What Happens When You Declare Bankruptcy in Canada?

When you declare bankruptcy in Canada, action is taken against you to, as far as possible, satisfy the debts that you owe.

A Licensed Insolvency Trustee leads this action on behalf of your creditors.

While bankruptcy has serious financial consequences, most bankrupt individuals don’t lose their homes and can retain many of their possessions.

In this guide, we’ll take a more detailed look at what happens when you declare bankruptcy in Canada – including answering some common questions about the scope of bankruptcy action.

What Happens If You File for Bankruptcy in Canada?

Declaring bankruptcy in Canada has the most significant impact on three areas of an individual’s life:

• Possessions (also known as ‘assets’)
• Debts
• Credit score

Of course, people also have questions about how bankruptcy can affect other areas too – including:

• A person’s income
• A person’s spouse
• Legal proceedings used by creditors to recover debts
• Mandatory financial counselling sessions

Let’s take a more detailed look at how the bankruptcy process affects each of these different areas in turn. We’ll start with how filing for bankruptcy works.

How to File for Bankruptcy

In Canada, filing for bankruptcy is done through a Licensed Insolvency Trustee (LIT). An LIT is a federally regulated professional authorized to administer bankruptcies and consumer proposals, as well a providing guidance and solutions for managing debt.

Part of the LIT’s role involves explaining to you what the process you’re considering involves, including how bankruptcy works, how it could help you, what the impact on your assets and life will be, and alternatives to bankruptcy that might be better suited to you.

If you decide that bankruptcy is the right solution for you, the LIT will file on your behalf and become your point of contact for everything relating to your filing thereafter.

What Happens to My Possessions During Personal Bankruptcy?

While people assume that declaring bankruptcy means losing all of your personal possessions (also known as ‘assets’), this is not the case.

Bankruptcy is not intended to be a punishment – it’s a legal process that is in place to give you a fresh financial start while ensuring your creditors are treated equitably.

While the rules a slightly different depending on the province you live in, you can generally keep most personal belongings, the furniture in your home, and any tools of the trade you use to earn an income. You will be able to keep your vehicle too, provided it is valued below the provincial limit.

If you have possessions that have loans secured against them – like a mortgage on a property or a loan on a car – these will not be affected by bankruptcy.

Secured creditors still have the right to the collateral or assets that are pledged against the loan – so, as long as you keep up with your monthly payments, you will usually be able to keep these assets.

RRSPs are protected in the bankruptcy process too – although contributions you have made in the last year are not, and can be used by the bankruptcy trustee to help repay your creditors.

If you are expecting a tax refund for the year of bankruptcy, this too will be used to help satisfy creditors – as too will any refunds for previous years that you are yet to receive.

What are some non-exempt assets that can be seized?

While there are many assets that you will usually retain during bankruptcy, there are some that are not exempt. While these vary based on province, this list typically includes:

• Cash and bank account balances
• Investments, including stocks, bonds, and mutual funds
• Real estate properties (except for certain exemptions like a portion of the home equity, depending on provincial laws)
• Secondary vehicles or luxury vehicles beyond the exempted value
• Recreational properties and vacation homes
• Valuable collections, such as art, antiques, or coin collections
• Inheritance received during the bankruptcy process
• Windfalls such as lottery winnings or insurance settlements received during the bankruptcy process

What Happens to My Debts if I File for Bankruptcy?

In most cases, the bankruptcy process will eliminate most of your unsecured debts. These are debts that are not secured against an asset, so can include:

• Bank loans
• Credit card balances and arrears
• Payday loans
• Outstanding bills
• Some tax debts
• Lines of credit
• Student loans (as long as you have been out of school for at least 7 years)

Although this list of unsecured creditors often covers much of an individual’s debt, there are some debts that will not be forgiven by a bankruptcy filing, including:

• Court fines
• Spousal support payments
• Child support payments
• Remaining debts due to fraud

If an unsecured debt has become a secured lien on your property, bankruptcy cannot be used to deal with such debts.

So a full picture of your debts can be established by your Licensed Insolvency Trustee at the time of filing, you will be expected to provide a full list of creditors along with an estimate of how much money you owe to each. Your creditors will then be required to make a claim and prove what you owe as part of the proceedings.

What Effect Does the Bankruptcy Process Have on My Credit Report?

Bankruptcy will have a significant effect on your credit score. Since your credit rating is used in different ways, this can then have a knock-on effect on some areas of life:

You Will See an Immediate Credit Score Drop

Filing for bankruptcy causes an immediate big drop in your credit score. This reflects how high-risk you are.

You Will Get a Credit Report Entry Reflecting Bankruptcy

The fact that you filed for bankruptcy will be on your credit report. For a first-time bankruptcy, it’s 6 to 7 years after discharge, depending on the credit bureau (Equifax or TransUnion). For a second bankruptcy, it’s up to 14 years.

You will Find it Much Harder to Get Credit

After bankruptcy it’s hard to get new credit. Lenders view people who have filed for bankruptcy as high risk and will charge higher interest rates and less favorable terms if they do lend to you.

Rebuilding Credit Will Take Time

Rebuilding credit after bankruptcy is possible but takes time and discipline. This can mean getting a secured credit card, making on time payments and keeping low balances.

Loans and Mortgages Can Be Hard to Obtain

Getting loans and mortgages after bankruptcy is tough and often comes with conditions and higher interest rates.

Some lenders may require a waiting period and proof of better financial management before they will consider your application.

Alternative Lending May Be Required

You may have to go to alternative or subprime lenders who will charge higher interest rates and fees because you’re higher risk.

Future Employment May Be Affected

In some cases, employers will check your credit report as part of the hiring process, and bankruptcy may impact your employment opportunities – especially in financial or management positions.

What Happens to My Income if I File for Bankruptcy?

When you file for bankruptcy in Canada your income is monitored but not taken. Your Licensed Insolvency Trustee (LIT) will compare your monthly income to government set thresholds based on family size. These thresholds are set by the Office of the Superintendent of Bankruptcy Canada and are updated annually.

If your income is above the threshold you will have to make surplus income payments which are 50% of the amount earned above that threshold.

These payments can extend your bankruptcy from 9 to 21 months for a first time bankruptcy or 24 to 36 months for a second time bankruptcy.

You will be expected to submit monthly income and expense reports to your LIT, and any income changes can adjust your surplus payments.

How Does Bankruptcy Affect My Spouse?

If your debts are yours alone, your spouse will not be affected by you filing for bankruptcy. What’s more, their credit report will not be affected by your bankruptcy.

This changes if you have any joint debt – and will almost certainly be a discussion you have with your LIT before deciding on the right kind of debt solution for you.

With joint debt, the creditor owed will continue to pursue your spouse for collection. In cases where someone has co-signed a loan for you, they will still be liable for repayment of the debts, even if they are forgiven for you as part of your filing.

If you own any assets jointly, only your share of those assets will be included in your bankruptcy by your trustee.

Again, this will be an area of detailed discussion with your LIT, especially if you jointly own a home.

What Does Bankruptcy Do to Legal Proceedings Relating to My Debt?

If you have any legal proceedings currently in place or being pursued against you by creditors that you owe, bankruptcy will put a stop to these.

This is down to a process called a “stay of proceedings”.

A stay of proceedings means all legal actions and collection activities by creditors against the bankrupt stop immediately.

Creditors can’t start or continue lawsuits, wage garnishments or any debt collection.

The stay of proceedings also gives the bankrupt relief from creditor communication and allows them to focus on their financial recovery.

The Licensed Insolvency Trustee oversees the process to ensure compliance with bankruptcy rules.

What Will I be Required to Do Following Bankruptcy Filing?

If you decide that bankruptcy is the right option for you, you will have a series of obligations – known officially as ‘bankruptcy duties’.

While the specific duties will depend on your unique circumstances, the list will typically include:

• Attending a creditor meeting or bankruptcy court (in some cases)
• Attending two mandatory financial counselling sessions
• Sending proof of your income each month
• Paying your trustee if you receive any surplus income

In Summary: What Happens When You Declare Bankruptcy?

Filing for bankruptcy in Canada affects many areas of your life, including; your possessions, debts, income and credit score.

The process starts by filing through a Licensed Insolvency Trustee (LIT) who will guide you through the process and assess your financial situation.

While bankruptcy protects many personal assets and unsecured debts, you will have to make surplus income payments if your income exceeds government thresholds. This can extend the bankruptcy period. Bankruptcy also puts a ‘stay of proceedings’ on creditors and stops them from pursuing current and future legal action against you.

While their are limitations put on your financial life, including a number of actions required by you, the goal of bankruptcy is to give you a fresh start while being fair to creditors.

Key Takeaways

• Your possessions: Although rules vary between provinces, bankruptcy usually means you can keep most personal belongings, the furniture in your home, any tools of the trade you use to earn an income, and a vehicle up to a certain value. Most bankrupts will also keep their home.
• Income and Surplus Payments: During bankruptcy in Canada, your income is monitored but not seized. If your income exceeds government-set thresholds, you’ll make surplus income payments, which can extend the bankruptcy period.
• Effect on Credit Score: Bankruptcy significantly lowers your credit score, makes obtaining new credit difficult, and stays on your credit report for 6-7 years (first time) or up to 14 years (second time).
• Stay of Proceedings: Filing for bankruptcy enacts a stay of proceedings, halting all legal actions and collection efforts by creditors, providing you with relief and allowing you to focus on financial recovery.
• Mandatory Duties: Post-bankruptcy, you’ll have obligations like attending financial counselling sessions, submitting monthly income reports, and possibly making surplus income payments.