In its simplest terms, bankruptcy is a legal procedure that is intended to clear you of your debts so you can make a fresh financial start.In Canada, the Canadian Bankruptcy and Insolvency Act (BIA) is federal legislation enacted to allow “honest but unfortunate debtors” a chance to make a fresh financial start. In other words, it’s a process designed to help someone start over with a clean slate financially should they find themselves overwhelmed by too much debt.
Bankruptcy protection is only available through the services of a licensed bankruptcy trustee.In order to be able to file for bankruptcy, you must meet the following criteria:
- You must owe at least $1,000.
- You are not be able to make your payments as they come due.
- You do not have sufficient assets to pay off your debt.
Generally speaking, the upside of bankruptcy is that it doesn’t affect your employment, it lets you cease making payments to unsecured creditors, it prevents your wages from being garnished, and it stops the harassment of collection calls and legal proceedings.
However, while bankruptcy may seem to be a straightforward solution to your financial problems, it isn’t a process to be taken lightly. In addition to surrendering your assets to your trustee, you will also have to meet other obligations set forth by the government:
- You must give up all your credit cards.
- You must attend two financial counselling sessions during your bankruptcy term.
- You must file monthly statements of income and expenses to your trustee for the duration of your bankruptcy period.
- You may be required to make surplus income payments to your trustee each month that you’re in bankruptcy. Surplus income payments are determined according to set rules depending on your level of income and number of dependents. These payments will be distributed to your creditors.
In addition, if you’re considering this as a possible solution to your financial situation, you should also be aware of the following:
- Not all debts are released by bankruptcy. If you are paying child or spousal support, those payments will continue. Certain student loans, debts arising from fraud, and court fines are also not included in a bankruptcy and must still be paid in full.
- If your employment requires you to be bonded, bankruptcy could make it more difficult to obtain bonding.
- Filing will have a negative impact on your credit rating. It will remain on your record for approximately seven years after you complete your bankruptcy term.
The length of time you will be in bankrupt varies depending on your circumstances. If this is your first time, you have no surplus income, and you meet all of your obligations, you’ll receive an automatic discharge after nine months. If you do have surplus income, you’ll be required to make payments for an additional 12 months after that. For second-time bankrupts, the term is 24 months if you have no surplus income, and 36 months if you do. Listed below is a list of frequently asked questions about Bankruptcy.
- Do I need a lawyer?
- How do I file for bankruptcy?
- What meetings do I have to attend?
- What will a bankruptcy trustee do for me?
- What does it cost to file for bankruptcy?
- Will bankruptcy eliminate all my debts?
- Will I have to make any payments?
- Who will know I’ve filed for bankruptcy? Will a notice be published in the newspaper?
- What happens to my student loan debt if I go bankrupt?
- Will filing for bankruptcy affect my credit rating?
- How will my creditors know I have filed for bankruptcy?
- Can a bank refuse to open an account for me because I’m bankrupt?
- When will my creditors stop calling me for payment?
- What if you have a significant tax debt?
- Can taxes that I owe be included in my bankruptcy?
- If I file for bankruptcy will I lose my home?
- When is my bankruptcy over?
- Will my husband or wife be held responsible for my debts?
- What is counselling and do I have to take it?
- What’s the difference between a bankruptcy trustee and a credit counsellor?
- How does surplus income work?
- Are any of my assets exempt?
- What defines my property in a bankruptcy?
- Do I still have to pay child support if I go bankrupt?
- What about my wages during bankruptcy?
- Where can I get more information about personal bankruptcy?
Do I need a lawyer?
Only a licensed bankruptcy trustee can initiate and process bankruptcy proceedings. You generally don’t need a lawyer unless your circumstances are particularly complex, in which case your trustee will work with your choice of counsel.Back to Index
How do I file for bankruptcy?
You must see a bankruptcy trustee who will:
- review your financial situation with you, usually for free
- prepare the documents you need
- guide you through the signing process
- provide you with financial counselling to help you manage your finances in the future
What meetings do I have to attend?
In addition to the two mandatory financial counselling sessions, you’ll have to attend an occasional meeting with a creditor to discuss your finances if you’re requested to do so. This generally doesn’t happen unless you have creditors of a personal nature.Creditors and the Office of the Superintendent of Bankruptcy also carry out random examinations which you’re required to attend if asked.Back to Index
What will a bankruptcy trustee do for me?
A bankruptcy trustee is an insolvency expert who will:
- provide a free consultation to determine if, when, and how you should proceed
- explain options other than bankruptcy, such as consolidation loans, re-mortgaging your home, borrowing from family/friends, budgeting, proposals, and/or selling assets
- provide you with personalized attention throughout your entire proceedings
- deal with creditors on your behalf
What does it cost to file for bankruptcy?
Bankruptcy administration costs are paid from the proceeds of sale of your property, and from mandatory or voluntary payments made to your bankruptcy trustee.Back to Index
Will bankruptcy eliminate all my debts?
Bankruptcy eliminates most unsecured debts, but not all. The following debts are not dischargeable in a bankruptcy:
- court imposed fines, penalties, and restitution orders
- parking tickets and speeding tickets
- alimony or child/spousal support
- debts arising from fraud, embezzlement, misappropriation or fraudulent misrepresentation
- civil court damages awarded against you for sexual assault or bodily harm
- student loans for studies within the past seven years
Will I have to make any payments?
You will most likely have to make monthly payments to your bankruptcy trustee for the benefit of your creditors. The government refers to this payment as a surplus income payment.Back to Index
Who will know I’ve filed for bankruptcy? Will a notice be published in the newspaper?
Most personal bankruptcies go undetected by family and friends. Only creditors and their agencies are formally advised by mail, and newspaper announcements are reserved for corporate and/or larger personal bankruptcies.Doyle Salewski Inc. will only discuss your bankruptcy with you, your creditors, your lawyer (if one is involved), and bankruptcy officials. If your bankruptcy trustee has to stop the garnishment of your wages, your employer will also be notified.Back to Index
What happens to my student loan debt if I go bankrupt?
Your student loans can be discharged by bankruptcy only if you file your assignment seven years after you cease to be a full- or part-time student (seven years after the last month in which you finished school).Back to Index
Will filing for bankruptcy affect my credit rating?
Yes. Your credit bureau record will be updated to reflect your bankruptcy, which will remain listed for six or seven years (depending on the region in which you live) after your discharge.Back to Index
How will my creditors know I have filed for bankruptcy?
The bankruptcy trustee will send documents to your creditors within five days of the date of your bankruptcy. If creditors contact you between the time you file for bankruptcy and the time they’re notified, refer them to the bankruptcy trustee. You don’t have to give them any additional information.Back to Index
Can a bank refuse to open an account for me because I’m bankrupt?
No. In fact, a Canadian bank cannot refuse to open a personal bank account for any of the following reasons:
- lack of deposit funds at the time of opening the account
When will my creditors stop calling me for payment?
Creditors should stop calling you as soon as they know you’ve declared bankruptcy, whether you’ve told them yourself or they’ve received documents from your trustee. If your creditors and/or collection agencies continue to call, advise your trustee, who will call them personally.If your wages are presently being garnisheed, your assignment in bankruptcy will, in most cases, stop the garnishee.Back to Index
What if you have a significant tax debt?
You should see a trustee immediately to find out whether Canada Revenue Agency has filed a secured claim against you.Back to Index
Can taxes that I owe be included in my bankruptcy?
Personal income tax and director’s liability (HST, GST and PST, source deductions) are all debts that can be included in a personal bankruptcy.Back to Index
If I file for bankruptcy will I lose my home?
That depends. If you’re in arrears on your mortgage, bankruptcy does not prevent the mortgagee (bank) from foreclosing on your house. If your payments are up to date, however, your mortgage agreement can continue. To find out if this is an option for you, you’ll need to provide a recent appraisal of your home along with an up-to-date mortgage balance statement so the bankruptcy trustee can determine the amount of equity you have. To remain in your home, you’ll have to pay the amount of that equity to the trustee for the benefit of your creditors.This equity payment is over and above your surplus income payments and income tax refunds, which you are also required to pay. The bankruptcy trustee will usually register a charge against your home until the equity amount is paid in full.Back to Index
When is my bankruptcy over?
If this is your first bankruptcy and you have no surplus income, you’ll be eligible for an automatic discharge from bankruptcy after nine months—assuming you’ve met all your responsibilities. If you do have surplus income, you will remain in bankruptcy for an additional 12 months so that you may continue making the surplus income payments.If you’re a second-time bankrupt who has no surplus income and you’ve met your responsibilities, you’ll be eligible for an automatic discharge after 24 months. If you do have surplus income requirements, you’ll remain in bankruptcy for an additional 12 months, during which time you’ll continue making payments.Back to Index
Will my husband or wife be held responsible for my debts?
Unless you have a joint debt (your spouse co-signed for it), no. Your personal debts belong to you, your spouse has no legal connection to them, and your marital status is irrelevant.
What are my responsibilities while I’m in bankruptcy?
Generally, in a first-time personal bankruptcy, you are required to:
- disclose to the trustee all your assets and debts to the best of your knowledge
- surrender all your credit cards to the bankruptcy trustee;
- attend two counselling sessions
- report any changes in your financial, family, and residential status (including major changes to your income)
- make a monthly surplus payment (or, if you have no surplus, an amount determined by your trustee)
- file monthly income and expense reports
- provide your income tax information to the bankruptcy trustee who will do your taxes for the year of your bankruptcy and, if necessary, the prior year
What is counselling and do I have to take it?
You are required to attend two financial counselling sessions before you can be discharged from bankruptcy. You must attend the first session between 10 and 60 days following the date you file for bankruptcy, and the second no later than 210 days after that same date. Counselling sessions cover areas such as:
- examining what brought about your financial distress in the first place
- money management skills
- enhancing your well being
- implementing lifestyle changes
- securing family co-operation
- preventing a financial relapse
Counselling can be done privately with your counsellor.Back to Index
What’s the difference between a bankruptcy trustee and a credit counsellor?
Only a bankruptcy trustee is licensed by Industry Canada to administer the Bankruptcy and Insolvency Act. Unless a credit counsellor is affiliated with a bankruptcy trustee, he/she cannot file bankruptcy or consumer proposal documents. The “informal” proposals they make with creditors carry no legal weight, are often not supported by your creditors, and may not deal effectively with your debt. To find out more, we suggest you read this McLean’s magazine article.Back to Index
How does surplus income work?
Each year, the Canadian government decides how much a household needs on a net monthly basis in order to maintain a reasonable standard of living. In a bankruptcy, every dollar you earn above that limit is considered to be ‘surplus’ and 50% of it must be paid to your trustee for the benefit of your creditors. You’ll pay this surplus amount every month as long as you remain in bankruptcy: anywhere from 9 to 21 months for a first-time bankrupt, and from 24 to 36 months for a second-time bankrupt.If you make less than what the government says you need for a reasonable standard of living, you won’t have surplus income, but your trustee may still require you to make a voluntary payment.Back to Index
Are any of my assets exempt?
Provincial law determines which assets are exempt from seizure in a bankruptcy.In Ontario, a bankrupt person may claim exemptions for:
- household furniture and appliances ($11,300 worth)
- personal effects, jewellery, etc. ($5,650 worth)
- tools required for your work, which may include your automobile if you need it to earn income ($11,300 worth)
- one vehicle per bankrupt person, owned free and clear of liens ($5,650 worth)
In Quebec, a bankrupt person may claim exemptions for:
- household furniture and appliances ($6,000 worth)
- food, fuel, linens and clothing necessary for the life of the household
- tools required for your work
- family papers and portraits, medals and other decorations
- property declared by a donor or a testament to be exempt from seizure
- judicially awarded support and sums given or bequeathed as support
- certain benefits payable under a supplemental pension plan
- certain disability benefits and property of a person that he/she requires to compensate for a handicap
- RRSPs, Registered Retirement Income Funds and Deferred Profit Sharing Plans
Bankruptcy does not prevent a secured creditor from repossessing assets they have a lien against (such as with a car loan), even if the assets are exempt from seizure by the trustee.Back to Index
What defines my property in a bankruptcy?
Your property is defined by the government as the things you would generally consider to be property yourself (equity in your home, vehicles, jewellery), plus income tax refunds and a portion of your income.Back to Index
Do I still have to pay child support if I go bankrupt?
Child support or spousal support payments that are part of a court-ordered agreement are not dischargeable in a bankruptcy. You have to pay them regardless of whether you are bankrupt or not, and anyone pursuing you for these payments (i.e. the Family Responsibility Office or a lawyer) can continue to do so during the bankruptcy.Back to Index
What about my wages during bankruptcy?
The bankruptcy trustee is required to collect funds from any earnings above what the Superintendent of Bankruptcy considers reasonable for your situation. These standards usually apply to higher income earners.Back to Index
Where can I get more information about personal bankruptcy?
To find out more about personal bankruptcy and to determine whether you’re eligible to declare Bankruptcy —or if doing so is even your best option—you’ll need to speak with a licensed bankruptcy trustee. At Doyle Salewski, your first consultation is free, confidential, and carries no obligation, so call one of our professionals today, and let us help you find your path to financial relief.Back to Index