What is Personal Bankruptcy in Canada?
How it can give you a fresh start
Through the bankruptcy process, 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) 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 certain assets such as your home (provided you pay your mortgage), car, RRSP’s, pension plans, furnishings and effects, and so on.
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. In addition, one of the goals of the insolvency process in Canada is the rehabilitation of the debtor through financial counselling.
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 or, have the majority of their property in Canada, and must be insolvent.
To be insolvent essentially means:
- To owe at least $1,000.
- Not to be able to meet your debts as they are due to be paid.
- To not have sufficient assets to convert to cash to pay your debts.
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 and regulated by the Office of The Superintendent of Bankruptcy. Trustee fees are regulated under the Bankruptcy and Insolvency Act and are moderate, so the cost of bankruptcy is tends to be reasonable.
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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 legislation, 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 six years from the date of your discharge in most provinces.
Exceptions to the Discharge of all Debts
Some debts are not erased. Bankruptcy generally only extinguishes 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 where you were last in school less than 7 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.
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. For example, in Saskatchewan, a motor vehicle with a value not exceeding $10,000.00 is exempt along with personal items such as clothing and jewelry to the extent of $7,500.00 and all household furnishings and appliances. In addition, RRSP’s, RDSP’s (except contributions made within the previous 12 months) as well as equity in your residence to a maximum of $50,000.00 per registered owner are exempt from seizure. For the relevant exemptions in your province, we recommend speaking with a Licensed Insolvency Trustee.
For most people, the assets that may be lost in a bankruptcy include certain non-registered investments, RESP’s, recreational equipment such as a boat, snowmobile, or motorcycle, etc.
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 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 the Cost of Bankruptcy
In addition to the trustee fee and potential loss of assets, you may be required to pay a portion of your monthly income towards your debts, 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 idea is that the more you earn, the more you can presumably afford to repay to your creditors. In general, the greater your level of income, the greater the cost of a bankruptcy and the more attractive the alternatives to bankruptcy become.
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What you can expect from your initial, free consultation with a Trustee?
If you want to learn more about how filing for a bankruptcy would affect you, and whether there are other alternatives that are available to you, booking a free personal consultation with a local Licensed Insolvency Trustee is an easy next step.
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.
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 lightened emotional load, knowing you have gotten trusted professional advice.