Top 5 bankruptcy & credit myths in Canada

Licensed Insolvency Trustees spend a lot of time dispelling myths about bankruptcy in general. There is a lot of misinformation on the internet, especially, which people often take as gospel: if it’s in writing, it must be true! Let’s take a minute to review some of the most common ones we hear.

(Also, people really like lists these days, so we’ll even do it in list form.)

If you prefer this in video form, I’m here on You Tube:

Here are the Top 5 myths about bankruptcy in Canada:

#1. I will lose my house & personal possessions

First, it is the equity in a house that is of interest to the trustee – in other words, would there be any money left over after sale costs? If not, then keep your house during a bankruptcy. As long as you keep paying your mortgage, you can keep your house.

If your house does have equity, Ontario property legislation allows you $10,000 in exemption. So you’d have to have over $10,000 in equity before the house was of interest to the trustee. And even then, if you made a settlement with the trustee to pay the equity into the estate, you could keep your house and that equity payment would be distributed by the trustee to the creditors. Very few trustees actually seize houses these days because of these factors.

As far as personal possessions, there are also exemptions for this, but unless there are significant items such as fine art which could be liquidated, personal items are not seized.

#2. My trustee will tell me what I can spend my money on

Also false. The trustee assists the bankrupt in laying out a personal monthly budget that is reasonable, but it is a guideline based on income. Since income is reported monthly during a bankruptcy, the trustee sees where you money is going, and provided it is reasonable there is no need for any issues regarding the bankrupt’s discharge.

#3 I will go to jail

Absolutely not. This is not a Dickens novel. Debtor prisons existed long ago, but the spirit of the bankruptcy law today is rehabilitative in nature – i.e., the government wants you to have a fresh start. Bankruptcy law is not meant to be punitive.

#4 My spouse/partner’s credit will be affected

Totally untrue. Nobody can cause credit harm to another person simply by virtue of filing a bankruptcy in Canada. Even married people cannot do any credit harm to each other. If you have joint debts, of course, and only one person files bankruptcy, the other is liable for that debt, but that would have been the case anyway.

#5 I will not be able to renew my mortgage

Almost every client with a conventional mortgage asks this as often their mortgage is coming up for renewal during the time of bankruptcy. Mortgages are usually amortized over a maximum of 25 years. Interest rates are set for specific periods. When the rate comes up for renewal, it is usually a formality with a conventional bank and as long as you are current with your payments there should not be an issue.