Could You Afford to Lose Your Job, And For How Long?

could you afford to lose your job

If you were to lose your job today, do you have enough of a financial cushion to live off of for a few months while you find a new job?

For many the answer is no. In today’s economy, most people live from pay cheque to pay cheque, and with no emergency savings, and any drop in income can make them vulnerable to financial difficulties and may lead to filing for bankruptcy.

In both Canada and the United States, there has been an increase in bankruptcies filed. In 2013, statistics showed a total of 118,678 Canadians filed either a personal bankruptcy or a consumer proposal (a 0.2% increase compared to 2012); and the United States filed a total of 1,032,326 bankruptcies.

Related: Things You Can Do If You Anticipate Being Laid Off

Regardless of which country you live in, the decision to file for bankruptcy is not easy and should be used as a last resort, but when creditors are issuing ultimatums and threats, sometimes it is the best option. Before making the decision to file for bankruptcy it is important to contact a bankruptcy trustee to explore other financial options and decide what the best move is for you.

Know Your Options

In Canada, The Bankruptcy and Insolvency Act (BIA) is the federal statute which governs bankruptcy and insolvency and applies to all provinces and territories. In addition to their jurisdictions, each province has its own rules and regulations pertaining to the situation.

Before you move down the path of bankruptcy, there are two types of debt management strategies to consider. The first being a Consumer Proposal and the other the Division 1 Proposal.

So which solution is best for you?

Consumer Proposal

One alternative to declaring bankruptcy is the Consumer Proposal. This option allows you to work with your creditors through a licensed bankruptcy trustee. A legal agreement is negotiated between the two parties, protecting you from debt collectors, and sets up an arrangement for partial repayment of your debts.

To qualify for a consumer proposal, your total debt must be less than $250,000, excluding mortgages. It is also important to note that even if you file a consumer proposal, it is not guaranteed to be granted. Your creditors will have to agree with the arrangement, and if they do, fixed monthly payments will be negotiated.  If the consumer proposal is denied, personal bankruptcy might be your best option. Your bankruptcy trustee will be able to help and answer your questions.

Division 1 Proposal

The other option, Division 1 Proposal, also known as a commercial proposal, is for anyone (individuals and businesses) who owe more than $250,000. Like the consumer proposal, this proposal allows you to negotiate with your creditors to reach a settlement for paying off your debt. If the division 1 proposal is not accepted, there will be no other alternatives, leading to automatic bankruptcy.

Personal Bankruptcy

If neither proposal is available to you, and you’ve explored other options (i.e. a debt consolidation loan or a debt management plan), filing for personal bankruptcy is your best option to help you eliminate your financial problems. There are obviously advantages and disadvantages to declaring bankruptcy and you should be aware that not all your debts will be erased when you file.

Bankruptcy only dissolves unsecured debts, such as credit cards, personal loans, overdrafts, etc.

It is important to note though that not all unsecured debt will be expunged. Student loans, alimony, and child support will continue to be a part of your financial obligations.

However, secured debts, assets which can be used as collateral (home mortgages, car loans, or a lien), are exempt from the bankruptcy.

Because bankruptcy does not wipe away secured debts, as long as you keep up with your payments, you will be able to keep your home and car. Failure to pay, or if you fall behind in your payments, can lead to foreclosure.

Questions to Ask Yourself Before Filing:

  • How will bankruptcy benefit you if you file?
  • Will I be able to pay off my debt within the next five years?
  • Am I employed and bringing in a stable income?

Navigating the United States Bankruptcy Process

In the States, The United States Code controls the bankruptcy process, which is broken down into titles, which include within each title, chapters.

The three most common types of bankruptcy in the United States are Liquidation (Chapter 7), Reorganization (Chapter 11), and Individual Debt Adjustment (Chapter 13). Before filing for bankruptcy, consult with a qualified legal counsel or financial expert to know your options and which Chapter is your best option.

Chapter 7

If you have little to no disposable income, Liquidation Bankruptcy, filing under Chapter 7 is probably your best option. Under this Chapter, you move into a liquidation bankruptcy where your assets are sold in order to pay off your credit cards and medical bills. Because Chapter 7 is for low income individuals, there are usually very few assets to sell, but this option provides the debtor a quick discharge from most of their debts and gives them a fresh start.

Chapter 11

Reorganization Bankruptcy, or better known as Chapter 11, is used when a business or partnership is unable to meet their financial obligations while reorganizing a business, working to keep it open, and paying off creditors over time. In some cases an individual can file under Chapter 11, but it is very rare.

Chapter 13

In most cases, Chapter 13, the Individual Debt Adjustment Bankruptcy, is the bankruptcy option most people qualify for. Similar to Canada’s consumer proposal, Chapter 13 allows individuals to work with their creditors to pay off their debt, stop the collection calls, and keep their assets.

So how do the Consumer Proposal and Chapter 13 compare?

Consumer Proposal

Chapter 13

Your total debt cannot exceed $250,000, excluding the mortgage on your principal residence.

Eligible if your unsecured debts (credit cards, student loan, medical bill, etc.) are less than $383,175 and your secured debts (mortgages and home equity loans, personal loans from finance companies, etc.) are less than $1,149,525.

Negotiate with creditors to set up an arrangement for partial repayment of your debts.

Certain debts must be paid in full. These debts are called “priority debts” and include child support, alimony, wages owed to employees, and tax obligations.

If you cannot meet the terms of your agreement, personal bankruptcy might be your next option.

If unable to meet payment plan, the bankruptcy trustee may modify your plan or the court might release you from your debts due to hardship. If neither are an option, Chapter 7 may be filed.

There is a clear distinction between bankruptcies in Canada versus the United States, the prominent one being the States use Chapters to differentiate between the various bankruptcy options. No matter where you live bankruptcy is a complicated and costly (emotionally and financially) process, but remember there is always a solution to your financial problems.

Contributed By: Harris and Partners


Comments

    • Natalie @ Financegirl

      Natalie @ Financegirl 09/03/2014 7:01 a.m. #

      I have two problems with bankruptcy: 1) you cannot discharge your student loans, so it leaves people with debt afterwards, and 2) you're more likely to claim bankruptcy again once you've done it (b/c you don't learn anything different about money; you just start over, making similar mistakes in the future). I wish there was a mandatory education component to bankruptcy.

      • Sicorra

        Sicorra 09/03/2014 8:47 a.m. #

        I understand your point Natalie.

        And yes, in some cases people do declare bankruptcy several times.

        But there are truly cases where people are in trouble and just need a new start, and are careful the second time around.

        In Canada there is mandatory education component to bankruptcy, which does make a difference too. Of course you will always have the case where people will attend and not follow through, but that doesn't mean everyone will behave that way.

    • Bren Lee

      Bren Lee 09/03/2014 10:17 a.m. #

      Definitely a scary thought Sicorra. I would have enough for a few months or so but not much after that. It would pretty much devastate me not only financially but emotionally. We try to put away that nest egg, but one never knows how much you will really need, until you are without. Great post!

      • Sicorra

        Sicorra 09/03/2014 1:32 p.m. #

        I agree Bren, it is difficult to know how much you would really need in a time like that.

        Yes, it would be an emotional time, but at least you would be able to put food on the table while you find a new job, because you have money saved up.

        Thanks very much for stopping by!

    • Corina Ramos

      Corina Ramos 09/03/2014 6:14 p.m. #

      I was stuck at my job for years because of poor financial planning. We had two incomes and we were spending more than we were saving.

      We thought about filing for Chapter 7 a couple of times but we never proceeded with it...glad we didn't.

      We still aren't completely debt-free but we're better off than we were back then.

      Great post Sicorra!

    • Uplifting Families

      Uplifting Families 09/04/2014 6:39 p.m. #

      Great post with helpful information. Don't forget to contact creditors, sometimes they are willing to work with you if you are upfront about your situation.

    • Stephanie May

      Stephanie May 09/08/2014 8:51 a.m. #

      This was a very informational post, Sicorra! Such a scary thought about losing a job, but also a very important thought to plan for the future just in-case it ever happened. Thanks for sharing!

    • Kate @ Money Propeller

      Kate @ Money Propeller 09/09/2014 8:16 p.m. #

      I lost my job 5 years ago, actually I resigned from my job because I had a problem with my boss. It was difficult for us, especially that we are not financially stable yet. I would prefer with Chapter 7.

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