What Is Bankruptcy?
Personal bankruptcy is a legal process overseen by Licensed Insolvency Trustees (LIT), as they are the only regulated professionals in Canada that can administer bankruptcies. When you have declared bankruptcy, it means that you cannot afford to repay your debts on your own. In certain cases, people face frozen bank accounts or wage garnishments, and filing a bankruptcy will generally stop those actions. There are many reasons why someone may want to file for bankruptcy; life events such as divorce, unemployment, and illness can impact your financial health.
There are certain assets you can have that may be exempted by provincial or federal law. A Licensed Insolvency Trustee will settle your debts with creditors by using the proceeds from the non-exempt assets that you possess. There are certain cases where you can buy back the assets that you want to keep, such as a car or a house. To keep assets during your bankruptcy, you may be required to make monthly payments to your Licensed Insolvency Trustee while completing your bankruptcy.
What Am I Required To Do During Bankruptcy?
Once you’ve filed for bankruptcy, there are duties you must uphold during the process. These include the following:
- Disclose any information to the Licensed Insolvency Trustee regarding your assets and liabilities.
- Surrender all of your credit cards to the LIT.
- Report your monthly income and expenses.
- Provide details to complete your income tax returns.
Each month you’ll be required to submit a copy of your pay stubs and any other proof of income to the LIT. Based on your income, you might have to make monthly payments to your LIT, which are called surplus income payments. The LIT will calculate your surplus income based on the materials you submit and tell you how much you’ll have to pay. Surplus income is the portion of your income that exceeds a standard number set by the Office of the Superintendent of Bankruptcy (OSB). The surplus income payments are based on your family size, and the larger your household, the higher the basic standard allowance for income will be.
You will also have to attend two credit counselling sessions. These credit counselling sessions are mandatory when you choose bankruptcy as a debt relief option in Canada. The goal of these two credit counselling sessions is to assist you with moving forward from financial difficulty. You’ll learn about making smart financial decisions, as well as set future financial goals.
How Much Debt Do You Need To File for Bankruptcy in Canada?
To be eligible to declare bankruptcy in Canada, there are some requirements you must meet:
- You have to owe at least $1,000 in unsecured debt, or;
- Your debt must be greater than the value of your assets, or;
- You’re unable to pay the debts as they become due
Contrary to what many people think, the bare minimum of $1,000 owing is enough to declare bankruptcy, although that doesn’t mean you should. Only a Licensed Insolvency Trustee can advise you as to your best option, given your particular circumstance.
Does Bankruptcy Clear All Debt in Canada?
Bankruptcy can eliminate most of your debts, which can include your unsecured debts, such as:
- Credit cards
- Medical bills
- Payday loans
- Bank loans
- Lines of credit
- Income tax debts
- Student loans (if you’ve been out of school for more than seven years)
Certain debts cannot be eliminated by declaring bankruptcy. Debts that are not eliminated by bankruptcy include the following:
- Spousal or child support
- Court-imposed fines
- Debt arising from fraud or misrepresentation
- Student loans if you haven’t been out of school for seven years
- Court imposed restitution orders
What Do You Lose When You Declare Bankruptcy?
When you declare bankruptcy, the equity in your non-exempt assets may be liquidated or realized on by the Trustee, and used to repay the money that you owe your creditors. The process is simple: any assets of value that you own when you file will be used to pay towards your debts, and your debt will be forgiven.
The common items that you may lose when declaring bankruptcy include the following:
- An inheritance
- Valuable artwork
- Stocks, bonds, and investments
- Tax refunds for the year of bankruptcy, and any years prior that you haven’t yet received
- Equity in your home above your provincial exemption
How Long Does It Take To Be Discharged From Bankruptcy in Canada?
If you follow and complete the duties assigned to you during your bankruptcy, and your trustee, creditors, and the Office of the Superintendent of Bankruptcy (OSB) don’t object to your discharge, you may be out of the bankruptcy process as soon as nine months, if this is your first bankruptcy.
Getting discharged from bankruptcy essentially means that you’re no longer bankrupt. You will no longer be responsible for the debts that were included in the bankruptcy, and you’re free to start rebuilding your credit. If you don’t complete your duties, and therefore are not discharged, your trustee will eventually be discharged from your file. If you remain undischarged, creditors will be free to contact you again and collect any outstanding debts.
For first-time bankruptcy, you can get out in nine months if you don’t have any earnings above the income guidelines that are set by the government, known as surplus income, and your other duties are complete. It would take 21 months to be discharged if you do have surplus income payments to make. The process can be longer if you declare bankruptcy for a second time: 24 months if you don’t have any surplus income and 36 months if you do. If you fulfill all of the duties that you must follow, your discharge can happen automatically at the timeframes outlined.
What Will Happen To My Credit Rating?
When you declare bankruptcy, your credit rating will fall. This will only be temporary, as the information about your bankruptcy will appear on your credit report for the period of time during your bankruptcy plus only 6 years after your bankruptcy discharge. For some people, bankruptcy showing on their credit report may be something they want to avoid. If you want to avoid bankruptcy, a consumer proposal may be an alternative choice.
Are Debt Collectors Allowed To Keep Calling Me If I Declare Bankruptcy?
Once you have filed a bankruptcy, all creditors and collection agencies are required by law to stop contacting you. The term that’s often used for when collection agencies cannot contact you is referred to as a Stay of Proceedings. In addition, a creditor is not allowed to implement a wage garnishment for debts that are part of the bankruptcy.
How Will My Creditors Find Out About My Bankruptcy Claim?
After you’ve declared bankruptcy, the Licensed Insolvency Trustee will notify your creditors, which is usually done electronically. There are certain cases where a Meeting of Creditors is required. If the meeting is requested, you must attend. The purpose of this meeting is to:
- Allow the creditors to get information about your bankruptcy filing;
- Approve the particular LIT that has been appointed;
- Appoint inspectors who are expected to assist with the bankruptcy claim, if desired; and
- Allow the creditors to give direction to the LIT.
You may have to face an examination under oath, which will be conducted by a representative from the Office of the Superintendent of Bankruptcy. The purpose of this examination is to see what actions you have taken before filing for bankruptcy, the reasons that caused your bankruptcy, and to confirm any property that you have acquired before or after you’ve filed.
Is There an Alternative to Bankruptcy?
Depending on your financial situation, some people may inquire about a consumer proposal instead. With a consumer proposal, your debts can be consolidated into one simple monthly payment made to the Trustee. A Consumer Proposal generally avoids the loss of secured assets, or assets that might otherwise be lost in a bankruptcy, which can be an appealing choice for those who has assets they don’t want to give up. The consumer proposal option might not work for everyone, but it is an option you should discuss with your Licensed Insolvency Trustee.
Whatever financial difficulty you may be facing, we want you to know that you don’t have to do it alone; there are definitely debt solutions available for your situation. When you make an appointment for a free consultation with our experienced team, we’ll go over everything you need to know. We assure you that we’ll guide you in finding the right debt relief option for your situation. See the other services we offer.