Bankruptcy and Insolvency: Know the Impact and Your Options
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Having trouble paying your bills? You’re not alone. Every year, more than 145,000 Canadians file for bankruptcy or insolvency, and the numbers are increasing.
Financial troubles can happen for a lot of different reasons. Maybe you lost your job. Maybe you can’t keep up with the rising cost of living. Or maybe you’re in the middle of a divorce.
Whatever the reason, you have debt you can’t pay off. Here’s what you need to know about your options and the possible impact on your career.
Insolvency and bankruptcy defined
What is insolvency?
Being insolvent means that you owe at least $1000 and at least one of these things are true:
You can’t pay your debts on time.
You stopped paying your debts on time.
You couldn’t pay your debts even if you sold everything you owned to get more cash.
Insolvency is not a temporary setback. If you forget an occasional payment or pay late occasionally, you are not insolvent.
What is bankruptcy?
Bankruptcy is one of many ways you can deal with insolvency.
In Canada, bankruptcy and insolvency are regulated under the federal Bankruptcy and Insolvency Act. If you are insolvent, the act provides a legal framework for you to work with a licensed insolvency trustee to propose a repayment plan or, if that’s not possible, to declare bankruptcy. But bankruptcy is rarely your only option.
What’s the difference between bankruptcy and insolvency?
Insolvency is a condition. It’s the financial state you’re in when there’s no way for you to pay your debts.
Bankruptcy is one of many ways to deal with insolvency. You have to be insolvent to file for bankruptcy, but you don’t have to file for bankruptcy just because you’re insolvent.
The consequences of insolvency
The good news is that bankruptcy and insolvency don’t make you unemployable. But they can have serious consequences for your credit rating, your job, your future job prospects, and your business.
Insolvency can affect your current job
Most employers don’t check your credit rating.
There are only 3 situations where your credit rating does affect your job:
When your wages are being garnished
When your employment contract requires you to maintain good credit
When you belong to a professional association that requires disclosure of bankruptcy or other financial difficulties
Insolvency can hurt your future job prospects
Most jobs do not require a credit check as a condition of employment. If you’re looking for work in the following sectors, the chances of your employer requiring a credit report are extremely small:
Hospitality
Retail
Health care
Education
Technology
Manufacturing
Construction
Agriculture
The arts and the trades
On the other hand, if your job requires you to be responsible for large sums of money, a credit report may be part of the application process. And maintaining good credit may be a condition of employment.
Credit checks are routinely required in the following industries:
Financial services, including banking and investment
Accounting, auditing, and tax services
Insurance
Government and public service jobs that require security clearance
Law and law enforcement
Casinos and gaming
Corporate or executive-level management
Insolvency can hurt your business
If you are the sole proprietor of your business, your personal debts and your business debts are not separate. If you make an insolvency claim, it includes both your personal and your business debts.
Your claim will make it difficult to borrow money for your business. If you do get approved, you will probably face higher interest rates and stricter conditions.
Insolvency is a serious matter. If you’re stressed about your finances, don’t wait until you’re in crisis before you get help! The sooner you get professional advice, the more choices you’ll have and the easier the process will be.
Dealing with insolvency
1. Manage your stress
Debt causes stress. Constant worry about how you’re going to pay your bills means you can’t focus on your job, your family, and the things that bring you joy in life. Stress about your finances can mean you don’t perform at your best at work.
It’s important to take care of your mental health and deal with stress before it’s out of control.
2. Take care of the basics
The Financial Consumer Agency of Canada website offers tips and tools for getting your debt under control and staying debt free. (Does this need to be a callout?
Make a plan to pay off your debt. Create a budget to help control your spending. Reduce your expenses wherever you can. Be a smart shopper. Sell items you don’t need. And avoid more debt—stop using credit for purchases you can’t pay for in full each month.
3. Get help
If you’re facing insolvency, the first step is to contact your bank. You may be able to negotiate lower fees, reduce interest rates, or arrange a temporary pause on payments.
Your next step might be to meet with a professional credit counsellor who can help you create a budget, learn good money management, and deal with problem debt. A credit counsellor can also give you advice and refer you to other professionals you might need.
Search the Alberta tab on the Credit Counselling Canada website for a list of qualified credit counselling agencies.
Check out the Financial Consumer Agency of Canada’s tips for choosing a credit counsellor who is right for you.
If your debt situation is serious, you may need the services of a licensed insolvency trustee (LIT). LITs are the only professionals who can administer consumer proposals and bankruptcies, which are regulated under the federal Bankruptcy and Insolvency Act. They act as a third party between you and your creditors, handle the paperwork, and make sure that proceedings are legal and fair.
Search the licensed insolvency trustee registry for a list of active trustees. Or use Canada 411’s “Find a Business” feature to search “licensed insolvency trustee” in your location.
4. Understand your options
Dealing with insolvency is a very personal matter.
In Alberta, there are 5 main options for dealing with insolvency. What works for one person may not be the best option for someone else. Everyone’s situation is different.
Consult with a professional to choose what’s best for your circumstances.
Consolidation loan
Work with a credit counsellor or directly with your bank to arrange a debt consolidation loan. This can reduce your monthly interest and simplify your debt into a single payment. It only works if you don’t take on more debt.
Debt management plan
This is similar to a consolidation loan. A credit counsellor sets up a debt management program that consolidates your payments and negotiates reduced interest rates with your creditors. You pay back all of your principal within 5 years, but with reduced or eliminated interest.
Note: Beware of for-profit debt settlement companies. Working with a not-for-profit agency is your best option.
Orderly Payment of Debts program
Alberta is 1 of 4 provinces in which this option is available. The not-for-profit credit counselling agency Money Mentors is Alberta’s only authorized provider.
If you qualify for the program, Money Mentors contacts your creditors and consolidates your debts into a single, affordable, court-ordered payment. You pay everything off within 3 years at an interest rate of 5%. You’re protected from legal action or harassment, and you get financial counselling.
Consumer proposal
A consumer proposal is a legally binding agreement that a licensed insolvency trustee negotiates with your creditors. This option is only available if you owe $250,000 or less, not counting the mortgage on your home. You will pay off 20% to 50% of your debt over a period of 5 years, and your creditors will not be able to take legal action against you.
Bankruptcy
Bankruptcy is typically a last-resort option for dealing with insolvency.
Like a consumer proposal, bankruptcy is a legal process that a licensed insolvency trustee files on your behalf. The process is faster than other options, but the impact on your credit score is more severe. Bankruptcy proceedings usually take from 9 to 21 months. You may have to sell your property or belongings as part of the process, but some of your debts will be discharged by the end of it. This means that they are legally cancelled, so you do not have to pay them back. You’ll be able to make a fresh start.
Rebuilding your career
Insolvency does not define you. It doesn’t mean you’re incompetent or irresponsible or incapable of having a great career. It may even teach you some important life lessons.
Remember that rebuilding a career takes as much persistence and hard work as rebuilding your finances.
Be sure to keep your skills up to date and your professional certifications current. Keep in touch with your professional networks, and find a mentor or career counsellor if you need to.