LIFE AFTER DEBT: NAVIGATING YOUR FINANCES ONCE DISCHARGED FROM BANKRUPTCY

Being discharged from bankruptcy finally lifts the burden of past debts and sets the stage for financial recovery. This article concisely addresses what a discharge means, its effects on your credit score, and practical steps to rebuild your financial foundation. Expect no-nonsense advice to steer your post-bankruptcy journey towards stability.

Key Takeaways

  • Bankruptcy discharge releases a debtor from certain debts, but obligations like alimony, child support, and specific taxes remain. Debtors must fulfill bankruptcy duties and criteria to achieve automatic discharge, which varies between first-time and repeat bankruptcies.

  • Objections to bankruptcy discharge, which may come from creditors, trustees, or the Superintendent of Bankruptcy, can lead to a court hearing. Legal advice is essential in the event of such objections to navigate the subsequent legal proceedings and discharge process.

  • Post-bankruptcy financial recovery involves responsibly rebuilding credit and undertaking financial education to make informed decisions. Disclosure of bankruptcy status when applying for loans is legally required, and individuals should prepare for the long-term impact of bankruptcy on their financial records.

Automatic discharge criteria
Handling objections to bankruptcy discharge

Understanding Bankruptcy Discharge

An automatic bankruptcy discharge, a prevalent form of discharge, frees a debtor from their bankruptcy-included debts without necessitating a court hearing. This occurs when the debtor fulfills specific criteria, such as being a first-time bankrupt and completing all bankruptcy duties.

A first-time bankrupt debtor obligated to contribute a portion of their income into the bankruptcy estate will qualify for an automatic discharge after making contributions for 21 months, assuming they fulfill all other bankruptcy obligations. On the other hand, a second-time bankrupt who is not obligated to contribute a portion of their income will be eligible for automatic discharge 24 months after the date of the bankruptcy, provided they have attended two financial counselling sessions and no objections have been raised.

Keep in mind that not all individuals qualify for automatic discharge. For example, if the debtor has surplus income, the discharge period can extend to 21 months for a first-time bankrupt and up to 36 months for a second-time bankrupt. Additionally, the discharge period can be extended due to objections from creditors or trustees.

Time Period for Discharge

The timeframe for a debtor to qualify for an automatic discharge can fluctuate significantly owing to various factors. For a first-time bankrupt, the standard period is nine months, assuming all bankruptcy duties have been fulfilled. However, surplus income can extend this period to 21 months.

Additionally, filing for bankruptcy or a Consumer Proposal multiple times can prolong the period. Other factors that could extend the discharge period for bankruptcy include objections from creditors or trustees.

Impact of Surplus Income

Surplus income is the amount a debtor earns above a particular threshold established by the government. This threshold is determined based on the debtor’s household size and is calculated post-tax. Any income exceeding this threshold may result in surplus income payments.

Surplus income can significantly influence the duration of the bankruptcy process and the achievement of discharge. For first-time bankrupts, the standard nine-month period can extend to 21 months. For individuals with prior bankruptcies, the duration can increase from 24 to 36 months. Also, remember that surplus income can extend the bankruptcy duration from the minimum period to possibly twice that period, contingent on whether it’s a first-time or subsequent bankruptcy.

Handling Objections to Your Bankruptcy Discharge

Objections to bankruptcy discharge can occur, potentially delaying the process. These objections can come from various sources, including:

  • Disputes related to property exemptions

  • Failure to fulfill obligations mandated by the Bankruptcy and Insolvency Act

  • Objections raised by the Trustee

  • When creditors suspect fraudulent conduct or believe the debtor could have paid more

Creditors can oppose a debtor’s discharge, the Licensed Insolvency Trustee (LIT), or the Superintendent of Bankruptcy if the debtor has failed to meet their obligations or committed an act of misconduct under the Bankruptcy and Insolvency Act. Suppose a creditor opposes a debtor’s discharge entirely. In that case, the matter will be brought before the Bankruptcy Court, where the court may either grant a court order against the debtor or determine that the debtor has fulfilled all obligations and grant their discharge.

The Court Hearing Process

Collection notices are crucial in the debt collection process. In Alberta, they must adhere to the Collection Agency Compliance Standards 2020 and contain vital information, including the name of the collection agency, the debtor, and the exact amount owed. The agency must wait 30 days after sending the notice before taking additional action.

Failure to send these notices can prevent the agency from pursuing legal action after two years after the debt becomes due.

Seeking Legal Advice

When faced with challenges to your bankruptcy discharge, obtaining legal counsel can offer guidance and assistance in navigating intricate legal procedures. A bankruptcy attorney can help:

  • Understand your rights

  • Evaluate the legitimacy of the objections

  • Formulate a robust defence strategy

  • Ensure that all discharge requirements have been met

  • Assist in addressing any underlying issues that may have prompted the objections

It’s advisable to seek legal advice after completing all monthly payments and credit counselling sessions, which can occur as early as nine months. It’s also recommended to seek legal advice at least 15 days before the automatic discharge date, as the trustee will provide notice of the impending discharge. A lawyer can aid in objecting to bankruptcy discharge by representing the individual at the court hearing, assisting in objecting to the conditions requested by the trustee or creditor and seeking the individual’s discharge. The responsibilities of a lawyer involve addressing objections raised by creditors or the bankruptcy trustee, assisting in substantiating that a debt should be discharged and advocating for the debtor’s eligibility for a discharge or the discharge of specific debts.

Steps to Obtain a Discharge from Undischarged Bankruptcy

While securing a discharge from undischarged bankruptcy may appear complicated, it’s a manageable process. An undischarged bankruptcy is when a debtor has not yet received a formal discharge from bankruptcy and still has outstanding debts. A bankruptcy lawyer can assist by:

  1. Obtaining your bankruptcy files

  2. Discussing any outstanding obligations with you

  3. Petitioning the bankruptcy court to appoint a new trustee to facilitate the discharge process

Fulfilling all remaining obligations is crucial to obtaining a discharge from undischarged bankruptcy. Once the outstanding bankruptcy duties are fulfilled, the trustee can seek an Order of Absolute Discharge from the bankruptcy court, officially releasing the debtor from their debts.

Completing Outstanding Duties

Fulfilling all outstanding duties in the bankruptcy process is essential to obtaining a discharge from undischarged bankruptcy. These duties typically involve:

  • Collecting payments

  • Ensuring all bankruptcy duties are fulfilled

  • Providing information to the trustee

  • Distributing funds to creditors

A Licensed Insolvency Trustee can assist with this process, offering guidance and overseeing it.

However, there could be serious consequences if a debtor fails to fulfill their remaining bankruptcy obligations. The court may revoke their discharge, resulting in opposition to the discharge and potential legal consequences, including fines or imprisonment.

Working with a New Trustee

Working with a new trustee may become necessary in certain circumstances during the bankruptcy process. The new trustee’s responsibilities include:

  • Collecting payments

  • Ensuring completion of required duties

  • Distributing funds to creditors

  • Monitoring claims

  • Assisting in the sale of non-exempt assets

The process for selecting a new trustee when discharging bankruptcy involves the following steps:

  1. Set up a meeting with a trustee.

  2. During the meeting, inquire and gather information to make an informed decision about selecting a new trustee.

  3. It’s important to note that after filing for bankruptcy, the trustee appointed by the Office of the Superintendent of Bankruptcy is typically not interchangeable during the bankruptcy proceedings.

Steps to obtain discharge from undischarged bankruptcy
Rebuilding credit post-bankruptcy

Rebuilding Credit Post-Bankruptcy

Post-bankruptcy, rebuilding credit is an essential step toward achieving financial stability. The process begins with reviewing your credit report. However, acquiring new credit is not guaranteed immediately post-discharge and depends on convincing lenders of your financial stability and ability to repay. Strategies for establishing a positive credit history after filing for bankruptcy include:

  • Maintaining low credit card balances

  • Automating payments

  • Regularly monitoring credit reports

  • Adopting good credit habits

  • Obtaining a secured credit card or loan to establish a positive credit history

The responsible utilization of new credit, such as making timely payments and adhering to credit limits, improves your credit score, making tools like secured Visa cards particularly important in establishing a positive credit history. Financial education is pivotal in enhancing financial literacy. It aids individuals in regaining financial control and opens up a broader spectrum of financial opportunities post-bankruptcy.

Responsible Use of New Credit

Using new credit responsibly is a key step in rebuilding credit after bankruptcy. One recommended strategy is to apply for a secured credit card, which enables the utilization of savings to make a deposit, serving as collateral and aiding in establishing a history of responsible credit usage and punctual payments. Individuals discharged from bankruptcy can enhance their credit score by acquiring small credit balances on new credit cards and ensuring timely payment before the due dates to establish a positive payment history, which is crucial for a favourable credit report.

Furthermore, it’s advised to maintain a credit utilization ratio below 30%, indicating responsible credit management by not using more than 30% of your available credit limit at any given time. Responsible use of new credit contributes to rebuilding credit after bankruptcy by demonstrating to lenders a dedication to prompt repayments and effective credit management, which involves selecting an appropriate secured credit card, ensuring timely payments, and maintaining a low credit utilization.

Importance of Financial Education

Financial education, also called financial literacy, plays a crucial role in the aftermath of bankruptcy. It involves gaining proficiency in understanding and using diverse financial skills, such as personal financial management, budgeting, and investing. A Licensed Insolvency Trustee can provide guidance on establishing and attaining future financial objectives and instructing on spending strategies.

A financial education plan after bankruptcy should consider conducting a comprehensive assessment of your financial situation, setting financial goals, and using your post-bankruptcy income and credit wisely. By equipping individuals with the necessary tools and knowledge to make well-informed financial decisions, financial education can help manage personal finances and avoid common problems. 

Preparing for Major Purchases After Discharge

Preparation is vital when you plan to make significant purchases post-bankruptcy discharge. Individuals who have been discharged from bankruptcy are required to disclose their bankruptcy status when applying for new loans. This process usually entails waiting at least two years and having at least one year of re-established credit. However, a bankruptcy discharge can limit the ability to make major purchases, as it can result in a damaged credit report and credit score, which may hinder the acquisition of loans or credit cards.

Therefore, it’s generally advised to wait at least two years before qualifying for financing for a major purchase after bankruptcy. This allows sufficient time for credit repair and the demonstration of financial stability. To exhibit responsible financial behaviour following the declaration of bankruptcy, consider the following:

  • Rebuilding credit with patience and discipline

  • Maintaining consistent savings

  • Demonstrating effective management of living expenses by ensuring stable housing

Disclosure Requirements

Disclosing your bankruptcy status is a legal requirement when applying for loans after bankruptcy. According to the Bankruptcy and Insolvency Act, lenders must disclose bankruptcy status during the loan application process. If an individual is bankrupt, they cannot borrow more than $1,000 without informing the lender about their bankruptcy status.

Failing to disclose bankruptcy status as mandated by law can result in serious consequences, including fines or imprisonment. Additionally, supplementary penalties or fines may be stipulated under the Income Tax Act or provincial legislation.

The disclosure of bankruptcy status can substantially impact the approval of loans and credits, potentially resulting in a decreased credit score. This, in turn, can create difficulties in obtaining credit from:

  • Lenders

  • Insurers

  • Landlords

  • Employers

The Long-Term Impact of Bankruptcy on Your Financial Records

Bankruptcy significantly impacts your financial records in the long run and can influence your ability to obtain credit and loans. The bankruptcy record will remain on an individual’s credit report for seven years for the first time and will last longer for subsequent bankruptcies.

Filing for bankruptcy may significantly decrease your credit score, reducing your immediate credit eligibility. However, gradually enhancing your credit rating can improve your long-term credit and loan eligibility.

Summary

Navigating the waters of life after bankruptcy can be challenging. However, with a firm understanding of the process and a proactive approach to managing your finances, you can successfully navigate the road to recovery. From understanding the role of a Licensed Insolvency Trustee and the types of debts affected by discharge to the criteria for achieving an automatic discharge and handling objections to your bankruptcy discharge, this guide has provided a comprehensive overview of the bankruptcy discharge process and life after bankruptcy.

While bankruptcy may seem like a daunting setback, it’s also an opportunity for a fresh start. By diligently rebuilding your credit, responsibly using new credit, advocating for yourself in the face of objections, and continuously educating yourself about financial management, you can regain control of your financial future and confidently move forward.

Frequently Asked Questions

What happens to bankruptcy after discharge?

After being discharged from bankruptcy, you will be released from your obligations, and the bankruptcy process will be complete. Your debts will be wiped clean, but a record of your bankruptcy will remain on your credit report for several years.

How do I know if I am discharged from bankruptcy?

You will know you are discharged from bankruptcy when you receive an order stating that you no longer have to pay most of the debts you owe, and most of your debts will be erased. Once discharged, your bankruptcy ends.

What is an absolute discharge from bankruptcy?

An absolute discharge from bankruptcy means that, after completing all duties, you are no longer bankrupt and are released from the legal obligation to repay most debts.

What does it mean when a trustee is discharged?

When a trustee is discharged, creditors can no longer take legal action against the individual to recover the debts included in the consumer proposal or bankruptcy. It’s important to note that not all debts are dischargeable through a consumer proposal or bankruptcy.

What happens if you don’t finish bankruptcy?

If you don’t finish bankruptcy, your debts will still exist, and your creditors can pursue you for collection as if you never filed for bankruptcy. This could result in serious financial consequences for you.