Declaring Personal Bankruptcy

Bankruptcy isn’t a walk in the park. It’s a significant decision that can have life-altering implications. However, understanding the ins and outs of declaring personal bankruptcy in Canada can help you make an informed decision. This guide will shed light on everything you need to know about the process.

1. The Basics: What is Bankruptcy?

Bankruptcy is a legal status declared when an individual or business is unable to pay their debts. In Canada, only a Licensed Insolvency Trustee (LIT) can administer bankruptcy and proposal procedures.

2. The Process: How Does Bankruptcy Work in Canada?

When you declare bankruptcy, a LIT oversees the process. They settle your debts using the proceeds from your non-exempt assets, i.e., assets that exceed the provincial equity limit. For instance, if your car’s value surpasses the limit, the LIT might sell it to repay your creditors.

2.1 Keeping Your Assets

You can keep an asset that exceeds the limit by arranging to “buy back” the asset from your creditors. This involves paying the amount that exceeds the exemption limit. Each province provides a list of exempt assets that you can retain despite declaring bankruptcy.

3. The Timeline: How Long Does Bankruptcy Last?

Bankruptcy typically lasts about nine months for first-time applicants who complete all assigned duties. However, the duration may extend to 21 months or even longer, depending on various factors like the number of previous bankruptcies and compliance with duties.

4. What Does “Discharged” Mean?

When your bankruptcy is “discharged,” it means you no longer have to pay your debts and you can apply for credit again. However, your credit rating will be affected, and the bankruptcy record will stay on your credit report for six to seven years, depending on your province.

5. Impact on Debts: What Happens to My Debt if I Declare Bankruptcy in Canada?

Bankruptcy eliminates most unsecured debts, such as credit card bills and medical bills. However, you might still be required to pay your secured debts, such as a mortgage or a car loan. Some debts, like court-imposed fines and alimony payments, cannot be eliminated by bankruptcy.

6. Dealing with Debt Collectors

Once you file for bankruptcy, all creditors and collection agencies must stop contacting you. This is called a Stay of Proceedings. However, this doesn’t apply to secured creditors, such as those for a mortgage or alimony payments.

7. Impact on Income

Your wages aren’t affected by your bankruptcy. However, you may have to make surplus income payments, based on your average earnings and the number of people in your household.

8. Bank Accounts and Credit Cards

Bankruptcy doesn’t prevent you from having a bank account. However, if you have more than $999 in your account and want overdraft protection, you must notify your bank. Also, once you file for bankruptcy, you have to surrender your credit cards to your LIT.

9. Fees for Bankruptcy

Bankruptcy fees are regulated by the federal government. You can discuss the costs of filing for bankruptcy with a LIT during a free initial consultation.

10. Bankruptcy and Student Loans

If you were a student, either part-time or full-time, less than seven years from the date you declared bankruptcy, you will still have to repay your student loan debt, including the interest charges.

11. Assets and Bankruptcy

Bankruptcy shouldn’t impact your secured debts, like a vehicle lease or a mortgage, as long as you continue making payments and there’s no equity in your secured assets. In most provinces, you don’t lose your house or car when you declare bankruptcy.

12. Tax Debts and Bankruptcy

Contrary to common belief, income tax debt can be discharged in bankruptcy. After filing for bankruptcy, all interest and collection activity by the Canada Revenue Agency (CRA) will stop. Your LIT will communicate directly with the CRA on your behalf.

Bankruptcy is a challenging situation to navigate, but with the right knowledge and guidance, it can be a stepping stone towards a fresh financial start. Always consult a professional before making any decisions, and remember, you’re not alone in your journey towards financial stability.

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.