How Bankruptcies Work in Canada

If you rely on credit, have suffered a loss of income and can no longer pay your debts, bankruptcy could offer a way out.

This guide explains how it works, the pros and cons, the cost and how to file.

What is bankruptcy?

Personal bankruptcy is a legal process under the Bankruptcy and Insolvency Act, in which you give up some of your assets in exchange for assistance with your debts.

Most people are declared bankrupt through no fault of their own; they just need some help to get back on their feet. It is a positive step for people drowning in debt they cannot afford to repay.

How bankruptcies work in Canada

Once you are declared bankrupt, you pay what you can afford. Your assets can be sold, with the money distributed to your creditors.

You are legally protected from your creditors and no longer required to pay your unsecured debts once the bankruptcy process is completed.

Freeze interest on your debts, halt legal action, end wage garnishments, and eliminate your debt in as little as nine months.

Does bankruptcy clear all debt?

Most unsecured debts can be included in your bankruptcy, like credit card debts, loans, bank overdrafts, utility bills, tax debts and student loan debt.

Can I include secured debts?

Bankruptcy does not include secured creditors like your mortgage or car loan.

Can I include tax debts?

You can eliminate tax debt if the Canada Revenue Agency (CRA) hasn’t registered a lien on your property.

Can I include student loans?

If you have been out of school for at least seven years, your student loan debts can be included in your bankruptcy and discharged upon completion.

How much does it cost to claim bankruptcy in Canada?

There is a cost to filing bankruptcy in Canada, but the amount varies depending on your income and assets.

If you have a substantial income, you must make surplus income payments. To determine how much you might pay, speak to a Licensed Insolvency Trustee.

How long does bankruptcy last in Canada?

The length of your bankruptcy depends on your income and whether you have been bankrupt before, but it can be completed in just nine months. If you have surplus income, it is extended to 21 months.

Can bankruptcy stop wage garnishment?

Bankruptcy stops all wage garnishments, legal action and collections thanks to a Stay of Proceedings when you file.

Will bankruptcy clear judgements?

You are legally protected from creditor action. Judgements, collection calls and wage garnishments will cease.

Creditors must not contact you or take further action to recover the money owed. There is no more interest charged on your debts.

What do you lose when you declare bankruptcy?

You can protect some assets during your bankruptcy. Some assets are exempt from seizure to ensure you are not left destitute. A Licensed Insolvency Trustee can determine which assets you can keep.

You can also repurchase non-exempt assets through a payment arrangement with your trustee.

What are the advantages of filing for bankruptcy?

Bankruptcies are best suited to those with little hope of paying off their liabilities. There are many pros and cons, but let’s start with the advantages:

1. Eliminate debt

You can eliminate most of your unsecured debts in as little as nine months. You are released from your debts upon completion and can start rebuilding your credit.

2. Stop collections

Automatic protection from all legal action, giving you some breathing room. Collection agencies and creditors must stop calling.

3. Freeze interest

Upon filing, interest and charges are frozen.

4. Stop wage garnishments

Wage garnishments are lifted.

5. You might pay less

If you have no assets and no surplus income due to low earnings, it may be less expensive than other debt relief solutions.

How long does bankruptcy stay on your credit report?

If this is your first bankruptcy, it will remain on your Equifax or TransUnion credit report for at least six years after you are discharged.

A second filing will be on your credit report for fourteen years from the date of discharge.

Going bankrupt lowers your credit score, but resolving your old debts and paying future lenders and creditors on time is the fastest way to repair your credit in the long run.

If your score is already suffering due to missed or late payments, bankruptcy can stop the rot, and you can take the first steps to rebuild your credit.

Do you lose your house in bankruptcy?

If you make yourself bankrupt, you do not automatically lose your house. Depending on where you live, you may be able to keep some of your home’s equity.

The first step is to meet with a Licensed Insolvency Trustee who can advise further.

Do I lose my car in bankruptcy?

You can keep your car by continuing to make the loan payments.

Qualifying for bankruptcy

To qualify for bankruptcy in Canada, you must meet some eligibility requirements.

If you owe at least $1,000 in unsecured debt, cannot make payments to your unsecured creditors, and your debts surpass the value of your assets, you might be eligible to file.

How to file for bankruptcy

You must first appoint a professional known as a Licensed Insolvency Trustee. Under the Bankruptcy and Insolvency Act, only a Licensed Insolvency Trustee can administer bankruptcies and consumer proposals.

A trustee protects the rights of you and your creditors and will ensure you receive the best possible financial advice based on your financial situation. Your trustee will prepare the paperwork and schedule an appointment for you to attend two credit counselling sessions.

You must complete some duties before you are discharged. Your Licensed Insolvency Trustee will guide you through this process.

Find a trustee

Connect with a qualified and experienced Licensed Insolvency Trustee in your area through our trustee network.

It’s worth noting that you don’t have to pay to talk with a Licensed Insolvency Trustee or to have documentation prepared in advance. Meeting with a trustee for the first time is completely free.

All trustees are licensed and regulated by the Office of the Superintendent of Bankruptcy (OSB).

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