What is Personal Bankruptcy in Canada?
How it can give you a fresh start
Through bankruptcy, a person hopelessly burdened with debt gets a chance to start fresh.
What is bankruptcy?
In plain language, the concept behind personal bankruptcy in Canada is this: you assign (surrender) everything you own to a Licensed Insolvency Trustee in exchange for the elimination of your debts. Certain exceptions that vary by province allow you to keep some minimum necessities.
Surrendering many of your assets may sound harsh, but keep reading to learn how bankruptcy affects and assists people in real life – how bankruptcy might affect YOU.
Personal bankruptcy is a legal process, governed by federal law (the Bankruptcy & Insolvency Act).
The law is designed to permit an honest but unfortunate debtor to obtain relief from his or her debts while treating creditors equally and fairly.
Who can file bankruptcy?
To go into personal bankruptcy in Canada, a person must have lived or done business in Canada within the last year, and must be insolvent.
To be insolvent means:
- To owe at least $1,000.
- Not to be able to meet your debts as they are due to be paid.
What is a Trustee and what is a Trustee’s role?
A Licensed Insolvency Trustee is the only professional who can administer a bankruptcy in Canada.
Licensed Insolvency Trustees are federally licensed. Their fees are regulated and moderate, so the cost of bankruptcy is reasonable.
Length of bankruptcy
You may be entitled to an automatic discharge from personal bankruptcy in as little as 9 months, the minimum time set by the Court, provided you have never been bankrupt before and you complete various duties and responsibilities.
Your ability to obtain credit in the near future could be affected, since bankruptcy will remain on your credit report for several years.
Exceptions to the discharge of all debts
Some debts are not erased. Bankruptcy only deals with unsecured debts – things like credit cards, personal loans, income taxes, overdrafts, etc.
A secured debt, such as a car loan or mortgage, may not be included. Since you have given an asset as collateral, your creditor can recover the amount owing to them. Any shortfall can be dealt with in the bankruptcy.
Some unsecured debts are also not discharged in a bankruptcy, such as student loans less than 7 years after you stopped going to school and/or any alimony or child support, as well as any debt arising from fraud.
Exceptions to the surrender of all assets
Some assets are not taken from you in bankruptcy. These are the “exemptions” that the government has determined you need to survive. The goal of bankruptcy is to give you a fresh start – not to punish or humiliate you. You will typically retain personal items and furnishings.
The list of exemptions is set by each provincial or territorial government. For example, in Ontario, a car not exceeding $6,600.00 is exempt, also personal items such as clothing and household items worth less than $13,150.00, RRSPs as well as equity in your residence to a maximum of $20,000.00.
For most people the assets they must surrender include their investments and RESPs.
Exceptions to discharge from personal bankruptcy in nine months
The length of your bankruptcy will be nine months, unless one of the following is true:
- You fail to perform all your bankruptcy duties, such as regular payments of surplus income to the trustee.
- You have surplus income (see below).
- You have been bankrupt before.
- There is an objection filed to your discharge.
How much longer your bankruptcy period will be depends on the details of your case. Twenty-one month is typical when the bankrupt individual makes a good salary (has surplus income).
Surplus income adds to cost of bankruptcy
On top of the trustee fee and your loss of assets, a bankruptcy may cost you some of your income, depending on how much you earn and the size of your household. The principle is that, if you earn more than your household needs to survive, you must pay a portion of the “surplus income” to your trustee for the creditors. The formula is prescribed by law. The more you earn, the more you can afford to repay to your creditors.
Is bankruptcy the right solution for you? – Talk to an expert
The Trustee will discuss your personal situation with you, answer your questions, and advise you on whether a bankruptcy is the right solution in your case, or if a different insolvency solution – an alternative to bankruptcy – might be more suitable for you.
There’s no need to hesitate: the consultation is confidential, and also risk-free – as you have no obligation to continue to work with the same Trustee in the future, nor can the Trustee make any decision on your behalf. You will leave the Trustee’s office with lightened emotional load, knowing you have gotten trusted professional advice.