A complete guide to bankruptcy in Canada

James Rodriguez James Rodriguez  updated on 2022-04-07

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Bankruptcy is a legal process that is defined by an inability to pay your debts and meet other financial obligations. In Canada, all personal bankruptcies are governed by federal law through a Licensed Insolvency Trustee (LIT). Insolvency is when you can no longer pay your bills and have insufficient assets to pay or clear your debts. 

In Canada, individuals must owe more than $1,000 in total debt to be eligible to declare bankruptcy. However, there is no obligation to file for bankruptcy and other options are available through a Licensed Insolvency Trustee. 

While bankruptcy is a practical solution for clearing your debuts, it is not always the best option. There are risks and disadvantages associated with filing for bankruptcy. In the following guide, we will discuss bankruptcy in-depth, covering common questions with straightforward information. 

How does bankruptcy work in Canada?

Consumer bankruptcy is a legal process reached with the assistance of a Licensed Insolvency Trustee (LIT) to discharge one's debts.

A global pandemic caused uncertain financial times for millions of Canadians, so if you are finding it hard to pay off your debts bankruptcy may seem like an ideal solution. It provides you with a chance to clear what you owe and have a fresh start. Your debts will be forgiven while your creditors will claim some repayment from your assets. 

Dischargeable debt is debt that is removed when you successfully file for and complete bankruptcy. You are no longer liable for that debt and have no legal obligation to repay it. In theory, bankruptcy is a powerful tool for getting your head out of the water, financially, if you are drowning in debt. Bankruptcy is often best as a last resort as it can mean forfeiting assets and future difficulty borrowing.

Bankruptcy is a delicate process. We recommend speaking with a professional about the best options for you.

What debts are eligible for bankruptcy?

Under bankruptcy, one may be legally released from having to repay certain kinds of debts. While many types of debt may be discharged, there are a few exceptions. Below is a list of what is eligible and ineligible:

Eligible to discharge

  • Credit cards
  • Lines of credit
  • Store cards
  • Unsecured bank loans
  • Bills
  • Tax debts
  • Student loans (provided you have been out of school seven years)

Ineligible to discharge

  • Secured debt (such as liens on properties)
  • Student loans (within seven years of ending your studies)
  • Spouse/child support payments
  • Court fines
  • Debts from fraud

How do I file for bankruptcy?

In Canada, all bankruptcy is done by a Licensed Insolvency Trustee (LIT), a federally licensed professional who will help you complete the necessary documentation and provide advice. Your LIT sends documentation to the Office of the Superintendent of Bankruptcy (OSB), and, if eligible, you are declared bankrupt. Your LIT handles all negotiations and dealings with your creditors on your behalf. 

Once you claim bankruptcy, the following will happen:

  • You no longer make payments on unsecured debt to your creditors.
  • Wage garnishments on your income will stop. 
  • Legal proceedings against you by creditors will stop. 
  • Your assets will be sold by the License Insolvency Trustee.
  • OSB may request a meeting under oath to determine the circumstances of your case.
  • You must attend two financial counselling sessions. 

How long does it take to declare bankruptcy?

How long bankruptcy lasts depends on your income and bankruptcy history.

First BankruptcyTime to discharge
Your surplus income is lower than $200 per month, so you don’t make surplus income payments.9 months after filing
You have a surplus income larger than $200 per month21 months after filing
Length of time taken to file a first bankruptcy
Second BankruptcyTime to discharge
Your surplus income is lower than $200 per month, so you don’t make surplus income payments.24 months after filing
You have surplus income larger than $200 per month36 months after filing
Length of time taken to file a second bankruptcy

What happens when you file for bankruptcy?

It is worth looking at what happens when you declare bankruptcy in more detail:

What happens to your debts?

Most, and likely all, of your unsecured debts will be forgiven when you declare bankruptcy. This includes all debts from the date of the filing. Your filing must include a list of your creditors and how much you owe to each. Those creditors must then make a claim and prove that you owe them the debt. 

What happens to your assets?

Your Licensed Insolvency Trustee (LIT) will sell your assets to pay off your creditors. This likely means all your eligible assets. One of the conditions for qualifying for bankruptcy is that you cannot cover your debts with your existing assets.

However, there is nuance regarding assets, and it is worth remembering that bankruptcy is meant to help you start fresh, not punish you over the long term. Another important consideration is major secured credit, such as car loans or mortgages, is not part of insolvency. As long as you keep up with payments, these assets will remain safe. 

If you own your home or car, these could be eligible assets in a bankruptcy filing depending on your equity in them. In this case, bankruptcy may not be the best option for you. may want to look into a consumer proposal as an alternative solution. 

Exemption amounts for how many assets can be taken depend on which province you live in. In general, you will be able to keep most of your personal belongings, including household goods. You can also keep assets if they are essential to your income. 

What happens to your income?

When you declare bankruptcy, your creditors have been taking will stop garnishing your income. Even so, bankruptcy laws in Canada work on the principle that the more money you earn, the more you must pay. This is known as a surplus incomes payment and will influence the cost of your bankruptcy.  

How long does a bankruptcy stay on your credit report in Canada?

Bankruptcy has a strongly negative effect on your credit score. In fact, it is one of the most severe credit rating hits you can take. It does, however, lead you on a path to recovery and it is not permanent. 

Bankruptcy data remains on your credit file for six to seven years. Just because bankruptcy appears on your report, it does not mean you cannot obtain new credit during this period. Some lenders are willing to offer credit to an existing bankrupt consumer. Credit cards are the most likely line of new credit you can get during bankruptcy, helping you to strengthen your credit score if you make timely payments.

What are the pros and cons of declaring bankruptcy?

Declaring yourself bankrupt is a chance to start fresh with a debt-free slate. However, there is a downside to filing for bankruptcy. Below are the pros and cons of going through bankruptcy. 

Pros

  • Clear your debts and become debt-free
  • No more dealing with creditors and the stresses of being in debt
  • Legal action by your creditors stops
  • No more wager garnishment

Cons

  • You must maintain bankruptcy payments
  • Bankruptcy lowers your credit rating score
  • Your non-exempt assets are sold
  • Must report monthly income

Can you file bankruptcy yourself in Canada?

It is not possible to file for bankruptcy yourself in Canada. Licensed Insolvency Trustees (LITs) are the only professionals in Canada that can administer bankruptcies and consumer proposals. They hold a license from the Canadian Superintendent of Bankruptcy, and you must work with a LIT on your filing. 

Alongside helping you build your bankruptcy filing, a LIT will provide information on other forms of debt relief, such as a consumer proposal. When picking a Trustee, it is best to select someone local and someone you are comfortable working with. Never be afraid to ask your LIT questions, and always confirm they have a license from the Superintendent of Bankruptcy. 

If you need a Licensed Insolvency Trustee, pick someone with whom you are comfortable working. See here to speak with an expert.

How can I avoid declaring bankruptcy?

Of course, the easiest way to avoid bankruptcy is to keep up with payments on your debt. For some people, circumstances can put a financial strain and making those payments can become challenging. It is important to understand the signs of debt trouble and act quickly to resolve the situation:

  • Speak to your creditor: A good first option is to speak to your creditor. Lenders want customers to repay the money they borrow because that is how they make profit (on the interest). Many creditors will work with borrowers to find a best outcome for both parties. That may include adjusting the terms of the agreement or giving you grace months to catch up on payments. 
  • Cut costs: If you see your debt is spiraling and you are heading for insolvency, it is time to drastically reduce your spending. Only use money on the bare essentials (food and housing), cut up your credit cards, skip your vacation, and consider selling assets to pay your debts. 
  • Boost your income: Nobody wants to work a two jobs, but sometimes it is an option for combating your debts. Adding to your income can help you to stabilize your debt repayments and retake control of your financial life. 
  • Consolidate your debts: It is common for someone with debt issues to become lost in a sea of creditors. Combining all your debts into a single loan with a better interest rate can help you to better manage your payments and have more control over your debt. 
  • Consider a consumer proposal: An alternative to bankruptcy is a consumer proposal. You also work with a Licensed Insolvency Trustee (LIT) on a proposal to your creditors to reduce your rates and pay off a lower amount. 

How much does it cost to declare bankruptcy?

Bankruptcy in Canada costs at least $1,800 if it is your first time. This cost is payable across nine monthly installments and covers the costs of working with a LIT, government fees and other administrative costs. 

What is the difference between bankruptcy and consumer proposal?

A consumer proposal is an interesting alternative to bankruptcy because it helps you become debt-free, without risking your assets. You must still work with a Licensed Insolvency Trustee (LIT) to make a consumer proposal. 

As the name suggests, this is a proposal you make to your creditors to write off a portion of your debt, allowing you to pay back a part of what you owe. Like a bankruptcy, the purpose of a consumer proposal is to help you become debt-free, but there are key differences.

Bankruptcy vs consumer proposal

While you reduce debt payments with a consumer proposal, you still have a monthly payment. This is typically a larger amount than bankruptcy payments. 

TermsBankruptcyConsumer proposal
AssetsYour assets will be at riskYour assets are not at risk
AgreementIf you are eligible, bankruptcy is automatically acceptedCreditors need to agree to your offer
Repayment termsPayment is set over a specific termYou are able to pay it a consumer proposal early
$ limitYou can declare yourself bankrupt on debts higher than $250,000There is a limit debt up to $250,000
Comparison of Bankruptcy vs consumer proposal

Want to learn more? HelloSafe's guide to consumer proposal has got you covered.

Bankruptcy vs debt consolidation

Debt consolidation has one similarity with bankruptcy… it can provide financial relief. However, these are two quite different solutions for managing debts. Debt consolidation involves restructuring debts into a single payment. A new lender provides a loan that covers all your debts with other creditors, and you then pay off the new loan as a single payment. 

Bankruptcy is a more drastic solution when you can no longer keep up with your debt payments. 

Under the right circumstances, debt consolidation helps to make your debt payments more manageable and could improve your credit rating.

Are you thinking of declaring bankruptcy?

Being unable to meet your debt repayments can be one of the most stressful aspects of life. Creditors are on your back, you may be facing lawsuits, and you no longer have control over your finances. Bankruptcy could be the answer to your problems, providing you with a path to becoming debt-free.

Bankruptcy is not without its risks so you should weigh up a decision to declare yourself bankrupt carefully. To have a better understanding and consider your options, and connect with top Licensed Insolvency Trustees (LITs) in your area.

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