If you’ve been struggling with your debt for some time, you’ve probably considered filing for Bankruptcy. But there’s a lot of confusing information out there. You might be asking yourself…
How does Bankruptcy work in Canada?
In Canada, the Bankruptcy and Insolvency Act (BIA) defines the legal options for a person or company to be relieved of their debts.
One of these options is a Personal Bankruptcy.
What is a Personal Bankruptcy?
Personal Bankruptcy is a legal process whereby a debtor gives up his or her non-exempt assets and performs certain duties in exchange for a discharge from their debts.
How do I file a Personal Bankruptcy?
To file Bankruptcy, you will need the help of a Licensed Insolvency Trustee (LIT) who will administer the Bankruptcy.
An LIT is the only professional authorized by the Canadian government to administer Bankruptcies or Consumer Proposals.
How much debt do you need to file Bankruptcy?
You will need at least $1,000 in unsecured debt in order to file Bankruptcy in Canada.
You also need to be insolvent. This means you either:
- Can’t repay your debts as they come due; or
- Owe more to your creditors than the value of what you own.
Does Bankruptcy clear all my debt?
Bankruptcy discharges you from the obligation to repay all your unsecured debts as of the date of your Bankruptcy filing. This includes:
- Credit card debt;
- Payday loans;
- Tax debt owed to the Canada Revenue Agency; and
- Student loan debt if you stopped being a student 7 or more years ago.
Bankruptcies generally do not affect the rights of your secured creditors.
Bankruptcy law also excludes the following debts from being discharged:
- Child support;
- Student loans if you stopped being a student less than 7 years ago;
- Court-ordered fines or penalties; and
- Debts arising from fraud.
How much does Bankruptcy cost?
You’ll need to make a basic monthly payment to cover the cost of your Bankruptcy’s administration. The minimum monthly cost will be $200 every month for 9 months (which totals $1,800).
That said, the cost of a Bankruptcy is based on your particular circumstances, including your:
- Monthly income;
- Monthly expenses;
- Family size; and
In a nutshell, the more you own, the more you’ll have to pay your creditors.
The three components that make up the costs of your Bankruptcy are:
- Your monthly contribution to cover administration costs;
- Surplus income payments; and
- Assets you keep or lose under Bankruptcy law.
What if I can’t afford a Bankruptcy?
Low-income consumer debtors who cannot afford to pay the $200 minimum costs of a Bankruptcy may be eligible for the Bankruptcy Assistance Program (BAP).
The BAP helps these individuals resolve their unmanageable debts at a reduced rate based on their available disposable income.
What is surplus income?
Every year, the Office of the Superintendent of Bankruptcy (OSB) sets out the amount of income a family of any particular size needs to maintain a reasonable standard of living.
Surplus income is the part of your earnings that exceeds that amount, based on the size of your family.
Every month during the Bankruptcy process, you’ll submit a copy of your pay stubs and proof of other income to the LIT.
The LIT will then calculate your surplus income, if any. That amount gets paid into the Bankruptcy.
What happens to the assets that I own after I file Bankruptcy?
First, you need to know that you won’t lose everything in a Bankruptcy.
Bankruptcy isn’t considered a punishment. Rather, it’s a way for you to get a fresh financial start.
The government has rules about what you can keep (those assets that are exempt from the Bankruptcy).
These rules differ by province, but typically include:
- Most household furnishings;
- Most personal possessions;
- Tools you need for work;
- A motor vehicle under a certain value;
- Equity in your home that’s less than a certain amount. For example, in Ontario, this amount is $10,000; and
- Most pension and RRSP savings. For example, with respect to RRSPs, exceptions include contributions made in the 12 months prior to your Bankruptcy filing.
The assets you own that are not exempt from the Bankruptcy are given over to the LIT. The LIT turns them into cash to distribute among your creditors.
Will I lose my house after I file Bankruptcy?
The laws differ in each province. In essence, you can’t keep a house if you have a lot of equity in it at the time you file Bankruptcy.
If you have little equity, you may be able to keep your home. You’ll need to continue to make your mortgage payments on it. Secured debts are not covered in Bankruptcy.
However, if your equity exceeds the exemption set out by your province, the LIT will likely sell your home and distribute the equity to your creditors. There are some exceptions to this, such as getting a personal loan to repay that equity, or a second mortgage to repurchase the equity from your LIT.
What happens once I file for Bankruptcy?
The moment you file for Bankruptcy:
- You stop making payments directly to your unsecured creditors.
- Your creditors are notified by your LIT.
- Your creditors are stopped from enforcing action against you to collect on the debt you owe.
- You stop all wage garnishments, lawsuits, and collection calls.
- Your LIT will sell your non-exempt assets and hold this money in trust to distribute to your creditors.
- You keep those assets exempted by the provincial and federal laws.
How long does the Bankruptcy last?
Most personal Bankruptcies in Canada last 9 months for a first time Bankruptcy that requires no surplus income payments.
If your surplus income is higher, your Bankruptcy will be extended to 21 months.
What are my responsibilities in a Bankruptcy?
In order to be discharged of your debts in a Bankruptcy, you must complete certain duties.
For example, you’ll have to:
- Surrender any non-exempt assets and all your credit cards.
- Make monthly payments, including surplus income payments, if required.
- Attend two credit counselling sessions. This will help you better manage your finances moving forward.
- Send proof of income and expenses to your LIT every month.
- Provide the information needed to file necessary tax returns.
What are the benefits of filing for Bankruptcy?
When you file for Bankruptcy, you:
- Start on the path to eliminating your debts.
- Get legal protection from your creditors;
- Stop wage garnishments;
- Stop all collection calls and harassment;
- Protect your assets; and
- Get credit counselling to set you up for improved financial success moving forward.
What happens to my credit rating when I file Bankruptcy?
If you declare yourself Bankrupt, the lowest possible credit rating (an R9) will appear on your credit report.
Note of your Bankruptcy will be removed from your credit report 6 or 7 years after the date of discharge (depending on your province) for first-time Bankruptcies, and 14 years for subsequent Bankruptcies.
However, the decision of whether to file for Bankruptcy should not be made on the basis of the effect it will have on your credit report.
The negative effect is temporary.
What’s more, a Bankruptcy can actually improve your credit score:
- You wipe out old debts.
- You put a stop to the negative history you’ve been building from late payments or accounts falling into collections.
- You can start rebuilding your credit.
- You no longer pay interest on your debts. This savings can be put toward a down payment to get a better rate on a loan in the future.
What happens after my Bankruptcy is discharged?
After your debts are discharged, you can start rebuilding your credit by:
- Obtaining a secured credit card;
- Keeping your balances low; and
- Paying your bills on time.
Does my Bankruptcy protect my spouse?
When you file a Bankruptcy, only the portion of assets that you own are included therein. If you and your spouse jointly own an asset, only your portion may be sold and distributed to your creditors.
If your spouse co-signed a debt with you, a creditor can still pursue your spouse for its repayment.
How does a Bankruptcy affect someone who cosigned a loan for me?
Anyone (whether spouse or not) who cosigned a loan for you will still be responsible for making the loan payments even after you declare Bankruptcy.
I have more Bankruptcy questions. Who should I speak to?
If you’re interested in learning more about Bankruptcy, you should reach out to a Licensed Insolvency Trustee.
LITs are the only professionals authorized to administer Bankruptcies in Canada.
Plus, your initial consultation with an LIT is free.
It is at this first meeting that the LIT will review your financial circumstances and discuss all debt relief options available to you.
This way, when you’re ready to get a handle on your debt, you’ll be able to make an informed decision on how best to proceed.