If debt is always on your mind, keeping you up at night, straining your relationships, and leaving you feeling stuck, you’re not alone. Many Canadians reach a point where they can no longer afford to pay their bills and are overwhelmed by the stress. Bankruptcy is one option that can eliminate most of your unsecured debts and provide a fresh financial start.
In this article, we’ll explain who can file for Bankruptcy in Canada, how to file, and what you can expect along the way.
What is Bankruptcy?
Bankruptcy is a legal process that discharges individuals or businesses from most of their unsecured debts. Bankruptcies in Canada are governed by the Bankruptcy and Insolvency Act (BIA) and can only be administered by a Licensed Insolvency Trustee (LIT).
While filing for Bankruptcy is usually the last resort, the purpose is not to punish; it’s to help honest debtors get a second financial chance.
Who Can File for Bankruptcy?
You can file for personal Bankruptcy in Canada if:
- You’re insolvent (can no longer pay your debts when they’re due)
- You have debts over $1,000
How to File for Bankruptcy
If you want to file for Bankruptcy, the first step is to meet with a Licensed Insolvency Trustee (Previously known as a Bankruptcy Trustee). A LIT is a debt expert and the only professional in Canada authorized to administer a Bankruptcy proceeding. By meeting with a LIT, you can confirm if Bankruptcy is the right debt relief option for you or if there are other alternatives.
Debt has many solutions, and a LIT is there to find what works for your situation.
If you and your LIT decide Bankruptcy is the right choice, you’ll work together to complete the required documentation, and then your LIT will file this information with the Office of the Superintendent of Bankruptcy (OSB). From this point forward, your trustee will deal with your creditors on your behalf.
What to Expect During Bankruptcy?
As soon as you declare Bankruptcy in Canada, you’ll find some immediate relief.
- You stop making payments to your unsecured credits
- Any wage garnishment will stop
- All collection calls from collection agencies should stop
- Any creditor lawsuits against you will stop
You will lose some of your assets
Provincial and federal laws outline a list of assets that are exempt from sale in Bankruptcy. So, while you won’t lose all of your assets, you will lose some. As part of the Bankruptcy process, your LIT will sell your non-exempt assets to raise money to repay your creditors.
Whether or not you lose your house will depend on two criteria:
- If you can afford to keep up with your mortgage payments
- The amount of home equity you’ve built
If you fall behind on your mortgage payments, your home can go into foreclosure. If you have more equity in your home than is allowed by your province or territory, you might need to sell your home.
For example, in Alberta, you can keep your primary residence, providing your home equity doesn’t exceed $40,000. In Nova Scotia, New Brunswick, Quebec, Prince Edward Island, and Ontario, there is no exemption for equity in real estate.
Most of your unsecured debts are eliminated
Filing for Bankruptcy will eliminate most of your unsecured debts, including:
- Bank loans
- Credit card debt
- Lines of credit
- Payday loans
- Personal loans
- Student loans (if you’ve been out of school for more than seven years)
- Tax debt
There are some unsecured debts that are not included in Bankruptcy. Examples include debt from spousal support, child support, court fines and penalties, and debt arising from fraud.2
You will have to attend two financial counselling sessions
The two mandatory counselling sessions are meant to help you get to the bottom of your debt issues. You’ll explore how you ended up in debt in the first place and get tips for how to prevent it from happening in the future.
Do you have Surplus Income? – You may be required to make surplus income payments
Each month, you have to submit a copy of your paystubs to your LIT as proof of income. Your LIT will then calculate if you have surplus income.
**Surplus income is the amount of your earnings that exceeds the amount your family needs to maintain a reasonable standard of living, as set by the OSB.
You will be discharged from Bankruptcy
If you fulfill all of the conditions of your Bankruptcy, you’ll be discharged. This means you’re released from your legal obligation to repay the debts you had from the date you filed.
In a first Bankruptcy, you’re automatically discharged from Bankruptcy nine months after filing if you aren’t making surplus payments.
If you are making payments, it is 21 months after filing.
Who Should File for Bankruptcy?
Deciding if you should file for bankruptcy is a big and often intimidating decision. If you’re overwhelmed by your debt and can no longer manage to pay your bills on time or at all, it might be the right option.
A Licensed Insolvency Trustee can help determine if you’re eligible for Bankruptcy and will assess your finances to determine if it’s the best option for you, or if you have other alternatives.
Alternatives to declaring Bankruptcy
Some alternatives to Bankruptcy include:
- Credit counselling. A credit counsellor can provide education about money management and provide coaching on things like budgeting and proper use of credit.
- Debt consolidation. Use a debt consolidation loan or a balance transfer credit card to consolidate multiple debts into one payment, ideally with a lower interest rate. You will require a decent credit score for this option, and have to speak to your lender.
- Consumer Proposal. Like Bankruptcy, a Consumer Proposal is a legal debt-relief solution. In a Proposal, you and your LIT create an offer to your creditors to pay a percentage of your debts, extend the time you have to pay, or both.
Is Bankruptcy Right for You?
If you’re questioning whether filing for Bankruptcy is the right option for you, contact Allan Marshall & Associates to speak to a Licensed Insolvency Trustee. A LIT will assess your finances and help you decide which debt relief option is best for your situation. For a free, no-obligation consultation, you can call us at 1-888-371-8900 or complete our online contact form. You don’t have to deal with debt alone, we can help.
