Bankruptcy is a legal process designed to help the honest, but unfortunate debtor find debt relief. By filing for bankruptcy and completing all of your duties, you can eliminate most of your debts and get the fresh start you need to move forward.
Many people are surprised to learn that their debts do not simply vanish, but that one of the duties in a bankruptcy is to pay back a portion of the debts throughout the length of the bankruptcy. The exact cost of bankruptcy will vary depending on your income, family situation and assets, but in general, there are three components:
- Monthly contributions;
- Surplus income; and
- Asset repurchase.
A monthly contribution is required to cover the trustee’s fees and expenses. This is because the trustee has to pay money to file the bankruptcy with the government and has to pay for the credit counsellor to perform your counselling sessions. This monthly contribution also covers the trustee’s time to administer the file and communicate with your creditors.
The government sets surplus income guidelines governing how much someone in a bankruptcy is allowed to bring home each month. To determine whether you’re below or over those set guidelines, your trustee will review your net income and if you have any expenses such as child support or daycare. The general concept is the more you earn, the more you pay.
Each month you are required to report your income to your trustee and make a surplus income payment based on your income. If your income is higher than the government set guideline, you pay one-half of the excess to the trustee (for example if you bring home $2,506 and the government limit is $2,006 you are $500 above the limit and you would pay $250). You are required to make this payment for 21 months for a first time filer and 36 months for a second time filer.
When you file for bankruptcy, you surrender any non-exempt assets to the trustee. However, many people choose to keep the asset and pay their trustee the equivalent cash value. For instance, you may have contributed $500 into your RRSP in the past year. If you pay the trustee $500 you are allowed to keep the RRSP. If you are unable to pay the trustee the cash value, the trustee is legally required to sell the asset.
While not a direct cost of the bankruptcy, you will also lose your tax refund for the year of bankruptcy and any tax refunds for prior years if you have not yet received them. It’s important to know that you may also lose your GST/HST cheques.
Bankruptcy fees are not a one-size fits all process. Fees will vary based on the person’s individual situation including their income and assets. To find out more information about your own situation and what kind of fees may be legally required for personal bankruptcy, contact a local trustee in insolvency to discuss your options.