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Common Pitfalls When Filing for Bankruptcy - 10 Mistakes to Avoid
- Maha Sultan
- Feb 26
- 5 min read
Updated: Apr 7
Filing for bankruptcy is a significant financial decision that can provide relief to individuals struggling with overwhelming debt. However, navigating the bankruptcy process can be complex, and making mistakes along the way can lead to costly consequences. Whether you’re considering bankruptcy or actively preparing to file, understanding potential pitfalls can help you avoid unnecessary complications and maximize the benefits of this legal debt relief option. In this article, we’ll explore the most common mistakes people make when filing for bankruptcy and how to avoid them.
Table of Contents:
11.FAQs
1. Failing to Explore Alternatives First
Bankruptcy is a last resort for debt relief, but many individuals rush into it without considering other viable options. Debt consolidation, consumer proposals, or credit counselling may be better solutions depending on your financial situation.
How to Avoid It: Before filing for bankruptcy, consult with a licensed insolvency trustee (LIT), such as SCB Debt Solutions to explore all available debt relief solutions. We can assess your situation and recommend the best course of action.
2. Not Understanding the Impact on Assets and Credit
A common misconception is that bankruptcy results in losing all assets. While some possessions are protected, nearly 60% of bankrupt individuals in Canada are surprised by which assets they can and cannot keep.
How to Avoid It: Review the exemptions in your province, as laws vary across Canada. In Alberta, for example, certain assets like a portion of your home equity, personal belongings, and tools of trade may be protected. An LIT can provide clarity on what you may keep and what will be impacted.
3. Making Large Transactions Before Filing
Some individuals attempt to protect their assets by transferring money, property, or valuable items to family members or friends before filing for bankruptcy. However, these transactions can be flagged as fraudulent and may result in legal consequences. Attempting to protect assets by transferring money, property, or valuables before filing can be flagged as fraudulent. More than 25% of bankruptcy cases experience delays due to pre-filing asset transfers.
How to Avoid It: Avoid making large financial moves, such as selling assets or giving away property, before filing. Your trustee will review your financial history, and any suspicious activity could jeopardize your bankruptcy case.
4. Incurring More Debt Right Before Filing
Racking up additional debt before declaring bankruptcy can be seen as an abuse of the system. Over 30% of bankruptcy filers face challenges in discharging luxury purchases made before filing.
How to Avoid It: If you’re planning to file for bankruptcy, stop using credit cards and avoid taking on new loans. Any luxury purchases made right before filing may not be discharged.
5. Failing to Disclose all Debts and Assets
When filing for bankruptcy, you must provide a full and honest disclosure of all debts, assets, income, and financial obligations. Omitting information—whether intentionally or unintentionally—can lead to serious consequences, including delays in the process or legal penalties. Approximately 20% of filers unintentionally omit debts or assets, leading to delays and complications.
How to Avoid It: Work closely with your trustee to compile an accurate list of all debts, including credit card balances, loans, unpaid taxes, and other liabilities. Transparency is crucial for a smooth bankruptcy process.
6. Not Fulfilling Bankruptcy Duties
Once you file for bankruptcy, you must comply with specific obligations, such as attending credit counselling sessions, submitting monthly income reports, and making required payments. Failure to complete these duties can delay or even prevent your discharge.
How to Avoid It: Understand your responsibilities and follow through with them diligently. Your trustee will guide you through the process, but it’s up to you to meet all requirements.
7. Choosing the Wrong Bankruptcy Trustee
Not all bankruptcy trustees provide the same level of service. Some may not take the time to explain your options thoroughly or may not have your best interests in mind.
How to Avoid It:Do your research before choosing a licensed insolvency trustee. Look for professionals with good reputations, positive client reviews, and a commitment to helping you find the best debt solution.
8. Expecting Bankruptcy to Erase All Debts
While bankruptcy can eliminate many types of debt, some obligations such as child support, alimony, student loans (under certain conditions), and court-imposed fines, are not dischargeable.
How to Avoid It: Understand which debts will be forgiven and which will remain after bankruptcy. If you have non-dischargeable debts, consider alternative strategies, such as a consumer proposal or debt restructuring.
9. Not Planning For Life After Bankruptcy
Bankruptcy provides a fresh financial start, but it’s important to plan ahead to rebuild your credit and financial stability. Many individuals complete the process only to struggle afterward due to a lack of financial planning.
How to Avoid It: Develop a post-bankruptcy financial plan, which may include rebuilding credit through secured credit cards, budgeting effectively, and practicing responsible financial habits.
10. Ignoring the Emotional and Psychological Impact
Filing for bankruptcy is not just a financial decision. It can take a toll on your mental and emotional well-being. Many individuals experience stress, guilt, or anxiety during the process, which can affect their ability to make sound financial decisions. Over 50% of bankruptcy filers report increased emotional distress.
How to Avoid It: Acknowledge that bankruptcy is a legal tool designed to help individuals regain financial stability. Seek emotional support from friends, family, or financial counseling services to navigate the process with confidence. Surrounding yourself with a strong support system can make the transition smoother and help you rebuild with a positive mindset.
Filing for bankruptcy is a serious decision that requires careful planning and execution. By avoiding these common mistakes, you can navigate the process more smoothly and set yourself up for long-term financial recovery.
FAQs
1. What are the biggest mistakes people make when filing for bankruptcy?
Some of the most common mistakes include:
Failing to explore alternatives like a consumer proposal
Hiding assets or debts, which can lead to legal penalties
Taking on new debt before filing, which may be considered fraudulent
Not fulfilling required duties such as credit counselling and payments
Trying to file without professional guidance from a Licensed Insolvency Trustee
2. Can I use my credit cards before filing for bankruptcy?
No. Any large purchases, cash advances, or credit card transactions made within 90 days of filing may not be discharged in bankruptcy. This could be seen as fraudulent, and creditors may challenge the discharge of those debts.
3. What happens if I forget to list a debt in my bankruptcy filing?
All debts must be disclosed to your Licensed Insolvency Trustee. If a debt is left out, you may be liable to pay that creditor the same percentage of dividends the included creditors received. Always provide a full and honest list of your financial obligations.
4. Will I lose all my assets if I file for bankruptcy?
Not necessarily. Canadian bankruptcy laws provide exemptions that allow you to keep certain assets, such as:
Personal belongings and clothing
A portion of home equity (varies by province)
RRSPs (except contributions made in the past 12 months)
A basic vehicle if needed for work
Each province has different exemption rules, so consult an LIT for specific details.