What Happens When You Declare Bankruptcy In Canada?

What Happens When You Declare Bankruptcy In Canada?

Understanding the Process

With the current economic downturn, more people are finding themselves in financially challenging situations. People are asking the critical question, “What Happens When You Declare Bankruptcy in Canada?” This article aims to shed light on this complex issue.

What is Bankruptcy?

To begin, it’s essential to understand what bankruptcy means. Bankruptcy is a legal procedure that provides a fresh financial start for individuals or businesses who cannot repay their debts. The process involves surrendering certain assets in return for the discharge of debts.

Bankruptcy in Canada: An Overview

In Canada, bankruptcy is a legal process governed by the Bankruptcy and Insolvency Act. The primary objective is to allow honest but unfortunate debtors to be discharged from their debts. It’s an opportunity for individuals facing overwhelming debt to get a fresh start.

The Role of a Licensed Insolvency Trustee

When declaring bankruptcy, one needs to engage a Licensed Insolvency Trustee (LIT). An LIT is a professional licensed by the Office of the Superintendent of Bankruptcy Canada. They are responsible for ensuring the process is carried out according to Canadian law.

The Bankruptcy Process in Canada

The bankruptcy process in Canada begins with a thorough assessment of your financial situation. This includes a comprehensive review of your income, expenses, assets, and liabilities. You’ll discuss various debt relief options with your LIT to determine if bankruptcy is the best solution for your situation.

Upon filing for bankruptcy, you surrender certain assets to your LIT. The LIT then sells these assets to repay your creditors. In return, most of your debts are discharged.

Exceptions to the Rule: Debts That Are Not Discharged

It’s important to note that not all debts are discharged in bankruptcy. These include:

  • Student loans less than seven years old
  • Child and spousal support
  • Court-ordered damages for sexual assault or intentionally inflicting bodily harm
  • Debts that arose as a result of fraud, embezzlement, or misappropriation
  • Certain government overpayments

Secured and Unsecured Debts

Debts in bankruptcy can be classified into two categories: secured and unsecured. Secured debts are those tied to an asset, like a house or car. If you don’t make payments, the lender can take the asset. Unsecured debts, on the other hand, are not tied to any asset. Credit card debt, medical bills, and personal loans fall into this category.

In a bankruptcy scenario, secured creditors are treated differently. While most unsecured debts are discharged in bankruptcy, secured debts may stay depending on your situation.

The Impact of Bankruptcy on Credit Rating

Bankruptcy has a significant impact on your credit rating. It remains on your credit report for six years after discharge. This can make it more challenging to obtain credit in the future.

Alternatives to Bankruptcy: Consumer Proposals

If your debt—excluding your mortgage—does not exceed $250,000, you may consider making a consumer proposal instead of declaring bankruptcy. This is an offer to pay your creditors a percentage of what you owe or extend the time you have to pay off the debts.

A consumer proposal is often a better alternative as it has a lesser impact on your credit rating. It allows you to consolidate your debts into a single monthly payment and stop interest charges.

Rebuilding Credit After Bankruptcy

After completing the bankruptcy process or a consumer proposal, it’s crucial to work on rebuilding your credit. This can be done by consistently making payments on time, maintaining a low balance on your credit cards, and not applying for too much new credit at once.


Declaring bankruptcy in Canada is a serious decision that should not be taken lightly. It’s important to understand the process, the impact on your credit, and the alternatives available. Always consult with a Licensed Insolvency Trustee to discuss your unique situation and determine the best course of action.

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