Cost of Bankruptcy

The cost of bankruptcy is firstly reflected in the emotional stress and the stigma of insolvency. In terms of financial losses, the cost depends on three major factors: personal earnings, property that is owned by the debtor, and family size. Firstly, insolvent the individual loses all his property with the exception of assets that are exempt in the respective province of residence. Individuals may retain such property that allows them to keep their self-respect and to rehabilitate their financial health.

The Bankruptcy and Insolvency Act specifies three categories of exemptions. The first category covers any property that is held in trust for other people. The second category concerns the goods and services tax credit payments as well as all prescribed payments related to the individualís essential needs. The last exemption refers to territory-specific exemptions. Such exemptions, provided that they are in limited amounts, refer to: clothing, food, health aids, heating fuel, furnishings, housing property, car, farm land, animal stock, and retirement savings, among others. For instance, Manitoba stipulates exemption for a six month supply of food and fuel or its money equivalent. On the other hand, British Columbia does not guarantee exemptions for food and fuel supplies. Bank accounts are not exempt in the case of bankruptcy. Each province will determine the amounts of assets that the bankrupt individual may retain. In general, the exemption rules are complicated and change over time.

The amount of individual earnings is the second factor that has an impact on the cost of bankruptcy. The insolvent individuals lose a portion of their earnings which will be deemed a surplus income. The Bankruptcy and Insolvency Act of Canada mandates a monthly surplus income payment, based on the income of the debtor. The law sets a limit over the amount that is payable by the bankrupt person. This limit depends on another major factor, namely, the family size of the debtor. The bankruptcy trustee will employ a complex formula to calculate the surplus income, based on the earnings and the family size of the bankrupt. The trustee will request the debtors` recent paychecks and a proof of other income sources as to estimate the amount of surplus. The trustee will also offer an advice on taxation. In general, the goods and services tax credits and the tax returns will be lost by the debtor. Assets received in the form of inheritance or lottery prizes are lost, as well.

In addition, the cost of bankruptcy covers administrative costs such as court fees, costs for formal correspondence, and all fees for filing that are set by the Canadian government. The trustee, filing, and counseling fees are regulated by the government authorities. The bankruptcy trustees are normally paid a set portion of the funds accumulated with the liquidation of the bankruptís property. If the person does not have any assets, he or she will owe a retainer to the trustee. Alternatively, the
person will pay the trusteeís fees over time. This represents an additional cost of bankruptcy. Unless the case is complicated, the person should pay to the trustee the amount of $1347, plus the goods and services tax.

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