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For most people, bankruptcy is the adult version of the child's bogeyman in the closet at night. There are plenty of myths about it, and most of the time, those myths only serve to make a tough situation even tougher. But like that bogeyman, the fears diminish when you figure out what is really going on.
Here are five myths about bankruptcy and some truths that might help to turn a light on.
Bankruptcies involve expensive lawyers
In Canada, practising lawyers are not allowed to be bankruptcy trustees. This is different from the U.S., where bankruptcies are nearly always handled by lawyers. Licensed Canadian trustees might have gone through law school, but under Canadian law, they may either work as a trustee or a lawyer, not both.
"Small bankruptcies and consumer proposals do not require a court file, because a bankruptcy trustee is an officer of the court. So the filing of the bankruptcy is deemed to be accepted without going before a judge," says Colleen Craig, a bankruptcy trustee in Victoria, British Columbia.
As well, "since the law changed in 1997, there has been no requirement to advertise a simple, personal bankruptcy in the papers." So, if you're worried about your privacy, you can relax; the whole world does not have to know.
According to Toronto attorney Mark Laugesen, many people confuse restructuring proceedings with bankruptcy. Restructuring is a corporate process, and both corporate bankruptcies and restructuring usually require the services of an attorney, while a personal bankruptcy does not.
They'll take everything but the house
Many people believe that as part of declaring bankruptcy, you're giving up almost all of your worldly possessions. But that's not necessarily so, says Frank Kisluk, an Ontario bankruptcy trustee who has written two books on consumer debt and bankruptcy. "Out west you have homestead protection -- a certain amount of your equity is protected -- but in Ontario, your principal residence is not protected. If you have a home with equity, that equity goes to the creditors."
Different provinces have different rules about what you can keep. But while you are in bankruptcy, you can't keep much. In fact, you can only make a small amount of money
($1,870 a month for an individual). If you make more than that, the period of your bankruptcy may be extended. Deciding to declare bankruptcy means making a commitment to a very modest standard of living for at least nine months.
All of your debts are erased or paid
For better or worse, there are several instances when debts endure even after declaring bankruptcy. Alimony and child support are not changed by a declaration of bankruptcy. Student loan debts also remain after bankruptcy unless it has been at least seven years since your last day of school, although this can be challenged as a hardship after the bankruptcy is settled.
When you become bankrupt, all of your assets are transferred to your trustee. You are no longer responsible for your debts, but neither do you hold your assets.
Once you have declared bankruptcy, it is no longer your job to pay off your old debts. If your creditors cannot be located, the money goes into an account to be held indefinitely by the government. There is a database online where creditors can claim the funds owed to them if a trustee can't find them. It's interesting to note that the largest unclaimed amount in the database is currently over $100,000.
There's a set period of time when you are considered bankrupt
When a bankruptcy ends, the person who declared bankruptcy is discharged by the court; however, a discharge is not always automatic.
"Coming out of bankruptcy is a bit like coming out of a washing machine," says Craig. "You are eligible to be discharged at a certain time, but there are three people who can oppose your discharge: the trustee, the Office of the Superintendent or your creditors. Opposed discharges go automatically to court -- the worst that can happen is that you are deemed to be bankrupt forever." Craig says this happens very rarely and usually only in cases where fraud occurred.
More commonly, a bankrupt individual might not have fulfilled all the conditions of his or her agreement and will then be required to stay in bankruptcy for a total of 21 months.
You'll never get credit again
After nine months most bankruptcies are discharged.
"People assume they'll never have credit again, but it's not unusual for people to be able to re-establish all the credit they need in one to two years after declaring bankruptcy," says Kisluk.
Everyone's case is different, but it's always worth taking the time to discover the truth. With the closet monster gone, it's easier to sleep, breathe and, ultimately, get on with your life.
Stephanie Farrington is a writer based in Victoria.
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