How do bankruptcies work in Ontario?

In Canada, the Bankruptcy and Insolvency Act (BIA) outlines the bankruptcy process and governs how bankruptcies are filed.

However, there are certain aspects of bankruptcy, like exemptions, that vary from province to province and you must know what to expect if you are planning to file for bankruptcy.

In this guide, we’ll outline how bankruptcies work in Ontario, from how much it costs to how it can affect your credit rating.

What is bankruptcy?

Bankruptcy is a legal process governed by federal law that is initiated when a person (personal bankruptcy) or company (business bankruptcy) is unable to repay outstanding debts.

Because it is a legal process, only a Licensed Insolvency Trustee (LIT) – sometimes referred to as a ‘bankruptcy trustee’ – is qualified to initiate bankruptcy proceedings.

Bankruptcy is usually only considered after you have exhausted other options to eliminate your debts, such as a debt settlement program, a consumer proposal, or credit counselling.

It is also only suitable for people that owe $1,000 or more but meeting this requirement does not necessarily mean that you should file for bankruptcy; you should always explore other options first.

How does bankruptcy work in Ontario?

The bankruptcy process contains slight variations from province to province. Here are the steps you should expect when you file for bankruptcy in Ontario:

Initial consultation

The first step in the bankruptcy process is meeting for an initial consultation with a Licensed Insolvency Trustee (LIT) in Ontario.

The purpose of this meeting is for you to provide as much information as you can about your financial situation and the various ways you have tried to clear your debts before considering declaring bankruptcy.

When your Licensed Insolvency Trustee is happy they have all the information they need, they will let you know what your options are and what they recommend your next steps should be.

Preparation of documents

If you have chosen to declare bankruptcy, your Licensed Insolvency Trustee will prepare all the necessary documents needed for you to officially file for bankruptcy.

Once you have signed the documents, they will be filed with the Office of the Superintendent of Bankruptcy (OSB).

Notice to creditors

When the documents have been filed with the Office of the Superintendent of Bankruptcy (OSB), your unsecured creditors will be notified and all communication and legal proceedings, such as wage garnishments, will be stopped, preventing further action from being taken against you. This is known as a stay of proceedings.

If you continue to be contacted or harassed by your creditors or a debt collection agency, let your Licensed Insolvency Trustees know as soon as possible so that they can take the necessary steps to stop the harassment.

Assets

Under Ontario bankruptcy law, your assets are protected from your creditors. In addition, certain assets are considered exempt from your bankruptcy estate.

You can make an arrangement with your Licensed Insolvency Trustee to compensate your estate for any assets that you have that are not exempt.

Your Licensed Insolvency Trustee will explain how your assets are effected in a bankruptcy when you have your initial consultation with them.

Discharge

If you have completed your obligations when your bankruptcy period comes to an end, you will be officially discharged and released you from your debts in 9, 21, 24 or 36 months, depending on whether you’ve been bankrupt before and depending on whether your income is above a certain threshold.

Your Licensed Insolvency Trustee will explain when your bankruptcy will end.

If you do not comply with your duties, you may need to go to court to get out of bankruptcy.

Will bankruptcy clear all my debts?

While filing bankruptcy is a suitable option for people with outstanding debts that they have tried and failed to clear through alternative means, it isn’t a viable option for all types of debt.

The types of unsecured debt that can typically be cleared through bankruptcy include:

• Credit card bills
• Payday loans
• Personal loans
• Unsecured lines of credit
• Retail store cards
• Income taxes
• Student loan debt, with some exceptions

However, it is a common misconception that bankruptcy can eliminate all debts and, as with most debt relief solutions, there are some types of debt that can’t be cleared by filing bankruptcy. This includes:

• Court-imposed fines
• Child and spousal support
• Debts that were incurred as a result of fraud
• Registered Retirement Income Funds

How much does it cost to file for bankruptcy?

The cost of filing for bankruptcy will differ depending on individual circumstances, such as monthly income, family size, added expenses and total assets.

In Ontario, the minimum cost of filing for bankruptcy is around $1,825, which is typically paid in monthly instalments of $225. This is known as a minimum contribution and covers administrative costs, such as government fees.

However, the government sets net monthly income thresholds that it believes is enough to maintain a reasonable standard of living and every dollar above this threshold is subject to surplus income payments of 50%.

This, essentially, means that if you make $500 per month more than the threshold amount, you must make a surplus income payment of $250 per month towards your bankruptcy. You will be required to make these surplus income payments for 21 months if it’s your first bankruptcy and for 36 months if you have a previous bankruptcy.

Can bankruptcy affect my credit rating?

As with most forms of debt relief, bankruptcy can affect your credit rating.

For example, when you file for bankruptcy, it will stay on your credit report for a number of years, during which time it can significantly lower your credit score (Equifax states that bankruptcy will stay on your credit report for six years whilst TransUnion states seven years).

However, if you file for bankruptcy a second time, it will remain on your credit record for a total of 14 years from the date of discharge regardless of whether you check your credit history on Equifax or TransUnion.