What Happens When You Declare Bankruptcy in Canada?

Personal bankruptcy in Canada offers a legal pathway to financial relief for individuals unable to manage their debts. Governed by the federal Bankruptcy and Insolvency Act, this process aims to provide a fresh start for debtors while ensuring fair distribution to creditors. Its purpose is to discharge most outstanding debts, allowing individuals to rebuild their financial life under reasonable conditions. This framework provides protection from collection efforts and offers a structured approach to debt resolution.

Initiating the Bankruptcy Process

Personal bankruptcy in Canada begins with consulting a Licensed Insolvency Trustee (LIT). LITs are federally regulated professionals authorized to administer consumer proposals and bankruptcies, acting as intermediaries between debtors and creditors.

During the initial consultation, the LIT assesses the individual’s financial situation, reviewing assets, liabilities, and income to determine the most suitable debt relief option. Individuals should come prepared with documentation to facilitate an accurate assessment. The LIT explains available options, primarily distinguishing between a consumer proposal and bankruptcy. A consumer proposal involves offering creditors a percentage of the debt over a period, often allowing the debtor to retain assets, while bankruptcy generally involves surrendering non-exempt assets.

Once bankruptcy is chosen, the individual signs necessary documents detailing assets and debts. The LIT then files these documents with the Office of the Superintendent of Bankruptcy, the federal body overseeing insolvency proceedings. Bankruptcy officially begins on the date of filing, at which point a “stay of proceedings” automatically takes effect, stopping most collection calls and legal actions from creditors.

Administration of the Bankruptcy Estate

After the bankruptcy is formally initiated, the LIT assumes control over the bankrupt individual’s non-exempt assets and notifies all creditors of the proceedings. The LIT’s responsibilities include managing the bankruptcy estate and ensuring compliance with the Bankruptcy and Insolvency Act. While certain assets are surrendered, Canadian law provides for exempt assets, allowing the bankrupt individual to retain basic necessities. These exemptions vary by province but commonly include equity in a primary residence up to a certain limit, basic household furnishings, tools of trade, certain vehicles, and most pension plans.

The treatment of debts during bankruptcy differs based on their nature. Unsecured debts, such as credit card balances, personal loans, and tax debts, are generally discharged through the bankruptcy process. Secured debts, however, are treated differently; these are loans tied to specific assets like mortgages or car loans. While secured creditors cannot typically cancel the loan due to bankruptcy, the individual must continue making payments on these debts to retain the asset. If payments cease, the secured creditor retains the right to seize the collateral.

During the bankruptcy period, the individual has specific obligations, including attending two mandatory financial counselling sessions with the LIT. These sessions provide guidance on budgeting, money management, and strategies for rebuilding financial health. Additionally, the bankrupt individual must submit monthly income and expense reports to the LIT, providing a detailed account of their financial activity. This reporting helps calculate “surplus income,” which is the portion of an individual’s income exceeding a government-set threshold based on family size.

If an individual’s income surpasses this threshold, they are required to make payments to the bankruptcy estate. For a first-time bankrupt, the period can be nine months without surplus income, but it extends to 21 months if surplus income payments are required. A meeting of creditors may also be called, though this is relatively rare in consumer bankruptcies, occurring primarily if requested by a significant portion of creditors or in larger, more complex cases.

Financial Implications and Discharge

Filing for bankruptcy impacts an individual’s credit report, typically resulting in an R9 credit rating, the lowest possible. This notation remains on the credit report for six to seven years after discharge. Once bankruptcy is filed, a “stay of proceedings” stops most collection calls and legal actions from creditors, providing immediate relief from harassment and wage garnishments.

After the bankruptcy period, a discharge legally releases the individual from most unsecured debts. Conditions for discharge include fulfilling all duties, such as attending counseling sessions and making any required surplus income payments.

There are different types of discharge. An absolute discharge is the most common and releases the individual from most debts without conditions. A conditional discharge means certain conditions must be met before an absolute discharge is granted, such as making additional payments. A suspended discharge delays the effective date of the absolute discharge, while a refused discharge is rare and means the individual is not released from their debts. An absolute discharge legally releases the individual from most unsecured debts, providing a fresh financial start.

However, certain debts are not discharged by bankruptcy in Canada. These typically include student loans if it has been less than seven years since the individual ceased being a student, child support and alimony payments, court-imposed fines or penalties, and debts incurred through fraud. Secured debts also remain, requiring continued payments to retain the associated asset.