The way personal bankruptcy works in Canada is that the debtor assigns non-exempt assets for the benefit of his creditors, in exchange for which he will be discharged from his debts.
This is the simplest explanation, but there is more to how bankruptcy works and how it affects debtors and creditors.
How does bankruptcy work?
Bankruptcy in Canada is a legal process, legislated under the Bankruptcy and Insolvency Act (BIA), allowing an honest but unfortunate debtor to eliminate most unsecured debts.
If you are insolvent and have no other way to meet your financial obligations, you may file for bankruptcy.
A bankruptcy can only be filed with a Licensed Insolvency Trustee, who makes sure that bankruptcy laws are applied equally and fairly to both the debtor and creditors.
Making a bankruptcy petition
When you file for bankruptcy protection, you sign various bankruptcy forms, including an “Assignment” and a “Statement of Affairs”. In the 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 your assets and liabilities. You will also be required to answer several questions about your situation including details on family, work, and disposition of assets.
Once your bankruptcy documents have been e-filed with the government, you are legally bankrupt.
What happens when I file for bankruptcy?
Upon filing bankruptcy, you get immediate legal protection from your creditors through an automatic stay of proceedings. Wage garnishments, lawsuits and harassing collection agency calls stop.
When you declare bankruptcy, your trustee must ‘realize’ on your assets and distribute the proceeds (along with your required bankruptcy payments) to your creditors. One asset that must be realized on is tax refunds up to and including the year you file bankruptcy, however there are bankruptcy exemptions which mean you keep most personal property.
Within 5 days, your trustee will send a notice of bankruptcy to your creditors along with a proof of claim form.
The creditor’s role in a bankruptcy filing
A creditor is the 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. For example, it is an offence under the bankruptcy code in Canada to fraudulently dispose or hide property before or during your bankruptcy.
It is important to remember that, once bankrupt, you will not be dealing directly with your creditors. One of the biggest benefits of filing for bankruptcy is the bankruptcy protection you receive from declaring bankruptcy. Collection activities stop immediately upon filing and your Licensed Insolvency Trustee will work as middleman between you and the creditors during your bankruptcy.
The Licensed Insolvency Trustee’s role in a bankruptcy filing
A Licensed Insolvency Trustee is a federally regulated professional who administers both bankruptcies and consumer proposals in Canada. As an officer of the court, a trustee ensures that both debtors and creditors follow all required rules and regulations during the bankruptcy process.
Prior to filing, your trustee will get a good understanding of your financial situation, including learning about who you owe, how much you owe, your income, and the causes of stress in your life. Your trustee will carefully explain all your debt relief options and help you find the best solution for your needs.
The debtor’s role in a bankruptcy filing – what you have to do.
During bankruptcy you must complete all required bankruptcy duties including making monthly payments, surrendering your assets and credit cards, and submitting proof of monthly income.
You must also be available to attend two mandatory credit counselling sessions, as well as attend any meeting of creditors, examination or bankruptcy court hearing if one is held.
How does bankruptcy affect your debts?
Upon completion of your bankruptcy, your debts are discharged. A bankruptcy discharge means that you are no longer obligated to pay your debts owing to creditors included in your bankruptcy.
Creditors will receive a proportional distribution of bankruptcy funds from your bankruptcy payments and realization on any assets that were surrendered. Any remaining debt owing is forgiven.
The most common forms of dischargeable debts are credit card debt, unsecured lines of credit and bank loans, financing company loans, payday loans, unpaid bills, accounts in collection and income tax debt.
Bankruptcy can discharge government student debt if you have been out of school for 7 years.
Private student loans from a bank or credit union are automatically discharged.
Bankruptcy does not clear all debts. Some debts not discharged by bankruptcy include family responsibility arrears (support and alimony payments), court fines, traffic tickets and debts due to fraud.
It is an offence in a bankruptcy to knowingly run up your credit cards immediately before filing bankruptcy. If you do, creditors can object to your discharge, and these debts can be deemed to be non-dischargeable in a bankruptcy.
Secured debts, like a mortgage or car loan, are not included in a bankruptcy. You must however be able to keep up with monthly payments or your creditors will act on their rights to foreclose or repossess the underlying security.
How does bankruptcy affect your credit?
While a bankruptcy in Canada will remain on your credit report for 6 years after discharge, it eliminates debts. Falling behind on payments and having past due bills sent to collection agencies if you can’t repay your debts will also negatively affect your credit score.
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.
Who pays for bankruptcies?
Debtors do not technically pay the trustee for their services. Trustee fees, which are regulated by the federal government, are deducted from the proceeds distributed to creditors. As a debtor, your bankruptcy payments are based on what assets you own and your income, and as such your cost to file bankruptcy is the same no matter which trustee you see.
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.