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Can You Stop Paying Your Bills Before Filing For Bankruptcy?

Filing for Bankruptcy is a big decision that affects your financial life for a long time. One common question is whether you can stop paying your bills before filing for Bankruptcy in Canada. The answer is not simple and depends on various factors. This guide will discuss what happens if you stop paying your bills before filing for Bankruptcy.

Should You Stop Paying Bills When in Debt?

Before making a decision, it’s crucial to understand how stopping payments impacts various types of debts:

  • Essential Bills: You should keep paying essential bills like mortgage or rent, utilities, and car payments. This ensures you have a place to live, basic utilities, and transportation.
  • Secured vs. Unsecured Debt: Secured debts are debts backed by collateral, such as mortgages and car loans. If you stop paying these, creditors can take your property.

Unsecured debts, such as credit cards and personal loans, are not tied to specific assets. You can usually stop paying these just before filing for bankruptcy, as bill collection stops within 5 days of filing. However, don’t stop months in advance as creditors might take actions like wage garnishment.

If you have unsecured debts with the same bank where you hold your chequing or savings account, you should open a new bank account at a different bank. This precaution is necessary because if you owe money to your current bank, they can freeze your account and withdraw funds to cover your debts.

  • Priority Debts: Certain debts, like child support, alimony, and some taxes, are considered priority debts and are not discharged in Bankruptcy. Failing to pay these can result in severe consequences, including legal actions and additional penalties.

The role of timing

If you plan to file for Bankruptcy, it might make sense to stop payments on some unsecured debts shortly before filing. However, this should be done strategically and with the guidance of a Licensed Insolvency Trustee (LIT) to avoid any potential pitfalls.

Avoid making large purchases or taking on new debt in the period leading up to filing, as these actions can be scrutinized by the Bankruptcy court and may be deemed fraudulent.

The role of a Licensed Insolvency Trustee

When considering Bankruptcy, it is essential to work with a Licensed Insolvency Trustee. A LIT is a federally regulated professional who administers the Bankruptcy process, ensuring compliance with the law and protecting the rights of both the debtor and creditors. Before filing for Bankruptcy, a LIT will review your financial situation, explain available options, and help you determine the best course of action.

Steps to Take Before Filing for Bankruptcy

If you are considering stopping payments before filing for Bankruptcy, here are some steps to take:

1. Consult a LIT: Before making any decisions, consult with a Licensed Insolvency Trustee. They can explain to you in detail what will happen if you stop paying your bills and help you develop a comprehensive plan. They will also help you understand the provincial asset exemptions (what you can keep) in a personal Bankruptcy.

2. Assess Your Financial Situation: Take a detailed inventory of your debts, assets, income, and expenses. Understanding your financial situation is crucial for making informed decisions.

3. Prioritize Essential Expenses: Ensure you can cover essential living expenses, such as rent, utilities, and groceries. Maintaining stability in your day-to-day life is important during the Bankruptcy process.

4. Communicate with Creditors: If you decide to stop paying your bills, communicate with your creditors. Inform them of your intention to file for Bankruptcy and explore any temporary arrangements or hardship programs they may offer. Filing for Bankruptcy will stop collections from creditors.

5. Avoid New Debt: Do not take on new debt or make significant purchases before filing for Bankruptcy. These actions can complicate the process and may be viewed unfavourably by the Bankruptcy court.

6. Document Everything: Keep detailed records of your financial transactions, communications with creditors, and any advice received from professionals. This documentation can be valuable during the Bankruptcy proceedings.

After Filing for Bankruptcy

After filing for Bankruptcy, you’ll need to follow certain steps to rebuild your financial standing:

1. Budgeting: Create a budget to help you keep up with your monthly bill payments and avoid future debt.

2. Rebuild Credit: Pay your current bills on time to start rebuilding your credit score.

3. Financial Counselling: Participate in any mandatory financial counselling sessions as required by the Bankruptcy process.

Alternatives to Bankruptcy

  • Consumer Proposal: A Consumer Proposal is a formal agreement between you and your creditors to repay a portion of your debt over a specified period. This option is less damaging to your credit rating than Bankruptcy and allows you to retain your assets. A Bankruptcy will show on your credit report for up to seven years. On the other hand, a Consumer Proposal will be removed from your credit report 3 years after you pay off all the debts included in the proposal, or 6 years after you sign the proposal (whichever is sooner). A Consumer Proposal must be administered by an LIT.
  • Debt Consolidation: Debt consolidation involves combining multiple debts into a single loan with a lower interest rate. This can simplify payments and reduce the overall cost of debt. However, qualifying for a consolidation loan requires a reasonable credit rating and the ability to make regular payments.
  • Credit Counselling: Credit counselling services can provide financial education, budgeting assistance, and debt management plans. You will find out how late payments affect your credit score and how to avoid them. These services can help you regain control of your finances without resorting to Bankruptcy.

Financial Problems? We Can Help

Stopping bill payments before filing for Bankruptcy is a complex decision that requires careful consideration and professional guidance. While it may seem like an easy way to handle debt when you cannot pay, the consequences can be serious. By consulting with a Licensed Insolvency Trustee, assessing your financial situation, and prioritizing essential expenses, you can navigate the Bankruptcy process more effectively and work towards a fresh financial start.

Licensed by the Federal Government of Canada to manage Bankruptcies, Consumer Proposals, and other insolvency services, the caring team at Allan Marshall & Associates has the knowledge and experience to assess your situation and provide the best advice for your needs. Whether you are a first-time bankrupt or simply struggling to make ends meet, call (888) 371-8900 to schedule your free consultation today. We will explain all of your debt options so you can make an informed decision.

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Francyne Myers, JD, CIRP, LIT

Francyne spent many years in senior positions with the Office of the Superintendent of Bankruptcy. During the course of those years, she also found time to study Accounting at Saint Mary's University and attend the Schulich School of Law (formerly Dalhousie Law School) to earn her degree in law (J.D). In 2012, Francyne left public service life and joined Allan Marshall & Associates Inc. where she completed her education becoming a Licensed Insolvency Trustee in 2013. She is actively involved in her local Trustee Association and enjoys helping others find solutions to their financial problems.