What Is Personal Bankruptcy?
Personal bankruptcy in Canada is a legal process, governed by federal law (the Bankruptcy & Insolvency Act).
Insolvency is defined as the inability to meet your financial obligations (pay your bills as they come due), combined with the lack of assets sufficient to pay these bills.
If you are insolvent and owe more than $1,000 in total, you qualify for bankruptcy, which may be a practical option for your situation. However, meeting this requirement does not mean you must file for bankruptcy – other options can be explored with the help of a Licensed Insolvency Trustee.
How Bankruptcy Can Help You
Bankruptcy in Canada is designed to permit an honest but unfortunate debtor to obtain relief from his or her debts while treating creditors equally and fairly. Another goal of the bankruptcy process in Canada is the rehabilitation of the debtor through financial counselling.
Through bankruptcy, a person hopelessly burdened with debt receives a chance for a fresh start and a better financial future. Bankruptcy is not a punishment. Although bankruptcy can be difficult, it is a constructive process.
The legal process of bankruptcy features a “stay of proceedings” that prevents a garnishment or any legal action from taking place and stops your creditors from calling. Most first-time personal bankruptcies in Canada last nine or 21 months, depending on the debtor’s income and other factors.
When you are discharged from bankruptcy, you can make a fresh financial start.
Why you should not be embarrassed by bankruptcy
According to the Office of the Superintendent of Bankruptcy, approximately 100,000 Canadians every year turn to bankruptcy or consumer proposal as a way to deal with their debt problems.
It is important to recognize that there should be no shame associated with declaring personal bankruptcy. People find themselves in this stressful position for a wide variety of reasons, from a sudden loss of employment to large, unexpected bills.
When your bankruptcy is completed (you are discharged), the debts included in your bankruptcy will be extinguished and you can begin to improve your credit rating right away.
Should I File for Bankruptcy?
The first step in declaring bankruptcy in Canada is recognizing and assessing your financial situation.
Filing for personal bankruptcy starts with understanding that you have a debt problem. The sooner you recognize your financial situation, the sooner you can begin your bankruptcy filing. If you have been wondering whether or not to file for bankruptcy, here are a few signs that you might need to consider taking this step:
- Your credit cards are always at their limit
- You are paying bills with your credit cards or cash advances
- You continually fail to make one or more payments each month
- You have received letters threatening legal action unless you pay money owed
- Loss of income in the household means there is no money to pay the debts
- You are making the payments, but the debt is persisting/increasing
- You are credit reliant – the cost of the debt is so high there is no money left for everyday expenses so you need to use your credit cards to buy gas and groceries
- You are overwhelmed and stressed about your finances, and it is affecting your sleep and wellness
- You have reached your borrowing limit and your bank will not provide any further financial assistance
Every bankruptcy file is different, but there are consistent indicators that you need to seek help with your finances. If any of the above points sound familiar, declaring personal bankruptcy may be the right choice.
What You Can Expect from Your Initial, Free Consultation with a Trustee?
To learn more about how filing for bankruptcy would affect you, and whether there are practical alternatives, we encourage you to book a free personal consultation with a local Licensed Insolvency Trustee.
The Trustee will discuss your personal situation with you, answer your questions, and advise you on whether bankruptcy is a good fit for your situation, or if a different insolvency solution – an alternative to bankruptcy – might be more suitable for you.
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 decisions on your behalf. You will leave the Trustee’s office with a lightened emotional load, knowing you have received trusted professional advice.
How Does Bankruptcy Work?
In plain language, this is what happens in personal bankruptcy in Canada: you assign (surrender) your non-exempt assets to a Licensed Insolvency Trustee in exchange for the elimination of your debts. Certain exemptions that vary by province may allow you to keep some assets such as your home (provided you continue with your mortgage payments), car, RRSPs, pension plans, furnishings and effects, etc.
As soon as your bankruptcy papers are filed, your creditors are barred from attempting to contact you, and most legal proceedings and garnishments related to your debts will cease. Once you are released from bankruptcy (most first-time bankruptcies take nine or 21 months), the debts included in the bankruptcy will be extinguished. Those creditors are legally blocked from approaching you for any further payments.
What Happens After I File for Bankruptcy?
After you complete the process of filing for personal bankruptcy, there is an immediate “stay of proceedings” in any legal cases against you regarding your debt. This part of the process protects you from unsecured creditors who might wish to begin or continue any legal actions against you, such as wage garnishees and lawsuits. Creditors are also barred from contacting you after you have filed.
Within five days of filing your bankruptcy documents with the Office of the Superintendent of Bankruptcy, your Trustee will send a copy of the bankruptcy paperwork to all creditors so they can begin the process of filing their claims.
Your Trustee will also file any outstanding tax returns up until the date of bankruptcy. Any outstanding balances or penalties will be included.
After your personal bankruptcy paperwork is complete, you will have obligations such as providing monthly income statements and attending credit counseling sessions.
When your bankruptcy is discharged, the debts included in the bankruptcy will be cancelled. A notation about your bankruptcy will remain on your credit report for approximately six years after the date of discharge. As soon as your bankruptcy is discharged you can begin rebuilding your credit.
What Is a Trustee, and what Is the Trustee’s Role?
A Licensed Insolvency Trustee is the only professional who can administer a bankruptcy or consumer proposal in Canada. This means that you need to engage a Trustee in order to file your bankruptcy.
Licensed Insolvency Trustees are highly qualified professionals and are federally licensed by the Office of The Superintendent of Bankruptcy. Trustee fees are regulated under the Bankruptcy and Insolvency Act.
The federal government requires the Trustee to perform an assessment of your financial situation to determine if bankruptcy is the best option for you.
With your help, the Trustee will examine your financial situation including your assets, income, expenses, and debt level. You may have additional options, which the Trustee will explain and describe. The Trustee will also fully explain the bankruptcy process so you can decide if you should declare bankruptcy.
If you choose to file for bankruptcy – or to file a consumer proposal – the Trustee will prepare the necessary paperwork, review it with you, and file it with the Office of the Superintendent of Bankruptcy.
Additional Factors to Consider When Deciding If You Should Declare Bankruptcy
Bankruptcy is meant for individuals who cannot make progress in paying down their debts. If this describes your situation, declaring bankruptcy can provide you with a fresh financial start.
Bankruptcy provides these advantages:
- Legal protection from your creditors (no judgments, wage garnishments)
- Eliminates most unsecured debts (credit cards, loans, etc.)
- You will typically be debt free within 9–21 months in a first bankruptcy
- The cost of the process is relatively low, especially compared to the cost of continuing to pay the debts
Disadvantages of filing for bankruptcy:
The Bankruptcy and Insolvency Act (BIA) is the legislation by which Licensed Insolvency Trustees administer bankruptcy files. The laws and regulations of the Act are meant to balance the scales between the need of an honest but unfortunate debtor for a fresh financial start, and the rights of the creditors. For this reason, filing for bankruptcy in Canada has some disadvantages:
- Filing for bankruptcy will lower your credit score for a minimum of six years from the time your bankruptcy is completed
- Some of your assets may need to be surrendered, and/or a portion of your income above a certain level may need to be paid into your bankruptcy
- In bankruptcy, you must provide the Trustee with detailed income and expense information
- Your income tax refund, if you get one, is part of the bankruptcy and is forfeited to the Trustee for the year of bankruptcy
If you have reached the point where you are over-extended and can no longer afford your debt, the advantages of filing for bankruptcy or consumer proposal likely far outweigh the disadvantages.
Consequences of filing for bankruptcy
As mentioned above, your credit score will be impacted for at least six years after you are discharged from your bankruptcy. Take heart, though – you can begin to improve your credit rating as soon as your bankruptcy is discharged, and your credit options will improve in step with your credit rating. Read more on our page: When Does a Bankruptcy Clear from My Credit Report?
While your bankruptcy is in progress, you may not be a director in a corporation. Certain professional designations and board memberships are also affected while you are bankrupt – your Trustee can help you source the relevant information, or you may check with the specific professional association or board.
Some financial and professional applications will require you to declare whether you have been bankrupt – you will need to answer truthfully. This does not necessarily mean your application will be denied. Note that if you have filed a consumer proposal but have never been bankrupt, you will answer “no” to this question.
Is personal bankruptcy the only solution?
No. There are alternatives to bankruptcy in Canada. When your Licensed Insolvency Trustee completes their assessment of your financial situation, they will discuss any alternatives that may work for you. In some cases, the Trustee may recommend a debt consolidation loan, a credit counselling program or a consumer proposal. Each of these options has its own set of pros and cons, and not everyone will qualify for all of them.
Length of Bankruptcy
You may be entitled to an automatic discharge from personal bankruptcy in as little as nine months, the minimum time set by the legislation, provided you have never been bankrupt before and you complete various duties and responsibilities. If your income is above a certain monthly amount (your Trustee can advise you), you may need to make “surplus income” payments, in which case your bankruptcy will last a minimum of 21 months.
Your bankruptcy will remain on your credit report for six years from the date of your discharge in most provinces. Your ability to obtain credit in the near future could be affected. However, you can begin to improve your credit rating before the six years have passed, even while the record of the bankruptcy remains on your credit report.
Exceptions to Discharge from Personal Bankruptcy in Nine Months
The length of your bankruptcy will be nine months unless one or more of the following is true:
- You fail to perform all your bankruptcy duties, such as making 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 lasts will depend on the details of your case. Twenty-one months is typical when the bankrupt individual makes a higher salary (has surplus income).
Exceptions to the Discharge of All Debts
Some debts are not erased. Bankruptcy generally only extinguishes unsecured debts – such as those to credit cards, personal loans, income taxes, overdrafts, etc.
A secured debt, such as a car loan or mortgage, may not be included. This is because this type of creditor can recover the amount owing to them via the collateral you posted as security. Your Trustee can advise further if you have a secured loan you want to include in the bankruptcy.
Some unsecured debts are also not discharged in a bankruptcy. An example is student loans, if you attended school less than seven years from the date of bankruptcy. Alimony or child support obligations, fines or penalties imposed by the Court, as well as any debt arising from fraud are not discharged in a bankruptcy.
Exceptions to the Surrender of All Assets
Some assets are not taken from you in bankruptcy.
These are the “exemptions” that the federal and provincial governments have determined you need to survive and be a productive member of society. 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. Residences, motor vehicles and certain investments are partially or completely exempt from seizure in most provinces. To learn about the relevant exemptions in your province, we recommend speaking with a Licensed Insolvency Trustee.
For most people, typical assets that may be lost in a bankruptcy include certain non-registered investments, RESPs, recreational equipment such as boats, snowmobiles, motorcycles, etc.
Surplus Income Adds to the Cost of Bankruptcy
As mentioned above, you may be required to pay a portion of your monthly income towards your debts via the Trustee, 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 used to calculate this is prescribed by law. In simple terms, you will pay about half the amount deemed to be “surplus income” to your Trustee. Your Trustee can tell you how the surplus income rule will likely apply in your situation.
In general, the greater your income, the greater the cost of bankruptcy – and the more attractive the alternatives to bankruptcy (such as consumer proposal) become.
How Often Can You File for Bankruptcy?
There is no limit to the number of times you can file for bankruptcy, and no legislated time limit between bankruptcies. However, the length of the bankruptcy and your obligations within the bankruptcy – along with the length of time your credit rating will be negatively impacted – will increase with each successive bankruptcy. If you file bankruptcy more than twice, the Court will be required to determine how you will be discharged from bankruptcy.
Find a local Trustee you can trust. Bankruptcy Canada can connect you with Trustees from coast to coast in Canada including Toronto and Ottawa. Talk to one today.