The decision to file bankruptcy can be a scary one. Our team of Licensed Insolvency Trustees are asked many questions every day about how bankruptcy works and how declaring bankruptcy will affect you and your family. We have pulled together a list of the most commonly asked questions about personal bankruptcy in Canada. Feel free to bring these, or any other concerns, up with your LIT during your free consultation.
What can I keep if I file bankruptcy?
Contrary to most fears, you do not lose everything when you file bankruptcy in Canada. There are certain assets that are exempt from seizure by the trustee. In Ontario, provincial exemptions are high enough that most people do not lose anything unless they have high dollar value assets. Ontario exemptions from seizure include:
- all personal clothing,
- most household furnishings (up to a maximum)
- a vehicle below a certain dollar value
- tools of the trade used to earn a living or run a business (up to a maximum)
- your home if the equity is less than $10,000
You keep all RRSP, RRIF and DPSP (Deferred Profit Sharing Plan) savings except contributions made in the 12 months before your bankruptcy.
If I file bankruptcy what happens to my house?
Whether you can keep your home will depend on how much equity is in your home and if you decide you can afford to keep up with your mortgage payments.
Read more in our article how bankruptcy affects your home.
If I file bankruptcy can I keep my car?
An individual filing for bankruptcy is entitled to keep one vehicle below the exemption limit ($6,600 in 2017 under Ontario law). In a joint bankruptcy, each filer qualifies for one motor vehicle up to $6,600, if the vehicle is registered in that person’s name. Leased or financed vehicles are not included in your bankruptcy unless they have significant equity value over the loan amount. If you have multiple vehicles, or other assets that you would like to keep, speak to your licensed insolvency trustee about your options to retain other vehicles.
Read more in this article about bankruptcy and your car.
What happens to my tax refund if I file bankruptcy?
Any income tax refunds owing to you 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. While you lose income tax refunds as part of the bankruptcy process, you keep your HST cheques and child tax benefits.
Do I have to list all my debts in a bankruptcy?
Yes. You cannot voluntarily exclude a creditor from your bankruptcy filing. The good news is bankruptcy will eliminate all unsecured debt including credit card debt, bank loans, lines of credit, accounts in arrears or in collection, payday loans and tax debt.
Are tax debts included in a bankruptcy?
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 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.
Can I file bankruptcy for student debt?
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.
Read more about student loan forgiveness in Canada.
What happens to co-signed debt if I file bankruptcy?
If a spouse, parent, friend or other family member has co-signed a loan for you, the lender will look to that person to repay the full amount of the loan even though you filed bankruptcy.
Will my current mortgage be affected if I am bankrupt?
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. If you are current on your payments most mortgage holders will renew your mortgage even if you are bankrupt or in a consumer proposal.
What debts are not discharged by bankruptcy?
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
In addition, secured debts like your mortgage and secured car loan are not affected by bankruptcy and you can keep these assets, if you wish, as long as your payments are up to date.
Will bankruptcy stop a wage garnishment?
If your wages are being garnished, or have the potential to be garnished, you want to have that wage garnishment 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.
How does bankruptcy affect assets in my divorce?
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.
What happens to joint debts we both owe?
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.
What happens to my wages in a bankruptcy?
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.
How does bankruptcy affect alimony & maintenance payments?
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 equalization 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.
What happens to lottery winnings, inheritances and windfalls in bankruptcy?
Inheritances received, or due to you, because 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.
Should I switch my bank account if I’m declaring bankruptcy?
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 can 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
What credit counselling do I receive during bankruptcy?
Part of the bankruptcy process and starting over includes attending two private credit counselling sessions. This will help you obtain the necessary information and skills needed to rebuild your finances, repair 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
Who will know I filed bankruptcy?
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.
What happens to my credit report when I file for 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 notice will remain on your report:
- 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
Can I keep my credit card after I file for bankruptcy?
No. You are required by law to hand over all credit cards to your LIT once you file. During your credit counselling sessions, your LIT will provide information on how to rebuild your credit after bankruptcy including how to apply for a secured credit card.
Book a free, confidential debt assessment to find out if bankruptcy is the right option to help you eliminate your debt.