How Bankruptcy Can Help You Achieve Financial Well-Being

Bankruptcy isn’t always the best option for doing that. In fact, there are several other options that should be considered first. But when bankruptcy is the right option, it can help improve a person’s overall financial health in a number of ways:

Fixing your balance sheet

When a person (or company) has significant debt, their debt may be significantly higher than the value of their assets. This means they have negative net worth.

If they were to immediately liquidate everything, it wouldn’t be sufficient to pay off the debt, which means there are limited options if they want to eliminate the debt. And lenders are much less likely to provide new credit to someone who is already in this deficit position.

Bankruptcy may involve liquidating assets, but it also eliminates the debt that’s left over (with a few exceptions), so that the balance sheet can be brought back into balance. Typically, after a bankruptcy, a person will end up with a neutral net worth or a slightly positive net worth (because there are some assets they’re allowed to keep).

Balancing your budget

When a person (or company) is drowning in debt, they often can’t afford their ongoing debt payments. This means they either have negative cash flow – they’re getting further in the hole every month by using new debt to cover expenses and debt payments – or they’re not making the required minimum payments at all. Either way, with interest continuing to accrue, their debt situation is getting worse over time.

Upon filing a bankruptcy, debt payments cease and interest no longer accrues. There will usually be a requirement to make payments to the Trustee, but those are not based on the amount of the debt, interest rates, or the lenders’ payment schedules – it will be based on various aspects of the bankrupt person’s financial situation, most commonly their income.

Although the budget will be extremely tight during bankruptcy due to the required payments (and possibly after bankruptcy, if income is low or expenses are high), the elimination of debt payments usually means that achieving a balanced budget is easier.

Financial education and literacy

A fundamental aspect of Canadian bankruptcy law is that it is rehabilitative. In addition to providing relief from debt, the goal is to allow individuals to emerge with a better chance of financial success and a lower likelihood of accumulating too much debt in the future. To assist in this goal, it is a requirement for individuals who’ve filed bankruptcy to attend two financial counselling sessions with a qualified financial counsellor.

Budgeting, financial goal setting, proper use of credit and other relevant topics are addressed in the financial counselling. This gives the individual tools to develop a better relationship with money and debt by moving from the chaos and/or avoidance that overwhelming debt causes, to a more careful yet optimistic approach.

A fresh start

Many times, individuals who’ve decided to make a bankruptcy filing have already made huge strides in improving their financial wellness. They’ve identified where they went wrong and taken steps to ensure it won’t happen again, including connecting with community, government, or professional assistance resources. They’ve examined their budgets and cut back wherever possible. They’ve got a solid plan for the future. They just can’t make meaningful progress until they deal with the burden of the impossible level of debt hanging over them, which continues to absorb all of their resources and attention.

Bankruptcy allows an opportunity to start over, to make better decisions with the knowledge that has been acquired and the lessons learned from past mistakes. This makes it possible to achieve goals that would have been impossible while managing costly and excessive debt.

A holistic approach to financial well-being addresses multiple interconnected aspects of your financial life. While bankruptcy won’t fix all of these aspects overnight, it can prepare the foundation to allow for eventual success.

Charla Smith & Company is a Calgary-based Licensed Insolvency Trustee, serving the southern Alberta region. We regularly help individuals review various options, including bankruptcy, for dealing with overwhelming debt. If you'd like to explore these options, please reach out to us.

Disclaimer: This publication provides general information and should be seen as broad guidance only. The information contained herein cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon this information without obtaining specific professional advice relating to your particular circumstances. Charla Smith & Company Ltd. does not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.