What Happens When You Go Bankrupt in Canada?
Bankruptcy is a life-changing decision. And despite the common stigma, it can often improve your financial future for the better. When completed with professional support, Bankruptcy is an ideal way to earn a fresh start.
In Canada, the Bankruptcy process is governed by the federal Bankruptcy and Insolvency Act (BIA). Understanding the steps involved with the BIA (along with the consequences) is crucial for anyone considering filing. Plus, there are sometimes other debt-relief options that might serve you better and are worth looking into.
Let’s explore all the details about what happens when you go bankrupt in Canada.
What is Bankruptcy in Canada?
In short, Bankruptcy is a legal process that helps people or businesses that can’t pay their debts to eliminate or reduce what they owe. The goal is to give people a clean financial slate and give creditors some payment from the debtor’s assets.
Who manages Bankruptcy proceedings in Canada?
That means the OSB authorises Licensed Insolvency Trustees (LITs). A LIT is a government-regulated professional who manages the Bankruptcy process. Your LIT is your first point of contact and will work closely with you on the best ways to eliminate your debt.
What happens when you file for Bankruptcy?
Personal Bankruptcy in Canada is straightforward. Simply put, you surrender certain assets in exchange for the discharge of most debts. You can keep some specific assets covered by federal law, but most of the money raised goes toward creditors.
Exemptions
Protections by the Government of Canada do apply to you and your creditors. For example, Bankruptcy doesn’t magically clear all debts. Secured creditors (those with a claim on a specific asset) receive special treatment during a Bankruptcy proceeding. If you financed a vehicle, the finance company likely has a secured interest in that car. Similarly, a mortgage on your home represents a secured debt. These creditors are handled differently and may require you to continue with payments. For help with exemptions, consult with your Licensed Insolvency Trustee.
In addition, there are some types of debts you cannot discharge. Some Canada debt exceptions include:
- Student loans and apprentice loans less than 7 years old
- Child and spousal support
- Fines and most court-ordered restitution payments
- Court-awarded damages for sexual assault or intentional bodily harm
- Debts from fraud, embezzlement, or misappropriation
- Certain government overpayments
- Secured debts, like a house mortgage or debts tied to collateral, may also stay (depending on your situation).
The purpose of Bankruptcy
While a Bankruptcy discharge doesn’t clear all debts, it does offer relief from most unsecured debts. That includes credit card balances, unsecured lines of credit, unpaid utility bills, and payday loans.
For many, removing those debts provides a new lease on life. And you don’t have to do it alone, as a Licensed Insolvency Trustee can guide you through the entire process. The Bankruptcy Court of Canada also fairly manages all bankruptcy hearings.
Starting the Process: Meeting With a Licensed Insolvency Trustee
The first step in declaring Bankruptcy is to meet with a Licensed Insolvency Trustee. They will examine your complete financial situation (income, expenses, assets, and debts). With that data, they can then advise on the benefits of Bankruptcy. And if need be, they might suggest other possible debt solutions.
Note that you must select a LIT to initiate the process. Many other agencies or services may offer debt support but do not have the designation from the Government of Canada. If you cannot find or hire a Licensed Insolvency Trustee, the OSB’s Bankruptcy Assistance Program offers help.
Filing for Bankruptcy
If you and your LIT believe Bankruptcy is the best option, the trustee will have you file the correct forms with the OSB. Once filed, the Bankruptcy starts. That means actions from collection agencies against you must stop (like wage garnishments and lawsuits).
Will I Lose My Paycheque if I File for Bankruptcy?
Filing for Bankruptcy does not mean you lose your paycheque. Life continues as usual. You can deposit your regular paycheck and maintain control over your earnings. No one can garnish your wages, and the money remains available for living expenses.
It’s normal to have privacy concerns or worries about losing possessions. But you have considerable protections in Canada. Each province sets exemptions for what can be shielded from creditors during Bankruptcy.
For example, in British Columbia, there is a $4,000 exemption per person for household furniture and appliances. This amount is based on the garage sale value of the items, not their original purchase price. You can keep many of your everyday possessions, and no one will arrive for an inventory check.
On your end, make sure you report your monthly income during the Bankruptcy period and disclose your assets.
Can I Keep My Vehicle if I File Bankruptcy?
The outcome of your vehicle depends on whether you own it outright or have a loan. There is a standard $5,000 vehicle exemption in BC (and up to $10,000 if your car is essential for work). If the vehicle value exceeds the exemption amount you might need to cover the difference. Even then, you won’t necessarily lose it.
If you have a vehicle loan and owe more than the vehicle’s worth, there is no equity. So you can either pay the loan and keep the car (as it’s a secured debt) or stop payments. In British Columbia, the lender can repossess the vehicle if you stop payments but cannot take further action after repossession.
Even outside Bankruptcy, failure to pay a vehicle loan can lead to repossession (though this generally applies to personal-use vehicles, not business-use ones). In most situations you can keep an exempt car by making payments or covering any non-exempt equity. It’s uncommon for anyone to aggressively pursue taking your vehicle.
The Impact on Your Credit and Future Finances
Bankruptcy does affect your credit score. In Canada, a first Bankruptcy stays on your credit report for six to seven years, while a second Bankruptcy can stay for up to 14 years. Getting credit during and after Bankruptcy will be tough. But, it is possible to rebuild your credit over time if you responsibly manage your finances moving forward.
Alternatives to Bankruptcy
Bankruptcy isn’t the only way to deal with debt. A Consumer Proposal is another option. With a Consumer Proposal, you repay part of your debt over an agreed upon period with less negative impact on your credit score. Other possible alternatives include debt consolidation or credit counselling. It all depends on your unique financial situation—talk with your LIT for the right action strategy.
Life After Bankruptcy
Once you file for Bankruptcy, the following month tends to involve a lot more peace. Right away payments to unsecured creditors stop. Any collection actions, like collection calls or legal threats, are halted. The Government of Canada enforces a Stay of Proceedings that inhibits collections.
That kind of change reduces the heavy debt pressure and is a relief in itself. Many people can finally focus on covering basic living expenses like food, utilities, and other necessities. Of course, some debt relief options may push you to the edge of your paycheck. But with the newfound flexibility (thanks to the Bankruptcy), you gain plenty of needed breathing room.
Afterwards, manage your finances carefully. Rebuilding your credit takes time. It will involve budgeting, saving, and setting new financial goals. You will need some margin for sustainability, and running a deficit once again can just put you back into the debt cycle. Luckily, there are plenty of tips and tricks to help you build for the future. For example, a secured credit card can improve your credit score post-Bankruptcy.
Get Started Today
Chase & Associates is a team of chartered professional accountants with the Licensed Insolvency Trustee designation from the Government of Canada. During an initial consultation, we evaluate your situation and provide feedback on how a particular debt solution could impact your monthly payments and overall budget. After Bankruptcy, many people experience reduced stress and an improved quality of life. Contact us today for more information on how we can help you lift the financial pressure.
