Canadian Bankruptcy Overview
Canada’s bankruptcy laws are designed to permit an honest but unfortunate debtor to obtain a discharge from his or her debts while treating creditors equally and fairly.
Bankruptcy is a legal proceeding that relieves an insolvent person of his or her financial obligations.
A bankruptcy proposal lets a debtor restructure his or her financial affairs, often allowing for reduced payments and/or an extension of the time to pay.
Who Does It?
Filing bankruptcy is usually the last resort for people under siege by creditors. It is a powerful vehicle for a debtor to get a fresh financial start.
In almost all cases it is the result of a catastrophic event or set of circumstances. It could be a business owner whose company has failed, leaving him or her personally responsible for the business debts. Sometimes it is caused by an illness that prevents a person from working.
It could be because a person has lost his or her job and was forced to live off credit before a new job was found.
In some instances individuals succumb to the lures of gambling or tax evasion, and some students take on too much debt and then are unable to earn enough to pay it off.
Note that student loans cannot be erased by bankruptcy until 7 years after the completion of studies.
How it Works:
You can only go bankrupt or file a proposal if you use the services of a trustee in bankruptcy.
You can locate a trustee by looking in the Yellow Pages or by visiting Our list of Government Licensed Trustees in all provinces and territories.
There is an immediate stay of proceedings once bankruptcy is filed.
That means creditors cannot take any action to seize assets, other than those signed over as security in the event of non-payment. Nor can creditors seek a court order to garnishee wages. Collection calls also stop once the debt collector knows the individual has filed for bankruptcy.
In most cases, only your creditors will know you have gone bankrupt. Only in rare circumstances is a legal notice placed in the local newspaper.
In the most common type of personal bankruptcy, a creditors’ meeting is not held unless requested by the Official Receiver (Office of the Superintendent of Bankruptcy) or by creditors.
During bankruptcy a person cannot be a director of a company, must make monthly payments to the trustee, turn in all credit cards, borrow no more than $1,000 from anyone without divulging they are bankrupt, report monthly income and expenses to the trustee including copies of pay stubs, and attend two counselling sessions on money management.
Advantages and Disadvantages:
For a person facing a financial crisis, there are really very few disadvantages to bankruptcy. There is the argument that a bankruptcy adversely affects a person’s credit rating, but the reality is that the person going into bankruptcy will have such a bad credit rating that nothing will make it worse. In fact, the person will be a better credit risk after bankruptcy because he or she will have no debt. Many creditors will give bankrupts newly discharged from bankruptcy a secured credit card, a vehicle loan or a mortgage. Please refer to this list of After Bankruptcy Lenders.
What it Costs:
The payments a debtor makes in the nine months of bankruptcy are set by the government. Trustee fees come out of this amount. In the most common situation, the monthly payments are $200 a month for nine months. For the exact cost and how long you will be in bankruptcy please refer to: The Bankruptcy Calculator.
What you keep:
Most debtors keep all their assets. In B.C., for example, bankruptcy exemptions include $12,000 in home equity ($9,000 outside Greater Vancouver and Victoria), $4,000 in household items, $5,000 equity in a vehicle (reduced to $2,000 if the debtor is behind on child-care payments), $10,000 in work tools, and essential clothing and medical aids.
Exemptions are in effect for all registered retirement savings plans (RRSP’s, RRIF’s and DPSP’s (Deferred Profit Sharing Plans). Contributions made in the 12 months prior to the date of bankruptcy will be recovered (clawed back) for the benefit of the bankruptcy estate in some provinces. In other provinces and territories all RRSPs are retained. Please refer to your province or territory’s exemptions.
The government, in a straightforward bankruptcy (summary administration), regulates trustee fees and costs. The duration of a bankruptcy varies based on the bankrupt’s family situation, income and previous bankruptcies. However, in the vast majority of cases, the bankrupt is discharged in nine months.
Although each person’s situation is different, there are certain key events in a straightforward bankruptcy, that are common to all bankruptcies.
|Timeline||Key Events in a Straightforward Bankruptcy|
|Day 1||Initial consultation with the trustee office.|
|Day 3||Bankruptcy documents are signed and filed and the bankruptcy takes effect.|
|Day 8||The trustee mails the creditors notification of the bankruptcy.|
|Days 3 to 33||If the creditors who have in the aggregate at least 25 percent in value of the proven claims or official receiver wish a creditors meeting, they must notify the trustee within 30 days after the date of bankruptcy.|
|Days 13 to 63||First counselling session is held.|
|Each month||The bankrupt must submit budgets and required payments.|
|Days 33 to 213||Second counselling session is held.|
|Eighth month||The trustee reports on the conduct of the bankrupt and recommends whether a discharge should be granted. (S. 170 Report)|
|Ninth + month||Bankrupt is discharged. At this point the eligible debt is erased.|
|Tenth to 48th month||Trustee completes administration of the estate including processing tax returns and selling any assets.|
|48th month||Trustee applies for discharge upon the file being completed.|
Debts that are not Erased:
Almost all debtors are discharged or out of bankruptcy in nine months, when most debts are erased. Exceptions are fines imposed by a court, money owing for things stolen, things obtained by misrepresentation, alimony or maintenance payments, damages awarded by a court for sexual assault or intentionally inflicting bodily harm, and student loans within 7 years after the completion of studies.
Some of the duties of the trustee in bankruptcy are to:
- Investigate the financial affairs of the bankrupt.
- Administer the bankruptcy estate to ensure the orderly and fair distribution of property among the creditors.
- Set aside any side deals or fraudulent transactions designed to hide assets from creditors or benefit one ordinary creditor over another.
- Sell any available assets.
- Recommend whether the bankrupt should be discharged. In rare cases, discharge can be withheld if the individual fails to meet his or her obligations outlined above.
The record of a bankruptcy stays on your credit bureau report for six to seven years. However, a diligent person can rebuild his or her credit rating in as little as two years by following tips given on our Rebuilding Credit Page.