What Happens When You File Bankruptcy in Canada?

Bankruptcy shouldn’t be a scary experience. In fact, it should be the exact opposite. Imagine having no debts in nine months and the chance to hit the reset button.

Most people go through financial hardship at some point in their lives, and personal bankruptcy offers a fresh start to many Canadians when they need it most.

So what happens when you file for bankruptcy in Canada? Read on to find out.

Why do people file for bankruptcy?

Many Canadians choose bankruptcy as a last resort when they have overwhelming debt they cannot repay. It generally suits people on a low income with assets worth less than their debts.

If this doesn’t apply to you, you may benefit from another debt relief program.

What happens when you file for bankruptcy?

Bankruptcy is a simple process where you relinquish some of your assets in exchange for debt forgiveness. You receive legal protection from your creditors and no longer need to pay your unsecured debts upon completion.

Typically, you can eliminate most of your unsecured debts in as little as nine months. Once you have declared bankruptcy, you make monthly payments to a Licensed Insolvency Trustee. Your bankruptcy’s cost and length are based on your income, and your credit score will be severely damaged.

Does bankruptcy clear all debt in Canada?

Bankruptcy will eliminate most unsecured debts, like credit cards, personal loans, payday loans, and other lines of credit. Secured creditors, like mortgages and car loans, are not included so you need to continue to pay your secured debts.

Not all debts can be discharged through bankruptcy, including:

• Court fines or penalties
• Unpaid alimony or child support
• Debts incurred by fraud
• Student loans, if less than seven years old
• Debt from an award by a civil court for damages arising from intentional bodily harm, personal or sexual assault, or wrongful death.

What assets can you keep in bankruptcy?

As part of your bankruptcy, your trustee seizes any assets you aren’t allowed to keep under the provincial exemption rules. The proceeds of these assets will be distributed among your creditors to settle your debts.

Each province and territory has a list of exempt assets that you can keep. For example, you can protect your vehicle from seizure up to a certain dollar value.

Alternatively, if you want to keep an asset that exceeds your province’s equity limit, you can repurchase it by making a payment to cover the excess amount.

How long does bankruptcy last?

Typically, bankruptcy lasts for 9 months if all your duties are fulfilled and it is your first bankruptcy. If you are required to pay surplus income, your bankruptcy can last up to 21 months. If you’re filing bankruptcy a second time, it will last 24-36 months.

How much does bankruptcy cost?

Your income determines how much you pay towards bankruptcy. If you earn more than the income threshold set by the government, you are required to make monthly surplus income payments.

Surplus income is calculated by calculating your average earnings during bankruptcy and how many people live in your household.

The federal government regulates Licensed Insolvency Trustee fees. Contact a Licensed Insolvency Trustee to learn more about the costs of bankruptcy.

Can you claim bankruptcy on tax debt?

Debt owed to the CRA is included in your bankruptcy like any other unsecured debt. After you file bankruptcy, interest is frozen, and collection action will stop.

Before filing, your trustee will file any outstanding tax returns up to the date of your bankruptcy. Any due taxes and penalties owed to the CRA will be included in your bankruptcy.

Can creditors still call me after I file bankruptcy?

Once your bankruptcy is filed, a Stay of Proceedings is put in place. As a result, collection calls and legal action from creditors will stop, and wage garnishments will be lifted.

As this is the law, creditors must conform to these rules and can only be lifted by applying to the court. This is rare because the creditor has to prove that court action is necessary or has valid grounds.

If this happens, you can defend yourself in court to ensure the Stay of Proceedings remains in place.

How does bankruptcy impact my credit score?

Bankruptcy results in the credit bureaus applying the lowest possible credit rating (9) for your credit accounts, and your credit score drops.

If you are a first-time bankrupt, it will appear on your credit report for six years after discharge. Subsequent bankruptcies will appear on your credit report for 14 years.

While bankruptcy lowers your credit score, you can resolve your debt issues and rebuild your credit upon discharge.

How do I file for bankruptcy?

You must appoint a Licensed Insolvency Trustee to file your bankruptcy. A trustee, also known as a bankruptcy trustee, is the only professional licensed and regulated by the Office of the Superintendent of Bankruptcy (OSB) to administer bankruptcies.

A trustee’s role is to give impartial advice and assist in finding the best way to tackle your debt. During your initial consultation, they will assess your financial situation and discuss potential solutions.

What do I need to file for bankruptcy?

Before you speak to a Licensed Insolvency Trustee, gather all your financial information. Make a list of all your debts, and then collect evidence of the amounts you owe.

The best way to do this is to find paperwork or statements from each creditor. If you don’t have paper copies, download them from the creditor’s website.

If you cannot find this information, check your credit report to see the creditors and the amount owed.

You’ll be asked to supply evidence of your debts, income, expenses and assets. This allows the trustee to compare your debts with your assets and plan for bankruptcy.

To learn more about what happens when you file for bankruptcy or to get started, contact a local trustee today for a free consultation.

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