Declaring personal bankruptcy
By Jim Middlemiss • Bankrate.com

If you are feeling overwhelmed by debt and contemplating going bankrupt, you're not alone. More than 101,000 Canadians turned to the Bankruptcy and Insolvency Act (BAI) in 2004 to get out from under their mountain of debt, according to the Office of the Superintendent of Bankruptcy.

"There's certainly less of a stigma about personal bankruptcy now than there was 20 years ago," says Conrad Hadubiak, a lawyer in the insolvency practice at MacPherson, Leslie & Tyerman LLP in Regina.

Now, it's a relatively straightforward process that sees most people automatically discharged from bankruptcy after only nine months and provides certain protections from creditors.

However, it's important to understand the ramifications. "Bankruptcy will impact your ability to get credit in the future," says Hadubiak.

Bankruptcy basics
So how does it work? First, the BAI requires you to be insolvent, which means you have debts exceeding $1,000 and can't pay them on time.

There are three primary categories of debt that drive people to bankruptcy: credit cards, student loans and tax installment payments owed by self-employed individuals to the Canada Revenue Agency.

Stanley Kershman, head of the insolvency practice at Perley-Robertson, Hill & McDougall LLP, in Ottawa, says a range of events can trigger a bankruptcy, from overspending to job loss to divorce. He says most people are two pay cheques away from bankruptcy.

You can seek bankruptcy voluntarily or your creditors can petition you into bankruptcy. What bankruptcy does is allow you to deal with all your creditors at once and puts things into a holding pattern.

"But you still have to deal with secured creditors," warns Hadubiak. So if you've borrowed money from a bank to buy a house or a car, the bank can seek to recover its loss by selling the asset in question.

To start the process, you meet with a trustee in bankruptcy or an accountant or lawyer who is licensed to handle your affairs under the BAI. You disclose all your assets and liabilities, and the trustee or administrator helps you decide if you should pursue an assignment in bankruptcy or prepare a consumer proposal.

Consumer proposals
Generally speaking, a consumer proposal can be brought for debts of less than $75,000, excluding a home mortgage.

Under a proposal, you make a repayment offer to your unsecured creditors. It might be to pay them back over a longer period of time or to pay them a percentage of what you owe. When you make a consumer proposal, it temporarily freezes unsecured creditors from taking action against you.

Within 10 days of filing, your administrator must file a report with the official receiver, who works for the Superintendent of Bankruptcy, stating whether the administrator feels the proposal is fair and if she thinks you will meet your obligations.

The report is also sent to your creditors, who have 45 days to accept or reject it. If they reject it, they must wait five days before commencing legal proceedings.

If they accept it, you're obliged to make the payments as set out in the proposal. If you stop paying, the proposal could be annulled, and the creditors could come after you.

Assignment in bankruptcy
An assignment also freezes unsecured creditors from taking legal action. Your property -- subject to certain exemptions depending on where you live -- is turned over to the trustee, who then sells it to raise cash to pay your unsecured creditors.

You can keep things like food, clothing and furniture, up to a limit. For example, in Ontario, Hadubiak says, there's a $5,000 exemption for personal clothing.

As well, most provinces allow you to keep some of the equity built up in your car or home. In Saskatchewan, for example, you are entitled to a personal residence exemption of $32,000.

Once you make an assignment, you have a number of legal obligations, including turning over all your property and financial records to the trustee. Kershman says you must also attend two counselling sessions to learn about money and debt management.

The trustee will establish a budget for you to live on based on federal guidelines. Kershman, author of Debt on a Diet, says for a family of two, it's $2,174 net of taxes, and for a family of four, it rises to $3,150. Any surplus goes to your creditors.

You are also required to tell the trustee if your finances change during the discharge period. For example, if you win a lottery or receive a tax refund or inheritance, it must be turned over to the trustee for distribution to creditors.

The trustee will file forms about your bankruptcy with the superintendent, and you must attend a meeting with your creditors. They approve the appointment of the trustee and provide him with direction on the administration of your estate.

The aftermath
First-time bankruptcies are automatically discharged after nine months, unless the creditors disapprove, which lawyers say rarely happens.

The trustee can also impose conditions, such as an order to pay a creditor some money. Normally, though, a discharge relieves you of your unsecured debts, except for certain court awards, such as damages for assault, fraud claims or spousal and child support.

The fee for filing a proposal or making an assignment depends on your individual circumstance.

While bankruptcy can relieve you of debts, there's a price to pay. If your employment depends on your being bonded, it can have negative implications. As well, it stays on your credit record for six or seven years.

Another downside is that bankrupts have to rebuild their credit rating, explains Fran Smith, executive director of the non-profit Credit Counselling Services of Alberta. A bankruptcy means you will be bumped to the lowest credit rating, she says.

If you want to get a credit card, you will likely have to put down a deposit. Expect to pay higher interest rates for any credit you do secure.

"For some people bankruptcy is going to be the only option," she says. However, there are a number of strategies to consider before taking that drastic step.

You could simply try refinancing and consolidate your debts into one loan. It might mean tapping into equity in your home. You could also contact creditors and suggest making lower payments over a longer period, an informal proposal. A credit counsellor can help you decide on the best plan.

To find a non-profit credit counselling agency in your province, visit Credit Counselling Canada.

Jim Middlemiss is a freelance writer and lawyer based in Toronto. He's a frequent contributor to the National Post, Investment Executive and Wall Street & Technology.