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How Does Bankruptcy Work?

Bankruptcy is a legal process that provides immediate relief from your unsecured debt burden, the most common example being credit card debt. It is important to note that certain types of debt are not wiped out or addressed by declaring bankruptcy, which means it's not necessarily an all-encompassing solution for your financial challenges.

Man using laptop to research how bankruptcy works Man reviewing bankruptcy paperwork with a Licensed Insolvency Trustee Man reviewing bankruptcy paperwork with a Licensed Insolvency Trustee
  • How Do I Start Bankruptcy Proceedings?

    The process starts when you meet with your Licensed Insolvency Trustee and fill in the appropriate paperwork. Bankruptcy will stop wage garnishments and law suits against you by your creditors.

    Once the filing is complete, you will begin to undertake bankruptcy duties and surrender your assets to your Licensed Insolvency Trustee, who will seek to turn those assets into cash and hold those monies in trust for distribution to your creditors.

  • What is an Unsecured Debt?

    Bankruptcy is designed to eliminate unsecured debt. If you have an unsecured debt and your creditor does not already have a lien (or claim) on any of your property then the creditor cannot repossess items once you file bankruptcy. Typical examples include credit card debt, bank loans, and medical bills.

    A secured debt, on the other hand, is a debt where an asset is held as collateral in order to reduce the lender's risk. The prime example is a mortgage. If you default on your mortgage payments, your mortgage lender has a lien on the property and can seek permission to foreclose on your home in order to recover the credit they extended to you. Filing bankruptcy does not prevent secured creditors from repossessing their collateral if you don't pay.

  • What Can I Keep Once I Have Declared Bankruptcy?

    Because bankruptcy is a process to help "honest and unfortunate" debtors, there are certain exceptions to the assets you have to surrender. Most people are entitled to keep limited amounts of essential items like clothing, furniture, medical equipment, tools of trade, pensions, and registered retirement savings.

    If you have little or no equity in your home, you may be able to negotiate with your mortgage provider to continue paying your mortgage throughout and after bankruptcy. In contrast, if you have substantial equity in your home—and equally substantial debts—your Licensed Insolvency Trustee will either seize and sell your property or help you make alternative arrangements to repay your equity and keep your house.

    In other words, it's not your home itself that's directly claimed by the bankruptcy process, but rather the equity you have in it. Either way, it can quickly become a complicated situation which is why it's essential to have impartial advice from a qualified professional.