What does it mean to be bankrupt in Canada?
The concept behind bankruptcy in Canada is this: you assign (surrender) everything you own to a trustee in bankruptcy in exchange for the elimination of your debts. Through bankruptcy, a person hopelessly burdened with debt gets a chance to start fresh. For a first time bankruptcy, this process is fairly easy to go through. For a repeat bankruptcy, the process is much more difficult to go through.

Personal bankruptcy is a legal process that is governed by federal law – the Bankruptcy & Insolvency Act. This law is designed to permit an honest but unfortunate debtor to obtain relief from his or her debts while treating creditors equally and fairly.

To go into bankruptcy in Canada, a person must live or do business in Canada, and must be insolvent. To be insolvent means:

1. To owe at least $1,000.
2. Not to be able to meet your debts as they are due to be paid.

Bankruptcy trustees are federally licensed and their fees are regulated and moderate, so the cost of bankruptcy is reasonable. Because bankruptcy is a legal process, there is a “stay of proceedings” that prevents a garnishment or any legal action from happening, and stops your creditors from calling.

You may be entitled to an automatic discharge from bankruptcy in 9 months, the minimum time set by the Court to be bankrupt, provided you have never been bankrupt before and you complete various duties and responsibilities as outlined through your trustee.

Your ability to obtain credit in the future could be affected, since bankruptcy will remain on your credit report for up to seven years.

Exceptions to the discharge of all debts
Some debts are not erased as bankruptcy only deals with unsecured debts. Things like credit cards, personal loans, income taxes and overdrafts can be included and listed in your bankruptcy.

A secured debt, such as a car loan or mortgage, is not included in the bankruptcy proceedings. Since you have given an asset as collateral, your creditor does not need the bankruptcy process to recover the amount owing to them.

Some unsecured debts are also not discharged in a bankruptcy, such as student loans less than 10 years after you stopped going to school and/or any alimony or child support.

Exceptions to the surrender of all assets
Some assets are not taken from you in bankruptcy. These are the “exemptions” that the government has determined you need to survive and the list of exemptions is set by each provincial or territorial government. For example, in Ontario, a car worth less than $5,650 is exempt. Also, personal items such as clothing worth less than $5,650 and household items worth less than $11,300.

For most people, the assets they must surrender include their investments, RRSPs, and RESPs, as well as their house.

Exceptions to discharge from bankruptcy in nine months
The length of your bankruptcy will be nine months, unless one of the following is true:

* You fail to perform all your bankruptcy duties, such as regular payments of surplus income to the trustee.
* You have surplus income (see below).
* You have been bankrupt before.

How much longer your bankruptcy period will be depends on the details of your case.

Surplus income adds to cost of bankruptcy
On top of the trustee fee and your loss of assets, a bankruptcy may cost you some of your income, depending on how much you earn and the size of your household. The principle is that, if you earn more than your household needs to survive, you must pay the “surplus income” to your trustee for the creditors. This formula is prescribed by law and the more you earn, the more expensive filing for bankruptcy will become.

How can a single number be meaningful enough to determine whether you can buy a house or car? If you’ve read How Credit Reports Work, you know that your credit report contains a history of how you’ve paid your bills, how much open credit you have, and anything else that would affect your creditworthiness. Your credit score boils down all of that information into a three-digit number.

In this article, we’ll find out how this formerly secret number is used and how it affects how much you pay for credit, insurance and other life necessities.

A credit score is a number that is calculated based on your credit history to give lenders a simpler “lend/don’t lend” answer for people who are applying for credit or loans. This number helps the lender identify the level of risk they may be taking if they lend to someone. While the same end result can come through reviewing the actual credit report (which lenders usually do), the credit score is quicker and less subjective. The system awards points based on information in the credit report, and the resulting score is compared to that of other consumers with similar profiles. With this information, lenders can predict how likely someone is to repay a loan and make payments on time. It’s the credit score that makes it possible to get instant credit at places like electronics stores and department stores.

Although there are several scoring methods, the score most commonly used by lenders is known as a FICO because of its origins with Fair Isaac and Company. Fair Isaac is an independent company that came up with the scoring method and software used by banks and lenders, insurers and other businesses. Each of the three major credit bureaus (Experian, Equifax and TransUnion) worked with Fair Isaac in the early 1980’s to come up with the scoring method.

The three national credit bureaus each have their own version of the FICO score with their own names. Equifax has the Beacon system, TransUnion has the Empirica system, and Experian has the Experian/Fair Isaac system. Each is based on the original Fair Isaac FICO scoring method and produces equivalent numerical results for any given credit report. Some lenders also have their own scoring methods. Other scoring methods may include information such as your income or how long you’ve been at the same job.

Advance-fee loans. The lenders appeal to consumers who, based on their credit history, can’t get a loan. The scammers falsely promise that for an advance payment, even consumers with bad credit histories can get a loan. Some of these lenders make money through the 900 numbers that charge consumers who call to find out about the loans. Others simply charge consumers a fee for a loan that is never delivered.

Home equity. Unscrupulous lenders target consumers who have good credit, but have a bad cash flow. They offer credit based not on income or the ability to repay, but on the equity of the home. Exploitative lenders may take advantage of the borrower by abusive practices such as “loan flipping” by repeatedly talking the borrower into refinancing the loan, which adds to the cost of the debt. If you don’t have enough income to make the monthly payments, you will probably lose your home, as many consumers do through these schemes.

Identity theft. This crime occurs when con artists steal credit card numbers, social security numbers, mother’s maiden names, or other personally-identifying information without one’s knowledge, to tap into the good credit histories of consumers. They then set up new credit accounts, charge purchases to existing accounts, or drain bank accounts. Frequently, consumers don’t know that their credit identities have been stolen until they get bills for credit card accounts that they never opened, see charges on their bills that they didn’t know anything about, or discover that their bank accounts have been fraudulently accessed.

Congress passed the Identity Theft and Assumption Deterrence Act of 1998, which makes it a federal crime to knowingly transfer or use another person’s means of identification to commit any unlawful activity.

File segregation. This is a relatively new scam that could get you fined or sentenced to jail time if you use it. It is an illegal scheme used by credit-repair companies to encourage consumers with unfavorable credit histories to obtain new taxpayer identification or employer identification numbers from the Internal Revenue Service under false pretenses and use them to hide their true credit identities from creditors. For a fee, the companies promise advice on how to go about segregating their credit files. File segregation is illegal and consumers who employ it are committing a felony.

Step 2: To thy own self be true
Whenever you have the urge to buy something, ask yourself, “Do I really need it?” For example, “Do I really need to pay four dollars for a double caramel latte when the coffee at work is actually pretty good? Or “Do I really need to go clothes shopping even though my closet is bursting now?” Chances are, you’ll say “no.” And you’ll see the extra savings in your bank accounts. Imagine how great you’ll feel, each and every month, knowing that you’re on the road to financial security.

Step 3: Open a savings account
This sounds like an obvious one, but you’d be amazed at how many consumers are living “paycheck to paycheck.” Financial experts suggest having six month’s worth of living expenses available in case of an emergency. Well, that may be a stretch for a society with a negative savings rate, but it’s something to shoot for. More realistically, choose to make savings a priority and start now. Savings rates have crept up over the last few years and most money market accounts are paying around four or five percent. Even if you deposit $50 or $100, it’s a positive step. And the higher your account gets, the happier you’ll be.

Step 4: Start a 401K account at work
You’ve probably heard your co-workers gleefully proclaim: “The difference in my take-home pay after my pre-tax deduction wasn’t bad!” Well, it’s true. Investing in a retirement plan with pre-tax dollars is one of the best kept financial secrets around. If you’re worried about not being able to make ends meet, start off with a small amount each pay period. You can always increase the amount later. Over time, you probably won’t even “miss” the money that’s taken out of your check, and your retirement funds will grow.

Step 5: Park your ATM card
With an ATM perched on almost every corner, the ease at which we can get cash 24 hours a day is almost scary. However, if you really want to see the ugly truth, check out your next checking account statement. Look through the section that lists your monthly ATM activity. Be brave. Grab a calculator and add up your ATM withdrawals. Now, sit back a minute and try to remember what you purchased. Chances are it’s a hefty amount of cash every month, and for what? Consider putting your ATM card aside, and when you need cash, go inside the bank, stand in line, and cash one of your personal checks made out to you. This minor inconvenience forces you to stop and think before you snag more money out of your account. Try this for three months. You may be amazed at the amount of extra money in your account.

By following these steps and rethinking your spending habits, you may feel better about yourself – especially when you see your credit card debt shrink and your savings account balances grow.

In reality, consolidating bills isn’t always easy. If you have a lot of debt, it can be hard to find a consolidation loan at a lower interest rate. And if you’re not careful, you can end up deeper in debt than when you started.

Your goal in consolidating your debt should be to lower your overall costs. To accomplish this there are two things to keep in mind:

1. Get the lowest interest rate possible
2. Have a plan to pay off your debts in 3 – 5 years.

Here are some of the best ways to approach debt consolidation:

Using Credit Cards

The good news about this method is that with a good credit rating, you may get a much lower rate than other forms of consolidation loans. And since credit card issuers don’t require collateral, you aren’t “risking the farm.”

Call your current issuer to ask what interest rates they will offer you if you transfer balances from other cards over to theirs. Go for a fixed rate if you can get it, and ask them to waive any transfer fees. If you can’t negotiate a low rate with your current issuer, try shopping for a new card at a site such as CardRatings.com. But be careful! Too many applications for credit in a short period of time can hurt your credit rating.

Once you do consolidate this way, be sure to set up an optimal payment plan so you can be debt-free in 3 – 5 years.

Home Equity Loans

With a home equity loan, you borrow against the value of you home, minus any other mortgages.

The two major kinds are:

* A Home Equity Loan – a fixed amount of money for a fixed period of time (sometimes at a fixed rate)
* A “Home Equity Line of Credit” where you borrow up to a pre-approved credit limit (interest rates usually variable) and can borrow again if you still have money available.

These loans can offer attractive rates, low payments, and the interest is usually tax-deductible if you itemize. Many issuers offer no or low closing costs for these loans. Interest rates are often variable, however, and there’s always the risk that you can lose your home if you can’t pay.

Cash Out Refinance

Refinancing your home and taking out money to pay off bills (called “cash-out refinance”) is yet another way to tap the equity in your home. If you can refinance at a substantially lower interest rate, you’ll eliminate the high interest costs of the debts you pay off, and you could even come out with a lower payment than you have right now since rates are so low.

One option to consider: an interest-only loan. By lowering your monthly payment, you can free up money to use toward paying down other high-rate debt or building a retirement fund.

Make sure you understand the total cost of refinancing. Take any money you’ve freed up by paying off other bills and use that to create an emergency savings fund.

Traditional Debt Consolidation Loans

A debt consolidation loan is an unsecured personal loan, and the only collateral you are offering for the lender’s security is you. Because lenders consider them risky loans, they’re usually more expensive and not always easy to get if you have a lot of debt.

If the interest rate is too high to make it worth it and the repayment term is ten or fifteen years, you should probably consider another method of consolidation. However, if the term and interest rate are right, this can be a great way to actually save money in the end. (Check Bankrate.com for current averages). Remember, to calculate the total cost of the loan from start to pay-off.

Credit Counseling

Credit counseling agencies may help you get out of debt, though they don’t actually consolidate your debt. Instead, payment plans (usually with lower interest and fees) will be worked out for all of your eligible debts. You’ll make one monthly payment to the counseling agency, which will pay all your creditors.

Participating in a credit counseling program generally won’t hurt your credit rating, and if you stick to the plan you can be out of debt in three to six years. But be careful which agency you work with. If the counseling agency pays your bills late, you’ll pay the price since you’re still responsible to the lender. It happens.

Debt Settlement

Debt settlement is another option that’s become increasingly popular with consumers who have a lot of debt and can’t, or won’t, file bankruptcy. You stop paying your bills and instead make a regular monthly payment to the settlement company. Your creditors contact them, and not you, about your overdue bills. As your accounts fall further behind, the negotiation company will settle your balances – usually for 50% of the balance or less (including fees) depending on the debt. Most people can be out of debt in less than two years or less using these programs.

It’s not perfect. Your credit rating will be hurt in the short run and you must be certain you’re dealing with a reputable company or the money you pay each month could disappear. Still, for consumers who can’t shoulder the burden of debt they have now, it can be a very good option.

Retirement Loans

If you have a 401(k), 403(b) plan or certain types of pension plans, you can borrow against your nest egg. (You can’t borrow against your IRA.) It’s easy, with no income qualifications or credit check.

The key here is to borrow against your retirement account, rather than withdraw from it early so that you don’t end up paying taxes and a 10% penalty. Also, if you leave or lose your job, you may have to pay your loan back immediately or pay taxes and penalties for an early withdrawal.

These loans typically offer low interest rates, and interest is paid to you, since you are the lender. While tapping your nest egg like this can short-change your retirement, so can costly debt payments.

If you are in your 20’s and 30’s, you obviously have more time to rebuild a retirement nest egg, but even if you’re in your 40’s or 50’s, you will want to weigh the cost of paying the high interest of the debts over time, versus borrowing from your retirement account. The return you get from paying off high-rate debts is guaranteed – while the stock market isn’t.

Rapid Repayment

There is a mathematically optimal way to pay your debts. Choose a fixed level monthly payment, and commit to it each month. Pay as much as you can on the highest rate debt first, while payment the minimums on the rest.

It is almost always suggested that consumers with debt start by creating one of these plans. Many people who do so find they don’t even need to consolidate to get out of debt in the next few years. They just need a plan and they can do it on their own.

If you have a charge off or collection account that shows as unpaid, don’t just send them a check and pay it off. Call the creditor on the phone, explain that you have the funds to pay the account in full, and calmly explain why it should not have been reported on your credit in the first place. Then ask if they will provide you a letter deleting the account entirely from all credit bureaus if you pay off the account. Try to get them to fax it to you. As before, be sure to document all of your telephone contact and always keep a nice pleasant tone in your voice. In a large percentage of cases, this also works.

There will be cases when the creditor does not agree to remove the negative credit item. If it is an item that is definitely not yours, call the credit bureau immediately (except for Equifax, who only responds by mail). When on the telephone, do not discuss any negative items that are accurate. Do not discuss any items that may be accurate in general but have some small error in detail that you can dispute by mail. Once you confirm any accuracy at all, you cannot dispute it later by mail.

For the remaining items, you need to dispute them by mail, writing directly to the credit bureaus. Write a letter to the appropriate bureau including your name, social security number, address, disputed accounts, and account numbers. You must sign the letter. Inform the bureau that you are disputing the data as it appears on your credit report.