The Frightening Truth About Insolvency
Did you Know?
The Scary Side of Insolvency
When financial difficulties become overwhelming, insolvency can seem like a way to get a fresh start. But before making such an important decision, it’s important to understand what filing for insolvency actually means and how it can affect your financial future.
Bankruptcy or Consumer Proposal may provide relief from certain debts, but it also comes with consequences that can last beyond the filing itself. From the impact on your credit and future borrowing opportunities to your assets, financial obligations, and ability to rebuild financially, there are several factors to consider.
In this month’s newsletter, we’re taking a closer look at the other side of insolvency—what you should know before filing, what can change after filing, and why understanding your options is an important part of making an informed financial decision.
Could Your Budget Handle the Unexpected?
A simple monthly budget + unexpected-expense calculator.
Your budget can handle the unexpected if you build a dedicated emergency fund and plan for seasonal costs like Halloween.
What Lurks Behind a Consumer Proposal?
A consumer proposal can provide a way to deal with overwhelming debt, but it also comes with responsibilities and consequences that are important to understand before making a decision. From the impact on your credit to the commitment of making payments, there may be more lurking beneath the surface than you expect.
Your Credit Will Be Affected
A consumer proposal is recorded on your credit report and can make it more difficult to obtain new credit. The Government of Canada says Equifax and TransUnion remove a consumer proposal 3 years after all debts in the proposal are paid, or 6 years after the proposal is signed, whichever comes first.
You Still Have to Make Payments
A CP doesn't mean you stop paying altogether. You agree to make a lump-sum or periodic payments through the Licensed Insolvency Trustee according to the proposal terms. A proposal can last up to five years.
Missing Payments Can Put Your Proposal at Risk
A consumer proposal comes with specific payment requirements. Missing payments can have serious consequences and, in certain circumstances, may result in the proposal being annulled.
Not Every Debt May Be Covered
A consumer proposal does not necessarily deal with every type of debt. Certain debts may remain payable depending on the circumstances and the type of debt involved. It is important to understand exactly which debts are included before entering into a proposal.
A Consumer Proposal Isn't a Quick Fix
Although a consumer proposal can provide a structured way to address debt, it does not instantly resolve every financial challenge. You still have to complete the terms of the proposal, manage your finances during the process and work toward rebuilding your financial stability afterward.
A consumer proposal is a formal insolvency proceeding, not simply another debt-consolidation plan. You will need to provide information about your financial situation, including your assets, debts, income and expenses, as part of the process.
What Does Bankruptcy
Actually Mean?
Bankruptcy is a legal process designed to help individuals who are unable to repay their debts. It can provide significant relief, including protection from most collection actions and the possibility of being released from many debts after discharge. However, bankruptcy also comes with responsibilities and consequences that are important to understand before making such a significant financial decision.
Understanding what happens during and after bankruptcy can help you make informed decisions about your financial future.
Your Credit Will Be Affected
One of the most significant consequences of bankruptcy is its impact on your credit history.
When you file for bankruptcy, the credit bureaus are notified. A first bankruptcy is generally removed from your credit report six years after discharge, although in Ontario, TransUnion may report a first bankruptcy for seven years after discharge. A second bankruptcy can remain on your credit report for 14 years.
This can make obtaining new credit more challenging after bankruptcy. Lenders are not required to approve an application, and your ability to obtain credit will depend on the lender and your financial circumstances
You May Have to Give Up Certain Assets
Bankruptcy can affect the assets you own.
When you file, your Licensed Insolvency Trustee (LIT) takes control of your non-exempt assets and may sell them, with the proceeds distributed to creditors. Certain assets are protected under applicable provincial and federal exemptions.
This means it's important to understand how bankruptcy could affect things such as:
Your vehicle
Your home or other property
Investments
Other valuable assets
The impact depends on your individual circumstances and the applicable exemptions.
Bankruptcy Comes With Ongoing Responsibilities
Filing for bankruptcy does not mean that all financial responsibilities immediately disappear.
During the process, you may be required to:
Provide information about your income, assets and debts
Surrender your credit cards
Attend financial counselling sessions
Keep your LIT informed of changes to your circumstances
Provide additional information required to administer your bankruptcy
Make surplus-income payments if your income exceeds applicable thresholds
Your cooperation with the LIT is an important part of completing the bankruptcy process.
Not Every Debt Is Automatically Eliminated
Although bankruptcy can release you from the legal obligation to repay many debts, some debts are excluded from discharge.
Depending on the circumstances, these can include certain support obligations, court-imposed fines or penalties, debts arising from fraud, and some student loans.
This is why it's important to understand exactly which debts are included before proceeding.
Co-Signers Can Still Be Responsible
Bankruptcy generally deals with your obligation to your creditors. It does not necessarily eliminate the obligation of someone who co-signed or guaranteed your debt.
If someone co-signed a loan with you, they may remain responsible for the debt even after you file for bankruptcy.
This is an important consideration when reviewing your financial obligations.
Life After Bankruptcy
Receiving a discharge is an important milestone, but it doesn't mean your financial journey ends there.
After bankruptcy, rebuilding your financial foundation may involve:
Creating a realistic budget → Making payments on time → Managing new credit carefully → Building savings → Avoiding unnecessary debt
Your credit history will take time to recover, and lenders will consider your financial circumstances when deciding whether to extend credit.
The goal is to use the experience as an opportunity to establish sustainable financial habits for the future.
The Bankruptcy Impact Checker
Discover how bankruptcy may affect your credit, assets, future borrowing, and financial obligations through our interactive educational tool.
What you'll explore
Credit reporting and future borrowing
Assets and financial obligations
Co-signers and non-dischargeable debts
Rebuilding your financial future
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