Understanding Bankruptcy in Canada: A Comprehensive Guide
Declaring bankruptcy in Canada is a significant financial decision, and understanding the implications is crucial. This comprehensive guide will delve into the details of what happens when you declare bankruptcy in Canada, providing a clear picture of the process, its impact, and the potential outcomes.
1. Grasping the Concept of Bankruptcy
Bankruptcy is a legally declared inability or impairment of the ability of an individual or organization to pay their creditors. In Canada, personal bankruptcy is a legal process that provides relief to individuals who cannot afford to pay off their debts.
1.1 Basic Principles of Bankruptcy
The primary principle behind bankruptcy is the surrendering of assets in return for the discharge of debts. However, certain debts and assets are exempt from this process. For instance, not all assets are surrendered, and not all debts are discharged. Specific creditors, referred to as secured creditors, are treated differently due to their rights over particular assets.
1.2 Secured vs. Unsecured Creditors
Secured creditors have a claim on specific assets. For example, a finance company that financed your car purchase is considered a secured creditor as they have a right over your vehicle. Similarly, a bank or finance company with a mortgage on your home is a secured creditor. These creditors have special treatment during bankruptcy, and their debts may not be entirely cleared.
On the other hand, unsecured debts are those not backed by an underlying asset and include credit card balances, personal loans, unpaid utility bills, and more. These debts are typically discharged during bankruptcy, providing significant relief to the debtor.
2. The Legal Framework Governing Bankruptcy in Canada
In Canada, federal bankruptcy laws are set out in the Bankruptcy & Insolvency Act (BIA). The BIA outlines three types of insolvency proceedings for individuals seeking relief from their debts: personal bankruptcy, consumer proposal, and a Division I proposal.
2.1 Role of a Licensed Insolvency Trustee
Bankruptcy can only be filed with a Licensed Insolvency Trustee. The trustee ensures that the bankruptcy process is carried out fairly for both the debtor and creditors. They provide immediate protection from creditor actions, known as an automatic stay of proceedings. It ensures that collection agencies and creditors stop calling and allows the trustee to stop a wage garnishment.
3. Eligibility for Bankruptcy
To file for bankruptcy in Canada, you must be an insolvent person. This means you owe at least $1,000 in unsecured debt, you are unable to pay your debts as they come due, or you owe more in debts than the value of the assets you own. You must also either reside, do business, or have property in Canada.
4. Implications of Declaring Bankruptcy in Canada
Upon declaring bankruptcy, several aspects of your financial life are impacted, including your possessions, debts, and credit score.
4.1 Impact on Assets
The consequences of declaring bankruptcy do not necessarily mean loss of all possessions. You can usually retain most personal belongings, household furnishings, and tools of trade used to earn your income. Moreover, it’s possible to keep assets like a car or a house, as long as you can keep up with monthly payments.
4.2 Impact on Debts
Bankruptcy will clear most, if not all, of your unsecured debts. Debts that you owe as of the date of filing are included in your bankruptcy. However, some debts cannot be forgiven through bankruptcy, including spousal and child support payments, debts due to fraud, and court fines.
4.3 Impact on Credit Score
Your credit rating will fall because of filing bankruptcy; however, this is temporary. The information about your bankruptcy will remain on your report for six to seven years for a first bankruptcy, but this does not mean you have to wait that long to get new credit.
5. The Bankruptcy Process
The bankruptcy process involves several steps, including filing paperwork, attending credit counselling sessions, and fulfilling your bankruptcy duties.
5.1 Duration of Bankruptcy
The length of bankruptcy depends on various factors, including whether you’ve declared bankruptcy before and your income level. If you are a first-time bankrupt with no surplus income, have completed all your duties, and if no creditors object, you could begin your life debt-free in just 9 months.
6. Life after Bankruptcy
Once your bankruptcy is over, you will receive your discharge certificate. This is the bankruptcy step that releases your obligation to pay back your remaining debts.
6.1 Rebuilding Credit
While bankruptcy does negatively impact your credit score, rebuilding it is possible. Many people can get a secured credit card and car loan soon after filing. Therefore, bankruptcy can, in some cases, be a fresh start, providing relief from significant debts.
7. Implications for Spouses
If your debts are your own, your spouse is not affected by your bankruptcy. However, if you have joint debt, your creditor will pursue your spouse for collection. In this case, you may want to talk to your trustee about a joint bankruptcy.
8. Responsibilities During Bankruptcy
During your bankruptcy, you have several obligations known as bankruptcy duties. These include sending your trustee proof of your income every month, paying your trustee if you have surplus income, completing two credit counselling sessions, and attending a creditor meeting or bankruptcy court if required.
9. Alternatives to Bankruptcy
Bankruptcy is not always the only solution. A trustee will review your financial situation and discuss potential alternatives to bankruptcy, such as filing a debt management plan, taking out a debt consolidation loan, or making a proposal to creditors.
10. Making the Decision to Declare Bankruptcy
Deciding if bankruptcy is the right solution for you begins with a free financial assessment of your situation. A good trustee does not assume declaring bankruptcy is what you should do. The goal of talking with a Licensed Insolvency Trustee is to discuss your personal financial situation and debts. Your trustee will look at the big picture, which can be hard to do when you are avoiding calls from collection agencies and trying to figure out how to make your next bill payment.
If filing bankruptcy in Ontario is the right solution for you, your trustee will fully explain the process and answer any further questions you may have.
Declaring bankruptcy in Canada is a significant step, and understanding what happens when you declare bankruptcy in Canada is crucial in making an informed decision. It is recommended to seek advice from a Licensed Insolvency Trustee to ensure you understand the implications and potential outcomes of this financial decision.
