How Bankruptcies Work In Canada

If you looking to learn how bankruptcies work in Canada, you’ve found the right page.

Bankruptcy is a legal procedure in which you assign (or surrender) your property to a Licensed Insolvency Trustee as part of a process that relieves your debts. You are allowed to keep certain assets, depending on where you reside. Laws dealing with personal bankruptcy are meant to allow the honest but unfortunate debtor a chance to re-start their financial life.

Individuals do not lose everything in bankruptcy. Each province has a number of bankruptcy exemptions (assets that are not seized in a bankruptcy), which may include work tools, a portion of a house’s value, or a car. Learn more about what is exempt from bankruptcy here: Bankruptcy Exemptions.

Let’s continue and cover more information on what happens when you declare bankruptcy and answer questions like:

What Happens When You Declare Bankruptcy

In Canada, only a Licensed Insolvency Trustee can file the paperwork for bankruptcy. When you declare bankruptcy, you meet with a Trustee to discuss your situation. If bankruptcy seems the most beneficial course, the Trustee will prepare the paperwork to file for bankruptcy. See our page: How to File Bankruptcy.

Once the paperwork is signed, your Licensed Insolvency Trustee will electronically transmit your bankruptcy information to the Office of the Superintendent of Bankruptcy in Ottawa (a division of the federal government). The Superintendent of Bankruptcy will inform the credit bureaus of your bankruptcy.

Within five days of the bankruptcy starting, your Trustee will send a copy of your bankruptcy paperwork to each of your creditors so that they can file a claim with the Trustee.

What Happens When You File For Bankruptcy

Once bankruptcy is filed, there is an immediate “stay of proceedings”. This means unsecured creditors can no longer contact you, and cannot begin or continue lawsuits or wage garnishees. (Secured creditors, such as mortgage companies, can still seize assets that you have given as security if you do not keep up your payments.)

Your Trustee will file your outstanding tax returns up to the date of bankruptcy. Any money you owe Canada Revenue Agency will be included in the bankruptcy, so you will no longer owe this money after you complete the bankruptcy. Any tax refunds or GST credits that arrive while you are bankrupt will go to the Trustee for your creditors.

During your bankruptcy, you must fulfill certain duties, such as:

• Attend a meeting of your creditors if such a meeting is requested (only happens in unusual circumstances).
• Send the Trustee proof of your income each month.
• Make monthly payments to the Trustee if you have surplus income (your Trustee will explain this).
• Attend two credit counselling sessions to learn budgeting and money management skills.

If you have never before been bankrupt, and if you have no surplus income, you will be eligible for discharge from bankruptcy in nine months. Otherwise, the bankruptcy will be longer. It is your discharge from bankruptcy that officially cancels your debts (with minor exceptions).

How much does bankruptcy cost?

As of this writing, the minimum cost of bankruptcy in Canada is $1,800. This covers administrative costs and can be well worth the price to eliminate all your unsecured debts.

In addition to this, if you have a steady income, you may have “surplus income,” a portion of which must be paid to the Trustee to divide between the creditors. The calculation of surplus income considers both your income and your expenses. Your Trustee can advise.

How long does bankruptcy last?

If you have never before been bankrupt, and if you have no surplus income, you will be eligible for discharge from bankruptcy in nine months if you perform all your duties as described below. Otherwise, the bankruptcy will be longer. It is your discharge from bankruptcy that officially cancels your debts (with minor exceptions).

During your bankruptcy, you must fulfill certain duties, such as:

• Attend a meeting of your creditors, if such a meeting is requested (only happens in unusual circumstances)
• Send the Trustee proof of your income each month
• Make monthly payments to the Trustee if you have surplus income (your Trustee will explain this)
• Attend two credit counselling sessions to learn budgeting and money management skills

If you have surplus income, some of this income will need to be paid to your Trustee for the benefit of your creditors. Your Trustee can tell you more. Your first bankruptcy with surplus income usually lasts 21 months if you fulfill all your duties.

What Happens After You File for Bankruptcy? 

Filing for bankruptcy has some immediate effects, such as protection from creditors, and some long-term effects, such as elimination of your debts and impact on your credit rating.

Protection from creditors in bankruptcy

An advantage of bankruptcy is that once filed, there is an immediate “stay of proceedings”. This means that unsecured creditors can no longer contact you and cannot begin or continue lawsuits or wage garnishees. (Secured creditors, such as mortgage companies, can still seize assets that you have given as security if you do not keep up your payments.)

What about income tax?

If you have heard that outstanding income tax debts to the Canada Revenue Agency are not covered by a bankruptcy, you’ve been misinformed. In the case of bankruptcy, income tax arrears are cleared once a bankruptcy is discharged, just like any other unsecured debt. Occasionally, the Canada Revenue Agency objects to the discharge (ending) of a bankruptcy which included a great deal of income tax debt – your Trustee can advise you if this is a possibility.

As for past income tax returns, your Trustee will file your outstanding tax returns up to the date of bankruptcy. Money you owe Canada Revenue Agency will be included in the bankruptcy, so you will no longer owe this money after you complete the bankruptcy. Any tax refunds or GST credits that arrive while you are bankrupt will go to the Trustee for your creditors.

What happens to your debts?

Your unsecured debts (for example, personal loans and debts, most credit cards, payday loans and debts to businesses) will be eliminated when you are discharged from your bankruptcy. The creditors will not be allowed to contact you regarding these debts.

Secured debts, such as house mortgages and most vehicle loans and leases (debts that are secured with collateral), are not eliminated in a bankruptcy but may be affected by the bankruptcy if you have significant equity in the property you have put up as security. Your Trustee can give you more information.

What about student loans?

Outstanding student loans can be included in a bankruptcy according to the “Seven-Year Rule”: if you have not attended school for a full seven years, student loans can be eliminated in your bankruptcy.

If less than seven years have elapsed since you attended school, your student loan debts will not be included in bankruptcy – but bankruptcy may still be worthwhile if you have significant other debts.

Can I Keep My House if I File for Bankruptcy?

Keeping your house when you file for bankruptcy is possible in some cases. If you have little or no equity in the property (value remaining if it were liquidated and the mortgage was paid off), and if your payments are reasonable, it can be possible to retain a home. Also, some provinces allow for an exemption of a portion of a house’s value from being included in a bankruptcy to make it possible for more people facing bankruptcy to keep their homes.

In other cases, particularly if there is significant equity in the home, it must be liquidated (sold) to make the equity value available for distribution by the Trustee to the creditors who have filed claims in the bankruptcy.

Your Trustee can advise you further.

What Happens When a Bankruptcy is Finished? 

Your bankruptcy is complete when the court approves your discharge. You will receive your Notice of Discharge from your Trustee. At that point, you will be free of the unsecured debts that were included in your bankruptcy. You can begin to rebuild your credit.

A notation about your bankruptcy will remain on your credit bureau reports after the date of discharge. This is usually removed automatically in six years. 

Even while the bankruptcy is still noted on your credit bureau reports, you may be able to get approval for credit from certain lenders. You can begin taking active steps to rebuild your credit. Start with a small bank loan or secured credit card, and be sure to make all payments on time.

Read more in our article, What To Do After Bankruptcy.

Your Trustee can give you advice on getting a new start.

Get the Debt Help You Need with a Bankruptcy Canada Licensed Insolvency Trustee

Don’t waste time worrying – take action to address your financial difficulties. A Trustee will understand your situation, and your first meeting is confidential, no-obligation, and free of charge. The Trustee may also be able to suggest alternatives to bankruptcy. Contact a Licensed Insolvency Trustee near you – we have bankruptcy trustees all over Canada. Get the help you need today, and begin to plan for a better financial future!