Personal Bankruptcy in Canada

Introduction

Personal bankruptcy in Canada is a legal procedure meant to give an honest but unfortunate debtor a fresh start. When you file personal bankruptcy, you surrender your non-exempt assets, and most of your unsecured debts are discharged.

Who can file bankruptcy in Canada?

To be eligible to file personal bankruptcy in Canada you must owe more than $1,000, and you must be insolvent. An insolvent person is one whose liabilities are greater than their assets (meaning they owe more than they own), and they are unable to pay their debts as they come due.

Are all debts included in a bankruptcy?

Personal bankruptcy includes most unsecured debt. An unsecured debt is a debt that is not secured by an asset. (A secured debt would include the mortgage on your house, or a car loan). Common examples of unsecured debts would include credit cards, bank loans and lines of credit, pay day loans, and income taxes.

Certain debts are specifically not discharged in bankruptcy, including obligations for court ordered child or spousal support, student loans that are less than seven years old, debts that are the result of fraud, and court ordered fines and penalties (such as traffic fines or restitution orders).

In most cases secured debts are not discharged in bankruptcy, so if the lender and your trustee agrees, you may continue to make your mortgage payments or car loan payments while bankrupt, and you may retain the asset.

What assets will be lost in a bankruptcy?

In bankruptcy, the trustee seizes your assets, sells them, and distributes the proceeds to your creditors. If you own a valuable house or car that is not mortgaged, it is likely that you will be required to surrender the equity in that asset during bankruptcy. In most cases the bankrupt will lose all income tax refunds they are eligible to receive during the bankruptcy, and GST credits also become the property of the bankrupt estate in most cases.
Certain assets are exempt from seizure. The list of exemptions varies by province.

Under federal law, you are permitted to retain your RRSP while bankrupt, except to the extent of any contributions you have made in the twelve months preceding bankruptcy.

How does bankruptcy affect someone’s spouse?

Only the bankrupt person’s debts are discharged in bankruptcy. A spouse’s debts are not discharged or impacted in a bankruptcy, unless the spouse has co-signed those debts.

How long does a bankruptcy last?

The length of the bankruptcy depends on each person’s situation. In a first bankruptcy, the bankrupt is eligible to be automatically discharged after nine months. However, a creditor may oppose the bankrupt’s discharge, leading to a discharge hearing in bankruptcy court where a Bankruptcy Registrar or Judge will determine the terms of discharge.

How much does bankruptcy cost?

The cost of a bankruptcy in Canada will depend on a number of factors, including the family income of the bankrupt, and whether or not they were previously bankrupt. In most cases the trustee will require a minimum contribution from the bankrupt during the bankruptcy period. This minimum contribution is often in the range of $160 to $250 per month for the duration of the bankruptcy.

What is the process for filing bankruptcy?

The amount of time it takes to file bankruptcy will vary depending on both the debtor and the trustee’s availability and how prepared the debtor is with the information required by the trustee. A typical time line would be as follows:

Day 1: The debtor contacts a licensed bankruptcy trustee in the city where they live. Trustees can be found online. Usually, a professional will get the necessary information about the debtor’s financial situation and may be able to offer some advice over the phone. They will then arrange for a meeting with the bankruptcy trustee.

Day 1 to 3: A free-of-charge initial consultation with the bankruptcy trustee takes place. They will do an assessment of the financial situation and discuss options with the debtor to ensure that both agree filing for bankruptcy is the correct option. The trustee will explain all the duties of a bankrupt and calculate the estimated monthly payment based on the information given. The debtor is then responsible for providing the trustee with the necessary information to prepare the bankruptcy documents, including a list of their assets, liabilities, and monthly income and expenses.

Day 10: (or whenever the debtor decides) - The debtor and the trustee meet to sign the bankruptcy documents. The trustee then electronically files the documents with the Office of the Superintendent of Bankruptcy, and the bankruptcy commences immediately.

Day 10 to 15: All known creditors are notified of the bankruptcy, and are given the opportunity to file a proof of claim with the trustee. At this point collection calls and legal actions are also stopped.

Monthly: The bankrupt is required to submit proof of their family income each month to the trustee. This proof will include copies of pay stubs, and proof of allowable deductions from income, such as child support payments.

Before Day 60: The bankrupt is required to attend their first credit counselling session.

Before Day 210 The bankrupt is required to attend their second credit counselling session.

Day 280 (approximately): Bankruptcy is over if the debtor was eligible for automatic discharge in a first bankruptcy. If they are not, they will go to bankruptcy court for a discharge hearing.

What are the duties of the bankrupt?

During the term of the bankruptcy, the bankrupt is required to complete various duties. In most cases they must make their monthly contributions to the bankruptcy estate to cover the administrative costs of the bankruptcy. They must also supply monthly statements of income and expenses so that the trustee can determine whether or not they have any surplus income. In addition to this, the bankrupt must complete two credit counselling sessions.

What are the duties of the bankruptcy trustee?

The trustee’s job is to administer the bankruptcy. They are required to communicate with the creditors, and to ensure that the bankrupt completes all required duties.

How does bankruptcy affect a debtor’s credit report?

Bankruptcy generally appears on the credit report for six to seven years after the bankruptcy discharge date. Equifax, the largest credit bureau in Canada, assigns an R9 rating to bankruptcy. It may be a while before the debtor is able to get credit again because they will look like a big risk to potential lenders. There are, however, things they can do to begin rebuilding their credit after the bankruptcy. For example, they could get a secured loan or secured credit card and if they continue to make payments on time it will show that they have the potential to be a responsible borrower despite the previous bankruptcy.

Which is better, bankruptcy or a consumer proposal?

The answer to this question depends on each person’s individual situation. In general, bankruptcy is treated as a last resort only for those for whom no other option will work for. For people who are unable to make the payments required in a consumer proposal, bankruptcy may be their only option.

Resources

Personal bankruptcy in Canada information site

Information on student loans and bankruptcy in Canada

Personal Bankruptcy Alternative: Consumer proposals in Canada Knol