How to File for Bankruptcy in Canada (and Survive It)
By Arthur Dubois | 18 Aug 2023 |
No one ever dreams of having to file for bankruptcy. This decision can weigh heavily on your financial and emotional life. Nonetheless, sometimes it presents the only viable step to regain your footing and work towards a more stable economic future. If you believe bankruptcy may be your best option, fear not. This comprehensive guide will walk you through everything you need to know to survive a bankruptcy in Canada.
What is Bankruptcy?
Bankruptcy is a complex process that involves various legal and financial implications. An individual or business declares bankruptcy when they cannot meet their financial obligations and seek protection for their debts. This legal process provides a framework to manage their debts and, in some cases, discharge a portion of their debts.
Bankruptcy proceedings in Canada are overseen by licensed insolvency trustees, experts in navigating the Bankruptcy and Insolvency Act’s intricacies. These professionals guide debtors through the process. As a result, they ensure compliance with the legal requirements and facilitate a fair resolution for debtors and creditors.
The Legal Implications of Bankruptcy
Bankruptcies come with significant legal implications. First, your assets can be seized to pay off your creditors. You may get to keep household necessities, personal items, cars (up to a certain value) and tools needed for employment. However, a house with substantial equity might get seized.
Additionally, bankruptcy provides legal protection against debt collectors, stopping harassing phone calls and wage garnishment. This protection allows debtors to focus on their financial recovery without constant stress and pressure from aggressive collection efforts.
Common Myths About Bankruptcy
Various myths surrounding bankruptcy can create unnecessary fear and trepidation. You won’t lose everything or permanently destroy your credit. While you shouldn’t take this decision lightly, it can rebuild your life post-bankruptcy.
Remember, bankruptcy serves as a tool for a fresh start. It allows debtors to address their financial difficulties, eliminate or reduce their debts, and begin to rebuild financial stability.
Contrary to popular belief, bankruptcy can even have positive long-term effects on creditworthiness. By taking responsibility for their financial situation and declaring bankruptcy, individuals demonstrate their commitment to regaining control of their finances. Over time, with responsible financial management, they can rebuild credit and regain a solid financial standing.
Three Bankruptcy Alternatives to Consider Before Filing
Bankruptcy, often viewed as a financial lifeline during overwhelming debt crises, is a significant decision. It can indeed provide relief in specific scenarios, freeing individuals from crippling debts. However, before resorting to this drastic measure, take time to explore alternatives.
Considering bankruptcy alternatives ensures that you’ve weighed all options and chosen the most suitable route for your unique financial situation. These three alternatives might offer a better path forward.
Debt Consolidation
Debt consolidation offers a substitute for bankruptcy. This approach involves pooling all your unsecured debts into one, typically with a lower interest rate. By consolidating your debts, you simplify your repayments and reduce the total debt over time.
Consumer Proposal
To avoid bankruptcy yet still get help managing your debts, a consumer proposal might make the right choice for you. A consumer proposal is a legal agreement set up by a Licensed Insolvency Trustee (LIT) between you and your creditors. It allows you to repay a portion of your debt over time, based on what you can afford.
With this type of approach, the debtor must pay the administrator $750 when filing a copy of the consumer proposal, $750 upon court approval and 20 percent of the money distributed to creditors. Canadian law also mandates a $100 filing fee, plus charges for counseling, registration and taxes.
Credit Counseling Services
You may also seek help from credit counseling services such as Consolidated Credit. These agencies specialize in providing educational resources, budget assistance and debt management plans. Together, they help you regain control of your financial situation.
Step-by-Step Guide to Filing For Bankruptcy in Canada
Just as you need to stay sharp to navigate this process, you may feel overwhelmed. After all, it takes debtors through a series of actions they’ve never experienced before. However, 27, 383 Canadians went through bankruptcy stages between January 2022 and January 2023. Therefore, these bankruptcy statistics show that if they can do it, so can any other Canadian. This guide will help you approach each step so you can easily follow along.
Let’s delve deeper into each phase of the bankruptcy filing process:
Step 1: Consult with a Licensed Insolvency Trustee
When you’re considering filing for bankruptcy in Canada, first consult with a Licensed Insolvency Trustee. Only these professionals can file for bankruptcy on your behalf as they guide debtors throughout the process.
Finding a Good Trustee: Start by seeking recommendations from friends, family members or financial professionals you trust. Online directories offered by the Office of the Superintendent of Bankruptcy Canada can also be a resource to find trustees near you. Look for trustees with good reviews, extensive experience and a solid reputation.
Costs and Fees: The first meeting with a trustee typically comes free. This initial consultation is an opportunity for the trustee to assess your situation and for you to ask questions. After this, the federal government sets trustees’ fees at no more than $1,800.
Checking for Licensing: To ensure you’re working with a qualified professional, verify that your trustee has a current license. You can check the list of Licensed Insolvency Trustees on the Office of the Superintendent of Bankruptcy Canada’s website.
What to Expect in the First Meeting: During your initial consultation, be prepared to discuss your financial situation in detail. This will include your debts, assets, income and monthly expenses. The trustee will review this information to understand the gravity of your situation. They will outline possible solutions beyond bankruptcy, such as consumer proposals or debt consolidations. This presents your opportunity to ask questions, understand the process and decide if this trustee suits you.
Ideally, approach this meeting with an open mind. Bankruptcy might seem like the only option, but a good trustee will outline all available solutions.
Secured credit card
Step 2: Provide all the necessary paperwork to your trustee
Once you’ve made the difficult decision to proceed with bankruptcy, gather all the required documents. This includes providing your Licensed Insolvency Trustee with comprehensive information about your financial situation.
When it comes to bankruptcy, transparency matters. You will need to provide accurate and complete information regarding your income, assets, debts, expenses and any recent financial transactions. Here is the list of documents your trustee will most likely ask you to provide :
- a list of your assets (house, car, bank accounts, RRSPs, etc.) and their values
- bank or credit union account statements
- a list of all debts (mortgage, car loan, student loan, credit card statements, lines of credit, etc.)
- pay stubs
- monthly income and expense estimates
- records of interactions with creditors
- alimony or child support obligations
- outstanding fines or penalties
- medical expenses not covered by insurance plans
After reviewing your paperwork, the trustee will prepare your bankruptcy application. This document summarizes your financial situation, detailing your income, assets, debts and expenses. Having accurate and complete information avoids any complications during the bankruptcy process.
Step 3: File for bankruptcy
Once you have provided all the necessary documentation, your trustee will submit your bankruptcy application to the Office of the Superintendent of Bankruptcy (OSB).
Once your bankruptcy application gets filed, the official bankruptcy process begins and debtors get the relief of an automatic stay of proceedings. This means most of your creditors cannot take any legal action to collect their debts. This provides much-needed breathing space to regroup and plan for your financial future.
The OSB, upon receiving your bankruptcy application, will assign a bankruptcy estate number to your file. This unique number serves as an identifier for your bankruptcy case. Additionally, the OSB will notify your creditors of your bankruptcy. This notification informs them of your current financial situation and that legal proceedings have started.
Step 4: Seizure of assets (if needed)
After officially declaring bankruptcy, individuals primarily worry about the potential loss of their assets. However, not everything is subject to seizure and, thankfully, the process unfolds professionally and respectfully.
Assets That Can Be Seized
Bankruptcy laws provide relief from debt while ensuring fairness to creditors. This means some of your assets could get used to repay your debts. Assets commonly subject to seizure include:
- Non-essential property: This includes second homes, cottages or any other non-primary residence.
- Primary Residence equity: Exemptions vary by province: Saskatchewan and Northwest Territories, up to $50,000; Alberta, up to $40,000; Nunavut, up to $35,000; British Columbia, up to $9,000 or $12,000 in Greater Vancouver or Victoria; Newfoundland and Quebec, up to $10,000; Ontario, up to $10,783; and Manitoba, up to $2,500 or $1,500 as a co-owner. Other provinces don’t specify these amounts.
- Luxury Items: Expensive jewelry, antiques, high-value collectibles or artwork that exceeds allowable exemption limits.
- Recent RRSP Contributions: Creditors may claim any made in the 12 months preceding the bankruptcy.
- TFSA and RESP Contributions: Unlike RRSPs contributions, no exemptions cover those registered accounts.
- Pensions funds since they get locked into a group plan
- Vehicles: Depending on your province and its exemption limits, vehicles that exceed a certain value might be seized. This includes boats.
- Investments: Stocks, bonds, and other non-exempt investments.
Assets Typically Exempt from Seizure
Generally, creditors cannot seize property debtors held in trust for others, GST credits and payments relating to essential needs. While the specific exemptions can vary based on provincial laws, most provinces in Canada allow individuals to keep:
- Primary Residence: Up to a certain equity value as listed above
- Essential Household Items: These encompass necessary clothing, basic furniture and appliances.
- Tools of Trade: Items you need to earn a living, up to a set value.
- Pension plans and RRSP: Pension plans and RRSP contributions made more than 12 months before filing for bankruptcy
- Life insurance policies: Term life insurance policies hold no value until your death so creditors cannot take funds from them. Meanwhile, the value of a whole life policy can become an asset in a bankruptcy in Saskatchewan. In Alberta, however, life insurance only remains exempt if you name your spouse, child, parent or grandchild as the beneficiary. For all other provinces and territories, creditors cannot touch your life insurance policies.
- Vehicles: Up to a certain value, especially if they’re crucial for work or family commitments.
The Seizure Process
The process of asset seizure is structured and managed with utmost professionalism. Initially, your trustee will evaluate all of your assets and their estimated values to determine which qualify. Next, they will inform you which items might face seizure.
Finally, the trustee will make arrangements for any necessary evaluations or liquidations. They often coordinate with third-party appraisers or auctioneers to determine the value of assets and how best to liquidate them. For instance, they may go through a sale, auction or other means.
If certain assets within your home get identified for seizure, don’t panic. The procedure tends to happen with discretion and care. A professional will visit your home at a mutually agreed-upon time. They will carry out the process efficiently while respecting your circumstances and privacy. This pre-planned, organized approach minimizes any potential discomfort or embarrassment during the process.
Step 5: Fulfill your obligations during your bankruptcy
When you file for bankruptcy, you don’t just passively watch debts get erased. Debtors have specific duties and responsibilities during the period of a bankruptcy. Meeting these obligations ensures a smooth process and timely discharge.
Report Your Income
Primarily, report your income and expenses monthly to your Licensed Insolvency Trustee. This helps determine if you owe any “surplus income.” This means an amount deemed by the government beyond what a family needs to maintain a reasonable standard of living. If you consistently earn surplus income during your bankruptcy, you might need to make additional payments. Consequently, the length of your bankruptcy may extend further.
Payments
Additionally, your level of “surplus income” influences your payments as per the Bankruptcy and Insolvency Act in Canada. The Superintendent of Bankruptcy establishes monthly income thresholds based on family size.
| Family Size | Threshold for 2023 |
| 1 | $2,543 |
| 2 | $3,165 |
| 3 | $3,891 |
| 4 | $4,725 |
| 5 | $5,359 |
| 6 | $6,044 |
| 7 or more | $6,729 |
For every dollar that a bankrupt person makes beyond this income threshold, 50 cents becomes a surplus income payment. For example, if you earn $400 above the limit, you must make an extra payment of $200.
Having this extra income also affects the length of your bankruptcy period. For a first-time bankrupt individual, the process wraps up in nine months if you don’t have surplus income. However, the process gets extended to 21 months if you do.
Attend Credit Counselling
Meanwhile, debtors must attend two mandatory credit counseling sessions. These sessions aim to equip you with financial management skills and ensure you understand the causes of your bankruptcy. Typically, they offer invaluable advice on budgeting, managing credit and building a secure financial future.
Limitations on Borrowing
While you live in bankruptcy, you face restrictions on borrowing money. You cannot attempt to obtain credit more than $1,000 without informing the lender that you are an undischarged bankrupt. This protects both you, from incurring unmanageable debts again, and potential creditors, who might not know about your financial status.
Cooperation with the Trustee
Throughout the process, maintain open communication with your trustee. They may request certain documents or additional information from time to time. Of course, you have a duty to provide these promptly.
Step 6: Get discharged from your bankruptcy
Finally, you ultimately work towards obtaining a discharge. This means that you get released from your obligation of repaying most of your debts. This fresh start gives you a chance to rebuild your financial life. Remember, not all debts get discharged through bankruptcy, such as child support payments and certain court-ordered fines.
The length of your bankruptcy will depend on several factors, including your income and whether you have filed bankruptcy before. Typically, first-time bankruptcies in Canada last for a period of nine months. However, if you have surplus income, it can get drawn out into 21 months. During this time, you will need to adhere to certain obligations and requirements set forth by the trustee overseeing your case.
| Number of Bankruptcies | Duration (No Surplus Income) | Duration (With Surplus Income) |
| First Bankruptcy | 9 months | 21 months |
| Second Bankruptcy | 24 months | 36 months |
| Third Bankruptcy* | Determined by the Court | Determined by the Court |
Once you fulfill all the requirements and the necessary waiting period has passed, your trustee will apply for your discharge. This involves submitting a certificate of discharge to the Office of the Superintendent of Bankruptcy for review. Its staff will assess your case to check that you have met all the necessary obligations with no outstanding issues.
If approved, you’ll receive your certificate, marking the end of your bankruptcy. This document proves that you have successfully completed the bankruptcy process. Subsequently, you no longer have to repay most of your debts. Certainly, keep this certificate in a safe place, as you may need in future when dealing with creditors.
Life After Bankruptcy
Life doesn’t end after bankruptcy. On the contrary, you have a fresh start and an opportunity to rebuild your credit and regain financial stability.
If declaring bankruptcy stands as your only viable option, remember that it doesn’t reflect your worth as a person. Bankruptcy helps individuals and businesses overcome insurmountable financial challenges and start anew.
While going bankrupt will negatively impact your credit score, you can start rebuilding it right after a discharge. This process can take time and requires consistency. Thankfully, you won’t carry this stigma forever.
Rebuilding your credit score requires developing responsible financial habits. This includes paying your bills on time, avoiding unnecessary debt and managing your expenses wisely. By demonstrating financial responsibility, you can gradually rebuild trust with lenders and improve your creditworthiness.
The Impact of Bankruptcy on Credit Score in Canada
Declaring bankruptcy in Canada inevitably leads to a negative mark on your credit report. Specifically, a first-time bankruptcy remains on your Equifax or TransUnion credit report for six years after the discharge date. If you declare bankruptcy a second time, this extends to 14 years with Equifax and TransUnion.
The immediate aftermath can see a drop in your credit score by several hundred points. This means obtaining new credit, such as a credit card, a mortgage or a personal loan, becomes more challenging.
However, your financial life doesn’t stand still post-bankruptcy. Over time, with disciplined financial habits, you can rebuild your credit score. First, adopt responsible financial management practices, like timely bill payments and careful budgeting. Slowly, lenders might start seeing you as less of a risk, and you’ll notice improvements in your credit offers.
Next, you may wonder about major financial decisions, like buying a house or car. While getting a mortgage immediately after bankruptcy is tough, you can achieve it in the long run. You might need a larger down payment or accept higher interest rates initially. Similarly, for cars, some lenders specialize in bad credit car loans, but again, expect higher interest rates.
How to Rebuild Your Credit Score After a Bankruptcy
Rebuilding your credit score after bankruptcy might seem challenging, but with the right strategies and consistent efforts, it is entirely achievable. By taking planned and deliberate actions, you can gradually restore your financial standing and regain the trust of lenders.
Get a Secured Credit Card
Secured credit card
Post-bankruptcy, obtaining a regular credit card might be a stretch. However, secured credit cards work in your favour. They require you to deposit a certain amount, which then serves as your credit limit. The risk to the card issuer drops with your deposit, making it easier to gain approval despite a bankruptcy record. If used responsibly, paying off the full balance timely, this card can be a beacon of your renewed financial discipline. Gradually, it can enhance your credit score.
Monitor Your Credit Score Closely
In the journey to credit score recovery, stay vigilant. Regularly monitoring your credit report so you remain up-to-date with your progress and any changes to your score. Canadian credit bureaus, like Equifax and TransUnion, offer a free credit report once a year. Furthermore, numerous apps enable Canadians to monitor their credit scores free of charge. You can significantly benefit your credit recovery trajectory by ensuring your credit report is accurate and promptly addressing any discrepancies.
Only $10/month for 6 months
Limit New Credit Applications
As you set out to rebuild, resist the allure of applying for multiple credit products in quick succession. Each application results in a hard inquiry on your credit report, which can negatively affect your score. Instead, judiciously manage a few sources of credit. Demonstrating consistent reliability with these can contribute more positively to your score than a plethora of new applications.
Keep a Rigorous Budget
Budgeting serves as one of the cornerstones of sound financial health. By tracking and categorizing your expenditures, you gain a better understanding of your financial habits. This ensures you live within your means and can manage your debts effectively. The Hardbacon app is an excellent tool that can help you budget based on your actual transactions. However, you can choose another digital app, a spreadsheet or even a traditional notebook. The key is consistency and regular review.
Establish a Steady Income Source
Above all, lenders consider your credit history and your current income. Having a consistent and reliable source of income will help you manage your finances better and lower risks to potential lenders. Through stable employment, a side gig or other revenue streams, demonstrating financial stability can greatly aid your credit rebuilding efforts.
With patience and determination, regaining a healthy credit score after bankruptcy sits entirely within reach. Every sound financial decision you make takes you a step closer to achieving your financial goals.
FAQs About Bankruptcies in Canada
When you file for bankruptcy in Canada, you receive legal protection against most creditors. This means they cannot take legal action against you or contact you for payment. However, you must work with a licensed insolvency trustee to provide full details about what you owe. Further, debtors repay some of your debts and take two credit-counseling classes.
To file for bankruptcy in Canada, you must consult with a Licensed Insolvency Trustee (LIT) who will guide you through the process, including preparing and filing the necessary paperwork and notifying your creditors.
In Canada, a first-time bankruptcy remains on your credit report for six years from the date of discharge. That extends to 14 years if you’ve been discharged more than once.
Filing for bankruptcy has several downsides, including a significant impact on your credit score. Debtors also face a potential loss of some assets. Not all debts get erased in bankruptcy, such as recent student loans, alimony and child support. Additionally, the stigma and emotional impact of declaring bankruptcy can also be considered drawbacks.
In Canada, there’s no legal limit to the number of times an individual can declare bankruptcy. However, the consequences become more severe with each successive bankruptcy, including longer periods before being eligible for discharge.
In Canada, whether you can keep your house when declaring bankruptcy depends on the equity in your home and provincial or territorial exemptions. If the equity in your home exceeds the allowable exemption, you might be required to pay the trustee the excess equity or sell the property.
Whether you can keep your car when filing for bankruptcy in Canada depends on the equity in the vehicle. If the car’s equity falls within the allowable exemption limit, you can keep it. If it exceeds it, you can redeem it by paying the difference between its appraised value and the maximum limit.
These are the limits in each province for one vehicle only:
-Ontario – up to $7,117.
-Northwest Territories – up to $6,000.
-New Brunswick, PEI and Nova Scotia – up to $6,500.
-Alberta and B.C. – up to $5,000.
-Manitoba – up to $3,000.
-Newfoundland and Labrador – up to $2,000.
-Quebec, Nunavut and Yukon – no limit.
-Saskatchewan – no limit, only applies if needed for work.
The duration of bankruptcy in Canada depends on several factors, including if it’s your first bankruptcy. A first-time bankruptcy without surplus-income payments generally lasts for 9 months. However, it can be extended to 21 months if you have income beyond covering the essentials. For a second bankruptcy, this period extends to 24 months without surplus income payments and 36 months with them. Subsequent bankruptcies have even more extended durations before discharge.
If bankruptcy doesn’t get discharged in Canada, the individual remains legally bankrupt and under all bankruptcy restrictions. The reasons can vary, including failure to complete mandatory duties or objections by the trustee or creditors. This means the individual cannot obtain more than $1,000 in credit without informing the creditor of their status. Further, they cannot act as a director of a company. Not telling creditors can lead to a $5,000 fine.
In Canada, if one spouse declares bankruptcy, it does not automatically affect the other spouse. However, if both spouses have co-signed or jointly hold debts, the non-bankrupt spouse must shoulder the entire debt amount. The bankruptcy will not appear on the credit report of the non-bankrupt spouse unless they too declare bankruptcy. This could also happen if they have joint debts involved in the bankruptcy. Naturally, financial stress can impact your relationship.
Technically, you can file for bankruptcy without informing your spouse, unless they have co-signed a loan. However, doing so might have implications for the household’s finances, so you cannot keep the process entirely hidden. What if you have joint assets or if correspondence related to the bankruptcy arrives at a shared home? Everyone benefits from having open communication with your spouse about significant financial decisions.
In Canada, tax debts have equal standing to any other type of unsecured debt, such as a credit card or a personal line of credit. The trustee will file outstanding tax returns up to the date of bankruptcy to include any outstanding taxes or penalties. After discharging a bankruptcy, all tax debt will disappear. However, those who owe over $200,000 in taxes will not receive an automatic discharge from a bankruptcy. Instead, a court hearing will determine if more payment will discharge the bankruptcy.
The cost to file bankruptcy in Canada varies based on individual circumstances, including the amount of debt and assets. Licensed Insolvency Trustees charge legislated fees of no more than $1,800 for a first-time bankruptcy. Usually, they get paid in monthly installments. On top of this, debtors may pay surplus income payments. Certainly, discuss the fees with the trustee upfront to understand all associated costs.
If you have little to no money but must file for bankruptcy in Canada, talk with a Licensed Insolvency Trustee. However, the government sets their fees so they cannot change them.
No, a consumer proposal differs from bankruptcy although both are legal processes overseen by a Licensed Insolvency Trustee. With a consumer proposal, you negotiate to pay creditors a percentage of what you owe over a specified period. It allows you to retain your assets and freeze your debts without accumulating further interest. Bankruptcy, on the other hand, involves relinquishing certain assets in exchange for the elimination of most of your debts.
Yes, bankruptcy filings are a matter of public record in Canada. This information is maintained by the Office of the Superintendent of Bankruptcy. However, accessing detailed information typically requires a specific request and may involve a fee. It’s not as readily accessible as other public records, so the general public won’t stumble upon it unless they actively seek it.
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