Bankruptcy is your last resort. It is the option to consider when none of the other options are practical. Only Licensed Insolvency Trustees (LITs) are legally qualified to administrate bankruptcies. LITs are obligated to make sure you are provided sufficient information to understand all the basic options available before you decide to choose bankruptcy.
Bankruptcy is typically the cheapest and fastest way to obtain a fresh start. Most who choose bankruptcy have few assets and a modest income. It deals with all unsecured debts with few exceptions, such as child/spouse support, certain types of student loans, and debts incurred fraudulently. After bankruptcy starts, you do not make any payments to any unsecured creditors except as noted.
Secured debts are debts where you have pledged an asset to the creditor as security for a loan, such as a mortgage to the bank on your residence, or your vehicle to the creditor who loaned you the money to buy the vehicle. Secured creditor payments must be made in order for you to keep the asset given as security.
If you cannot afford to make payments to your secured creditors, you also stop making payments to the secured creditors who can then seize and sell the asset secured. If there is a shortfall to the secured creditor, it is unsecured debt which is dealt with by bankruptcy.
The fundamental duty of the trustee is to gather up the cash from your “surplus assets” and surplus income, if any, for eventual distribution to creditors.
You are allowed to keep basic assets, called exempt assets, that you need to maintain your household and your employment. In Alberta, this includes normal clothing and personal effects, reasonable household goods/appliances, tools of trade, equity up to $5,000 in a vehicle, and up to $40,000 equity in your residence, and qualifying pension savings and some others. These “protected assets” are determined by provincial law which varies from province to province.
Surplus income is based on a formula from a government agency that takes into account your monthly income, the number of your household members, the income of others in your household, and other minor factors. The formula is designed to allow you to keep a sufficient amount of your monthly income so that you can cover reasonable living expenses but ensure that a portion of the surplus is paid to the trustee for your creditors.
Other basic duties to co-operate with the trustee have to be fulfilled in order for you to qualify for a discharge from bankruptcy.
Once you are discharged, you have a fresh financial start free of your unsecured debt.
To obtain further detail about how bankruptcy would affect you, see a LIT in your locality.