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How bankruptcies work in Canada

Your bankruptcy begins when you file for bankruptcy with a Licensed Insolvency Trustee (LIT), as they are the only professionals in Canada that are licensed and regulated to administer bankruptcies. Your trustee settles all of your debts by paying the proceeds of your non-exempt assets to your creditors. A non-exempt asset is an asset that exceeds the equity limit set by your province. For example, if the value of your motor vehicle exceeds the limit set by your province, then your trustee can sell your car to repay creditors. (You would still receive the “non-exempt” amount of the asset and the creditors get the remainder.)

Alternately, if you would like to keep an asset that exceeds the exemption limit, you can make an arrangement with your creditors to “buy back” the asset by paying off the amount that exceeds the exemption limit.

Each province provides a list of exempt assets that you can keep regardless of the fact that you declared bankruptcy. While you are bankrupt, you will likely be required to make monthly payments to your trustee.

How long does bankruptcy last?

Bankruptcy lasts approximately 9 months, provided that it is your first bankruptcy and you complete all of the duties assigned to you. Your bankruptcy may last up to 21 months if you have to pay surplus income, which is calculated according to standards established by the Office of the Superintendent of Bankruptcy Canada and coordinated by your trustee after examining your income, expenses, and dependents in your household.

If it is your second bankruptcy, you will be bankrupt for 24 or 36 months. If you have been bankrupt more than once previously, have not complied with your duties, or have committed one or more bankruptcy offences, your bankruptcy timeline will be determined by the court.

After you have received an Absolute Discharge from your bankruptcy, you will no longer be responsible for any of the discharged debts. However, the fact that you filed a bankruptcy will appear on your credit rating for 6 to 7 years, depending on the province you live in.

What does “discharged” mean?

“Discharged” means your bankruptcy has ended; you no longer have to pay your debts and you are able to apply for credit. However, if you do not complete your duties during bankruptcy, you will not get discharged, your trustee will close your file, and creditors can resume collection efforts against you. To learn more about how to get out of bankruptcy, read about how long bankruptcy lasts in Canada.

What happens to my debt if I declare bankruptcy in Canada?

Bankruptcy will eliminate most of your debts, such as unsecured debts including credit card bills, medical bills, and payday loans. You may still be required to pay your secured debts, such as your mortgage or motor vehicle loan.

Some debts cannot be eliminated by your bankruptcy. Those include: 

  • Court-imposed fines 
  • Debt incurred by misrepresentation (fraud)
  • Alimony or maintenance payments
  • Debt for damages imposed by Civil Court for intentional bodily harm, sexual assault, or wrongful death
  • Student loans, if bankruptcy occurs within 7 years of ceasing full- or part-time studies

Are debt collectors in Canada allowed to keep calling me if I declare bankruptcy?

Once a bankruptcy claim is filed, all creditors and collection agencies are required by law to stop contacting you. (The formal term for when collections activity stops is called a Stay of Proceedings.) Additionally, a creditor cannot garnish your wages.

You can continue to receive calls from secured creditors. This applies to a mortgage, lien on a car, or debt for alimony or maintenance. 

What happens to my regular income if I declare bankruptcy in Canada?

Your wages are not affected by your bankruptcy, but part of your duties during bankruptcy includes providing your trustee with your household monthly earnings and expenditures. Additionally, if your income changes or you gain or lose a dependent, you must inform your trustee.

You may be required to make monthly payments to your trustee. These are called “surplus income payments”. Your trustee determines whether you have to make surplus income payments based on your average earnings over the bankruptcy and the number of people in your household.

Watch the video below to learn more about surplus income payments.

Video transcript: Meet Stephanie, the mother of a young son, James, who is just about to enter Primary School. Recently, Stephanie has overextended her credit and, despite her best efforts, is unable to pay her bills. Realizing that she needed to speak to an expert, Stephanie found a Licensed Insolvency Trustee located in her area and has gone to meet with her. After speaking to the trustee, Stephanie has determined bankruptcy was the most appropriate option for her.

After explaining the bankruptcy process and looking more closely at her income, the trustee told Stephanie that she will have to make what are called surplus income payments. These payments ensure that people who declare bankruptcy and have sufficient income contribute to paying off a portion of their debt. In simple terms, surplus income is the amount of income a person who has declared bankruptcy has that is over and above what they need to maintain a reasonable standard of living. The amount they have to pay is calculated according to standards established by the Office of the Superintendent of Bankruptcy Canada. Stephanie will have to make these surplus income payments for a total of 21 months because this is her first bankruptcy. If this were her second bankruptcy, the payments would have to be made over a longer period of time. Stephanie was also told that if her income changes at all during bankruptcy she must inform the license insolvency trustee as this may affect the amount of her payments. Stephanie knows she has some work to do but feels a weight has been lifted just knowing she is starting to deal with her financial issues.

Am I allowed to have a bank account if I declare bankruptcy in Canada?

If you have more than $999 in your account and want overdraft protection, you must notify your bank that you are bankrupt. In order to prevent creditors from taking money from you, it is recommended that you open a bank account at an institution where you do not owe money. Only use your new bank account and do not use any accounts that were active prior to your bankruptcy.

Can I get a credit card if I declare bankruptcy in Canada?

No. Once you file for bankruptcy,  you must hand over your credit cards to your trustee so they can be cancelled. Additionally, your credit rating will be negatively affected by your bankruptcy and Canadian credit bureaus will keep a note about your bankruptcy on your credit report for up to 7 years, depending on your province.

How much does it cost to declare bankruptcy in Canada?

Bankruptcy fees are regulated by the federal government and you can discuss the costs of filing for bankruptcy with a LIT during a free, initial consultation. To learn more about the costs of bankruptcy, discover how to file for bankruptcy in Canada.

Will my Canadian student loans go away if I declare bankruptcy?

If you were a student, either part-time or full-time, less than seven years from the date that you declared bankruptcy, you will have to repay your student loan debt, including the interest charges. Check with Canada Student Loans to learn what they consider to be the last official date you were in school.

If your official last day is under seven years ago, you may still be able to get your student loan debts discharged. You can retain a lawyer and make an application to the court. 

You must meet the following requirements: 

  • You have been out of school for a minimum of five years 
  • You acted in good faith with regard to the liabilities under the loan
  • You have and will continue to experience financial difficulty to such an extent that you will be unable to pay the liabilities under the loan

Can I keep my house and my car under Canadian bankruptcy rules?

Bankruptcy should not impact your secured debts, such as a vehicle lease or a mortgage, as long as you continue to make payments and there is no equity in your secured assets.

In most provinces, you do not lose your house or car when you declare bankruptcy. You can work out arrangements with your trustee and creditors to keep the asset and continue paying the mortgage or loan. Learn more about what assets you can keep in bankruptcy

Does bankruptcy take care of any tax money I owe to the Canadian Revenue Agency?

Many people assume that income tax debt is not dischargeable in bankruptcy. However, in a bankruptcy, your debt to the CRA is treated the same as any other unsecured debt, such as credit cards or lines of credit. After filing for bankruptcy, all interest and collection activity by the CRA will stop. Additionally, your trustee will communicate directly with the CRA on your behalf.

Learn more about bankruptcy.

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