Bankruptcy is a legal proceeding that is available to a person struggling financially. One of the main purposes of bankruptcy legislation is to give someone who is hopelessly burdened with debt the ability to get a fresh start. The rules and requirements for bankruptcy are set out in the “Bankruptcy and Insolvency Act” of Canada.
To qualify to go bankrupt a person must be insolvent, which means you owe at least $1,000 and are not able to meet your debts as they are due to be paid, or your debts exceed the value of your assets.
The most common way for you to go bankrupt is “to make an assignment in bankruptcy”. This means you are choosing to go bankrupt.
You start the process by meeting with one of our debt professionals, in person or over the phone, for your free consultation. We will find out the details of your particular situation, including what assets you own and what debts you have. We will then explain your debt solution options to you in detail. If you then decide that you want to file for bankruptcy, you will complete our Fresh Start Workbook. Once we have the completed Workbook, we can then prepare the forms that you are required to sign. You will meet with us to sign the forms and then we will file your bankruptcy with the Office of the Superintendent of Bankruptcy. You will then be bankrupt.
When you go bankrupt your goal is to do everything that is required so that you can be “discharged” from bankruptcy. This means you are no longer bankrupt, you are now officially free from having to pay your debts, and you are now allowed to apply for credit (although you may need to start with small steps in credit rebuilding).
Certain kinds of debts are not erased by bankruptcy, including:
- Fines imposed by a Court
- 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
Also, bankruptcy does not generally interfere with secured debts (e.g., a mortgage or vehicle lease) if there is no equity in the secured assets and you continue to make your payments.
Yes, they will! By law, all actions against you must cease once the bankruptcy documents are filed. This means that calls from creditors and collection agencies will stop and a creditor cannot garnish your wages. This does not apply to secured creditors such as banks holding a mortgage on a house or a lien on a car, nor does it apply to debt for alimony/maintenance.
When a bankruptcy is filed it is a public record with the Office of the Superintendent of Bankruptcy and also appears on your credit report. The credit bureaus are notified of all bankruptcies and a record of your bankruptcy will remain on your credit record for approximately six to seven years from the time of your discharge (assuming you have not been bankrupt before).
Your creditors are notified by regular mail, fax or email.
Your employer is not notified of your bankruptcy unless the trustee has to send a notice to them to stop a wage garnishment.
There are certain assets you can keep, like your home or your car, depending on the province in which you reside. We have provided a list of the exemptions by province on our website for your reference.
The majority of people who file for bankruptcy do not lose their house or car. With a house, your equity would be the amount left over after mortgages and taxes. If your equity in the asset is within the allowable exemption limit, then the trustee will generally “disclaim” any rights to it. You and the creditor would then make arrangements for you to keep the asset and continue paying the mortgage or loan. If your equity exceeds the exemption limit, then you may be able to make an arrangement with the trustee for you to “buy back” any equity over the exemption limit in order to keep your assets.
In a bankruptcy, assets (or equity in assets) in excess of your allowed personal exemptions, and anything that you acquire during the bankruptcy, belongs to the trustee for the benefit of your creditors. This would include:
- inheritances received or to which you might become entitled during the time of the bankruptcy;
- lottery winnings;
- anything that you might accumulate, such as assets bought before you are discharged; and,
- any cash assets you have at the time of your bankruptcy (i.e., GICs, TFSAs, RRSPs and RESPs are generally not allowed as exempt, no matter the amount; however, RESPs are exempt in Alberta).
Outstanding tax refunds also belong to the trustee for the benefit of the creditors. Income Tax law requires two tax returns for the year of the bankruptcy.
- The first (pre-bankruptcy tax return) covers the period January 1st through to the date of bankruptcy.
- The second (post-bankruptcy tax return) covers the period starting with the date of the bankruptcy and ending December 31st.
- Any tax refunds for the year in which the bankruptcy occurs and prior years are paid to the trustee for the benefit of the creditors.
Not directly. You and your spouse are separate individuals. Therefore, unless your spouse also files bankruptcy, their assets and liabilities are not affected. However, if your spouse’s assets are owned jointly, (e.g., a house or car) it is the trustee’s responsibility to investigate the interest owned by the person going bankrupt.
If a debt is in both names, then the bankruptcy of one spouse means that the other is now liable for the full debt.
Your wages are not affected. However, you may be required to make mandatory monthly payments to the trustee. These are called “surplus income payments”. The trustee determines whether or not you have to make these payments based on the number of people in your family and by averaging your earnings over the duration of your bankruptcy. You must keep track of all the money you receive and all the money you spend each month and report it to us on the Income and Expense form that we will provide you with. If you do not make all of these required payments to the trustee you will not be “discharged” from your bankruptcy. If your income is quite low, you may not be required to make these payments.
Yes. However, you cannot have overdraft protection on a bank account of more than $999 unless you inform the bank that you are bankrupt.
We strongly suggest that before you sign the papers to go bankrupt you ensure you are banking at a financial institution that you do not also owe money to. This may mean that you will have to open a new bank account. You must use this new bank account and stop using any other accounts. This will prevent your creditors from taking money from your bank account after you are bankrupt.
The co-signer will continue to have liability for the debt. Your bankruptcy does not cancel a co-signer’s responsibility to pay the debt.
You must attend two financial counselling sessions in order to be “discharged” from your bankruptcy. These sessions are held in our office with an estate administrator or the trustee. We will discuss budgeting, financial management, and the causes of bankruptcy. The first counselling session must be held between 10 and 60 days following your date of bankruptcy, and the second counselling session must be held no later than 210 days following your date of bankruptcy.
You must ensure that the trustee has your current contact information (address, telephone number and email address).
You must assist and co-operate with the trustee, including supplying any information or documents the trustee may request.
In relatively rare situations, your creditors may ask to have a meeting with you. If this should happen you are required to attend. The meeting is usually held at the office of the trustee.
In rare situations, you may be required to meet with a representative from the Office of the Superintendent of Bankruptcy at which time you would have to answer questions under oath. These meetings may be held at the office of the trustee or the Superintendent of Bankruptcy’s office.
Your goal is to be discharged from your bankruptcy as early as possible. If you complete your duties and payments in a timely manner and no creditors object to your discharge, you are eligible for an automatic discharge from bankruptcy as follows:
For 1st time bankruptcy:
- 9 months or
- 21 months if there is surplus income to pay
For 2nd time bankruptcy:
- 24 months or
- 36 months if there is surplus income to pay
For high-income tax debtors (where total personal income tax debt is $200,000 or higher and represents at least 75% of total unsecured proven debt), the discharge is decided by the courts.
If a creditor, the superintendent of bankruptcy or the trustee have opposed your discharge, then you will have to go to court where the decision about your discharge will be made.
Obtaining your discharge is important because it is what actually eliminates your responsibility for paying your debts. If you do not do what is required in the bankruptcy and therefore do not get discharged, the trustee will have to close your file. If this should happen your creditors will then be able to resume collection efforts against you.
Alimony/maintenance payments and child support payments are not affected by bankruptcy. Although you must include these debts with the liabilities you tell the trustee you have, they are debts that you must continue to pay. The bankruptcy does not discharge your obligation to pay this type of debt. These debts are often referred to as “debts that survive bankruptcy.” A bankruptcy does not stop any actions for collection.
Student loans (including interest) survive bankruptcy if it has not been more than seven years since you were in school (full or part time) on the date you go bankrupt.
It is very important that you check with Canada Student Loans to find out what they consider to be the date you were last in school. If it is less than seven years from the date of your bankruptcy, you will end up still having to repay your student loans after the bankruptcy is complete.
If your last day in school is not more than seven years after the date you went bankrupt you can ask the court to make an order that says your obligation to pay the student loans will in fact go away with your bankruptcy. However the court must be satisfied of the following:
- You have been out of school for at least five years
- You acted in good faith with regards 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
You would be responsible for retaining a lawyer and making any application to the Court to have this debt discharged.
The fees charged by any LIT for consumer insolvencies are regulated by the federal government. The cost is determined by a federal calculation and will be discussed with you during the free, initial consultation.
Once you file for bankruptcy, you will need to fulfill all of the following duties:
- Provide a complete statement of assets and liabilities including creditors’ names, addresses, account numbers, invoices and amounts. Where additional bills or legal documents are received by the bankrupt, they should be provided to the trustee. If you should forget to tell the trustee about certain assets or debts you must promptly tell them as soon as you remember
- Reveal and turn over to the trustee all non-exempt assets in your possession or control
- Make available to the trustee all books and records relating to assets or financial affairs
- Inform the trustee of the details of all property disposed of in the five years prior to the bankruptcy
- Turn over all credit cards to the trustee, for cancellation
- Submit monthly statements showing all the money received into your household and all money spent by your household and make payments to the trustee as required to do so
- Inform the trustee of any material change in circumstances (for example if your earnings significantly increase or decrease, if you get a job/lose a job, if you acquire a dependent/lose a dependent, etc.)
- Attend the first meeting of the creditors if there is one, and any other meetings when called upon by the trustee
- Attend first and second financial counselling sessions
- Provide information to prepare tax returns
- Keep the trustee advised of your address, phone number, and email address until approximately a year after you have been discharged
You may be required to attend at the Office of the Official Receiver (the government representative dealing with bankruptcies) or at the place set by the Official Receiver, if and when requested, to be examined under oath as to the facts relating to the bankruptcy. Most people who go bankrupt are not required to do this.
While in bankruptcy, you are subject to certain restrictions:
- You can’t obtain credit in excess of $999 unless you advise the creditor giving you the credit that you are going through bankruptcy
- You can go into business provided you advise people you are dealing with that you are an undischarged bankrupt
- You can’t sit on the Board of Directors of a limited company
- You can’t own or acquire any assets in excess of current exemption limits
The following five videos may help you better understand the insolvency process and your available options:
- Discussing your options with an LIT
- What to expect if you file for bankruptcy
- Submitting a consumer proposal to creditors
- Understanding the bankruptcy discharge
- Bankruptcy and surplus income payments
If you have further questions about bankruptcy, please speak with your Grant Thornton debt professional.
CONTACT YOUR CREDITORS
Explain why you cannot make your payments and suggest an arrangement that could work for both of you. You may be surprised that many creditors are more than willing to cooperate.
DEBT CONSOLIDATION LOAN
You can approach a bank or credit union about combining, or consolidating, your debts into one loan. The bank or credit union issuing this new loan then pays off all your debts and, in return, you make a monthly payment to them. Make sure you shop around—interest rates vary. Be sure you close the accounts for the old debts so there is no chance you can use them again! Avoid further credit purchases, as this could make your debt load too great for you to handle.
Under the Bankruptcy and Insolvency Act, a trustee or an administrator files a proposal, which is an arrangement between you and your creditors for you to pay off only a portion of your debts, extend the time you have to pay off the debt, or provide some combination of both. To be acceptable, your creditors must be better off under a proposal than if you go bankrupt. Each of your creditors then has the opportunity to accept or reject what you are offering.
There are two types of Proposals an individual can file:
- “Consumer proposals”
A person is eligible if his/her aggregate debts, excluding debts secured by a principal residence, do not exceed $250,000. The payments that you would make in the consumer proposal cannot be for more than five years. If the creditors do not accept the proposal you are not automatically bankrupt. You must attend two counselling sessions.
- “Other Proposals”
There is no restriction on the amount a person owes. And payments are not restricted to just five years. If the creditors do not accept the proposal the person is automatically bankrupt as of the date that the proposal was originally filed.
ADVANTAGES OF A PROPOSAL
- You decide what to offer the creditors based on what you can realistically afford to pay
- There is no interest charge
- Creditors may not take any further legal action (e.g., garnish wages)
- You retain ownership and control of your assets
DISADVANTAGES OF A PROPOSAL
- You usually may not obtain further credit while doing a proposal
- If there is a co-signor, the creditor may elect to obtain the payments from the co-signor
- The proposal may be refused by the creditors
The Credit Bureau will report the proposal for a period of three years after the proposal has been paid.
- “Consumer proposals”