Bankruptcy: the end of a dream or a fresh start?

 

Bankruptcy is a legal process that occurs when an individual, entrepreneur, or business is no longer able to repay their creditors. Depending on local laws, there are several types of bankruptcy, each with its own specific implications.

 

 

Here are the two most common types of bankruptcy: 

 

1. Personal Bankruptcy

In personal bankruptcy, a consumer is unable to settle their debts. Depending on local legislation, this process may lead to the liquidation of the individual's personal assets to repay part of their obligations. However, certain essential assets may be protected under specific legal systems.

 

2. Business Bankruptcy 

Businesses, small or large, can also declare bankruptcy. This typically occurs when they accumulate debts beyond their financial capacity. A business in bankruptcy may choose either liquidation or attempt to restructure to start anew (known as a reorganization process).

When filing for bankruptcy, your income determines the duration of the insolvency process. 

 

For a consumer with low or average income, the process lasts 9 months, after which the bankruptcy continues to appear on the credit report for 6 years at Equifax and 7 years at TransUnion. 

 

For consumers with excess income, the bankruptcy process can extend up to 21 months and will continue to appear on the credit report for 6 years at Equifax and 7 years at TransUnion.

 

Any subsequent bankruptcies will remain on credit reports for 14 years after discharge. 

 

Did you know that not all debts can be included in a bankruptcy?

 

Here are debts that can be included in a bankruptcy: 

 

Unpaid balances on credit cards, debts on lines of credit, personal loans, income tax debts, debts to collection agencies, student loans (under certain conditions), losses related to a voluntary surrender of an asset, and tax liabilities attributable to the responsibility or guarantee of a director. 

 

Here are debts that cannot be included in a bankruptcy: 

 

Debts resulting from alimony, fines, penalties, restitution orders, or other similar court-imposed penalties; debts from civil liability lawsuits for sexual assault or assault causing injury or death; debts resulting from fraud, misrepresentation, or illegal acts; debts related to money a creditor could not recover because you did not disclose it to the trustee; and debts related to a student loan if you have stopped attending school for less than 7 years (a judge may exceptionally reduce this period to 5 years).

 

After discharge, certain actions must be taken by the consumer.

 

When the consumer receives their discharge certificate from the trustee, it is imperative to verify the information with Equifax and TransUnion credit bureaus. 

 

It is neither the responsibility of the trustee nor the responsibility of the two credit bureaus to update your data unless you request corrections first. 

 

It is important to ensure that all creditors included in the bankruptcy have no outstanding balances marked as unpaid. If they do, you will be perceived by creditors as a poor payer, and approval chances for future applications will be almost nonexistent. The bankruptcy entry must also appear with each creditor included. 

 

Avoiding bankruptcy requires careful and proactive financial management. 

 

Here are some practical tips to protect your financial health and prevent bankruptcy:

 

1. Create a structured budget
   Make sure to track your income and expenses down to the last dollar, reduce non-essential spending, and prioritize debt repayment.
2. Anticipate and avoid excessive debt
   Before borrowing money, carefully evaluate your borrowing and repayment capacity. Use credit products in moderation. Excessive debt can quickly become unmanageable.
3. Establish an emergency fund
   An emergency fund protects you in case of unforeseen events (job loss, illness, etc.) and allows you to cover unexpected expenses without resorting to credit. It is recommended to set aside three to six months of basic expenses.
4. Reevaluate and reduce your loans
   If you have ongoing loans, check the possibility of refinancing or consolidating them to obtain better terms. A lower interest rate or smaller monthly payments can ease your financial burden.
5. Avoid high-interest credit products
   Microloans, payday loans, or high-interest credit cards can quickly worsen your financial situation. If borrowing is necessary, look for more affordable options and ensure you make payments on time.
6. Consult a financial advisor
   If you face financial difficulties, consulting a financial advisor can be an effective solution. These professionals can help assess your situation, develop a debt management plan, and provide strategies for better money management.
7. Take care of your credit
   Often overlooked, your credit file is crucial for favorable loan conditions when borrowing or renegotiating debt. Monitoring your credit report monthly is recommended: check personal information, ensure no collection agencies have added entries, and verify that account balances are up-to-date. 

 

In conclusion, bankruptcy is often seen as an end, but it can also be an opportunity to start fresh. Although it has significant financial and personal consequences, it also allows you to free yourself from a considerable debt burden. However, it can be avoided through careful financial management. The key to avoiding bankruptcy lies in prevention.

 

Finally, even after a bankruptcy, it is possible to recover and rebuild your financial situation in the long term. With a thoughtful approach, perseverance, and disciplined management, you can turn a difficult period into an opportunity for growth and learning.