Bankruptcy is a legal process that can provide a fresh financial start for individuals overwhelmed by debt. However, it is not a solution available to everyone. In Canada, certain qualifications must be met.
The Four Primary Eligibility Criteria for Bankruptcy
To be eligible to file for bankruptcy in Canada, four basic requirements must be satisfied:
- Canadian Connection: The individual must reside in Canada, conduct business in the country, or own property within its borders.
- Minimum Debt: The individual must be in debt of at least $1,000.
- Inability to Pay Debts: The individual must be unable to meet the payment requirements of the owed debts as they come due.
- Debt Exceeding Asset Value: The individual’s total debt value must surpass the total value of their assets.
By satisfying these four prerequisites, an individual may be considered eligible to declare bankruptcy.
Bankruptcy Eligibility Determination
The determination of bankruptcy eligibility is made by a Licensed Insolvency Trustee (LIT). LITs also oversee the filing of consumer proposals, which like bankruptcy, require a minimum debt of $1,000.
After conducting a comprehensive review of the individual’s debts, assets, and budget, the LIT assesses whether they can afford to meet the payment requirements of their bills. Additionally, the total debt amount is compared to the total asset value.
If the individual is unable to pay their bills and their debt surpasses their asset value, they are declared insolvent, which makes them eligible to file for bankruptcy.
Should you be eligible, the LIT will manage the bankruptcy process for you, setting up a trust, supervising the sale of non-exempt assets, and using the proceeds to pay your creditors.
Dissecting Bankruptcy Eligibility Requirements
Requirement 1: Canadian Connection
Citizenship is not a requirement to file for bankruptcy in Canada. You simply need to have a connection to Canada in one of three ways:
- Residing in Canada.
- Conducting business in Canada.
- Owning property in Canada.
Both Canadians living abroad and permanent residents can file for bankruptcy.
Requirement 2: Minimum Indebtedness
A straightforward requirement, most individuals seeking debt relief will meet this criterion. Simply add up all balances on loans, lines of credit, and credit cards. If the total exceeds $1,000, this requirement is met.
Requirement 3: Insufficient Income
The third requirement might pose a challenge for some. The LIT will scrutinize the individual’s budget and determine whether they can afford their monthly debt obligations. However, living paycheque to paycheque doesn’t necessarily mean that the LIT will determine that you can’t afford to pay your bills. If your budget includes discretionary expenses that could be reduced, you may not meet this requirement.
Requirement 4: Asset Value
This is where things can get intricate. The LIT will contrast the total value of your assets with your total debt amount. If the value of your assets exceeds your debt, you won’t qualify. To qualify, your debt must surpass what you could afford to repay if you sold all your assets.
Alternatives If Bankruptcy Qualification Is Not Met
If bankruptcy is not an option due to not meeting the asset value requirement, the LIT may suggest a consumer proposal. In this case, the LIT will decide how much of your debt can be realistically repaid and will create a repayment plan that both you and your creditors must follow.
Considering Other Options Before Contacting a Trustee
Before deciding to contact a LIT, it’s important to explore all other options for debt relief. These options include:
- Debt consolidation.
- Credit counselling.
- Debt settlement.
- a Consumer Proposal.
These methods can provide a means to pay back the owed amount more efficiently by minimizing interest.
Key Questions to Ask
Can Lower Payments Provide Relief?
A key qualification for bankruptcy is the inability to afford debt payments. However, before filing for bankruptcy, it’s crucial to consider whether reducing your payments would allow you to regain stability. Debt consolidation loans, debt management plans, and debt settlement programs can all potentially lower your monthly payments.
Are Interest Charges the Real Problem?
Another important consideration is whether your debts or the interest charges on them are the actual problem. Particularly with credit cards, APR can be 20% or higher, making it difficult to pay off the debt. By reducing or eliminating the APR, you may be able to pay off your debt.
What Are the Consequences of Bankruptcy?
The final consideration before deciding on bankruptcy is the potential loss. Your two biggest concerns should be your assets and your credit score. Bankruptcy can result in the liquidation of any non-exempt assets and significant damage to your credit score.
By understanding these requirements and considerations, you’ll be better equipped to answer the question: “Who qualifies for bankruptcy in Canada?”
