How to Claim Bankruptcies in Ontario

Filing for bankruptcy is often seen as a last resort for people in financial distress. If you find yourself struggling with debt that you simply cannot pay, bankruptcy may provide the relief you need. However, for homeowners, filing for bankruptcy might not be the only or best option. In many cases, leveraging the equity in your home could provide a more advantageous path to resolving debt without the negative long-term consequences that bankruptcy can bring.

This article explains the process of filing for bankruptcy in Ontario, but also highlights an alternative solution for homeowners: using your home equity to pay off debt and avoid bankruptcy altogether.

How Does Bankruptcy Work in Canada?

Bankruptcy is a formal legal procedure designed to help individuals eliminate unsecured debts when they cannot meet their financial obligations. It provides relief by halting creditor actions like wage garnishments and collection calls. However, it requires surrendering non-exempt assets for creditor repayment and has long-term credit implications.

What Are The Steps to Claim Bankruptcy in Ontario?

1. Consult a Licensed Insolvency Trustee (LIT): Meet with an LIT to assess your financial situation. They will explain your options, including alternatives to bankruptcy, and determine eligibility.
2. Complete Required Documents: Prepare a detailed statement of your income, assets, liabilities, and expenses with the LIT’s assistance.
3. Filing Process: The LIT files the bankruptcy paperwork with the Office of the Superintendent of Bankruptcy (OSB). This provides immediate protection from creditor actions.
4. Fulfill Duties: Attend mandatory financial counseling sessions, submit monthly income and expense reports, and make required payments.
5. Discharge: Upon meeting all obligations, you are discharged from bankruptcy, relieving you of most debts.

How Much Does It Cost to File for Bankruptcy in Ontario?

The cost of bankruptcy varies based on income, assets, and family size. For individuals with no surplus income, the base cost typically starts at $1,800 and is payable over nine months. Higher earners may be required to make additional payments, referred to as surplus income payments. For example, earning $500 above the surplus income threshold could result in an extra $250 monthly payment.

What Is a Licensed Insolvency Trustee in Bankruptcy?

An LIT is a government-regulated professional who administers bankruptcy proceedings. A Licensed Insolvency Trustee:

• Evaluates your financial situation.
• Files bankruptcy paperwork with the OSB.
• Manages communication with creditors.
• Ensures compliance with bankruptcy laws.
• Provides financial counseling to help rebuild your financial health post-bankruptcy.

Their expertise ensures transparency and fairness throughout the process.

What Assets Are Exempt in an Ontario Bankruptcy?

Ontario law allows you to retain certain assets during bankruptcy, including:

Clothing: Necessary clothing up to $7,000 in value.

Furniture: Basic household furnishings up to $14,180.

Tools of Trade: Essential tools for work up to $15,655.

Vehicles: One vehicle valued up to $7,117 (if it’s used for work purposes).

RRSPs: Contributions made more than 12 months before filing.

Understanding these exemptions helps reduce the fear of losing everything.

How Long Does Bankruptcy Last in Ontario?

The length of bankruptcy depends on whether it is your first filing and whether you have surplus income:

First-Time Bankruptcy: 9 months if no surplus income; 21 months if surplus income applies.

Second Bankruptcy: 24 months without surplus income; 36 months with surplus income.

Subsequent bankruptcies may last longer, depending on circumstances.

Can I Claim Bankruptcy for Credit Card Debt in Ontario?

Yes, bankruptcy eliminates most unsecured debts, including credit card balances. For example, if you owe $20,000 across several credit cards, filing for bankruptcy can discharge these debts, providing relief from high-interest payments. However, secured debts, like car loans or mortgages, are not included.

How Does Bankruptcy Affect My Credit Score in Ontario?

Filing for bankruptcy results in an R9 credit rating, the lowest possible, and remains on your credit report for six years after discharge (first-time bankruptcy). This rating significantly impacts your ability to secure credit but offers a chance to rebuild with disciplined financial habits.

What Debts Are Included in Bankruptcy in Ontario?

Bankruptcy covers most unsecured debts, including:

Credit card balances

Personal loans

Payday loans

Unsecured lines of credit

Tax debts owed to the CRA

However, some debts, such as alimony, child support, court fines, and student loans less than seven years old, are excluded.

Can I Keep My Car If I File for Bankruptcy in Ontario?

Yes, you can keep your car if its value is below the $7,117 exemption limit or if it is necessary for work. If your car exceeds this limit, you may need to pay the difference to retain it or surrender the vehicle for creditor repayment.

Can I Keep My House If I File for Bankruptcy in Ontario?

You might be able to keep your house depending on how much equity you have.

Low or No Equity: If your home’s equity is minimal, you can usually keep it by continuing mortgage payments.

Abundant Equity: You may need to pay the equity amount to creditors or sell the home. For instance, a home with $50,000 equity may require you to pay this sum to retain ownership.

What Are The Alternatives to Bankruptcy in Ontario?

Before filing for bankruptcy, consider these alternatives:

Debt Consolidation with Home Equity: Refinance or use the equity in your home (i.e. home equity loan) to pay off your debt.

Consumer Proposal: Negotiate to repay a portion of your debts over five years while keeping your assets.

Exploring these options may help you avoid bankruptcy.

How to Choose Between Bankruptcy vs. Alternatives

Scenario: Jane owes $40,000 in credit card and personal loan debt. She has stable income but struggles to manage payments.

Debt Consolidation with Home Equity: Jane uses a $30,000 consolidation loan at 7% interest, reducing monthly payments and avoiding legal proceedings.

Bankruptcy: Filing eliminates her debt but impacts her credit score for six years.

Consumer Proposal: Jane negotiates to pay $20,000 over five years, keeping her car and home.

Jane’s choice depends on her financial priorities and ability to repay.

How to Avoid Bankruptcy for Homeowners

For homeowners in Ontario, there is a valuable alternative to filing for bankruptcy: using your home equity to consolidate your debts and avoid the need to file for bankruptcy in the first place.

If you’ve been paying down your mortgage for several years, chances are you have built up some equity in your home. Home equity refers to the portion of your home’s value that you actually own, which can be used to consolidate high-interest debt and potentially avoid the consequences of bankruptcy.

What is Home Equity?

Home equity is the difference between your home’s market value and the amount of money you owe on your mortgage. For example, if your home is worth $400,000 and you owe $250,000 on your mortgage, your equity is $150,000.

If you have significant equity in your home, you can use it to consolidate your debt, reducing the financial strain without the need to file for bankruptcy.

How to Consolidate Debt with Your Home Equity

Home Equity Loan (HEL): A home equity loan allows you to borrow a lump sum of money based on the equity you have in your home. This loan typically has fixed interest rates and fixed monthly payments, which can make it easier to budget.

Home Equity Line of Credit (HELOC): A HELOC is a revolving line of credit that lets you borrow against your home equity as needed. You only pay interest on the amount you borrow, and you can make withdrawals whenever you need to.

Both options can help you consolidate and pay off high-interest debts, such as credit card debt, payday loans, and unsecured loans. They offer the advantage of lower interest rates compared to credit cards and payday loans, which can save you money in the long run.

Benefits of Consolidating Debt Into Your Mortgage

Lower Interest Rates: Home equity loans and HELOCs typically come with much lower interest rates than credit cards or payday loans. This can save you money and help you pay off your debt faster.

If you owe $15,000 on a credit card with an 18% interest rate and consolidate it with a 5% home equity loan, you could save thousands of dollars in interest over time.

Keep Your Home: Filing for bankruptcy could result in the loss of your home if there’s significant equity in it. Using your home equity to pay off debt allows you to preserve your property while still resolving your financial issues.

No Impact on Your Credit Score: Bankruptcy has a major negative impact on your credit score, which can last for years. Using home equity to consolidate debt generally has a less severe impact on your credit and may be a better way to get back on track.

Flexible Repayment: With a home equity loan or HELOC, you’ll have more flexibility in how you manage your payments. In contrast, bankruptcy requires you to follow a rigid process dictated by the trustee.

Claiming Bankruptcy in Ontario and the Alternative for Homeowners

Filing for bankruptcy in Ontario is a serious step that can have long-lasting consequences on your credit and financial future. However, for homeowners, using your home equity to pay off debt can often be a better solution, offering lower interest rates, flexible repayment terms, and the ability to preserve your home.

Before you decide to file for bankruptcy, it’s important to explore all of your options. Speak with a Licensed Insolvency Trustee (LIT) and a mortgage advisor to determine if using your home equity might be a better way to resolve your debt and avoid the negative consequences of bankruptcy.

By taking the time to consider all your options, you can find the solution that’s best for you and your financial future.