How Do Bankruptcy Work?
Bankruptcy is a legal procedure in which you assign (or surrender) your property to a Licensed Insolvency Trustee as part of a process that relieves your debts. You are allowed to keep certain assets, depending on where you reside. Laws dealing with personal bankruptcy are meant to allow the honest but unfortunate debtor a chance to re-start their financial life.
Learn more about what is exempt from Bankruptcy here: Bankruptcy Exemptions.
What happens when you declare bankruptcy in Canada?
In Canada, only a Licensed Insolvency Trustee can file the paperwork for a bankruptcy. Meet with a Trustee to discuss your situation. If bankruptcy seems the most beneficial course, the Trustee will prepare the paperwork to file for bankruptcy. See our page: How to File Bankruptcy.
Once the paperwork is signed, your Licensed Insolvency Trustee will electronically transmit your bankruptcy information to the Office of the Superintendent of Bankruptcy in Ottawa (a division of the federal government). The Superintendent of Bankruptcy will inform the credit bureaus of your bankruptcy.
Within five days of the bankruptcy starting, your Trustee will send a copy of your bankruptcy paperwork to each of your creditors, so that they can file a claim with the Trustee.
And now the good news. Once bankruptcy is filed, there is an immediate “stay of proceedings”. This means unsecured creditors can no longer contact you, and cannot begin or continue lawsuits or wage garnishees. (Secured creditors, such as mortgage companies, can still seize assets that you have given as security if you do not keep up your payments.)
Your Trustee will file your outstanding tax returns up to the date of bankruptcy. Any money you owe Canada Revenue Agency will be included in the bankruptcy, so you will no longer owe this money after you complete the bankruptcy. Any tax refunds or GST credits that arrive while you are bankrupt will go to the Trustee for your creditors.
During your bankruptcy, you must fulfill certain duties, such as:
- Attend a meeting of your creditors, if such a meeting is requested (only happens in unusual circumstances).
- Send the Trustee proof of your income each month.
- Make monthly payments to the Trustee, if you have surplus income (your Trustee will explain this).
- Attend two credit counselling sessions to learn budgetting and money management skills.
If you have never before been bankrupt, and if you have no surplus income, you will be eligible for discharge from bankruptcy in nine months. Otherwise, the bankruptcy will be longer. It is your discharge from bankruptcy that officially cancels your debts (with minor exceptions).
What Happens After You File for Bankruptcy?
Your bankruptcy is complete when you receive your Notice of Discharge from your Trustee. At that point, you will be free of the unsecured debts that were included in your bankruptcy. You can begin to rebuild your credit.
A notation about your bankruptcy will remain on your credit bureau report after the date of discharge. This is usually removed automatically after six years. Even while the bankruptcy is still noted on your report, you may be able to get credit from certain lenders. You can help this along by taking active steps to rebuild your credit. Your Trustee can give you advice on getting a new start.
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