How to File Bankruptcy in Canada – Follow These 7 Steps to Start the Process
Filing bankruptcy in Canada can seem daunting and overwhelming.
However, it is quite simple and straightforward.
When you follow these simple steps, the process will be come less daunting and you will learn everything you need to know.
You might have heard a few things about bankruptcy.
You might know that you must give up some of your belongings and your credit could be impacted.
Most of what you have heard is probably myths, however.
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But do you know how to begin the process of going bankrupt?
Do you know all the benefits and the nuances of the bankruptcy law, such as how the bankruptcy exemptions can protect all of your assets in most cases?
At Bankruptcy Canada, it is our goal to make the debt relief industry and Licensed Insolvency Trustees seem transparent, reliable, and easy to work with.
This guide will help you understand the exact steps you need to go through to file bankruptcy in Canada.
Bankruptcy is a last resort for people seeking debt relief, so when you meet with a licensed insolvency trustee, they will help you explore any viable bankruptcy alternatives.
After reading this guide’s sections you will learn:
- How to Apply For Bankruptcy.
- How the Bankruptcy Process Works.
- Life After Bankruptcy.
What are the basics of filing bankruptcy?
The steps of claiming bankruptcy are briefly:
Step #1: To file for bankruptcy, you need to work with a trustee, who will administer your bankruptcy.
You can find a trustee in your area here.
Step #2: The trustee will provide you with some forms that you must complete and return to your trustee.
The trustee will assist you with filling out these forms and when you are ready, the trustee will submit the paperwork with the Office of the Superintendent of Bankruptcy.
You will officially be bankrupt once this happens.
Step #3: You will surrender any of your non-exempt assets to the trustee, who will hold the assets in trust.
Eventually, the trustee will sell your assets and distribute the funds to your creditors.
Most bankrupts have few, if any, assets they surrender.
Certain assets are protected from seizure by the trustee or creditors.
Step #4: Your unsecured creditors (secured debts cannot be included in bankruptcy, so secured creditors are not a part of the bankruptcy process) will be notified that you have become bankrupt by your trustee.
In rare cases, your creditors will request a meeting with you.
Step #5: The bankruptcy process will start and your fresh start begins.
During the bankruptcy process, you will have certain assets to complete.
Duties include submitting financial information each month to your trustee and attending financial counseling sessions.
The purpose of the two financial counseling sessions you must attend is to help with your financial rehabilitation.
Step #6: Report your income and expenses each month throughout the bankruptcy.
Throughout the bankruptcy process, the government determines how much money you need to meet your needs.
You must report your income and expenses to the trustee each month so they can determine if you have “surplus income” payment requirements.
Any income that exceeds the government levels of income for your family size will be surplus income.
If you have over $200 a month in surplus income payments your bankruptcy will be extended and you must pay 50% of your surplus income to the bankruptcy estate.
Step #7: You will receive your bankruptcy discharge.
In almost all cases, this will happen automatically.
If it is your first bankruptcy and you have no “surplus income” payment requirements, you will receive your discharge automatically in nine months.
Second time bankrupts with surplus income will be bankrupt for 36 months, while third time bankrupts cannot get an automatic discharge.
Here, we will explore each step further.
Meet the Licensed Insolvency Trustee
The trustee is an integral part of your bankruptcy.
They will administer your bankruptcy process, deal with your creditors and protect your rights.
You must find a trustee that you feel comfortable working with.
Although you choose a trustee and will pay their fees, they do not actually represent you directly.
The trustee will represent your rights and ensure you are treated fairly, although they also represent the rights of your creditors, including making sure their rights are protected and they receive as much funds as they are entitled to.
The trustee is not your lawyer and is not fighting on your side.
It is important to be aware of this.
All this being said, your trustee will fight in your corner for you and make sure you get the right advice.
Licensed Insolvency Trustees are licensed by the Office of the Superintendent of Bankruptcy (OSB) and must pass rigorous courses and testing to get their trustee license.
All trustees offer a free initial consultation to meet with you to discuss your options.
The trustee will always help you explore bankruptcy alternatives as possible. Trustees will always help you explore bankruptcy as a last resort.
In many cases a bankruptcy alternative, such as a consumer proposal, can be more viable than going bankrupt.
What if I Cannot Afford a Trustee?
The fees that a trustee charges are very reasonable and are overseen by the government.
The fee to file bankruptcy is only $200 a month, which includes all the fees and payments.
If you cannot afford the fees of filing bankruptcy you are likely what is known as judgement proof.
This means that you do not need to file bankruptcy to get creditor protection.
If you are judgement proof, there is nothing your creditors can do to encourage you to pay them any money.
What if I Can’t Afford Bankruptcy?
Many Canadians struggling with debt think about filing bankruptcy.
Unfortunately, some people quickly realise that the associated costs through loss of assets and/or surplus income payments becomes too onerous.
What can these people do?
Fortunately, there is an extremely popular alternative available.
The reasons consumer proposals are becoming more popular include:
- They are more cost effective for many people.
- All of an individual’s assets are protected.
- There are no surplus income payments.
- The impact on credit is usually much less than bankruptcy.
- Consumer proposals are flexible.
What Should I Look for in a Trustee?
It is important you choose a trustee you are comfortable working with.
- Did they answer your questions in an easy to understand manner?
- Were they able to schedule a free consultation for you in a timely manner?
- Did the trustee meet with you, or their paralegal?
Main points about bankruptcy trustees
- The trustee handles all aspects of your bankruptcy.
- The trustee will handle communication with your creditors on your behalf.
- Trustees do not work for you or your creditors, but they work to protect your rights.
- All of the trustees on BankruptcyCanada are chosen for their reliability, professionalism and experience.
Complete Your Duties
After you have begun the bankruptcy process and the trustee has sold your non-exempt assets, you will be required to fulfill your duties to the bankruptcy court.
Firstly, you will be required to attend a financial counselling session with your trustee.
This usually happens about two months into your bankruptcy.
The purpose of the counseling is to give you better financial skills and to help you understand the causes of the money problems that led to your bankruptcy.
You will be required to attend a second counselling session during the seventh month of your bankruptcy.
Reporting Income and Expenses
Another duty that bankrupts must complete is to report their income and expenses to the trustee each month.
You will be required to submit your pay stubs and a report of your monthly expenses.
The trustee will use this information to calculate whether you have any surplus income payment requirements.
If your monthly income is over a certain threshold for your family size, you will be required to pay surplus income payments.
This will increase the length and cost of your bankruptcy.
Life After Bankruptcy
First time bankrupts will receive their discharge automatically after nine months (if they have no surplus income) or 21 months (if they have surplus income).
To receive your automatic discharge, you must complete all your duties such as attending the required counseling, making the necessary surplus income payments, and following all instructions of your trustee.
Once all your obligations are met and you have received your discharge from bankruptcy you will be released from the legal obligation to repay your debts.
This will only apply to debts that were included in your bankruptcy; since secured debts are not included in bankruptcy, you must continue to pay on these loans, such as your car loan or mortgage.
You must also continue to pay any new debts you incurred since going bankrupt.
Additionally, not all debts are eliminated by the bankruptcy process.
Along with secured debts, certain unsecured debts can not be cleared in bankruptcy either:
- Support payments, such as alimony or child support.
- Court fines and penalties.
- Student loans (unless you stopped being a student more than 7 years ago).
- Debts arising from fraud.
Most bankrupts get their discharge, and begin their life after bankruptcy, automatically.
However, some bankrupts do not qualify for an automatic discharge.
In this case, the trustee will have to apply for a discharge hearing at the court.
You will have to attend this hearing in person and the court will determine whether you will be discharged.
You could receive an absolute, conditional, or suspended discharge.
How Does Bankruptcy Impact My Credit Rating?
Another thing that many people are worried about is their credit rating.
Of course, bankruptcy has a negative impact on a person’s credit rating.
It will result in an R9 rating on your credit rating, which is the worst rating.
However, people that go bankrupt already have a terrible credit score and a poor credit report.
How can it get any worse?
In fact, bankruptcy gives you a chance to improve your credit rating.
When you receive your bankruptcy discharge you will have no debts and a fresh financial start.
You will be able to begin rebuilding your credit after your discharge.
In many cases, discharged bankrupts can qualify for a mortgage, at the same rates as someone who was never bankrupt, within 2 years.
A record of your bankruptcy will remain on your credit report for a minimum of six years.
Bankruptcy and Your Spouse
If you file bankruptcy it will only impact you and your finances.
It will not impact your spouse directly, although your spouse will be asked to divulge their income to help with your surplus income calculations.
However, your spouse can choose not to tell your trustee their income.
If you co-own assets that are not exempt your spouse can purchase your share of the equity in order to keep the property.
If someone co-signed on debt for you, they will continue to be responsible for making the loan payments.
Learn More About Bankruptcies
To help you learn more about bankruptcy, we’ve broken down the most common concerns into an easy to understand FAQ section.
“Can I Include Student Loan Debt in Bankruptcy?”
Yes, it is possible to discharge student loan debt in bankruptcy if you have been out of school for more than 7 years.
If you can prove that repaying your student loans would cause “undue hardship” you can reduce the period you need to have been out of school to only five years.
“How Much Does It Cost to File Bankruptcy?”
It is not free to file bankruptcy, although the fees are very reasonable.
The cost of bankruptcy will cost a base fee of $200 a month for 9 months.
However, there could be additional costs such as surplus income payment requirements and assets you need to surrender.
To learn the true cost of bankruptcy in your situation, you will have to consult with a local trustee to discuss your personal situation.
“How Does Bankruptcy Impact My Spouse?”
Bankruptcy will not impact your spouse directly, and your spouse does not have to go bankrupt if you do.
However, if your spouse has co-signed any of your debts, they will now be responsible for paying the debt in full.
Additionally, if you co-own your home, you might have to sell to cover the portion of the equity you own that is owed to your bankruptcy estate.
When you meet with the trustee, you will have to explain your situation so they can advise you on the best course of action.
“Are My Wages Garnished to Repay the Debts?”
No. While you might have to pay a portion of your income to your bankruptcy estate if you are a high-income earner, bankruptcy actually stops wage garnishments.
“How Much Debt Do I Need to Have to go Bankrupt?”
Theoretically, you only need $1,000 of debt to file bankruptcy.
However, you should practically have a lot more debt to make bankruptcy sensible.
In addition to the fact bankruptcy costs at least $1,800, it will have an impact on your life for several years.
If you have only a few thousands of dollars of debt you should look into budgeting changes or a debt consolidation loan as a way to get out of debt.
“How Public is a Bankruptcy Filing?”
Many people worry that their friends, family and neighbors will know about their bankruptcy.
In most cases the fact of your bankruptcy is only between you, your creditors and the trustee.
Bankruptcies are not published in the newspaper, except in the cases of high value bankruptcies, where the debtor has millions of dollars in assets.
Bankruptcy records are public; however, people have to go to the court and pay a fee to see the records. In our experience, nobody does this.
Filing Bankruptcy Should Be a Last Resort
Even a licensed insolvency trustee will tell you to avoid bankruptcy at all costs.
Filing bankruptcy is a drastic step that carries lasting consequences.
However, for certain people filing bankruptcy is the correct solution for getting out of debt.
However, before deciding to go for bankruptcy, we recommend you research alternatives such as a consumer proposal.
Many people who initially seek information on bankruptcy end up making a consumer proposal.
This is because a consumer proposal offers many of the benefits of bankruptcy without the drawbacks.
Learn about the difference between bankruptcy and consumer proposals here.
Bankruptcy laws by province
Alberta Bankruptcy Law
Alberta’s Civil Enforcement Act contains information on the bankruptcy law in Alberta.
British Columbia Bankruptcy Law
Manitoba Bankruptcy Law
New Brunswick Bankruptcy Law
New Brunswick’s Memorials and Executions Act contains information on the bankruptcy law in NB.
Newfoundland and Labrador Bankruptcy Law
Nova Scotia Bankruptcy Law
Ontario Bankruptcy Law
Prince Edward Island Bankruptcy Law
PEI’s Judgment and Execution Act contains information on the bankruptcy law in PEI.
Quebec Bankruptcy Law
Quebec’s Code of Civil Procedure contains information on the bankruptcy law in QC.
Saskatchewan Bankruptcy Law
Northwest Territories Bankruptcy Law
NWT’s Exemptions Act contains information on the bankruptcy law in NWT.
Yukon Bankruptcy Law
Yukon’s Exemptions Act contains information on the bankruptcy law in Yukon.
Nunavut Bankruptcy Law
Nunavut’s Exemptions Act contains information on the bankruptcy law in Nunavut.
How to File for Bankruptcy
What is Bankruptcy?
How Does Bankruptcy Work?
What is the Cost of Bankruptcy in Canada?
How to Rebuild Credit Following Bankruptcy
Personal Bankruptcy in Canada
What Debts are Erased in Bankruptcy?