How Bankruptcies Work In Canada
Including Common Questions and Misconceptions
If you are wondering how bankruptcies work in Canada, we have put together a guide based on common questions. Simply put, bankruptcy is a legal process that releases you from your financial obligation to pay your unsecured creditors. Typically this is for people who can no longer afford their debt. For Canadians, the procedures and policies around bankruptcy have been designed to “relieve honest but unfortunate debtors of their debts”.
Bankruptcy’s most obvious advantage is that it eliminates most of your debt, which would include: credit card debt, bank loans, business debts, income tax, payday loans, and consumer debts.
Knowing whether you should pursue bankruptcy can be a little tricky, but there are a few signs you should start looking for a Trustee. That you’re using one credit card to pay for another and you’ve been turned down more than once for extended credit. You repeatedly rely on payday loans to make it through the month. You have to skip payments or you’re behind on accounts. If this sounds like you, then it’s time to move forward with meeting a Trustee.
Typically you’ll get to keep your house, cars, and investments. Once you’ve filed, all legal actions, wage garnishments, and judgements will cease. Bankruptcy isn’t free but for some, it’s more affordable than the debt they have. The cost to file is regulated on the federal level and is dependent on household income, family size, and what assets you have.
While bankruptcy is often a last resort, there is simply no other process that eliminates debt as effectively when you’re unable to pay. As Licensed Insolvency Trustees, we want to provide you with the necessary information to make a knowledgeable decision.
Can an individual declare bankruptcy themselves?
Only a Licensed Insolvency Trustee (LIT) can file for you. Unless they’re also LITs, even your lawyer or accountant can’t file on your behalf.
The great thing is this means you have a qualified professional to advise and administer the bankruptcy filings for you. As a group they’re regulated by the federal government and LITs must successfully complete the Chartered Insolvency and Restructuring Professional Qualification Program to become certified. This program is supervised by the Office of the Superintendent of Bankruptcy.
These qualifications and trainings are necessary to ensure the integrity of bankruptcy as a process. It means you have a professional on your side who is well-versed in bankruptcy and who will look out for what’s in your best interest.
Who can file for bankruptcy in Canada?
You can file for bankruptcy in Canada if you meet the following criteria:
- You are a resident of Canada OR you do business in Canada OR you own property in Canada
- You owe more than $1,000
- You are unable to pay your bills when they come due
To declare bankruptcy in Alberta, you’re required to meet in person with a certified Trustee and have her submit the necessary legal documents with the government. It’s up the Trustee and you to decide if bankruptcy is the best solution since there is no kind of approval process to go through outside of meeting these criteria.
How do you file bankruptcy in Canada?
Your first step begins with a free consultation meeting with a Licensed Insolvency Trustee. This is a commitment-free meeting where you review the state of your finances and what options are available to you. Your Trustee will provide you with advice and information that is relevant to your situation.
At this meeting, you’ll need to provide the Trustee with your personal information and the list of your creditors and assets. This gives the LIT an accurate picture. You’ll then both review the paperwork together, and you’ll sign the papers to initiate the bankruptcy process.
What happens when you declare bankruptcy in Canada?
Now that you’ve signed the paperwork there are several steps in the bankruptcy process after filing:
1. There is a ‘stay of proceedings’ protecting you from your creditors:
The stay of proceedings is a legal process that revokes your unsecured creditors of their collection rights. If they still call you, don’t worry. Explain a bankruptcy has been filed and then forward them the phone number of your Licensed Insolvency Trustee. Your LIT will now communicate on your behalf to your unsecured creditors. The stay of proceedings also means unsecured creditors can’t garnish wages, request payments, or continue lawsuits. It’s important to keep in mind that your secured creditors can still seize assets if you don’t keep up with your payments. Secured debts are things like mortgages, car loans, lawsuits, alimony, child support, or student loans. (More specifically on student loans, if you’ve taken classes within the last seven years prior to filing.)
2. The bankruptcy is reported to the Credit Bureau resulting in an R9 rating on your credit report:
Simply put, the “R” means “revolving or recurring credit” and the nine means the debt has been sent to a collection agency or is included in a bankruptcy filing. It’s common for people to worry about how a bankruptcy will affect their credit score. If you’ve been behind on bills and are struggling to pay what you owe, it’s likely your score has dropped quite a bit already. At this point, your credit might not be great, but you can absolutely repair it.
3. Surrender any non-exempt assets to the LIT:
Your LIT will sell non-exempt assets and then use the money to pay your unsecured creditors. What is considered exempt varies from province to province. Your LIT will guide you on what qualifies as an exempt asset. Don’t worry, you’ll still have everything you’ll need for your life including your home, car, furniture, clothing, retirement savings, and other items.
4. Surrender any credit cards and the Trustee will close the accounts
5. Initiate making monthly payments to the “bankruptcy estate”:
In Canada, a monthly base payment is often required to the bankruptcy estate. For a first-time bankrupt this is more or less about $200.
6. Attend two required credit counselling sessions:
These sessions review budgeting and finance to help you in your future financial life.
7. Submit monthly financial statements:
These monthly statements are required while you’re in bankruptcy. You send the reports to your LIT and they detail the types of income coming into your household and how it’s spent. Your Trustee uses this report to determine if you need to pay surplus income payments.
Surplus income is a monthly payment calculated based on standards designated by The Office of the Superintendent of Bankruptcy Canada. This income is considered above what your household needs. Any surplus income payments will be sent to your Trustee. You can find instructions around surplus income payments in Directive 11R2. If your income changes during bankruptcy, you’ll need to tell your Trustee since this affects what you’re paying.
9. Obtain your Certificate of Discharge:
Once you receive this document, you’ve officially eliminated your unsecured debts. This comes after nine months or 21 months depending on if you’re making income surplus payments. If you have been, then you can expect to be discharged at the 21-month mark.
10. Bankruptcy goes on your credit history:
A bankruptcy notation is on your credit history for seven years. After this time, there is no record to show that you have had a bankruptcy on your credit report. You can definitely rebuild your credit. In fact, if you meet the income tests you will qualify for most loans. There are lenders who specifically work with people who have poor credit. You can apply for a secured credit card while you’re in bankruptcy. This is a card where you give the company $1,000 and then you get a line of credit worth $1,000. You can also re-establish credit by paying your bills on time and keeping within a monthly budget.
Does bankruptcy clear tax debt with the CRA?
In Canada, you can be discharged from income tax debt through bankruptcy. Most debts to the CRA are considered unsecured debt and can be included with your bankruptcy filing. Your Trustee will review your specific situation and let you know if there are any other considerations.
How long does bankruptcy last in Canada?
If you’re on a first bankruptcy then you’ll be automatically discharged after nine or 21 months depending on whether you’re making surplus income payments. For those on a second bankruptcy, this process is a little longer at either 24 or 36 months. This also depends on if you’re making surplus income payments.
Review your options with a free consultation
While we do our best to help you avoid bankruptcy, as we’ve outlined in this article it can be an excellent avenue for those who can no longer afford to deal with their debt. We want you to be aware of what all of your options are including debt management plans, consolidation loans, consumer proposals, and bankruptcy.
We offer a free initial consultation where we review your financial situation with you. We’ve Licensed Insolvency Trustees who are professionals in consumer debt solutions and we’ve been incorporated since 1993. We’re always willing to take the extra time to explain how bankruptcy works and how we can help.
We have six convenient locations throughout Edmonton & Northern Alberta. Call us today at 780.780.435.5110.