Effects of Claiming Bankruptcy in Canada: What Really Happens

Short Answer: What Are the Effects of Claiming Bankruptcy?

Claiming bankruptcy in Canada has both negative and positive effects. Negatively, it hurts your credit, may impact certain assets, and appears on your credit report for several years. Positively, it can stop collection actions, wage garnishments, and overwhelming interest, and eventually erase most unsecured debts.

When you file bankruptcy through a Licensed Insolvency Trustee, you get a legal stay of proceedings that usually stops most collections, and after you complete your duties, you receive a discharge that wipes out eligible debts.

The Government of Canada (through the Office of the Superintendent of Bankruptcy) provides an overview of what happens when you consider or file bankruptcy.

What Happens When You Claim Bankruptcy in Canada?

In Canada, you cannot claim bankruptcy on your own. You must work with a Licensed Insolvency Trustee (LIT), who files the bankruptcy under the Bankruptcy and Insolvency Act and notifies your creditors.

When you claim bankruptcy:

• A stay of proceedings comes into effect, usually stopping wage garnishments and most collection actions.
• Creditors must deal with your LIT rather than contacting you directly.
• Your unsecured debts are grouped together and dealt with through the bankruptcy process.
• You must complete certain duties (payments, income reports, counselling sessions).
• After you complete your duties, you receive a discharge that eliminates most unsecured debts.

The stay of proceedings and duties during bankruptcy are described on the Government of Canada site: Your Duties While Bankrupt.

How Claiming Bankruptcy Affects Your Credit

The most visible effect of claiming bankruptcy is on your credit report.

• Your credit file will typically show an R9 rating (the lowest rating) for accounts included in bankruptcy.
• For a first-time bankruptcy, the record usually remains on your credit report for 6–7 years after discharge (depending on the province and credit bureau).
• During and shortly after bankruptcy, you may find it harder or more expensive to get new credit.

However, the effect is not permanent. Many people begin rebuilding their credit within 1–2 years after discharge using secured credit cards and responsible borrowing habits.

The Financial Consumer Agency of Canada (FCAC) – Insolvency explains how bankruptcy and proposals affect your credit and what to watch out for.

Effects of Bankruptcy on Your Assets and Property

Many people fear that claiming bankruptcy means “losing everything.” In Canada, that is rarely the case.

Each province and territory has laws that protect certain exempt assets. These typically include:

• Basic household goods and personal belongings.
• Tools of the trade, up to a certain value.
• A modest vehicle, up to a provincial limit.
• Most RRSP contributions made more than 12 months before filing.

If you own non-exempt assets (such as significant home equity or a second property), your LIT must realize their value for your creditors. In many cases, you can keep assets by “buying back” the non-exempt value via additional payments instead of selling the asset.

Exact exemptions and effects of claiming bankruptcy on property vary by province. Some provincial government sites (for example, Saskatchewan’s “Consequences of Bankruptcy” page) outline provincial consequences and exemptions.

Effects of Bankruptcy on Employment and Professional Licences

In most jobs, claiming bankruptcy does not automatically cost you your employment. However, there are some important nuances:

• Some employers in financial, accounting, or security-sensitive roles may check credit reports or ask about bankruptcies.
• Certain professional licences or positions that require bonding (e.g., working as a trustee, investment advisor, or dealing with large sums of money) may have restrictions related to bankruptcy.
• Most employers do not receive automatic notice of your bankruptcy, but wage garnishments stopping may signal that something has changed.

If you are in a regulated profession or have a role that involves handling trust funds or client money, ask your Licensed Insolvency Trustee about potential employment/licensing impacts before filing. Many major trustee firms and resources (such as MNP’s article on bankruptcy and employment) discuss these issues in more detail.

Effects on Your Family, Spouse, and Co-Signers

Bankruptcy is a personal legal process — it applies to your debts. However, it can indirectly affect your family and anyone who has guaranteed your debts.

Your Spouse or Partner

• If debts are in your name alone, your spouse is not automatically responsible for them.
• If you have joint debts (joint credit cards, lines of credit, loans), your spouse may become fully responsible for the balance if you claim bankruptcy.
• Household income may be considered when calculating surplus income, which can impact your required monthly payments.

Co-Signers and Guarantors

• If someone has co-signed or guaranteed a loan for you, your bankruptcy does not erase their responsibility.
• The creditor can still pursue the co-signer/guarantor for 100% of the remaining balance.

It’s important to speak openly with family members who may be affected and to discuss joint debts with your LIT before you file.

Short-Term vs Long-Term Effects of Claiming Bankruptcy

Short-Term Effects

• Collection calls, wage garnishments, and most lawsuits stop due to the stay of proceedings.
• Your credit score usually drops significantly.
• You may need to adjust to a new budget and monthly reporting to your LIT.
• Some financial stress may decrease as creditor pressure is removed.

Long-Term Effects

• Bankruptcy stays on your credit report for several years after discharge (typically 6–7 years for a first-time bankruptcy).
• You may pay higher interest rates for a time when accessing new credit.
• You can often start rebuilding credit within 1–2 years, with responsible use of secured products.
• The relief from overwhelming debt can make it easier to save and plan for long-term goals.

How to Recover and Rebuild After Bankruptcy

The effects of claiming bankruptcy are not the end of your financial life. Many Canadians successfully rebuild their credit and finances after discharge.

Key Steps to Rebuilding

• Complete your mandatory financial counselling sessions with your LIT.
• Create a realistic monthly budget and stick to it.
• Build a small emergency fund to avoid relying on credit.
• Check your credit report for accuracy after discharge.
• Consider a secured credit card or small, affordable credit product to start rebuilding your score.

Our guide on Debt Relief in Canada explains how different solutions affect your long-term financial health and how to plan for the future after insolvency.

Alternatives If You Want to Avoid Bankruptcy’s Effects

If you’re concerned about the effects of claiming bankruptcy, you may want to explore alternatives such as:

• Consumer proposal: A formal, legally binding settlement where you repay only a portion of your debts, with no interest, and avoid an R9 bankruptcy notation. Learn more: Consumer Proposal in Canada.
• Debt consolidation: Combining debts into one new loan at a lower interest rate. See Debt Consolidation in Canada.
• Credit counselling & Debt Management Plans: Working with a non-profit agency to reduce interest and consolidate payments. See Credit Counselling and Debt Management.
• Informal settlements: Negotiating payment arrangements directly with some creditors.

Before you decide, a Licensed Insolvency Trustee is required to review all reasonable options with you, not just bankruptcy.