If you’re dealing with unaffordable debt, you may have considered bankruptcy as a means of resolving your financial difficulties. However, it’s important to do your research before agreeing to anything to ensure you know exactly what to expect from the bankruptcy process, including how long it’s likely to last.
Bankruptcy can give you some much-needed relief from your unsecured debts, including personal loans, credit cards, and utility bills, and you’ll usually be discharged and in a position to start rebuilding your credit in less than a year.
This guide will outline bankruptcy in more detail, including how to declare bankruptcy, how long a typical bankruptcy lasts, what can prevent your bankruptcy from ending on time, and what happens after you’ve been discharged.
What is bankruptcy?
Bankruptcy is a legal process designed to provide financial relief to individuals with unaffordable debt by pausing creditor contact, legal action, and interest and charges for a set period.Canada has two main types of bankruptcy: personal bankruptcy and business bankruptcy (which can be further split into small business and corporate bankruptcy). Both types are governed by the Bankruptcy and Insolvency Act (BIA).
Bankruptcies are administered and managed by Licensed Insolvency Trustees (LITs), who are financial professionals authorized by the Office of the Superintendent of Bankruptcy (OSB) to communicate with your creditors and distribute your monthly payments.
Unlike other debt solutions, such as a Consumer Proposal, you’ll be asked to hand over control of all your non-exempt assets to your LIT before your bankruptcy begins. They will then assess their value and decide whether they can be sold to recover some of the money owed.
How does bankruptcy work?
The bankruptcy process usually follows the same set of steps and it can be useful to familiarize yourself with these steps before you apply. Here is what you can expect when you apply for bankruptcy:Meet with a Licensed Insolvency Trustee (LIT)
The first step in the bankruptcy process is meeting with a Licensed Insolvency Trustee (LIT). They will review your finances, discuss your options, and determine whether bankruptcy is the right solution for you, making sure to keep you informed of the various benefits and risks.Remember, bankruptcy is just one of many options that may be able to help you deal with your debt. If your LIT thinks another solution would be better suited to your circumstances, they will let you know.
Complete your bankruptcy application
Once your LIT has determined that bankruptcy is the right option for you, they will help you complete all the relevant paperwork. The application will be made up of an ‘assignment’, where you declare that you’re aware your trustee will take control of your assets, and a ‘statement of affairs’, which outlines details of your income and expenditure.For this step, you may need to provide copies of tax returns, bank statements, and proof of asset ownership. The paperwork will then be filed with the federal government and your bankruptcy will begin.
Stick to your bankruptcy commitments
During bankruptcy, it’s important to carry out certain obligations and duties as outlined in your original agreement.This includes attending two credit counselling sessions with your LIT where they will examine your current financial situation and show you better ways to manage your finances to ensure you avoid further debt. Some LITs may also require you to compile monthly reports detailing any changes to your income and expenses.
If you earn more monthly income than is required to maintain a reasonable standard of living, you’ll be asked to make ‘surplus income payments’ to your LIT for the duration of your bankruptcy. Generally, the more you earn, the more you’ll pay.
Receive a bankruptcy discharge
The final step in the bankruptcy process is being discharged from your arrangement. The length of time this takes to happen depends on how many times you’ve filed for bankruptcy.Once you’ve been discharged, you’ll be released from the debts included in your bankruptcy and will be free to start rebuilding your credit score, allowing you to have a fresh financial start. Depending on your situation, your LIT may compile a final report and you may have to attend a court hearing.
How long does bankruptcy last?
Generally, the length and complexity of bankruptcy increases with each filing. We’ve outlined how long bankruptcy typically lasts depending on your situation below:First bankruptcy
If you’re filing for bankruptcy for the first time, you will be subject to bankruptcy restrictions for nine months (21 months if you’re making surplus income payments) and your credit will be negatively impacted for six years.Second bankruptcy
If you’ve been bankrupt once before, you won’t qualify for discharge for at least 24 months (36 months if you’re making surplus income payments) and your credit will be negatively impacted for 14 years.Third or more bankruptcy
If you’re filing for bankruptcy for a third time or more, you can expect the process to last at least 36 months and there may also be further complications to consider, which your LIT will explain.What happens after you’re discharged from bankruptcy?
Even if you’ve yet to begin your bankruptcy, it can be useful to know what to expect after your discharge date. Here is a rundown of what’s likely to happen after bankruptcy:Your included debts will be written off
The main advantage of bankruptcy is that all of the unsecured debts included in your arrangement will be written off after your arrangement ends. This can allow you to start afresh with a clean slate and work towards rebuilding your credit.You’ll receive a certificate of discharge
Once you’ve been discharged from bankruptcy, your LIT will issue you with a ‘certificate of discharge’, which is a legal document officially marking the end of your bankruptcy process. This can be useful if you need to prove to a lender or a credit bureau that you have successfully completed your arrangement.Your credit score will improve
Bankruptcy can have a detrimental impact on your finances. But while your credit score from all of the main credit bureaus will be affected, you will be free to start improving your credit score as soon as you’ve been discharged.What can prevent your bankruptcy from ending on time?
There are several things that can delay your bankruptcy discharge and prevent it from ending on time. We’ve outlined them below:You still owe surplus income payments
If you get to the end of your bankruptcy period and you still owe money, your discharge date will be delayed. When this happens, you must make arrangements with your trustee to repay your outstanding balance over an agreed period.You failed to stick to your obligations
If you fail to stick to the obligations laid out in your bankruptcy agreement, you won’t automatically qualify for a discharge and may be asked to attend court to discuss the matter in more detail. Most instances of negligence and misconduct are dealt with on a case-by-case basis.One or more of your creditors object to your discharge
If one or more of your creditors object to your discharge, you won’t receive a discharge date and will likely need to attend court. This can happen for various reasons, such as failing to provide correct details about your financial situation or paying less than you can afford to into your bankruptcy estate.How can I rebuild my credit score after bankruptcy?
Once you’ve been discharged from bankruptcy, you must take steps to rebuild your credit score if you want a loan or a mortgage in the future. Here are some of the ways you can improve your credit score after bankruptcy:Stick to monthly budgets
One of the best ways to improve your credit score after bankruptcy is to set monthly budgets, paying close attention to all your financial obligations. This can help you ensure you’re living within your means and, more importantly, are taking steps to avoid further debt.Regularly check your credit report
The key to keeping on top of your credit score is to monitor your credit report on a regular basis. If you notice information that is outdated or incorrect, you should report it to the relevant credit bureau as soon as possible and provide proof to allow them to update their record.Pay bills in full and on time
Paying your bills as they’re due is one of the easiest ways to improve your credit score and show lenders and credit bureaus that you can manage your finances responsibly. If you have a habit of forgetting to pay your bills, consider setting up automatic payments.Conclusion
Bankruptcy is an effective way of dealing with the unsecured debts you can’t afford to pay by giving you temporary relief from your creditors for a set period.The length of time bankruptcy lasts depends on how many times you’ve filed. Generally, first-time bankruptcies take nine months to complete while third bankruptcies can affect your finances for up to 36 months.
Unlike other debt solutions – such as Consumer Proposals which can last up to five years – bankruptcy can discharge you from your unaffordable debt and leave you free to have a fresh financial start in less than a year.
Key Takeaways
- Bankruptcy is a legal process that gives you temporary relief from your unsecured debt by pausing all creditor contact and legal action for a set period
- Bankruptcy lasts nine months the first time you file but it can last longer if you have surplus income or you’re filing for a second or third time
- After you’ve been discharged, your included debts will be written off and you’ll be free to make a fresh start with your finances
- If you fall short of your bankruptcy obligations, you won’t receive an automatic discharge and may need to attend court
- It’s important to take steps to improve your credit score after you’re discharged from bankruptcy