repayment.
Chapter 12 – This bankruptcy proceeding is geared toward family farmers and fishers. It helps them to reorganize their business affairs so that they can repay some or all of their debts while they continue to operate.
Chapter 13 – This bankruptcy is also called the wage-earner bankruptcy. It is used by individual consumers allowing them to reorganize their debts under a payment plan. The plan must be repaid in three to five years, and the individual consumer must be earning a steady income.
Chapter 15 – Bankruptcy proceedings involving foreign countries.
While you do not require a trustee to file bankruptcy on your behalf, it is highly recommended to seek the advice of a lawyer before you proceed. Chapter 7 is the one used most for personal bankruptcy purposes.
Chapter 7 bankruptcy is the process by which an individual can eliminate most or all of their debts by liquidating their assets to repay their creditors. The entire process costs $335.00 US to file plus administrative fees and takes four to six months to complete.
However, some debts are not covered by bankruptcy such as:
- Child support
- Most tax debts
- Student loans
An individual can file for bankruptcy themselves but in order to qualify, you must not have filed for Chapter 7 in the six to eight previous months. Also, if your finances are such that you can file a Chapter 13 repayment plan instead you will not be able to file Chapter 7.
You file a petition in which you describe your debts, income, monthly expenses, property, etc. Once you do this you have essentially put all of your finances and property in the hands of the bankruptcy court.
As a result, you cannot do as you please with your property and finances anymore without getting permission from the courts. This ends when the bankruptcy is completed.
When you file you also receive an ‘automatic stay’ which prevents creditors from trying to collect what you owe. This means they can no longer contact you, garnish your wages or seize your house, car or other property.
A bankruptcy trustee will be assigned to your case to make sure the creditors get paid as much as possible. The more assets they recover for the creditors, the more they get paid.
The bankruptcy trustee will also schedule a creditor’s meeting two weeks after your bankruptcy has been filed. The meeting takes place at the courthouse, and you will be answering questions pertaining to your bankruptcy.
During this meeting, it will be determined which of your assets are nonexempt so that they may be liquidated. You may have to surrender the property, provide its equal value in cash or if the property is not worth much it may be abandoned by the bankruptcy trustee (i.e. you get to keep it). Most property of debtors that file chapter 7 is usually either non-exempt or abandoned.
At the end of it all, you receive a discharge from the courts, unless the creditor objects or you have committed a fraudulent act.
In the UK
In the United Kingdom, the term bankruptcy and the process of bankruptcy are only for individuals. You can apply for bankruptcy yourself, or someone can apply on your behalf to make you bankrupt (i.e. adjudicator, etc.)
If you apply for yourself, you can only apply online, which costs £680. However, if someone applies on your behalf, the process is different.
Before you are made bankrupt, the people you owe, i.e. creditors must legally find other ways to attempt to have you pay your debts.
But you can be made bankrupt if:
- You owe 5000 pounds or more and you are not paying your debts.
- You break the terms of your Individual Voluntary Arrangement (IVA).
- You have given false information in order to get an IVA.
If you are made bankrupt by an adjudicator the process is as follows:
You will first receive a copy of the bankruptcy that was filed, then you may be interviewed about the situation that led you to become bankrupt. Your qualifying assets will be liquidated (i.e. sold) to pay back a portion of the debts you owe, and you will be required to follow bankruptcy restrictions during the process.
Bankruptcy restrictions prevent you from:
- Borrowing more than £500 without informing the lender of your bankruptcy.
- Becoming or acting as the director of a company without the permission of the court.
- Creating a new company, managing a company or promoting a company without the court’s permission.
- Managing a different business without telling the people that you do business with that you are bankrupt.
- Working as an insolvency practitioner.
Once you are in bankruptcy you will also have your name placed in the Individual Insolvency Register. However, you can apply to have your address removed if you fear for your safety.
Typically after a period of 12 months, you will be discharged from your bankruptcy, and you no longer have to adhere to the bankruptcy restrictions.
How To Know If You Should File Bankruptcy?
No matter what country you are in, it may be hard to tell if it’s time to consider filing for bankruptcy. You may still have hope that you can pay down your debts over time. Perhaps you are expecting a promotion or perhaps you have been making small payments toward your debts. However, there are a few indicators you should look out for to know if you should file for bankruptcy:
- Creditors and/or collection agencies are calling you.
- Your wages are being garnished.
- You are borrowing money monthly to cover your bills.
- You are missing payments.
- You are constantly worrying about your debts.
If one or more of these are happening to you, it may be time to talk to a professional about bankruptcy.
What happens after bankruptcy?
Once a bankruptcy is over and debts have been canceled, your bankruptcy will be on your credit record for a period of time. Once that time is over, you can work on rebuilding your credit and living a life free of financial burdens.
Falling deep into debt can be devastating and embarrassing, but there are systems in place to help you get a fresh start. Hopefully, this article explained what bankruptcy is and how it can help you.