Debt in Canada: Does it Lead to Bankruptcy in Canada?

Does Debt Lead to Bankruptcy in Canada?

Financial stability is something everyone desires. However, the burden of excessive debt can often lead to financial despair, sometimes culminating in bankruptcy. The question is, does debt inevitably lead to bankruptcy in Canada? To answer this question, it’s essential to understand the process of filing for bankruptcy, what it entails, and how it affects an individual’s financial life in Canada.

Understanding Bankruptcy in Canada

In Canada, bankruptcy commences once you file for it with a Licensed Insolvency Trustee (LIT), the only professionals licensed and regulated to handle bankruptcies in this country. Your LIT is tasked with settling all your debts, utilizing the proceeds from your non-exempt assets to pay your creditors.

Non-exempt assets are those that surpass the equity limit set by your province. For example, if the value of your car exceeds the limit set by your province, your trustee can sell your vehicle to repay your creditors. The non-exempt amount is given back to you, while the remainder goes to your creditors.

However, if you want to retain an asset exceeding the exemption limit, you can strike a deal with your creditors to reacquire the asset by paying the amount surpassing the exemption limit.

Provincially Exempted Assets

Each province outlines a list of exempt assets that you can retain even if you’ve declared bankruptcy. During the bankruptcy period, you’ll likely be obligated to make monthly payments to your trustee.

The Duration of Bankruptcy

Usually, bankruptcy lasts approximately nine months, assuming it’s your first and you’ve completed all assigned duties. If there’s surplus income to pay, your bankruptcy might last up to 21 months. The surplus income is determined in line with standards set by the Office of the Superintendent of Bankruptcy Canada, after examining your income, expenses, and the number of dependents in your household.

For a second bankruptcy, the duration extends to 24 or 36 months. If you’ve been bankrupt more than once before, have not complied with your duties, or have committed one or more bankruptcy offences, your bankruptcy timeline will be determined by the court.

Discharge from Bankruptcy

Once you’ve received an Absolute Discharge from your bankruptcy, you’re no longer responsible for any of the discharged debts. However, the record of your bankruptcy will appear on your credit rating for 6 to 7 years, depending on the province you live in.

“Discharged” signifies the end of your bankruptcy; you’re free from debt payments and can apply for credit. However, if you fail to fulfill your duties during bankruptcy, you won’t be discharged, your trustee will close your file, and creditors can resume collection efforts against you.

Impact of Bankruptcy on Debt

Bankruptcy can erase most of your debts, especially unsecured debts like credit card bills, medical bills, and payday loans. However, you might still be required to pay your secured debts, such as your mortgage or motor vehicle loan.

Certain debts are immune to bankruptcy, including:

  • Court-imposed fines.
  • Debts incurred through fraud.
  • Alimony or maintenance payments.
  • Debts imposed by Civil Court for intentional bodily harm, sexual assault, or wrongful death.
  • Student loans, if bankruptcy is declared within 7 years of ending full- or part-time studies.

Debt Collection during Bankruptcy

Following a bankruptcy claim, all creditors and collection agencies are legally required to stop contacting you. This cessation of collections activity is known as a Stay of Proceedings. Moreover, a creditor can’t garnish your wages.

However, you may continue to receive calls from secured creditors. This applies to a mortgage, lien on a car, or debt for alimony or maintenance.

Income during Bankruptcy

Your wages aren’t affected by your bankruptcy. However, you’re required to provide your trustee with your household’s monthly earnings and expenditures. If your income changes or you gain or lose a dependent, you must inform your trustee.

You may have to make monthly payments to your trustee. These are called “surplus income payments”. The trustee determines whether you need to make surplus income payments based on your average earnings over the bankruptcy and the number of people in your household.

Bank Accounts during Bankruptcy

If you have over $999 in your account and need overdraft protection, you must inform your bank about your bankruptcy. To prevent creditors from accessing your money, it’s recommended to open a bank account at an institution where you don’t owe money. You should only use your new bank account and avoid any accounts that were active before your bankruptcy.

Credit Cards and Bankruptcy

Once you file for bankruptcy, you must surrender your credit cards to your trustee so they can be cancelled. Your credit rating will be negatively affected by your bankruptcy and Canadian credit bureaus will keep a note about your bankruptcy on your credit report for up to 7 years, depending on your province.

The Cost of Declaring Bankruptcy

Bankruptcy fees are regulated by the federal government and can be discussed with a LIT during a free initial consultation.

Student Loans and Bankruptcy

If you declared bankruptcy less than seven years from the date you were a student, either part-time or full-time, you’ll have to repay your student loan debt, including the interest charges. However, you may still be able to get your student loan debts discharged by retaining a lawyer and making an application to the court.

Secured Assets and Bankruptcy

Bankruptcy doesn’t usually impact your secured debts, such as a vehicle lease or a mortgage, as long as you continue to make payments and there is no equity in your secured assets. You can make arrangements with your trustee and creditors to keep the asset and continue paying the mortgage or loan.

Tax Debt and Bankruptcy

Many assume that income tax debt is not dischargeable in bankruptcy. However, your debt to the Canada Revenue Agency (CRA) is treated the same as any other unsecured debt. After filing for bankruptcy, all interest and collection activity by the CRA will stop.

In conclusion, while excessive debt can lead to bankruptcy, it is not always the case. With careful planning, financial discipline, and perhaps professional guidance, it’s possible to navigate through the stormy seas of debt and avoid the drastic solution of bankruptcy. The key is to start as early as possible and not let the debt pile up to unmanageable levels.

Find Your Personal Debt Relief Solution

Licensed Insolvency Trustees are here to help. Get a free assessment of your options.

Discuss options to get out of debt with a trained & licensed debt relief professional.