Understanding how bankruptcies work in Canada can be crucial for anyone facing severe financial strain. While filing for bankruptcy is often seen as a last resort, it is a structured process designed to help individuals manage overwhelming debt and find financial relief. This guide will take you through the essentials of the bankruptcy process in Canada, its requirements, and what you can expect at each stage.
What is Bankruptcy in Canada?
Bankruptcy in Canada is a legal process intended to relieve individuals of unmanageable debt while providing creditors a way to recover at least part of what they’re owed. Governed by the Bankruptcy and Insolvency Act (BIA), this process requires a Licensed Insolvency Trustee (LIT) to help facilitate the legal proceedings. Declaring bankruptcy means surrendering some of your assets, although exemptions apply, depending on your province.
Key Steps in the Canadian Bankruptcy Process
1. Consulting a Licensed Insolvency Trustee (LIT)
The first step in filing for bankruptcy in Canada is to consult a Licensed Insolvency Trustee. These professionals are the only individuals authorized by the federal government to administer bankruptcies. A trustee will assess your financial situation and help you determine if bankruptcy is the best option or if other debt-relief alternatives may be more suitable.
2. Filing for Bankruptcy
If bankruptcy is the most viable path forward, your trustee will begin the formal process by filing the necessary documents with the Office of the Superintendent of Bankruptcy (OSB). Once filed, creditors are legally prevented from contacting you, giving you immediate relief from collection calls and harassment.
3. Asset Surrender and Exemptions
In Canada, not all assets are taken during bankruptcy. Each province has exemptions that protect specific essential assets, such as household goods, tools of the trade, and, in some cases, a portion of home equity. Your LIT will explain what assets are exempt in your province so you know exactly what you may retain.
4. Making Surplus Income Payments
If your income is above a certain threshold, you may be required to make surplus income payments. These payments are based on your household income and the number of dependents you have. The idea is that if you earn more than necessary for basic living expenses, part of your income should go toward repaying creditors.
5. Credit Counselling Sessions
During bankruptcy, you will attend two mandatory credit counselling sessions. These sessions are designed to help you understand budgeting and money management, with the goal of preventing future financial distress.
6. Receiving a Discharge
Once all requirements are met, including any necessary payments and attendance at counselling sessions, you will be eligible for a discharge. A discharge legally releases you from most of your debts, except for obligations such as child support, alimony, and certain government debts like student loans under certain conditions.
Key Rules Governing Canadian Bankruptcy
Who Can File for Bankruptcy?
To file for bankruptcy in Canada, you must owe at least $1,000 in unsecured debt and be unable to meet your financial obligations. Whether due to job loss, illness, or excessive debt, bankruptcy is available to individuals who genuinely cannot pay their debts.
Types of Debts Discharged in Bankruptcy
Most unsecured debts, such as credit card bills, personal loans, and utility bills, are erased through bankruptcy. However, some debts cannot be discharged, including child support payments, alimony, and fines or penalties from criminal activity.
Impact on Your Credit Score
Filing for bankruptcy has a significant impact on your credit score. It will remain on your credit report for six years after discharge if it’s your first bankruptcy and up to 14 years if it’s a second or subsequent bankruptcy. This can make it challenging to secure new credit, although some individuals begin rebuilding their credit soon after discharge.
Bankruptcy and Student Loans
Student loans are treated differently in Canadian bankruptcy law. If you’ve been out of school for more than seven years, your student loans can be included in bankruptcy. However, if it’s been less than seven years, you will remain liable for these debts.
What to Expect After Bankruptcy
Immediate Debt Relief
Filing for bankruptcy stops all collection efforts, including wage garnishments and calls from creditors. This immediate relief can reduce stress and provide the breathing room needed to focus on meeting bankruptcy requirements.
Asset Protection and Exemptions
While certain assets must be surrendered, Canadian law allows debtors to retain essential items necessary for daily living. These exemptions vary by province, but they generally cover personal clothing, household items, and, in some cases, a vehicle.
Life After Discharge
After receiving your discharge, you’ll likely need to take steps to rebuild your financial profile. Many people start by opening a secured credit card to establish a positive repayment history, which helps gradually improve their credit score.
How Bankruptcies Work in Canada
Understanding how bankruptcies work in Canada is essential if you’re considering this path. The process involves a series of structured steps managed by a Licensed Insolvency Trustee to ensure all parties are treated fairly. Bankruptcy not only provides relief for individuals overwhelmed by debt but also outlines specific rules and protections for creditors.
Alternative Options to Bankruptcy
Before deciding on bankruptcy, your Licensed Insolvency Trustee will review possible alternatives, such as a Consumer Proposal or debt consolidation.
- Consumer Proposal: This option involves negotiating with creditors to pay a portion of the debt over time, avoiding bankruptcy but still achieving debt relief.
- Debt Consolidation: A loan used to pay off multiple smaller debts, simplifying payments but requiring a reliable income source to manage.
- Credit Counselling: In some cases, credit counselling can help create a debt management plan, though it is not a legal process and does not erase the debt.
Conclusion
Navigating how bankruptcies work in Canada requires understanding the key steps, rules, and expectations involved in the process. Bankruptcy offers Canadians a structured path to resolve unmanageable debt, though it comes with specific responsibilities and long-term consequences. By consulting with a Licensed Insolvency Trustee and exploring all available options, you can make an informed decision about the best way to regain financial stability.
Each step in the Canadian bankruptcy process is designed to support a fresh start, ensuring a balanced approach for individuals facing financial hardship. Whether you proceed with bankruptcy or choose an alternative path, understanding the rules and expectations can help you move forward with confidence.
