Our trustees are asked many questions every day about how bankruptcy works in Canada. We have pulled together a list of the most commonly asked questions about personal bankruptcy. Click on any question to get a short answer or watch a short video.

How Bankruptcy Works

To help prepare the necessary bankruptcy documents you will need to:

  • Make a list of assets you own;
  • Make a list of your creditors and amounts you owe;
  • Provide information about your family income, expenses and other necessary personal information.

Once the trustee prepares the bankruptcy paperwork, a meeting will be arranged for you to sign the documents. These will then be electronically filed with the government.

Once you file bankrutcy you have immediate legal protection from creditors and collection calls.

Your trustee will send a  formal notice to your creditors of your bankruptcy within 5 business days.

If your wages are being garnished your trustee will notify your employer, the court and the creditor that you declared bankruptcy so they garnishment can be stopped.

You will be required to surrender any non-exempt assets to your trustee for the benefit of your creditors and hand over your credit cards. Credit cards issued to your employer may not have to be surrendered.

If your wages are being garnished, or have the potential to be garnished, you want to have that stopped quickly.

The automatic ‘stay’ in a bankruptcy or consumer proposal stops most wage garnishments.

With all the necessary information, it is usually possible to have a garnishment stopped the day you file.

An automatic stay applies to:

  • banks and credit unions
  • credit card companies
  • collection agencies
  • Canada Revenue Agency
  • payday loan companies

What Else You Need To Know

  1. Under the Ontario Wages Act, the maximum a creditor can garnish is 50% of gross wages excluding certain deductions required by law (CPP, EI etc).
  2. Canada Revenue Agency can garnish wages without a court order.
  3. Payday lenders and credit unions can garnish wages if you signed a voluntary wage assignment.
  4. Bankruptcy law cannot stop a garnishment for family law support payments.

To help us process your garnishment quickly it is important that you bring the following in with you when you meet with one of our local bankruptcy trustees.

  1. Details of the garnishment including a copy of the garnishment order or requirement to pay by CRA. Your employer will have a copy if you do not.
  2. Payroll contact information including private email and fax number.

Bankruptcy in Canada lasts a minimum of 9 months but how long you will be bankrupt depends on:

  • whether this is your first bankruptcy or if you have been bankrupt before;
  • whether or not you have surplus income.
First Time BankruptSecond Bankruptcy
No Surplus Income9 months24 months
Surplus Income21 months36 months

You must also complete all your bankruptcy duties in order to obtain your bankruptcy discharge.

During your bankruptcy you will be required to:

  • Make all required payments;
  • Submit proof of income and expenses monthly;
  • Provide information for your trustee to file all necessary tax returns;
  • Attend two credit counselling sessions;
  • Attend any meetings or examinations if requested by your creditors, your trustee, or the Office of the Official Receiver;
  • Update your trustee about changes to your information including your current address if you move.

Part of the process of starting over includes attending two private credit counselling sessions. This will help you obtain the necessary information and skills needed to rebuild your finances, your credit and to remain debt free.

  • 1st Session - two to eight weeks after filing
  • 2nd Session - any time after 30 days from the first session but before the end of the 7th month

What Is Covered At These Counselling Sessions?

Your credit counselling sessions are designed to help you develop stronger budgeting and money management skills. They also help you to stay on track with the bankruptcy and consumer proposal process.

For example, your counsellor will ask if the phone calls and collection letters have stopped and if you have any other questions or concerns.

When filing bankruptcy or a consumer proposal, attending both of your counselling sessions is a required part of your duties. These sessions are for your benefit so that you have the knowledge and expertise to build a stronger financial future for you and your family.

Generally the only people who will know you filed bankruptcy will be you, your creditors and your trustee.

We will only notify your employer if you ask us to in order to stop a wage garnishment.

Your bankruptcy does become part of the public record but a search of these records comes with a fee and someone would need a reason to want to conduct a search in the first place.

If you owe money to your bank for credit cards, a line of credit, or loans we strongly advise that you move your account to a different bank before filing bankruptcy or a consumer proposal.

Why Make the Switch?

Your bank has the right to take funds from your account to pay back money you owe to them.

Your bank has the ability to freeze your account so that you cannot access your money.

  • Your new bank should be a bank with whom you have no debt.
  • You cannot have overdraft protection.
  • You are entitled to bank at any financial institution of your choice.
  • Your new bank can help you re-establish credit after you are done a consumer proposal or bankruptcy

Download our free Fact Sheet for instructions on how to open a new bank account when you have filed bankruptcy.

What You Keep in Bankruptcy

In Ontario, there are certain assets that are exempt from seizure. These exemptions include:

  • Clothing - unlimited
  • Furnishings and appliances - $13,150
  • One motor vehicle - $6,600
  • Tools of the trade - $11,300
  • Certain types of life insurance
  • Most pension savings

Any assets over these exemption amounts that you own as of the date of bankruptcy must be surrendered to the trustee for the benefit of your creditors.

Under Ontario law you can keep one owned motor vehicle valued up to $5,650 or less.

If you own a vehicle worth more than $5,650 you can ‘buy back’ the difference from your trustee and still keep your car.

For Example: If your vehicle is worth $8,000 you would pay the trustee $2,350. This payment can be made in installments during the term of your bankruptcy.

Using resources such as Black Book determines the value of the vehicle.

In most cases a leased or financed vehicle is not affected by bankruptcy. You have options based on what you can afford:

  1. Continue making your monthly car payments and keep your vehicle.
    Once you decide to continue your monthly payments you cannot change your mind if you find that you are unable to make your payments.
  2. Voluntarily return the vehicle to the lending or leasing company and let them make a claim in your bankruptcy for any money still owing.

Speak to your trustee about this option if you cannot afford the monthly car payments or if the amount owing greatly exceeds the value of the car.

An individual filing for bankruptcy is only entitled to one vehicle exemption under Ontario law.

In a joint bankruptcy, each filer qualifies for one motor vehicle up to $6,600, as long as the vehicle is registered in that person’s name.

If you have multiple vehicles, or other assets that you would like to keep, speak to your bankruptcy trustee about a consumer proposal.

Your creditors are entitled to any ‘equity’ value in your home when you file for bankruptcy.

If your house has little or no equity you have 2 options:

  1. If you can continue to make your mortgage payments and keep your home.
  2. If you cannot afford your mortgage payments you can voluntarily surrender your home and any ‘shortfall’ will be included in your bankruptcy.

If there is equity in your home you have 3 options:

  1. You can surrender your house to the trustee and walk away from the mortgage.
  2. You can keep your home and make arrangements to pay the trustee the equivalent of the equity value in your home.
  3. You can file a consumer proposal. The advantage of a consumer proposal over bankruptcy is that you are able to spread your equity payments over a longer period of time, resulting in lower monthly payments.

A mortgage is a secured loan and as such is not included in a bankruptcy.

If you are not behind on your payments your mortgage lender cannot cancel your mortgage or foreclose on your home just because you file bankruptcy.

As long as you are current on your payments most mortgage holders will renew your mortgage even if you are bankrupt or in a consumer proposal.

You keep your wages in a bankruptcy. You will be required to submit proof of income and expenses monthly to your trustee. Your trustee will use this to determine your average net income for the purposes of calculating “surplus income”. If your income exceeds the government set threshold limit, you will be required to make surplus income payments during your bankruptcy.

If your wages are being garnisheed, bankruptcy will stop most garnishments.

We strongly advise anyone considering bankruptcy to open a new bank account at a different bank prior to declaring bankruptcy. This will avoid the risk of your bank seizing funds for unpaid debts once you file.

While any funds in your bank account are not exempt assets, typically you are allowed to keep a small amount of cash on hand in your new banking account to cover living expenses like rent, food, etc. for a short period of time.

You keep all RRSP, RRIF and DPSP (Deferred Profit Sharing Plan) savings except contributions made in the 12 months before your bankruptcy.

RESP, TFSA and other investment savings are not exempt.

Inheritances received, or due to you, as a result of the death of someone during bankruptcy become an asset of the bankruptcy.

Lottery winnings and similar windfalls received during your bankruptcy also vest in the trustee for the benefit of your creditors.

Bonuses and commissions from employment would be considered income and not subject to seizure by the trustee however they will impact the calculation of surplus income.

Your bankruptcy trustee will file two tax returns for the year that you declare bankruptcy:

  • a pre-bankruptcy tax return (covering the period January 1 to the day before you file bankruptcy)
  • a post-bankruptcy tax return (covering the period from the date of bankruptcy to December 31)

Any income tax refunds owing to your for any years up to the year you filed bankruptcy will be sent directly to the trustee by Canada Revenue Agency. This includes any tax refunds for any years prior to your bankruptcy, resulting from your pre-bankruptcy return and from your post-bankruptcy return.

Any taxes owing up to your pre-bankruptcy tax return (including any tax debts from prior years) are included in your bankruptcy and will be eliminated once your are discharged.

Any taxes owing on  your post-bankruptcy tax return, or any subsequent tax return are your responsibility and must be paid by you.

While you lose income tax refunds as part of the bankruptcy process, you keep your HST cheques and child tax benefits.

Surplus Income

Surplus income is based on the concept that the more you earn the more you have to pay in a bankruptcy.

Surplus income is important because it will affect both how much you have to pay and how long you will be bankrupt.

The government has set limits, or thesholds, of how much money you get to keep. The larger your family, the more you can keep. Earn any amount over this threshold, and you have to pay 50% into your bankruptcy for distribution to your creditors.

The basic calculation is:

Net Income - Threshold = Surplus Income x 50% = Payment

Here are some examples:

Single: personal monthly net income $2,414:
$2,462 - $2,062 = $400 x 50% = $200 payment

Married: one person bankrupt net income $2,016, spouse’s income $1,500), 1 child
($2,016 + $1,500) = $3,516 - $3,156 = $400 x 50% = $200 family surplus
Pro-rata payment: $2,016/$3,156 = 57% x $200 = $114 payment

The current government threshold limits for 2015 are

Family SizeThreshold
1$2,062
2$2,567
3$3,156
4$3,831
5$4,345
6$4,901
7+$5,456

Each month you are required to submit a monthly statement of income and expenses, along with proof of income.

At the end of the seventh month, your trustee will calculate your average income. If your average monthly income exceeds the monthly limit by $200 or more, your bankruptcy will be extended.

If you earn a bonus, are paid a large sales commission or have a month where you receive three paycheques instead of two, your average monthly income could be higher than expected, potentially affecting the length of your bankruptcy.

Be sure to advise your trustee before filing if your income fluctuates or you expect a three pay period month during your bankruptcy so they can help you understand the potential impact.

Income includes:

  • your take home pay + spouse’s take home pay
  • voluntary deductions for RRSPs or RESPs
  • child tax benefit, social assistance, pension income
  • any other income sources for anyone living in the household

Certain deductions are allows:

  • support payments
  • child care payments
  • medical bills
  • fines and penalties
  • employment expenses that are deductible for income tax purposes

If you expect to have a large monthly surplus income payment, you may want to consider a consumer proposal as an alternative.

A consumer proposal will allow you to negotiate a repayment plan with your creditors and spread out your payments over a longer period of time (up to 5 years). This can reduce your monthly payments to an amount that is more affordable.

Debts Eliminated in Bankruptcy

Bankruptcy eliminates most unsecured debts. When you receive your bankruptcy discharge papers you are legally released from all debts that are covered in your bankruptcy. Most unsecured debts are discharged including:

  • credit card debt
  • bank loans
  • finance company loans
  • unsecured lines of credit
  • student lines of credit
  • payday loans
  • loans from individuals
  • income and other tax debt
  • student loans under certain circumstances (see our FAQ section on student loans)

Personal income tax debts, HST and other tax debts can be included in a bankruptcy and can be discharged (eliminated) by bankruptcy in Canada.

There may be additional duties required in order to obtain your bankruptcy discharge including the requirement to keep all tax filings and installment payments current. CRA has the power to register a lien against property prior to bankruptcy and filing bankruptcy does not remove the lien. You should advise your trustee of any tax debts prior to filing to fully understand any rights and remedies CRA may have.

There are certain debts that cannot be included in, or discharged by, bankruptcy in Canada. These include:

  • spousal and child support payments
  • alimony payments
  • debt arising out of fraud
  • court imposed fines
  • student loans less than 7 years (see our section on student loan debt for more details)
  • restitution orders

Yes. You cannot voluntarily exclude a creditor from your bankruptcy filing.

Secured creditors are not affected by bankruptcy. For more information see our FAQ section - What You Keep.

Student Loans & Bankruptcy

Your student loans are eligible to be automatically discharged if you have been out of school for more than 7 years and:

  • You declare bankruptcy, or
  • You file a consumer proposal.

This waiting period can be shortened to 5 years if you can prove financial hardship.

The seven year period is calculated from your “end of study date”.

  • The end of study date is the last day the government has you registered as a student in a post-secondary education facility.
  • This has nothing to do with when you received your student loans.
  • The time period restarts if you return to school for additional studies.

To determine your end of study date according to government records call:

Canada Student Loans: 1-888-815-4514 (will need SIN NUMBER and pass code if available - press “0” for a live person)

Ontario Student Loans: 1-807-343-7260 (press “*” for a live person)

Eliminating credit card and other unsecured debt through a bankruptcy or proposal can improve your financial circumstances enough that you are able to keep up with your student loan payments.

  • Your student loan lender will receive a pro-rata share of any bankruptcy or proposal payments, reducing your balance owing;
  • Because of the stay of proceedings, your student loan creditors cannot pursue collections during your bankruptcy or proposal.
  • You don’t have to make student loan payments while bankrupt or in a proposal. Interest will continue to accrue during this period.
  • You are still eligible for any government Repayment Assistance programs.
  • You can apply to the court, with the help of legal counsel, to have the waiting period reduced to 5 years.

Bankruptcy & Divorce

Divorce, separation and bankruptcy law frequently overlap and the effect can be quite complicated. Always talk to your bankruptcy trustee about your specific situation.

Bankruptcy does not discharge outstanding alimony or child support payments.

The spouse owed back support payments can make a claim in the bankruptcy and receive their share of any ‘dividend’ paid from the estate. Any alimony or support arrears for the 12 months prior to the date of bankruptcy are considered a preferred claim and are paid out of the proceeds of the bankrupt estate before any other unsecured claims. The balance left unpaid is still owed by the paying spouse.

Unpaid debts due to equalizaton payments under the terms of a divorce or separation agreement are treated like any other unsecured debt and are eliminated by filing bankruptcy.

Support and alimony payments are deductible for purposes of calculating surplus income.

This potentially lowers your net income, reducing any surplus income payment you may be required to make in a bankruptcy.

If you filed bankruptcy first, your assets transfer to your bankruptcy estate and are no longer available for distribution in a divorce. Alternately, if assets are transferred to an ex-spouse as part of a Family Court Order or legal separation agreement before you file for bankruptcy (assuming not done fraudulently) then these assets are no longer available for your creditors in the bankruptcy.

A joint debt cannot be eliminated by a divorce or separation agreement.

Your lender must agree to remove one spouse from any debt they co-signed or guaranteed. This includes joint credit cards.

A divorced or separated couple can still file a joint bankruptcy or joint consumer proposal.

This is not uncommon as a method of dealing with joint debts owed by a couple who can no longer repay these debts due to their divorce and a change in their financial circumstances.

Rebuilding After Bankruptcy

When you file bankruptcy or a consumer proposal in Canada a note will appear on your credit report. The note is based on information received by the Credit Bureau from the Office of the Superintendent of Bankruptcy (OSB) and includes:

  • The fact that you filed and the type of proceeding (bankruptcy, consumer proposal)
  • The date you filed
  • The date of your discharge or completion when this happens

This note is removed after a certain period of time:

  • 1st time Bankruptcy – 6 or 7 years after your bankruptcy discharge, depending on the credit bureau
  • 2nd time Bankruptcy - 14 years after each bankruptcy discharge
  • Consumer Proposal - 3 years after all payments are completed

How Will The Note Be Removed?

  1. The OSB notifies credit bureaus monthly of all bankruptcy discharges and completed proposals.
  2. Credit reports are automatically updated from this information.
  3. We recommend you review your credit report to ensure this happens. You will need to contact the credit bureau personally to correct any mistakes.

Don’t Panic!
It can take up to 2 months for your discharge or proposal completion to appear.

Filing bankruptcy or a consumer proposal does not usually affect your current mortgage and lenders cannot cancel your mortgage just because you have filed. Most will renew your mortgage as long as you have kept all payments current.

It is possible to rebuild credit by doing the following:

  • Review your credit report and alert the credit bureau of any errors.
  • Pay all bills on time and in full.
  • Obtain a new credit card (either secured or unsecured) and use it wisely.

We also recommend you begin to build a small emergency fund during your bankruptcy or consumer proposal. This can help you avoid relying on credit and can be used as a down payment or security for a new loan.

To qualify for a new mortgage, lenders generally look for 2 years of good credit history and the ability to responsibly handle at least $5000 in new credit. Good credit choices would be a secured credit card, line of credit, or car loan.

Credit bureaus report differently. For this reason, we recommend that you request a credit report from both of the companies listed below.

FYI: Free credit reports will provide you with a credit history report, but not a credit score. Credit scores are only available on paid reports.

Equifax Canada Inc. Consumer Relations
Box 190 Jean Talon Station
Montreal, Quebec H1S 2Z2
1-800-465-7166
consumer.relations@equifax.com

Equifax Credit Request Form
Equifax Website
Equifax Dispute Resolution Page

TransUnion Consumer Relations
3115 Harvester Road, Suite 201
Burlington, ON L7N 3N8
1-800-663-9980
marketing@tuc.ca

TransUnion Consumer Disclosure Request Form
TransUnion Website
TransUnion Dispute Resolution Page