How Bankruptcy Works for Debtors and Creditors in Canada

How Going Bankrupt Impacts Debtors and Creditors

Understanding the intricacies of bankruptcy in Canada is crucial both for those considering the process and creditors. This article explores how bankruptcy operates in Canada, shedding light on its pros and cons, its impact on debtors and creditors, and the process involved.

Understanding Bankruptcy

Bankruptcy is a legal procedure in Canada for debt relief, provided under the Bankruptcy and Insolvency Act (BIA). If you cannot meet your debt obligations and owe at least $1,000, you may be eligible for bankruptcy. Upon filing for bankruptcy, you agree to surrender non-essential assets and surplus income to your creditors in return for debt release.

A Licensed Insolvency Trustee (LIT), a federally regulated professional, is the only authorized entity to file bankruptcies and consumer proposals. The trustee ensures that all bankruptcy laws are adhered to, maintaining fairness for both the debtor and creditors.

Bankruptcy can be a beneficial option as it offers legal protection. If creditors are pursuing legal action or wage garnishment, bankruptcy can halt these collection actions.

The Bankruptcy Declaration Process

Prior to Bankruptcy

Before filing, a Licensed Insolvency Trustee conducts a debt assessment to determine if bankruptcy is the appropriate solution. This assessment involves understanding your financial situation, including your income, assets, and debts. If you cannot repay your debts in full, you may be advised to consider bankruptcy or a consumer proposal if it is more financially viable.

Filing Bankruptcy Petition

When filing for bankruptcy, you are required to sign various forms, including an “Assignment” and a “Statement of Affairs”. In the bankruptcy assignment, you declare that you are surrendering your property for the benefit of your creditors. The statement of affairs is a list of all your assets and liabilities.

You must also provide details about your family, work, and disposition of assets before bankruptcy. Selling or hiding assets from your creditors when planning to file bankruptcy is considered an offence under the Bankruptcy & Insolvency Act.

Creditor Protection

Upon filing for bankruptcy, you receive immediate legal protection from your creditors through an automatic stay of proceedings. This legal mechanism prohibits creditors from pursuing further legal action. It halts wage garnishment, lawsuits, and collection activities. Your trustee will then handle your creditors, relieving you from making payments.

Surrendering Assets

In bankruptcy, you must surrender any non-exempt assets to the Licensed Insolvency Trustee. These assets are sold for fair market value, and the proceeds are held in trust for distribution to creditors. You can avoid asset sale by agreeing to pay the trustee the asset’s equity value.

It’s important to note that not all assets are lost in bankruptcy. Certain exemptions allow you to retain most personal property, including personal items, household goods, a single vehicle, RRSPs and pension savings, and necessary work tools.

Duties During Bankruptcy

During bankruptcy, you are required to make monthly payments, attend two credit counselling sessions, and file monthly income and expense reports with your trustee. Credit counselling sessions provide you with essential money management tools to aid in your financial recovery.

Post-Bankruptcy

Upon the completion of your bankruptcy, you receive a Certificate of Discharge, which releases you from your debt obligations to creditors included in your bankruptcy. After your bankruptcy, creditors receive a proportional distribution from your bankruptcy payments and the realization from any sold assets. The remaining debt is forgiven.

Things to Avoid Before Bankruptcy

If you are contemplating bankruptcy, there are certain actions to avoid. These include maxing out your credit cards, selling or transferring assets to hide them from creditors, omitting creditors from your list, making preferential payments, or hiding information about a potential future windfall.

Debts Cleared by Bankruptcy

Bankruptcy eliminates most unsecured debts, including credit card debt, unsecured lines of credit and bank loans, unpaid bills, interest and penalties, accounts in collection, judgments and lawsuits, and certain government obligations. However, some debts are not discharged by bankruptcy, such as child support and alimony payments, court fines, traffic tickets, and debts due to fraud.

Bankruptcy Costs

The base contribution fee for bankruptcy in Canada is $1,800 for a first-time bankrupt. However, your specific costs are determined by the assets you own and your income.

Bankruptcy Duration

The duration of your bankruptcy depends on your income and whether you have declared bankruptcy before. A first bankruptcy with no surplus income lasts 9 months, while a second bankruptcy with no surplus income lasts 24 months.

Impact of Bankruptcy

Impact on Credit Rating

Bankruptcy remains on your credit report for 6 years after discharge. It can affect your future creditworthiness, but this impact is temporary. You can start rebuilding your credit after bankruptcy.

Impact on Spouse

In most cases, bankruptcy does not affect your spouse unless both names are on the debt. In such cases, you may want to discuss filing a joint bankruptcy or proposal with your trustee.

Who Will Know About My Bankruptcy?

Your bankruptcy documents are filed with the Office of the Superintendent of Bankruptcy, and people can search these records. Your creditors will also be notified that you filed for bankruptcy. Your employer is not notified unless you have a wage garnishment.

Declaring Bankruptcy

Before you file, the trustee will review all your debt relief options. If you cannot afford to repay your debts in full, the trustee may recommend bankruptcy or a consumer proposal. If you are considering bankruptcy, it is recommended to consult with a Licensed Insolvency Trustee.

Find Your Personal Debt Relief Solution

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