How bankruptcies work in Canada

In abridged terms, filing for bankruptcy is when you surrender everything you own to a Licensed Insolvency Trustee in exchange for having your debts eliminated. (Please note that depending on the province in which you reside, you may be able to keep some minimum necessities.) When you file for bankruptcy, it includes a “stay of proceedings” that stops your wages from being garnished and forbids creditors from phoning you directly.

Bankruptcy is a legal process governed by Canada’s Bankruptcy and Insolvency Act.

What is the Bankruptcy and Insolvency Act?

Sometimes referred to as simply the “Bankruptcy act”, the Bankruptcy and Insolvency Act establishes rules for Canadians who want to pursue bankruptcy. Its main purpose is to provide Canadians with relief from debt, while treating creditors fairly by respecting their rights, and advising trustees along with the courts of their duties, powers and responsibilities.

Under the Bankruptcy and Insolvency Act, an insolvent consumer has two choices to deal with their debts: file a consumer proposal or file for personal bankruptcy.

It’s important to note that each Canadian province has its own legislation for the process of filing bankruptcy. If there’s ever a disagreement between federal and provincial bankruptcy laws, the federal laws trump the provincial laws.

What is the minimum debt required to file for bankruptcy?

If you’re thinking about filing for bankruptcy, it’s important to determine if you qualify by meeting the minimum amount of debt needed for personal bankruptcy. In Canada, the bar is set pretty low: You can file for personal bankruptcy if you have as little as $1,000 in unsecured debt. (In case you’re wondering, there’s no maximum debt amount for filing for bankruptcy.)

What are the steps in filing for bankruptcy?

The question of “how to file bankruptcy” can be a daunting one, so we’ll provide a simplified overview of the process:

1. Speak to a licensed insolvency trustee

The Bankruptcy and Insolvency Act states that bankruptcies can only be filed through a Licensed Insolvency Trustee—a trained professional who will sit down with you and look at what your best options are for managing your debt. Bankruptcy may indeed prove to be the best option, but there could be better options depending on your individual circumstance. The Licensed Insolvency Trustee should ask you questions about your debts and budgeting to try and find the best solution for you.

2. Completing the necessary paperwork

If, after consulting with the Trustee, you decide to go ahead with filing for personal bankruptcy, you’ll need to put together the necessary paperwork. These forms include a Statement of Affairs, which has a listing of your assets, debts, income and expenses, and the Assignment of Assets, which assigns your assets to creditors to help pay off the amounts owing.

3. Filing documents and notifying creditors

Your trustee will file the forms electronically with the federal government after you’ve signed them to confirm their accuracy. You’re then considered to be bankrupt once these forms have been filed with the Official Receiver. At this point, your Trustee should receive a notification and you should get a file number.

Your Trustee will then notify your creditors about the bankruptcy filing, so that they can file a claim. These notifications are most often sent electronically, so it shouldn’t take long for your creditors to find out and for the collection calls to stop. Likewise, if your wages are being garnished, your trustee should notify your employer to stop the garnishment.

The Trustee will also be responsible for filing any outstanding tax returns you may have up to your bankruptcy date. Any money that you owe to the Canada Revenue Agency will be included in the bankruptcy.

4. Acquiring a bankruptcy discharge

Discharging your debt is the most important step in bankruptcy proceedings, as it eliminates any and all unsecured debts. (Unsecured debt is debt not secured by an asset like your house, such as credit card debt.) To acquire a discharge of your debts, you must fulfill a number of duties, such as surrendering your assets and credit cards, attending credit counselling meetings, submitting proof of income and expenses, making payments as per your agreement, and providing necessary details to file your tax return.

In most cases, you’ll receive an automatic discharge after fulfilling the duties described above. If you’re filing for bankruptcy for the first time, you may receive the discharge in as little as nine months.

How long does bankruptcy last?

The legal minimum period for a bankruptcy to last is nine months, but some factors may extend your bankruptcy. If you have income beyond the surplus income limit then it may be extended so that your creditors can be paid further. Those with more than one bankruptcy are often extended past the nine-month minimum as well, and it’s also important to complete all the bankruptcy objectives in order to be discharged on time.

Are there any differences in the bankruptcy process from one province/territory to the next?

Besides the federally administered Bankruptcy and Insolvency Act that we discussed earlier, each province in Canada has its own bankruptcy rules that impact various aspects of the bankruptcy laws and process. This is a unique variable in how bankruptcies work in Canada specifically. The provincial bankruptcy rules spell out exemption limits from personal bankruptcy. This lets individuals filing for bankruptcy hold on to certain basic assets, such as clothing, furniture and inexpensive vehicles. The provincial rules also spell out the rights of creditors and debtors when dealing with collection calls.

If you’ve lived in different provinces, you may be wondering the province in which you should be filing for bankruptcy. The Bankruptcy and Insolvency Act states that you’re supposed to file for bankruptcy in the “locality of the debtor.” In layman’s terms, this means you’re supposed to file for bankruptcy in the province where you lived or ran your business for the last year. If you don’t meet this criteria, you’re supposed to file for bankruptcy in the province where the majority of your property is located. If you’re unsure where you should be filing, it’s best to speak to a Licensed Insolvency Trustee.

If you move to another province while filing for bankruptcy, it’s important to let your trustee know of any changes of address. You may be able to complete the required credit counselling at a local office in the city in the new province in which you reside.

What are the outcomes of filing for bankruptcy?

When you file for bankruptcy, as mentioned earlier, it includes a “stay of proceedings.” This halts legal action by your creditors, the collecting calls and any garnishment of your wages by your employer for unsecured debts. It’s important to note that secured creditors, such as your mortgage lender, still have the right to seize your assets, such as the family home, if you fall in arrears.)

After filing for bankruptcy, a note will remain on your credit report for at least six years after the discharge date. Even with the bankruptcy on your credit report, you may still be able to obtain credit, depending on the lender’s policy. You’ll also most likely want to work closely with your trustee to take the necessary steps to rebuild your credit after bankruptcy.

When should someone file for bankruptcy rather than taking other debt reduction measures?

If you find that your debts are more than you can handle to repay within the time periods allotted by your creditors, it may make sense to consider filing for bankruptcy or a consumer proposal. Consumer proposal is a less damaging route, but it is expensive and still lowers your credit score. You may have to remain in consumer proposal for up to five years while you pay off the remaining debts, but this process can be sped up by applying for a consumer proposal loan. This loan pays off your creditors which allows you to exit consumer proposal early and helps you rebuild your credit score by reporting your monthly payments to Canada’s credit agencies.

The decision to file for bankruptcy is a personal one. For instance, if you have an annual household income of $150,000, you may be able to handle $100,000 in unsecured debt. However, if your annual household income is only $60,000 because the breadwinner is on maternity leave, then handling $100,000 in unsecured debt may be tough and you might find yourself on the brink of filing for bankruptcy.

Most people don’t want to take the drastic and credit-damaging step of filing for bankruptcy, which is why it’s important to have an emergency fund. If you have an emergency fund, you may be able to use that money to make your minimum payments until your financial situation improves and you’re able to chip away at the debt. Even saving $100 a month toward an emergency fund helps. If you find yourself in dire financial straits and you lack an emergency fund, that’s when filing for bankruptcy can make sense.

I can’t emphasis enough the importance of speaking with a Licensed Insolvency Trustee. Although you may think that bankruptcy is your only choice, a Licensed Insolvency Trustee may be able to come up with alternative arrangements to help you avoid bankruptcy.

More: 6 necessary steps to repair your credit after bankruptcy

Sean Cooper Freelance Contributor

Sean Cooper is the bestselling author of the book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians. He bought his first house when he was only 27 in Toronto and paid off his mortgage in just 3 years by age 30. An in-demand Personal Finance Journalist and Speaker, his articles and blogs have been featured in publications such as the Toronto Star, Globe and Mail and Financial Post.

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