what happens when you declare bankruptcy in canada

Receiving money from an inheritance or some sort of random windfall is something we all dream about. But what happens when that dream becomes a reality and the money becomes payable to you when you are in Bankruptcy? And what happens if your financial situation improves while you are bankrupt?

These questions and more are answered by Julie Drane, Licensed Insolvency Trustee with Allan Marshall & Associates. Julie also discusses:

  • Surplus income – how it is calculated and when it is payable
  • Receiving an inheritance or windfall after filing a Consumer Proposal
  • How to start rebuilding your credit score
  • When it is advantages to switch from Bankruptcy to a Consumer Proposal 
  • Changes to your Bankruptcy or Consumer Proposal if your income increases or marriage breaks up

Federally regulated, Licensed Insolvency Trustees are knowledgeable in all aspects of debt management and adhere to strict ethical guidelines. You can be assured you are receiving the best unbiased advice. 

Wayne Kay 00:04
Welcome to the Debt Matters podcast where we help Canadians find solutions to their debt with Licensed Insolvency Trustees from across Canada. I’m Wayne Kay, and in today’s show we’re going to talk about receiving surplus income, an inheritance, or maybe a windfall while you’re in Bankruptcy. 

What happens? What happens if all of sudden you file your Bankruptcy and then the next week you end up getting a promotion? What is surplus income? What happens if you win the lottery or you get an inheritance? What are your options if life changes during the Bankruptcy? 

To tell us about this and a lot more, I’ve got Julie Drane from Allan Marshall & Associates Licensed Insolvency Trustee with offices across the country. Julie is joining me from Victoria, British Columbia today. Hi there, Julie.

Julie Drane 00:57
Hi Wayne.

Wayne Kay 00:58
Welcome back to the show.

Julie Drane 01:00
Well, thank you very much.

Wayne Kay 01:01
I’m looking forward to this discussion because you say this is something that happens quite a bit. So we’re talking about what happens when all of a sudden money comes in.

There’s surplus income, an inheritance or a windfall while you are bankrupt. So explain. When you’re bankrupt, you’re not supposed to have more money coming in, right?

Julie Drane 01:26
When you’re bankrupt, your income is monitored. Our lives change. So therefore it’s good when you get more money. However, it does impact how much you potentially could have to pay in a Bankruptcy. 

So what happens is, when an individual comes in, we have this chart that the government gives us that says, okay, if there’s so many people in the family after taxes, medical expenses, child support, spousal support, or child care, that has to be paid. If there’s a certain amount of money left over without taking into account things like your rent, your car payment, your insurance, your food, anything that you earn over and above that, for a period of the Bankruptcy, 50% of it would have to be paid to the Trustee. 

So you could have an individual come in, they said, no, I don’t think I’m getting a promotion, I’m not getting a new job. They’re way under this guideline. Okay, here’s your base fee. 

Next week I get a call, guess what, Julie, I just got a manager job at Canadian Tire and this did happen to me. What’s this mean for me now? So, okay, what that means is you’re going to report your income and we’ll have to figure out a new payment for you because now you’re over that guideline. It’s not just a fee you have to pay –  this 50% that the government says that you have to pay over and above.

Wayne Kay 02:48
And this does happen.

Julie Drane 02:50
Obviously it does happen, yes. And a lot of the time I do find too, it’s the stress. The stress is alleviated off the individual or the family and all of a sudden things start falling into place because of that mental block is gone, that stress is gone.

So they’re able to concentrate more on their job on those job applications and things seem to fall into place which is positive. But when you’re looking at Bankruptcy, it’s, oh crap, now I have to pay more money.

Wayne Kay 03:19
Right? But this is the one thing – this is probably the most important piece of this show is that people who are listening, who are in debt, are having financial troubles. It’s the importance of making that phone call and how different their life will be after they do something about it and get some help and realize, oh, there is help. There’s things I can do.

Julie Drane 03:43
Yes. And it’s not the end of the world. You can still get credit going forward, you can still get a mortgage. It is going to be a little bit more difficult. But we also, as part of the process, do the counseling sessions which talk to you, one of the two, about how to start to rebuild your credit, give you some of those tools so that even while you’re in, especially in a proposal, you’re able to start to rebuild. 

Or as soon as you get your Bankruptcy discharge, you’re able to go out, say to the lender, here, I’ve got this discharge and you can start to build that credit score back up.

Wayne Kay 04:20
Right. And so as you were talking about this person who was working and then all of a sudden they became a manager, that would be surplus income.

Julie Drane 04:29
Depending on the level of income and the people in their household. In most cases, yes, you’ve got such a large bump in income that it all of a sudden triggers this surplus.

So surplus income, like I said, comes from this guideline that the government gives us whereby they say if you earn more than this amount of money, depending on your size of your family, you pay 50% of it over and above and it usually extends the Bankruptcy period. 

Now, it is also done on an average basis. So if you have a one time little blip and you go back down, it may or may not affect you. However, when you have something like a major promotion, most of the time it does have that impact.

Wayne Kay 05:11
Right. So all of a sudden you’re in Bankruptcy, you know what your fees are supposed to be, you know what’s coming in. But all of a sudden you’re listening to a radio station and you are the 10th caller in. You call in and you win $25,000. And yes, that also happens.

What happens in that case? Do you just keep it quiet?

Julie Drane 05:38
Well, you can try and I’m sure people have. However, people do talk and most times we do find out there are different places who also watch. You have creditors who keep an eye, the Superintendent of Bankruptcy who keeps an eye. It’s not just the Trustee. 

So in that case, there are a couple of options. Number one, you turn it over to the Trustee if it’s enough to pay off your debt, pay the Trustees fee, you get your discharge, away you go. 

If it’s not in some cases where there is a windfall, whether it be a lottery winning an inheritance, something like you talked about the call in show on the radio, we would look at seeing whether or not we could take that money and proposal the individual out of that Bankruptcy. So say to the creditors, look, here’s how much we anticipate you get in the bank balance of the Bankruptcy.

You’re going to get this $25,000 right now if you accept it and get the debtor out, get them back on their feet more quickly. So that is an option that also can get discussed with the Trustee should something like that happen. Now, are we encouraging people to gamble? No. But should that windfall, that inheritance, radio call in occur? Absolutely. 

There are options other than just completely losing it. But keeping it quiet is probably not a good idea because somebody is going to talk and then you don’t want to get in trouble with the Superintendent of Bankruptcy for not doing your duties. And one of your duties is to tell the Trustee if something like that is to occur while you are still in Bankruptcy.

Wayne Kay 07:13
Well, everybody’s working hard to keep you, to help you with your situation. You need to help them as well. So that makes perfect sense. But once you’re in Bankruptcy, did I understand you right that you can actually change it to a Consumer Proposal?

Julie Drane 07:29
It is very rare, but it is a possibility. I haven’t had it happen to me personally, but I have had colleagues where someone does unexpectedly, someone passes away or they were in a will, they didn’t know.

All of a sudden this windfall comes in and they’re able to go to the Trustee, say, look, I now have this sum of money I know I’m going to lose in the Bankruptcy. Is it possible for me to file a proposal to get out of the Bankruptcy more quickly and to get on with my life? So it is rare, but it can happen.

Wayne Kay 08:06
Okay. All right. What about if your life changes, you’re going along and other things happen to your situation during the Bankruptcy? You maybe either start a relationship or you end a relationship, your marriage breaks up, does that affect the Bankruptcy as well or not?

Julie Drane 08:26
Yes, it can. And that would be a situation where in your Bankruptcy you get on the phone with your Trustee right away and say whether it be a material, what we’ll call adverse, so bad change for you or a good change. You wanted to keep in contact, to help us help you, to make sure that you’re continuing down the right path. 

Are you overpaying, are you underpaying? Does it make sense to look at a proposal or another option to get you out of the Bankruptcy more quickly? So communicate with your Trustee to make sure that we can help you, help us help you. I guess that’s the best way.

Wayne Kay 09:04
It’s been used in movies forever. It’s got to be a great line, right?

Julie Drane 09:10

Wayne Kay 09:11

Julie Drane 09:12
Not much. Yes, absolutely.

Wayne Kay 09:15
Okay, what about other options? Let’s say you were in a Consumer Proposal and all of a sudden you end up getting the inheritance or you get the surplus income. Does that change anything?

Julie Drane 09:26
We don’t monitor for surplus income in a proposal. So you get more money. Great. You pay off your proposal sooner if you want to. 

If you have a change where your income has gone down, there’s been a material adverse change in a proposal. Again, contact your Trustee. See whether or not, don’t struggle long. See whether or not there could be an amendment done to the proposal.

So that’s, again, help us help you. If you win the lottery, get an inheritance, you decide to sell your home, you’ve got this big chunk of change in your pocket. You’re not obligated to pay off the proposal. However, we usually encourage it because if you can get rid of that payment and once the proposal payments are done, the proposal only reports to your bureau for three more years. So pay it off.

You keep whatever is left over that wasn’t required to pay off the proposal, and your credit report can clean up more quickly. So it is encouraged, but it’s not required in a lot of cases. Now, if there’s a clause in the proposal that says you have to do that, that’s different. But if it’s something that’s just out of the blue, you won them some money, somebody gave you a scratch ticket and you won money. You sold your house, you got a great raise at work or bonus.

It doesn’t impact the proposal amount offered, but you could use that money to pay the proposal off more quickly. Hope that answers your question.

Wayne Kay 10:50
It does. Definitely does. It helps. And when you were talking about getting your credit rating restored after three years. Let’s talk a little bit about that. So during the Bankruptcy, the credit score is like 100 or something out of like 900 or what does that look like?

Julie Drane 11:11
Unfortunately, I am not an expert on credit scores. I can tell you what the rating is. So during the period of a Bankruptcy or a Consumer Proposal, it reports as an R9, which is the worst rating that you can get on the debt that is included for a Bankruptcy.

At the end of the Bankruptcy period, if it’s the first time, it stays on the report for approximately six years. If it’s the second time, it’s 14 years from the date of discharge. 

With a proposal for the period of the proposal, it reports the same thing, R9. And then at the end, it reports as an R7 for three additional years. There may be a slight difference between Equifax and TransUnion union in Canada.

Unfortunately, they’re not identical, but yet if an individual wanted real specifics, I encourage them to go to Equifax and TransUnion, ask those questions. They become much more amenable to answering questions. And there’s a lot of online FAQs on Equifax CA or TransUnion CA that can help people to kind of understand that as well.

Wayne Kay 12:13
Right, but it’s basically a big X on your credit rating, I would think, until you’re discharged from it.

Julie Drane 12:21
From the Bankruptcy, yes. With the proposal, there’s a lot of people who will go and apply within 12 to 24 months for a secured credit card, a small furniture loan, or something like that. They are going to be high interest. You’d want to pay them on time, but that can, while one is still in a proposal, start to help that individual to start to rebuild their credit.

Wayne Kay 12:44
Right on. Okay. Anything else we need to know about this income receiving windfalls while you’re in Bankruptcy?

Julie Drane 12:52
No, I think that pretty much covers the highlights. Like I said before, everybody’s different, so these are very generic comments and if you want to know something more specific to your individual situation, give us a ring and we’d be more than happy to speak with you with regards to your individual situation.

Wayne Kay 13:12
I think it’s great. Julie, thank you so much for being on the show and all the great information today.

Julie Drane 13:16
Thank you very much for having me. Wayne.

Wayne Kay 13:18
Well, my guest today, Julie Drane. You can learn more or schedule a free consultation with Allan Marshall & Associates Licensed Insolvency Trustee, by going to the website wecanhelp.ca and that first one is absolutely free, by the way. You may be able to get a lot of great information from them – wecanhelp.ca.

And that is it for today’s Debt Matters podcast. Just make sure you subscribe wherever you get your favorite podcast from. And of course, for more information, you can always check out debtmatters.ca. Thanks for listening.

About Julie Drane

Julie began her career in the insolvency industry in 1997 with Canada Trust, Citi Financial and then with a corporate trustee. She achieved her goal of becoming a Licensed Insolvency Trustee in 2008 and now focuses on consumer insolvency. 

Julie’s depth of knowledge and commitment to service allows her clients to find the best option for a fresh start. She is now working in the Victoria, BC offices.

Additional Resources