Bankruptcy is a debt relief solution designed to help the honest but unfortunate debtor eliminate the burden of overwhelming debt.
In this guide, I explain what will happen when you declare bankruptcy, how much it might cost, and what your recovery after bankruptcy may look like. I hope this information can help you decide if filing for bankruptcy is the right solution for you to clear your debts
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How does bankruptcy work?
Bankruptcy in Canada is a legal process, legislated under the Bankruptcy and Insolvency Act (BIA). If you owe at least $1,000, reside or have assets in Canada and are insolvent (you can no longer pay your debts), you may file for bankruptcy.
When you file bankruptcy in Canada you assign non-essential assets and surplus income to your creditors in exchange for which your debts are released.
A bankruptcy can only be filed with a Licensed Insolvency Trustee. An LIT is a federally regulated debt professional, licensed to administer both bankruptcies and consumer proposals in Canada. As an officer of the court, the trustee’s role is to ensure that all bankruptcy laws are applied equally and fairly to both the debtor and creditors.
One of the advantages of bankruptcy is that it is a legal proceeding. If creditors are taking you to court or garnisheeing your wages, bankruptcy law provides a mechanism to stop these types of aggressive collection actions.
What will happen when you declare bankruptcy?
Prior to filing, a Licensed Insolvency Trustee is required to perform a debt assessment to see if bankruptcy is the right solution for you.
During this free consultation, the trustee will gain an understanding of your financial situation, including learning the causes of money stress in your life. They will ask questions about your income, assets (what you own), and debts (the people you owe money to). This information helps them review all possible debt relief options with you and prepare the necessary documents if you decide to go bankrupt.
If you cannot afford to repay your debts in full, the trustee may recommend bankruptcy, but they might also suggest you consider filing a consumer proposal as an alternative to bankruptcy if this makes more sense for you financially.
Signing a bankruptcy petition
To file for bankruptcy protection, you sign various bankruptcy forms, including an “Assignment” and a “Statement of Affairs”. In your bankruptcy assignment, you state that you are handing over your property to the Licensed Insolvency Trustee for the benefit of your creditors. The statement of affairs is a list of all your assets and liabilities.
You will also be required to answer several questions about your situation including details about your family, work, and disposition of assets before bankruptcy. It is an offence under the Bankruptcy & Insolvency Act to sell or hide assets from your creditors when you know you intend to go bankrupt.
With the advent of COVID-19 and the required social distancing, it is now possible to file bankruptcy online by video-conference and electronic signature. However, you must still file with a trustee in the province where you live or where most of your assets are if you live outside of Canada.
Once your bankruptcy documents have been e-filed with the government and the bankruptcy court, you are legally bankrupt.
Upon declaring bankruptcy, you get immediate legal protection from your creditors through an automatic stay of proceedings. This stay is one of the advantages of personal bankruptcy since it legally prohibits your creditors from pursuing any further legal action to collect. Bankruptcy stops a wage garnishment, lawsuits, and collection activity.
Once you declare bankruptcy your trustee will contact your creditors and deal with your debts, so you no longer have to. You stop making payments to your creditors as soon as you file. Within 5 days, your trustee will send a notice of the bankruptcy to your creditors along with a proof of claim form. If you have accounts in collection, you simply tell the debt collector you are bankrupt, and the calls should stop. If a collection agency continues to harass you, talk with your trustee about speaking directly with the agent.
When you declare bankruptcy, you are required to surrender any non-exempt assets to the Licensed Insolvency Trustee who has a duty to realize on those assets for the benefit of your creditors. Your trustee will sell any assets for fair market value and the monies will be set aside in a trust account for distribution to your creditors. You can avoid the sale of an asset by arranging to pay the trustee the value of any equity in the property. Payments can be made over the length of your bankruptcy.
It’s essential to know you do not lose all your assets. There are provincial and federal bankruptcy exemptions that allow you to keep most personal property including:
- Personal items and household goods
- A single vehicle worth less than the provincial exception limit
- RRSP and pension savings (except for some recent contributions)
- Tools you need to work
Another asset that must be realized on is tax refunds up to and including the year you file bankruptcy.
While not an asset, you are also required to stop using and surrender all credit cards once you file bankruptcy.
Duties during bankruptcy
During your bankruptcy, you have several primary duties. You will be required to:
- make your monthly bankruptcy payments
- attend two credit counselling sessions
- file monthly income and expense reports with your trustee
The credit counselling sessions are very beneficial to your financial recovery. They are designed to give you money management tools to help you budget, save and make better borrowing choices. These sessions also provide you with information on how to rebuild your credit after bankruptcy.
You may also be required to attend a meeting during bankruptcy. This does not happen in all personal bankruptcies but it is important for you to know that your creditors can request a creditors’ meeting during which they can ask questions about your financial affairs and can provide further directions to the trustee. The Official Receiver, a representative of the Office of the Superintendent of Bankruptcy (OSB), can also request an examination of a bankrupt, which they do occasionally. Most examinations are randomly chosen and uneventful.
Upon completion of your bankruptcy, you receive a Certificate of Discharge. A bankruptcy discharge means that you are no longer obligated to pay your debts owing to creditors included in your bankruptcy.
There are 5 types of bankruptcy discharge:
- automatic (the most common)
- absolute (if a court hearing is required)
- conditional (you have additional duties)
- suspended (absolute but effective at a later date)
The key to obtaining an automatic or absolute discharge is to complete your duties as required during your bankruptcy.
After your bankruptcy, creditors will receive a proportional distribution of bankruptcy funds from your bankruptcy payments and realization from the sale of any assets that were surrendered. Any remaining debt owing is forgiven.
What not to do before filing bankruptcy
If you are considering bankruptcy, there are certain things you should not do before filing.
- Don’t max out your credit cards and lines of credit or take on new debt just before filing.
- Do not sell or transfer any assets to someone else with the intent to hide them from your creditors.
- Don’t omit creditors from your creditors’ list thinking you can keep that debt or pay them separately.
- Don’t make a preferential payment to or pay off any single creditor at the expense of your other creditors.
- Don’t hide information about a potential future inheritance, bonus, or windfall.
- Don’t forget to tell your trustee if you have filed a bankruptcy or consumer proposal before.
Activities like this will affect the advice you are given by the trustee, at best, and if viewed as fraudulent, could jeopardize your bankruptcy discharge. Your trustee is required to ask a series of general questions to review past transactions like these, so avoid these reviewable actions and be honest with your trustee in your disclosure.
Does bankruptcy clear all debts?
Bankruptcy eliminates most unsecured debts. People often file bankruptcy because they are no longer able to keep up with the minimum payments on their credit cards or may be struggling in a cycle of payday loans. However, bankruptcy discharges a wide range of legal obligations including:
- credit card debt
- unsecured lines of credit and bank loans
- financial company and installment loans
- unpaid bills
- interest and penalties
- accounts in collection
- judgments and lawsuits
- government obligations including tax debts and student loans if you have been out of school for 7 years.
There are however a few debts not discharged by bankruptcy include family responsibility arrears (child support and alimony payments), court fines, traffic tickets and debts due to fraud.
An unsecured creditor is required to file a proof of claim to be eligible to receive a dividend from your bankruptcy estate. However, even if they do not file a claim, unsecured debts included in your bankruptcy that exist at the date of bankruptcy are erased.
Bankruptcy also does not affect a secured creditor. As long as you keep up with your mortgage or car loan payment, you can continue to keep that asset. If you miss payments, bankruptcy does not prevent secured creditors from enforcing their rights to foreclose on your home or repossess your vehicle. If there is equity in any property beyond any exemption limit, for example substantial equity in your home, your trustee can provide you with options to keep your house or car if you can afford the monthly payments.
How much does it cost to file for bankruptcy?
The base contribution fee to file bankruptcy in Canada is $1,800 for a first-time bankrupt. This pays for the trustee’s time, filing fees, and counselling fees.
Your specific bankruptcy costs are determined by the assets you own and your income.
- You are required to surrender or ‘buy back’ any assets that are not exempt from seizure by the trustee
- You may be required to make additional surplus income payments if your income is over the government-set threshold
- You will lose any tax refunds up to and including the year you filed
How long will I be bankrupt?
The length of time you will be bankrupt and are required to make bankruptcy payments is determined by your income and if you have declared bankruptcy before.
- A first bankruptcy with no surplus income lasts 9 months. Surplus income will extend your bankruptcy to 21 months.
- A second bankruptcy with no surplus income lasts 24 months. This is extended to 36 months if you have surplus income.
- A third bankruptcy can only be discharged after a court hearing.
Most personal bankruptcies in Canada involve no surplus income and last for nine months. This is because someone with high surplus income would find it more advantageous to file a consumer proposal as an alternative to making high monthly bankruptcy payments.
How does filing bankruptcy affect you?
How does bankruptcy affect my credit rating?
Bankruptcy will remain on your credit report for 6 years after discharge. Bankruptcy can affect how future lenders view your creditworthiness, but this impact is temporary. While your credit score will drop immediately after filing, you can often get a secured credit card while bankrupt. This will be reported on your credit report as new, and positive, credit history. After your bankruptcy, you can apply for additional credit lines and you will see a slow and steady improvement in your score.
Bankruptcy also has the advantage of ridding you of debts that are causing your current financial hardship. Falling behind on payments and having past due bills sent to a collection agency if you can’t repay your bills will also negatively affect your credit score and can be hard to overcome without bankruptcy if your debts are large.
The purpose of filing bankruptcy is to gain a fresh financial start. Eliminating debt means you can begin the process of rebuilding your credit after bankruptcy and create a stronger financial future. If you take the right steps to rebuild, you will see your score rebound.
Will bankruptcy affect my spouse?
In most cases, no. If your debts are not shared (your wife has not co-signed or is not a co-borrower) you can file bankruptcy with no impact on your spouse. Your bankruptcy does not affect your spouses credit report.
If you have joint debts (both names are on the debt) you may want to discuss filing a joint bankruptcy or proposal with your trustee.
Who will know I filed for bankruptcy?
Bankruptcy is a legal process and your documents are filed with the federal government, specifically the Office of the Superintendent of Bankruptcy. People can search the government records, but they must first know the name of a person to search and must pay a fee before any information is provided.
Your creditors will also be notified that you filed for bankruptcy.
A creditor is an individual or business that is owed money by the debtor. There are two major types of creditors: secured and unsecured. A secured creditor is one that holds a right or claim against the debtor’s property. An unsecured creditor does not have a direct claim on the debtor’s property.
A creditor must file a proof of claim to participate in any dividend distribution from your bankruptcy. They can also request a creditors’ meeting to review the affairs of the bankrupt, although this rarely happens in most personal bankruptcies in Canada. The creditor’s role also includes informing the trustee of any irregularities before or during the bankruptcy filing.
Your employer is not notified that you filed bankruptcy unless you have a wage garnishment. In that case, your trustee will notify the payroll department to ask them to stop taking money from your pay.
The OSB will also notify the credit bureau when you file including the date of filing and type of proceeding (a bankruptcy or consumer proposal). They update the credit reporting agencies at the end of your bankruptcy with the date of discharge.
Other than that, there is no public advertising or publication that you filed a bankruptcy in Canada.
How do I claim or declare bankruptcy?
Before you file, the trustee will review all your debt relief options so you can decide if bankruptcy is right for you.
The trustee will ask questions about your income, assets, and debts (who you owe). If you cannot afford to repay your debts in full, the trustee may recommend bankruptcy, but they might also suggest you consider filing a consumer proposal as an alternative to bankruptcy if this makes more sense for your financial situation.
If you are considering bankruptcy, talk with a Licensed Insolvency Trustee today.