What Happens When Your Parents Declare Bankruptcy?

What Happens When Your Parents Declare Bankruptcy?

Navigating the Implications of Parental Bankruptcy

The prospect of your parents declaring bankruptcy can be a daunting one. This article aims to shed light on the legal and financial repercussions of such a situation, answering the question – What Happens When Your Parents Declare Bankruptcy?

Understanding Bankruptcy

Bankruptcy refers to a legal state where an individual or entity cannot repay their debts to creditors. It’s a process overseen by federal bankruptcy courts and is often a last resort for those drowning in debt.

The Role of a Licensed Insolvency Trustee

In Canada, this process is facilitated by a Licensed Insolvency Trustee (LIT). They are professionals authorized to administer bankruptcy and proposal estates. If your parents are considering filing for bankruptcy, the LIT will guide them through the process.

What Does Bankruptcy Entail?

When your parents file for bankruptcy, they agree to surrender certain assets in exchange for the dissolution of their debts. Not all assets are subject to this, as some are considered exempt under the Bankruptcy and Insolvency Act.

The Pros and Cons of Bankruptcy

While bankruptcy can offer a fresh financial start, it’s not without drawbacks. Here are some advantages and disadvantages:




  • Ends harassment from debt collectors.
  • Stops wage garnishment.
  • Protects certain assets like Registered Retirement Savings Plans (RRSPs).




  • Negatively impact credit score for six years (or 14 years for a second bankruptcy).
  • Difficulty securing low-interest loans.
  • Potential issues finding housing or co-signing loans.


Alternatives to Bankruptcy

Filing for bankruptcy isn’t the only solution to financial hardship. Alternatives like a consumer proposal might be a more appropriate course of action. This involves making a formal offer to creditors to pay back a portion of their debt over a period of time.

The Impact on Inheritance

A common concern when parents declare bankruptcy is the potential impact on inheritance. It’s important to understand that while an inheritance may include your parents’ debts, the estate is responsible for settling these, not the heirs directly. A LIT can help protect your inheritance by filing a consumer proposal or bankruptcy on behalf of the estate.

The Importance of Open Communication

When confronting the prospect of parental bankruptcy, open dialogue is crucial. Discussing their financial situation and exploring potential solutions can help prevent unexpected burdens from being passed down.

Seeking Professional Help

Professional advice can be invaluable in navigating the intricacies of bankruptcy. Firms like Bankruptcy Canada offer services to help Canadians out of debt, providing a new financial beginning. Whether you need a free consultation or a virtual appointment, we’re ready to assist.


Understanding What Happens When Your Parents Declare Bankruptcy? can be overwhelming, but knowledge is power. By staying informed and seeking professional advice, you can help your parents navigate this challenging situation and protect your own financial future.

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