These preliminary projections put personal bankruptcy filings at their highest level since 2005, according to the American Bankruptcy Institute. Back then Congress sought to limit bankruptcies through the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA).

Bankruptcies have soared just the same, says the ABI. “While the 2005 bankruptcy overhaul law aimed to reduce filings, overall consumer debt and continued financial stress have led to consumer bankruptcies climbing back to pre-BAPCPA levels,” said ABI Executive Director Samuel J. Gerdano. “We expect that there will be nearly 1.6 million new bankruptcy filings by year end.”


How can you avoid being a bankruptcy statistic? Start by knowing the key signs that you might be headed toward bankruptcy. With enough warning, you may be able to take steps to avoid financial calamity and get back on solid financial ground.

Here are a few clues that you may be headed off a financial cliff:

1. You’re using credit cards to pay for critical items like housing or groceries – Credit cards aren’t meant to pay ongoing household bills, especially if you have any outstanding balance. If you’re using a card to pay your mortgage each month, or are down at the Safeway (Stock Quote: SWY) sliding your card through the checkout line scanner for food and supplies every week, you may be headed down a slippery path.

2. You have no health insurance – Full-blown health reform doesn’t kick in until 2014 – that is, if the courts allow it. Until then, if you don’t have health insurance you’re just asking for financial trouble. Studies show that medical bills are a common trigger for bankruptcy proceedings. If you don’t have insurance, and you suffer a major accident or illness, that’s a surefire way to go broke.

3. Abusing a home equity line of credit – This one is hard to accomplish these days, as banks have really tightened the reins on home equity loans. But if you fall behind on your home equity payments, the bank treats it like you’ve fallen behind on your mortgage – and it could try to foreclose on your home. It’s imperative that you keep up to date on your home equity payments – banks and mortgage lenders are watching those payments very closely.

4. Living paycheck-to-paycheck: Another sign that you’re in danger of sliding into bankruptcy is not having any savings in your financial picture. This tees you up for serious financial trouble if you lose your job or suffer a debilitating illness.

5. Co-signing loans: Never co-sign a loan for anyone – even a family member. If the borrower forecloses on the loan, the bank will come to you looking for payment in full. If you can’t make good on the loan, then it’s your neck on the chopping block. Co-signed loans are another common theme in bankruptcy proceedings.

Although it may seem you have some or all of these signs, bankruptcy doesn’t have to be inevitable. If you suspect that you’re in a financial situation you may have difficulty digging out of, take concrete steps to avoid the “final straws” listed above. Your current debt situation may be difficult, but you have the power to take charge of your situation and you don’t need to be lead to bankruptcy.

                          

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.