Short Answer: What Is Personal Bankruptcy in Canada?

Personal bankruptcy in Canada is a legal process that eliminates most unsecured debts for an insolvent individual who cannot afford to repay what they owe. It is governed by the Bankruptcy and Insolvency Act and can only be filed through a Licensed Insolvency Trustee (LIT).

When you file personal bankruptcy:

• A stay of proceedings usually stops collection calls, wage garnishments, and most lawsuits.
• You make monthly payments based on your income and household situation.
• You complete certain duties (budget reports, counselling, etc.).
• At the end of the process, you receive a discharge that erases most unsecured debts.

The Government of Canada provides an overview here: Considering Bankruptcy – Office of the Superintendent of Bankruptcy.

What Is Personal Bankruptcy in Canada?

Personal bankruptcy is a legal process designed to give an honest but unfortunate debtor a fresh financial start. It is intended for individuals whose debts are so large that they cannot reasonably be repaid, even with lower interest or consolidation.

Key points about personal bankruptcy in Canada:

• It is governed by the federal Bankruptcy and Insolvency Act.
• It is overseen by the Office of the Superintendent of Bankruptcy (OSB).
• It must be filed and administered by a Licensed Insolvency Trustee.
• It typically lasts 9–21 months for a first-time bankruptcy, longer for repeat bankruptcies.

For a consumer-friendly overview, see also: RBC – Personal Bankruptcy in Canada: Your Top 10 Questions Answered.

Who Can File Personal Bankruptcy in Canada?

You may be eligible to file personal bankruptcy if:

• You owe at least $1,000 in unsecured debt.
• You are insolvent (you cannot pay your debts as they come due and your total debts exceed the value of your assets).
• You live in Canada, carry on business here, or own property in Canada.

Your Licensed Insolvency Trustee will confirm if you meet these criteria and whether personal bankruptcy—or another solution—is the best fit.

How Personal Bankruptcy Works: Step-by-Step

Step 1: Free Confidential Consultation with a LIT

Your first step is to meet with a Licensed Insolvency Trustee. Most LITs offer a free consultation to review:

• Your debts, income, expenses, and assets.
• Your goals and concerns (e.g., keeping your home or car).
• All options: budgeting, debt consolidation, credit counselling, Debt Management Plans, consumer proposals, and bankruptcy.

Step 2: Decide if Bankruptcy Is the Best Option

Personal bankruptcy is usually considered when:

• You cannot realistically repay your debts within a few years, even with lower interest.
• You face wage garnishments, lawsuits, or CRA collection actions.
• Your debt level is too high for consolidation or a Debt Management Plan to work.

If a consumer proposal can give you enough relief, your LIT may recommend that instead of bankruptcy.

Step 3: Provide Financial Information

If you choose personal bankruptcy, you will provide documents such as:

• Pay stubs or proof of income.
• Bank and credit card statements.
• Mortgage, loan, and line of credit statements.
• Recent tax returns and notices of assessment.
• Information about assets: home, vehicles, RRSPs, investments, etc.

Your LIT uses these to prepare your official bankruptcy forms.

Step 4: Sign the Bankruptcy Documents

You will review and sign:

• An Assignment in Bankruptcy (your legal declaration).
• A Statement of Affairs (detailed list of assets, debts, income, expenses).

Your LIT then files these with the OSB electronically.

Step 5: Stay of Proceedings Begins

Once personal bankruptcy is filed:

• A stay of proceedings generally stops wage garnishments and most creditor lawsuits.
• Creditors must stop most direct collection actions and deal with your LIT instead.
• Your LIT notifies your creditors and administers your bankruptcy estate.

Step 6: Complete Your Duties

During bankruptcy, you must:

• Make required monthly payments (including any surplus income if your income is above OSB guidelines).
• Submit monthly income and expense reports to your LIT.
• Attend two financial counselling sessions.
• Provide information/documents when requested.

Details on your duties are outlined by the Government of Canada here: Your Duties While Bankrupt.

Step 7: Discharge from Personal Bankruptcy

At the end of your bankruptcy, if you have met all of your duties, you will receive a discharge. This is the point at which you are legally released from most of your unsecured debts.

For a first-time bankruptcy with no surplus income and no complications, discharge is often after 9 months. If you have surplus income or previous bankruptcies, it may take longer.

Cost and Timeline of Personal Bankruptcy in Canada

The cost and length of personal bankruptcy depend on several factors:

• Your income and whether surplus income applies.
• Your household size.
• The value of any non-exempt assets.
• Whether this is your first or a subsequent bankruptcy.

Generally:

• First-time bankruptcy, no surplus income: Often discharged after 9 months with basic monthly payments.
• First-time bankruptcy with surplus income: May last 21 months, with higher monthly payments.
• Second or subsequent bankruptcy: Typically longer and more costly.

Your payments include your LIT’s fees, which are set by federal tariff and paid from your estate. For more details, see our guide: Bankruptcy Cost in Canada.

What Happens to Your Assets and Debts in Personal Bankruptcy?

Assets and Exemptions

Each province and territory has laws that protect certain exempt assets, such as:

• Basic household furniture and personal items.
• Tools of the trade up to a specific value.
• A modest vehicle (up to a provincial limit).
• Most RRSP contributions more than 12 months old.

If you have non-exempt assets (for example, significant equity in a home or a second vehicle), your LIT must realize that value for your creditors. Often, you can “buy back” the equity through additional payments instead of losing the asset.

Debts Discharged vs Not Discharged

Most unsecured debts are eliminated in personal bankruptcy, including:

• Credit cards and lines of credit.
• Personal loans and payday loans.
• Many tax debts owed to the Canada Revenue Agency.
• Overdrafts and certain old bills in collections.

Some debts are not discharged, such as:

• Child and spousal support.
• Most student loans less than 7 years from end of studies.
• Court fines and penalties.
• Debts arising from fraud or misrepresentation.

Your LIT will review each of your debts and explain which ones would remain after discharge. For more on the consequences of bankruptcy, see our page on the Effects of Claiming Bankruptcy.

Pros and Cons of Personal Bankruptcy

Potential Advantages

• Eliminates most unsecured debts, giving you a fresh start.
• Provides a legal stay of proceedings to stop most collection actions and garnishments.
• Stops interest on most unsecured debts included in the bankruptcy.
• May be the most affordable option if your income is low and you have few assets.

Potential Disadvantages

• Personal bankruptcy appears on your credit report for several years (typically 6–7 years after discharge for a first-time bankrupt).
• You may lose or need to buy back non-exempt assets.
• Your income is monitored, and surplus income can increase cost and duration.
• Certain debts (support, recent student loans, fines, fraud) are not discharged.

Alternatives to Personal Bankruptcy

Before deciding on personal bankruptcy, it’s important to explore all your options:

• Consumer proposal: A legally binding settlement where you repay a portion of your unsecured debt with no interest. It can be easier on your credit than bankruptcy. See Consumer Proposal in Canada.
• Debt consolidation: A new loan or line of credit that combines your debts at a lower interest rate. See Debt Consolidation in Canada.
• Credit counselling and Debt Management Plans: Non-profit agencies can reduce interest and consolidate payments, usually repaying 100% of your debt. See Credit Counselling and Debt Management.
• Informal arrangements: Negotiating directly with creditors for modified terms.

Our Debt Relief in Canada guide compares these options side by side.