What is Bankruptcy in Canada?
Bankruptcy Meaning Explained
Bankruptcy is a legal process governed by the Bankruptcy and Insolvency Act, which is a federal law.
Once your bankruptcy has been filed, the Stay of Proceedings will go into effect, which puts an end to all collection actions by your unsecured creditors.
Collection calls and any other legal action stops and interest stops accruing.
Wage garnishments, in place or contemplated are also stopped.
Canadian bankruptcies laws are intended to protect you and give you a chance for a fresh start without the burden of overwhelming debts.
Canadian bankruptcy provides individuals, corporations, partnerships, and certain trusts with financial relief when they are burdened by overwhelming debt. The primary goal of bankruptcy is to halt the legal actions of creditors through a stay of proceedings, ensuring fair treatment for all creditors involved.
Our Bankruptcy Calculator will give you the exact cost and how long you will be in bankruptcy.
The insolvency proceedings will give you an automatic discharge at the end of the case (usually 9 months)
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When you receive your bankruptcy discharge all your eligible debts are erased.
You need to use a government licensed insolvency trustee to go bankrupt.
Trustee fees are regulated by the government so all trustees charge the same amount.
You must use a licensed insolvency trustee to file the paperwork to go bankrupt and our trustees are licensed by the Office of the Superintendent of Bankruptcy.
To be insolvent you must:
* Owe $1,000 or more and;
* Be unable to make payments on your debt as the payments become due to be paid.
What is The Process?
The bankruptcy process almost always begins with a voluntarily assignment into bankruptcy although it is possible for someone to be petitioned into bankruptcy by their creditors.
You will work with a Licensed Insolvency Trustee who will administer your bankruptcy, file all necessary paperwork and deal with your creditors on your behalf.
As an officer of the court, the trustee does not work for you or your creditors, although the trustee will ensure that both you and your creditors are treated fairly.
This outline shows the steps involved in a typical straightforward case.
Your trustee will notify your creditors of your bankruptcy, hold the meeting of creditors (if one is requested) and will give you your two required bankruptcy counselling meetings that are part of your bankruptcy duties.
If you have any assets you have to surrender because they are not protected by the exemptions the trustee will hold these assets until they can be sold and then will hold the funds from the sale in trust for distribution to your creditors who have submitted a valid Proof of Claim on debts that you owe to them.
You must finish any of the bankruptcy duties required and make all required payments to your bankruptcy estate in order to receive your bankruptcy discharge.
After you have received your discharge a record of your insolvency will remain on your credit report for up to 7 years although you will be able to rebuild your credit and often, going bankrupt is the only way a person with high debts and poor credit can get a fresh start needed to rebuild your credit rating.
Understanding Bankruptcy Process
1. Voluntary Assignment in Bankruptcy
The bankruptcy process typically begins with a voluntary assignment in bankruptcy. This occurs when a company willingly assigns its property for the benefit of its creditors. Alternatively, creditors can petition the court to have a company declared bankrupt.
2. Licensed Insolvency Trustee
Upon the assignment or petition in bankruptcy, a Licensed Insolvency Trustee (Trustee) is appointed. The Trustee is an independent third party responsible for managing the bankruptcy process. They are licensed by the Office of the Superintendent of Bankruptcy and oversee the administration of the bankruptcy proceedings.
3. Taking Possession of Property
Upon appointment, the Trustee takes possession of the bankrupt’s property, including assets located outside of Canada and property held by third parties. They secure the property and may sell it, subject to the rights of secured creditors who may choose to appoint a Receiver to realize assets.
4. Compilation of Statutory Documents
The Trustee is responsible for compiling statutory documents according to the BIA. They notify creditors of the company’s bankruptcy and investigate the affairs of the bankrupt. Additionally, the Trustee arranges the first meeting of creditors to provide information about the bankruptcy.
5. Sale of Assets and Distribution to Creditors
The Trustee’s primary task is to sell the bankrupt’s property and distribute the proceeds to creditors based on the scheme of distribution outlined in the BIA. Secured creditors and priority claims receive priority in the distribution. If the proceeds are insufficient to fully repay these claims, unsecured creditors may not receive any realizations.
6. Proof of Claim
To participate in the distribution, creditors must submit a Proof of Claim to the Trustee. This document outlines the amount owed to the creditor and undergoes review by both the Trustee and the company. Any discrepancies are investigated, and disputed claims are resolved according to the BIA framework.
7. Discharge and Rehabilitation
Following the distribution to creditors, the Trustee is discharged from their duties, and the bankrupt is usually discharged from their debts. Bankruptcy provides an opportunity for a fresh start and improved financial future for the individual or entity. It is important to note that bankruptcy is not a punishment but a constructive process aimed at debt relief and rehabilitation.
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Is Bankruptcy the Right Choice for You?
Before considering bankruptcy as an option, it is crucial to assess your financial situation and explore alternatives. Bankruptcy is suitable for individuals who are unable to meet their financial obligations and have significant debt. Here are some signs that may indicate bankruptcy as a potential solution:
- Maxed-out Credit Cards: If your credit cards are consistently at their limit, it may be a sign of financial distress.
- Using Credit for Bill Payments: If you rely on credit cards or cash advances to pay bills, it suggests a financial imbalance.
- Missed Payments: If you consistently fail to make monthly payments, it indicates an inability to manage your debts.
- Legal Threats: Receiving letters threatening legal action due to unpaid debts is a warning sign.
- Loss of Income: If a loss of income in your household prevents you from meeting your financial obligations, bankruptcy may be necessary.
- Increasing Debt: Despite making regular payments, if your debt continues to grow, it may be time to consider bankruptcy.
- Reliance on Credit: If the cost of debt leaves no room for everyday expenses, forcing you to use credit cards for essential items, bankruptcy should be considered.
- Financial Stress: Overwhelming stress, sleepless nights, and a negative impact on your well-being due to financial troubles are indicators of serious financial problems.
- Borrowing Limit Reached: If your bank refuses to provide further financial assistance due to your borrowing limit, it may be time to explore bankruptcy.
Consultation with a Licensed Insolvency Trustee
To gain a better understanding of bankruptcy and explore alternatives, it is recommended to schedule a free personal consultation with a Licensed Insolvency Trustee. During this confidential meeting, the Trustee will assess your situation, answer your questions, and provide advice on whether bankruptcy is suitable for your circumstances. They may also suggest alternative solutions such as debt consolidation loans, credit counseling programs, or consumer proposals.
The Bankruptcy Process Explained
In simple terms, the bankruptcy process involves surrendering your non-exempt assets to the Trustee in exchange for the elimination of your debts. Certain exemptions, determined by provincial or territorial governments, allow you to retain essential assets like your home, car, RRSPs, and furnishings.
Once the bankruptcy papers are filed, a stay of proceedings is implemented, preventing creditors from taking legal action or contacting you. The duration of bankruptcy varies based on factors such as income and previous bankruptcies, typically lasting nine to 21 months for first-time bankruptcies.
After filing for bankruptcy, your Trustee will notify creditors, file outstanding tax returns, and provide monthly income statements. Upon discharge, the debts included in the bankruptcy will be canceled, allowing you to start rebuilding your credit.
The Role of a Licensed Insolvency Trustee
A Licensed Insolvency Trustee is the only professional authorized to administer bankruptcies and consumer proposals in Canada. They are highly qualified professionals licensed by the Office of the Superintendent of Bankruptcy. Trustee fees are regulated under the Bankruptcy and Insolvency Act.
The Trustee assesses your financial situation, including assets, income, expenses, and debt levels. They explore alternative options and fully explain the bankruptcy process, helping you make an informed decision. If you proceed with bankruptcy, the Trustee prepares the necessary paperwork and files it with the Office of the Superintendent of Bankruptcy.
Considering the Pros and Cons of Bankruptcy
Bankruptcy offers several advantages for individuals struggling with debt:
- Legal Protection: Bankruptcy provides protection from creditors’ legal actions, such as wage garnishments and judgments.
- Debt Elimination: Most unsecured debts, including credit cards and loans, are extinguished through bankruptcy.
- Timely Resolution: First-time bankruptcies typically last nine to 21 months, allowing individuals to become debt-free relatively quickly.
- Cost-Effective: Compared to continuing to pay off debts, the cost of the bankruptcy process is relatively low.
However, there are disadvantages to consider:
- Credit Score Impact: Bankruptcy lowers your credit score for a minimum of six years from the completion of the bankruptcy.
- Asset Surrender: Certain assets may need to be surrendered, and surplus income may need to be paid into the bankruptcy.
- Financial Reporting: In bankruptcy, you must provide detailed income and expense information to the Trustee.
- Tax Refund Forfeiture: Any income tax refund for the year of bankruptcy is included in the bankruptcy and forfeited to the Trustee.
- Professional Limitations: Bankruptcy may affect your ability to be a director in a corporation or hold certain professional designations.
Consequences and Limitations of Bankruptcy
Bankruptcy has consequences that extend beyond the duration of the process:
- Credit Rating Impact: Bankruptcy remains on your credit report for six years from the date of discharge, potentially affecting your ability to obtain credit.
- Professional Declarations: Some professional applications may require disclosure of bankruptcy history, which can impact your eligibility.
- Truthful Disclosure: If asked, you must truthfully declare your bankruptcy on relevant financial and professional applications.
- Limitations on Debt Discharge: Certain debts, such as student loans within seven years of bankruptcy or obligations arising from fraud, are not discharged in bankruptcy.
- Exemptions to Asset Surrender: Provincial or territorial exemptions determine which assets are exempt from seizure in bankruptcy.
Exploring Alternatives to Bankruptcy
Bankruptcy is not the only solution to overwhelming debt. Licensed Insolvency Trustees consider various alternatives during the assessment process. These alternatives may include debt consolidation loans, credit counseling programs, or consumer proposals. Each option has its own pros and cons, and eligibility varies.
Understanding Length of Bankruptcy
The length of bankruptcy can vary depending on individual circumstances:
- Automatic Discharge: First-time bankruptcies can be discharged automatically in as little as nine months, provided all duties and responsibilities are fulfilled.
- Surplus Income: Higher income levels may require surplus income payments, extending the bankruptcy duration to a minimum of 21 months.
- Credit Report Duration: Bankruptcy remains on your credit report for six years from the date of discharge in most provinces.
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When Does My Discharge Take Longer Than 9 Months?
A discharge usually occurs 9 months after you filed bankruptcy although there are some circumstances that will increase the length of time you will be bankrupt before you receive your discharge.
The conditions that increase the time until you receive your discharge include:
* You have already been bankrupt before;
* You have surplus income;
* You do not complete all of your required bankruptcy duties.
Does The Discharge Clear All Debts?
When you receive your bankruptcy discharge all your eligible unsecured debts, such as credit cards, payday loan debt and income tax arrears are erased.
Secured debts cannot be eliminated in bankruptcy unless the security (Such as a vehicle that is leased or a home that is mortgaged) is given up.
The following debts are not erased:
1) child support payments, 2) alimony payments, 3) court ordered damages and awards, 4) debts obtained by fraud and 5) student loan debt if you have ceased being a part time or full time student less than 7 years ago.
Secured creditors are not impacted by your bankruptcy, as secured debts cannot be discharged through going bankrupt.
Exceptions and Factors Affecting Bankruptcy
Exceptions and factors may impact the discharge of debts and surrender of assets:
- Exceptions to Discharge: Certain debts, such as secured loans or obligations related to family support, are not discharged in bankruptcy.
- Exemptions to Asset Surrender: Provincial or territorial exemptions protect essential assets from seizure during bankruptcy.
- Surplus Income: Payment of surplus income is required if your income exceeds the threshold determined by law.
- Multiple Bankruptcies: There is no limit to the number of times you can file for bankruptcy, but each successive bankruptcy may have longer durations and additional considerations.
Bankruptcy is a complex process that requires careful consideration. Consulting with a Licensed Insolvency Trustee can provide valuable insights into your specific situation and help you make an informed decision.
Remember, bankruptcy is not a shameful or punitive process; it offers an opportunity for a fresh start, debt relief, and a better financial future.