Bankruptcy is a legal process that offers relief to individuals burdened with overwhelming debt. It provides an opportunity for an honest but unfortunate debtor to start afresh financially. If you’re residing in Canada and considering bankruptcy, it’s crucial to understand how the process works and what it entails. This comprehensive guide will walk you through the key aspects of bankruptcies in Canada, including the steps involved, the impact on your assets and debts, the cost, and the aftermath. So let’s dive in and explore how bankruptcies work in Canada.
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Understanding Bankruptcy in Canada
Bankruptcy is a legal procedure where you surrender your assets to a Licensed Insolvency Trustee (LIT) to alleviate your debt. It allows for the elimination of unsecured debts while providing certain exemptions for essential assets based on provincial laws. Bankruptcy laws in Canada aim to provide a fresh start to debtors who find themselves in dire financial circumstances due to various factors such as illness, divorce, business failure, or poor financial management.
The Bankruptcy Process
Step 1: Consultation with a Licensed Insolvency Trustee
The first step in the bankruptcy process is to consult with a Licensed Insolvency Trustee (LIT). The LIT will assess your financial situation, review your debts and assets, and provide guidance on whether bankruptcy is the most suitable option for you. They will explain the process in detail, including the potential impact on your assets and the duties you need to fulfill.
Step 2: Filing for Bankruptcy
If bankruptcy is deemed appropriate, the LIT will assist you in preparing the necessary paperwork to file for bankruptcy. Once the paperwork is complete, your LIT will electronically transmit the bankruptcy information to the Office of the Superintendent of Bankruptcy, a division of the federal government. This step initiates the legal process and triggers immediate protection from unsecured creditors.
Step 3: Creditors’ Claims and Stay of Proceedings
Within five days of filing for bankruptcy, your LIT will send a copy of the bankruptcy paperwork to each of your creditors. This allows them to file a claim with the LIT to participate in the distribution of assets. Once bankruptcy is filed, an automatic “stay of proceedings” comes into effect. This means that unsecured creditors cannot contact you or take legal action to collect their debts, providing you with much-needed relief.
Step 4: Duties and Obligations
During the bankruptcy period, you have certain duties and obligations to fulfill. These include attending a meeting of creditors if requested, providing proof of income to the LIT, making monthly payments if you have surplus income, and attending credit counseling sessions to enhance your financial management skills.
Step 5: Discharge from Bankruptcy
The length of bankruptcy varies depending on your circumstances. If you have never been bankrupt before and have no surplus income, you may be eligible for discharge in nine months. However, if you have surplus income or previous bankruptcies, the duration may be longer. Discharge from bankruptcy cancels your unsecured debts, providing you with a fresh financial start.
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Assets and Debts in Bankruptcy
What Can You Keep in Bankruptcy?
Bankruptcy requires you to surrender your assets to the LIT, which will be used to repay your creditors. However, certain assets are exempt from seizure based on provincial laws. These exemptions typically include essential items like clothing, furniture, medical equipment, tools of trade, pensions, and registered retirement savings. If you have little or no equity in your home, you may be able to negotiate with your mortgage provider to continue paying your mortgage throughout and after bankruptcy.
Impact on Secured Debts
Secured debts are not eliminated in bankruptcy. These debts involve collateral that the creditor can seize if you default on payments. For example, a mortgage lender can foreclose on your home if you fail to make mortgage payments. Filing for bankruptcy does not prevent secured creditors from repossessing their collateral if you do not fulfill your obligations.
Treatment of Unsecured Debts
Bankruptcy primarily addresses unsecured debts, such as credit card debt, bank loans, and medical bills. These debts are typically eliminated once you receive a discharge from bankruptcy. Your creditors are not allowed to contact you regarding these debts, providing you with a fresh financial start.
Student Loans and Bankruptcy
Student loans can be included in bankruptcy under the “Seven-Year Rule.” If you have not attended school for a full seven years, your student loans can be eliminated in bankruptcy. However, if less than seven years have passed since you attended school, your student loan debts will not be included in bankruptcy. Nevertheless, bankruptcy may still be beneficial if you have significant other debts.
The Cost of Bankruptcy
The cost of bankruptcy in Canada consists of administrative fees and potential surplus income payments. As of now, the minimum cost of bankruptcy is $1,800, covering administrative expenses. Additionally, if you have surplus income, a portion of it must be paid to the LIT for distribution among your creditors. The calculation of surplus income takes into account your income and expenses. Your LIT will guide you through the cost implications and provide further information.
Life After Bankruptcy
Rebuilding Credit
After bankruptcy, it’s essential to take steps to rebuild your credit. While bankruptcy remains on your credit bureau reports for a certain period, usually six years, you can still obtain credit from certain lenders. Rebuilding credit involves making payments on time, starting with small bank loans or secured credit cards. Responsible financial management and a demonstrated commitment to repayment can gradually improve your creditworthiness.
Notice of Discharge
Once the court approves your discharge from bankruptcy, you will receive a Notice of Discharge from your LIT. This signifies the completion of your bankruptcy and the official cancellation of your discharged debts. While the bankruptcy notation remains on your credit reports, you can start planning for a better financial future.
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Conclusion
Understanding how bankruptcies work in Canada is crucial if you find yourself burdened with unmanageable debt. Bankruptcy provides an opportunity to alleviate your financial stress and start afresh. By consulting with a Licensed Insolvency Trustee, filing for bankruptcy, fulfilling your duties, and ultimately receiving a discharge, you can overcome your debt challenges and embark on a path toward financial stability. Remember, bankruptcy is not a decision to be taken lightly, so it’s essential to seek professional advice and explore all available options.
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