Bankruptcy Ontario: How to File for Bankruptcy in Ontario

April 13th, 2015 by Mark Silverthorn

How to file bankruptcy in Ontario

ontario on map of canada

Canadians don’t talk about money, especially when they’re doing well. They think it’s in bad taste. “Singer Sylvia Tyson, foreword in Chris Gudgeon, An Unfinished Conversation: The Life and Music of Stan Rogers (1993).

Ontario residents who are overwhelmed with debt might at one point or another contemplated filing for personal bankruptcy.  Personal bankruptcy, however, is just one of a number of options that consumers have to deal with their debt situation.  Depending upon a consumer’s particular situation the optimal debt resolution strategy might include any one of the following:

  • Consolidation loan
  • Consumer proposal
  • Credit counseling
  • Personal bankruptcy
  • Settling your debt on your own
  • Doing nothing
  • Adopting a “wait-and-see” approach

The goal of this article is to canvass what is involved when a person files for personal bankruptcy in Ontario.   As soon as a person meets with a Licensed Insolvency Trustee, the trustee submits the necessary forms to the Bankruptcy Court, and the trustee receives a Certificate of Appointment then the debtor is referred to as a “bankrupt”.   It will be many months later before the bankruptcy process will be over and the bankrupt will obtain their discharge at which time they are referred to as a “discharged bankrupt”. This article is divided into four distinct parts:

Part One:         How Long Will It Take Me to Get Out of Bankruptcy?

Part Two:         Preliminary Considerations in a Bankruptcy

Part Three:      A Step-by-Step Guide For Filing For Bankruptcy

Part Four:        When Does Bankruptcy Make Sense or Not?


Part One:     How Long Will It Take Me to Get Out of Bankruptcy?

A common question that Licensed Insolvency Trustees receive from consumers is how long will it take to get out of bankruptcy.  In this next section we are not only going to discuss the key variables that affect the length of time involved in getting out of bankruptcy but also we will create a timeline to show this process.

There are four variables that could potentially affect the length of time it takes for a bankrupt to obtain a discharge from bankruptcy:

  • Opposition to debtor’s discharge from bankruptcy
  • Delays arising from debtor’s election to purchase a non-exempt asset from the trustee
  • Prior bankruptcy
  • Obligation to make surplus income payments

It is possible that a bankrupt’s discharge might be opposed and in about 30 percent of all bankruptcy discharges are opposed—resulting in additional delays of up to 11 months.   With very few exceptions, it is Licensed Insolvency Trustees who oppose a bankrupt’s discharge because of the bankrupt’s failure to comply with the requirements of the federal Bankruptcy and Insolvency Act.  In a few instances, a bankrupt’s discharge from bankruptcy might be opposed by creditors—typically where the bankrupt might be involved in perpetrating some type of fraud against the system– or the Canada Revenue Agency (CRA) where large sums of monies owing to CRA are involved.

Bankrupt purchasing non-exempt assets from the trustee can delay discharge

Under both provincial law and federal law certain property belonging to the bankrupt is referred to as exempt property.  The largest potential exemption is that for RRSPs.  A person filing personal bankruptcy need not transfer their RRSPs to the Licensed Insolvency Trustee, except for any contributions made during the 12 month period prior to filing.  Exempt property under provincial law includes clothing ($5,650), household items ($11,300), and a very modest amount for a motor vehicle ($5,560).   Any property which is not exempt property is described as non-exempt property.

In Ontario it is common for bankrupts to purchase non-exempt property from their bankrupt estate.  The following items are routinely purchased by bankrupts who will usually make installment payments to the trustee to reimburse the trustee for their equity in the non-exempt property:

  • Homes
  • Automobile
  • RESPs
  • Life insurance policies with a surrender cash value

Ontario, unlike some western provinces, does not exempt any dollar amount with respect to real property.  If you have $3,000 in equity in your home—which is solely in your name– and you file for personal bankruptcy then you are required to transfer title of your home to the trustee unless you purchase this non-exempt asset from your estate by paying $3,000 to your trustee.  Most bankrupts purchase non-exempt property by making installment payments.  The fact that you are making installment payments to your trustee to purchase a non-exempt asset can potentially delay the date of discharge because no discharge is possible until the final installment payment has been made.

Prior bankruptcies will delay obtaining a discharge

Canada’s bankruptcy laws are more generous towards first-time bankrupts than people who have already filed for bankruptcy.  The minimum waiting period for a first-time bankrupt obtaining a bankruptcy discharge is nine months.  Compare this with the 24-month minimum waiting period for someone with a prior bankruptcy.  For those unfortunate individuals who have been discharged twice already, it is necessary for them to go before at judge at the Bankruptcy Court who will determine the minimum waiting period for them.

Those required to make surplus income payments face delays

Under Canada’s bankruptcy laws if you file for personal bankruptcy—depending upon the level or your income, your family’s monthly income and living expenses, you might be required to make what is known as surplus income payments until the date or your discharge.  The formula for determining whether or not a particular debtor will be required to make surplus income payments when filing personal bankruptcy is beyond the scope of this article.  For more details on surplus income payments, readers should read Directive 11R2-2015 issued by the Office of the Superintendent of Bankruptcy or speak to a Licensed Insolvency Trustee.

An example, however, will illustrate how low the bar is set for calculating who is required to make surplus income statements.  In 2015, a single individual, with no family and no dependents, with a salary of $35,000 a year would be required to make surplus income payments.  Once a person’s income hits their threshold then a minimum of 50 percent of what they earn over the threshold is paid to the trustee.

In Canada surplus income payments can be very punitive for middle-class and high-income earners which motivates many of these people to choose a consumer proposal over bankruptcy. If you are required to make surplus income payments under your bankruptcy then not only will you be required to make payments to the trustee prior to your date of discharge but also your date of discharge will be delayed significantly.

Both first-time bankrupts and those individuals with a prior bankruptcy will have their eligibility for a bankruptcy discharge extended 12 months if they are required to make surplus income payments.

The following chart will help illustrate the amount of time that it takes for a bankrupt to obtain a discharge.  Please note that the clock begins to run on the date that the Licensed Insolvency Trustees obtains a Certificate of Appointment from the Bankruptcy Court after the trustee files documents with the court commencing the bankruptcy proceeding.

bankruptcy

*If a person filing for personal bankruptcy has already been discharged twice or more then it is necessary for them to appear before a judge in Bankruptcy Court who will determine the minimum waiting period for their discharge from bankruptcy.


Part Two:    Preliminary Considerations in a Bankruptcy

You might not be eligible to file for personal bankruptcy

Not everyone who is experiencing financial difficulties is entitled to file for personal bankruptcy under the federal Bankruptcy and Insolvency Act (BIA).   Federal law does not permit people owing less than $1,000.00 in unsecured consumer debt to their creditors to file for personal bankruptcy.  The Act does not permit a person to file for personal bankruptcy unless they are “insolvent” as defined in the Act.  A person is “insolvent” under the Act if they satisfy the following two conditions:

  1. They cannot meet their financial obligations as they become due
  2. Their total debt exceeds their total assets

Some people experiencing major financial problems, with significant equity in their homes fail to meet the second condition, and therefore, they are not eligible to file for personal bankruptcy or to make a consumer proposal.  These individuals are “house-poor” and they might be able to pay off all their debts if they simply sold their house and used the proceeds to pay their creditors.

Which of your debts are eliminated in a bankruptcy?

It is important to understand what type of debts you have prior to making a decision to file for bankruptcy because not all debts are eliminated or discharged in bankruptcy.  In the context of bankruptcy, there are three different types of debt which can be summarized as follows:

Secured debt:  A secured debt is one where your creditor has collateral it can look if the debtor does not fulfill his payment obligations.  Mortgages and homes and liens on cars are the most common types of secured debt in Canada.  Filing for personal bankruptcy does not eliminate or discharge any of your secured debt.

Unsecured debt:   Any debt which is not secured debt is unsecured debt.  There are two types of unsecured debt.  If you borrowed money, or purchased goods or services as part of a consumer transaction then your unsecured debt would be referred to as unsecured consumer debt.  Unsecured consumer debt is eliminated or discharged under personal bankruptcy.

If you have unsecured consumer debt and some time has passed since your date of last payment then you might be able to take advantage of the expiry of a limitation period to avoid having to pay a penny on these debts.  The statute of limitations is two years in British Columbia, Saskatchewan, Ontario, and New Brunswick, three years in Quebec, and six years in the rest of the country.  You should be aware that you cannot take advantage of the expiry of a limitation period to defeat your creditors for secured debt, monies owing to the government, or debts which fall into our next debt category, non-dischargeable debt.

Non-dischargeable debt:   There is a special basket of specific debts, which we refer  to as non-dischargeable debt, which are not eliminated or discharged in a personal bankruptcy.  Non-dischargeable debt includes the following:

  • Child support and spousal support obligations
  • Government fines
  • Student loans in circumstances where the bankrupt has not ceased attending school for a minimum of seven years
  • Civil judgments against a bankrupt involving fraud

Obligation to transfer your non-exempt assets to your Licensed Insolvency Trustee

If you are an Ontario resident and you file for personal bankruptcy then it will be necessary for you to transfer all of your “non-exempt property” to your Licensed Insolvency Trustee.  Each province has a law permitting individuals to keep certain property should they file for personal bankruptcy and this property is referred to as exempt property. In Ontario this law is the Ontario Execution Act.   Furthermore, certain property, such as assets in your RRSP—with the exception of any contributions you made 12 months prior to filing for personal bankruptcy—is exempt property under federal law.

“If you file for personal bankruptcy then virtually any property which you own will be transferred to the Licensed Insolvency Trustee except that property which is exempt under either provincial or federal law.”

Property exempt under Ontario law

The following chart summarizes what property is exempt under Ontario law from the requirement of being transferred to a Licensed Insolvency Trustee when filing for personal bankruptcy.

Exempt Property Under Ontario Law (Execution Act)

Ontario Residents Filing For Personal Bankruptcy

AssetAmount of exemption
Clothing                        $5,650
Household furniture, utensils, food, and fuel                        11,300
For non-farmers, any “tools of the trade” used by a bankrupt in the bankrupt’s business, profession or calling                       11,300
For farmers, livestock, and assets used in the furtherance of operating a farm                        28,300
A motor vehicle                          5,650

If you do not operate a farm or you have a regular salaried job then your exemptions under the Ontario Execution Act are going to be limited to $5,650 for clothing, $11,300 for household items, and $5,650 for a motor vehicle.  Some individuals, however, are entitled to more generous exemptions with respect to exempt property.  People who operate their own business are entitled to an exemption of $11,300 for “tools of the trade”, and farmers are entitled to an exemption of $28,300 for livestock and items used for farming.  A self-employed person who uses their car, or even a salesperson on the road virtually every workday would be able to take advantage of $11,300 exemption for an automobile compared with the $5,650 motor vehicle exemption for regular folks.

Exempt property under Federal law

If you file for personal bankruptcy then under federal law you are not required to transfer your RRSP to the Licensed Insolvency Trustee, with the exception of any contributions that you made to your RRSP within 12 months prior to filing for personal bankruptcy.  Company pension plans are exempt because they cannot vest in the immediate future.

What happens to your car if you file for personal bankruptcy?

In this section we are going to canvass the various scenarios which might arise if an Ontario resident files for personal bankruptcy and what happens to their automobile.

Scenario A:       Car is worth less than $5,650

If the fair market value of an Ontario resident’s car is less than $5,650 then a person filing for personal bankruptcy is entitled to keep the car.

Scenario B:      Car is worth more than $5,650

If the fair market value of an Ontario resident’s car is more than $5,650 then are two potential outcomes.  The person filing for personal bankruptcy can keep the car provided they pay the Licensed Insolvency Trustee an amount of money—the difference between $5,650 and the fair market value of the car.  An example will help illustrate this point.

“If the fair market value of John Smith’s car is $6,650 and he files for personal bankruptcy he has the option of paying the Licensed Insolvency Trustee $1,000—the difference between the car’s fair market value and the $5,650 exemption for an automobile.  Alternatively, if John Smith transfers this car to the Licensed Insolvency Trustee who subsequently sells the car for $6,650, then the trustee will pay $1,000 to John Smith.”

What happens to your RESP or life insurance policy with cash surrender value?

Earlier in this article we noted that real estate—homes, condos, townhouses, cottages, rental properties, and farms are non-exempt property in Ontario.  Other non-exempt property includes Registered Educational Savings Plans (RESPs), and life insurance policies with a cash surrender value.  It is quite common for bankrupts to make installment payments to a Licensed Insolvency Trustee in order to purchase the non-exempt property which is transferred from the bankrupt to the bankrupt’s estate at the time of filing for bankruptcy.


Part Three:  A Step-by-Step Guide For Filing For Bankruptcy

When a Canadian contemplates filing for personal bankruptcy the decision is not made lightly.  There is typically a triggering event which motivates a consumer to explore personal bankruptcy as an option for resolving their current debt situation.  According to Carl Rumanek, an Ontario Licensed Insolvency Trustee, a triggering event might be a garnishment notice, a lawsuit from a creditor, a layoff notice at work, or collection calls.

Only Licensed Insolvency Trustees can do personal bankruptcies

In Canada if you are interested in filing for personal bankruptcy it is necessary to meet with a Licensed Insolvency Trustee in person in order for you do a bankruptcy.  In Canada today there are a substantial number of people and organizations offering to assist people eliminate their debts who are not Licensed Insolvency Trustees.  Some of these consultants meet with consumers in circumstances where they charge substantial fees, provide the consumer with little advice or service of any value, and subsequently inform the consumer that they should meet with a Licensed Insolvency Trustee.

Step 1:     Initial Meeting with a Licensed Insolvency Trustee

A Canadian can file for personal bankruptcy by meeting with a Licensed Insolvency Trustee and completing the necessary paperwork.  When a consumer has their initial meeting with a Licensed Insolvency Trustee he or she will typically be asked to complete some kind of  Application Form created by the trustee which will assist with obtaining all the information required by the Bankruptcy Court and required under federal law.

Fees a consumer pays to Licensed Insolvency Trustee for filing for personal bankruptcy

It is typical for a Licensed Insolvency Trustee to inform a consumer contemplating bankruptcy that the trustee charges a fee for doing all the work associated with a bankruptcy.  In Ontario those seeking to file for personal bankruptcy will be asked to pay approximately $1,800 to the Licensed Insolvency Trustee.  Many trustees will accept monthly installment payments with respect to this fee.  There are some trustees in Ontario, however, who do require payment of this $1,800 fee up-front.

Step 2:     Second Meeting with a Licensed Insolvency Trustee

Most people seeking to file for personal bankruptcy will have a second meeting with a Licensed Insolvency Trustee at which time the consumer should be in a position to provide the trustee with a number of documents, including the following:

  • Proof of the debtor’s legal name
  • Copy of most recent income tax return
  • Copy of most recent paystub from employer
  • Copies of bank statements for any bank accounts the debtor has

If the debtor has not completed the Licensed Insolvency Trustee’s internal Application Form on his first visit with the trustee then it would normally be given to the trustee at this second meeting.

At this second meeting the Licensed Insolvency Trustee will usually ask the consumer to give any credit cards the debtor has to the trustee, at which time the credit cards will be photocopied and then cut up.

Step 3:      Submission of documents to Bankruptcy Court

The information provided to the Licensed Insolvency Trustee at this second meeting should enable the trustee to submit the necessary documentation electronically to the Bankruptcy Court.   There are two documents that the trustee will submit to the Bankruptcy Court:

Statement of Affairs  (Form 79)

Monthly Income and Expense Statement of the Debtor and the Family Unit (Form 65)

The Statement of Affairs has a number of distinct sections.  One section contains background information regarding the bankrupt and another section contains a detailed list of the bankrupt’s creditors and the amounts owing to each creditor.

Typically, within 48 hours of receipt of a completed Form 79 and Form 65, the Bankruptcy Court will provide the Licensed Insolvency Trustee with a document known as a Certificate of Appointment, confirming that the trustee’s appointment with respect to an individual’s application for personal bankruptcy.

Step 4:     Creditors’ notified that bankruptcy proceeding has been commenced

On the same day that the Licensed Insolvency Trustee receives the Certificate of Appointment from the Bankruptcy Court the bankrupt is entitled to a stay of proceedings with respect to civil suits brought against the bankrupt by unsecured creditors, as well as a stay of proceedings with respect to wage garnishments against the bankrupt.

A Licensed Insolvency Trustee has five days, from the date of appointment, to notify a bankrupt’s creditors that bankruptcy proceedings have been commenced.  At this point in time it is possible for creditors, who oppose the bankrupt’s discharge to attempt to have the debtor’s bankruptcy proceeding annulled.  However, this rarely happens.  Creditors who oppose a bankrupt’s bankruptcy are much more likely to oppose the debtor’s discharge later in this process.

Step 5:    Debtor’s First Counselling Session

About four weeks after the Licensed Insolvency Trustee submits the Form 79 and Form 65 to the Bankruptcy Court the Licensed Insolvency Trustee will arrange for the bankrupt to meet with the trustee.  The bankrupt will be asked to bring the following documents to this meeting

  • Any correspondence the bankrupt has received from creditors, or their collection agents
  • Copies of bankrupt’s paystubs

The Licensed Insolvency Trustee has an obligation under the Bankruptcy and Insolvency Act (BIA) to determine if the bankrupt is required to make any surplus income payments.  During this first counselling session it is common for a discussion to take place in connection with the debtor’s monthly budget.

Step 6:    Second Counselling Session two months before date of discharge from bankruptcy

It is common for Licensed Insolvency Trustees to have a bankrupt meet with them approximately two months prior to the anticipated date of discharge.  Pursuant to section 170 of the Bankruptcy and Insolvency Act (BIA) Licensed Insolvency Trustees have an obligation to submit a report to the Bankruptcy Court advising them whether or not the bankrupt’s discharge is opposed, and if it is opposed, who is opposing the bankrupt’s discharge from bankruptcy.

If no one opposes the bankrupt’s discharge then a bankrupt is deemed to be discharged 60 days after the Licensed Insolvency Trustee’s section 170 report.  If the bankrupt’s discharge is opposed then there will be a delay as the file will stand in a queue to be heard in Bankruptcy Court and this might result in a delay of as much as 11 months in a bankrupt obtaining a discharge from bankruptcy.


Part Four:   When Does Bankruptcy Make Sense or Not?

For some consumers filing for personal bankruptcy might be the ideal solution for their particular debt situation.  For other individuals, given their specific circumstances, filing for personal bankruptcy might not be their optimal solution.  The following section canvasses the circumstances under which filing for personal bankruptcy might be the most desirable option as well as those situations where it might not be ideal.

When does filing for personal bankruptcy make sense?

Filing for personal bankruptcy does nothing to eliminate secured debt nor certain types of debt which survive bankruptcy, referred to earlier as non-dischargeable debt.

For whom does filing for personal bankruptcy make the most sense

Filing for personal bankruptcy can be advantageous for

  • someone who has a substantial amount of unsecured debt and/or owes substantial amounts to the government
  • those who earn less than $40,000 a year and who do not have a significant net worth
  • who do not have to own shares in a corporation
  • whose employment or professional status is not adversely affected by becoming a bankrupt
  • individuals with large student loans, in circumstances where the debtor ceased attending school more than seven years ago
  • someone with substantial amounts of money in RRSPs who has been withdrawing monies from their RRSP to pay their bills

For whom does filing for personal bankruptcy make the least sense

Filing for personal bankruptcy is not advantageous for individuals

  • who are high-wage earners
  • with significant net worth
  • who need to own shares in a corporation
  • in certain professions and certain jobs who might be prejudiced
  • who do not wish their financial problems to be a matter of public record
  • with substantial student loans where the debtor has not yet ceased attending school for at least seven years

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Mark Silverthorn
Mark is a former collection lawyer, collection industry insider and author.

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