What is Bankruptcy?

A bankruptcy is a legal process in Canada legislated under the Bankruptcy and Insolvency Act (BIA) that is designed to eliminate most, if not all your debts. A bankruptcy in Canada can only be filed with a Licensed Insolvency Trustee (LIT). The bankruptcy trustee will guarantee a fair process, correct applying the rules and laws for creditors and debtors.

Bankruptcy is a legal process of clearing debts a debtor can no longer repay. Yet not everyone who carries debt will file bankruptcy. By a Canadian Association of Insolvency and Restructuring Professionals (CAIRP) research, in the second quarter of 2023, an average of 343 people filed consumer insolvency each day, totaling 31,224, an increase of 23.5% compared to the same quarter in 2022.

Types of Bankruptcy in Canada

There are two main types of bankruptcy proceedings available to individuals and businesses in Canada:

Personal Bankruptcy

Personal bankruptcy is an option for individuals who are unable to pay their debts as they become due. It provides a legal process for eliminating most types of unsecured debt and obtaining a fresh financial start. 

Assignment in Bankruptcy

An individual voluntarily assigns all their assets and debts to a licensed insolvency trustee (LIT). The LIT administers the bankruptcy estate, liquidates assets where necessary, and distributes proceeds to creditors in accordance with the BIA.

Discharge

Upon completing certain duties and obligations, such as attending credit counseling sessions and making required payments, the bankrupt individual may be eligible for a discharge from bankruptcy, usually after nine or 21 months, depending on their circumstances and whether they have been bankrupt before.

Corporate Bankruptcy

Corporate bankruptcy is a legal process available to incorporated businesses that are insolvent, meaning they are unable to pay their debts as they become due. The process typically involves:

Filing for Bankruptcy

The corporation or its creditors may initiate bankruptcy proceedings by filing a bankruptcy petition with the Office of the Superintendent of Bankruptcy Canada (OSB).

Appointment of a Trustee

A licensed insolvency trustee is appointed to oversee the bankruptcy proceedings, liquidate the corporation’s assets, and distribute the proceeds to creditors.

Creditors’ Meeting

A meeting of creditors may be convened, allowing them to vote on matters such as the appointment of a trustee and the approval of any proposals put forth by the trustee.

Discharge 

Once the bankruptcy process is complete and all duties have been fulfilled, the corporation may be discharged from bankruptcy.

Rights of a bankruptcy

Following bankruptcy proceedings, individuals retain the right to pursue gainful employment to sustain themselves. As part of this entitlement, they are permitted to initiate or maintain a taxable business activity independent of the bankruptcy estate.

How Much Debt Do You Need to File Bankruptcy in Canada?

In Canada, there exists no fixed debt threshold for initiating bankruptcy proceedings, although a minimum unsecured debt amount of $1,000 is typically cited. However, the decision to file for bankruptcy isn’t solely contingent on the level of indebtedness. Various factors including income, assets, and the capacity to repay debts are also influential. Seeking guidance from a licensed insolvency trustee is advisable to ascertain the suitability of bankruptcy as a resolution for your financial predicament. To be eligible for bankruptcy, you need to be a Canadian legal resident and your debts must be greater than the value of your assets.

How Long Does Bankruptcy Stay with You in Canada?

The duration of bankruptcy in Canada is subject to several variables, such as whether it’s your initial or subsequent bankruptcy. Generally, a first bankruptcy spans nine months without surplus income payments. However, if surplus income payments are applicable, this duration can extend up to 21 months. In the case of subsequent bankruptcies, the minimum duration will be longer.

What Happens to Your Credit Score When You File Bankruptcy in Canada?

Filing for bankruptcy will have a significant impact on your credit score. Here’s what you need to know:

Credit Bureau Reporting

Your bankruptcy filing will be documented on your credit report and the damage will persist for a long time. This can pose challenges in securing new credit during this period.

Credit Rebuilding

Despite the adverse effects of bankruptcy on your credit score, it’s not a permanent setback. Through prudent financial practices, such as punctual payments and good credit management, you can embark on the journey of rebuilding your credit over time.

Access to Credit

Immediately following bankruptcy, acquiring credit may prove arduous, potentially restricting you to secured credit cards or loans featuring higher interest rates. Nonetheless, as you demonstrate enhanced financial stewardship, your access to credit will gradually expand.

2 Key Ways Bankruptcy Affects You

Your Debts are Forgiven

Bankruptcy indeed entails the forgiveness or discharge of debts by creditors, encompassing government obligations such as taxes and student loans. In Canada, filing for bankruptcy or opting for a Consumer Proposal represents the primary avenues for extinguishing nearly all debts, offering individuals a genuine financial clean slate.

While there is an administrative fee associated with filing bankruptcy, this expense typically pales in comparison to the total cost of repaying your debts in full, inclusive of accrued interest.

Creditors Can’t Contact You

Upon the completion of your bankruptcy process, a legal injunction known as a “stay of proceedings” takes effect. This injunction mandates creditors to cease all attempts to contact you for payments and suspends any ongoing collection efforts, thereby preventing further accumulation of interest.

3 Ways Bankruptcy Does NOT Affect You

Changing Employers

Filing for bankruptcy doesn’t stop you from changing jobs or starting a new career. It’s usually kept private, and your employer only finds out if they’re involved in wage garnishment, which your trustee will handle. Otherwise, most employers won’t know about your bankruptcy.

Making your Spouse Bankrupt

If one person files for bankruptcy, it doesn’t compel their spouse to follow suit, nor does it hold the spouse responsible for repaying the debts covered in the bankruptcy. Unless the spouse has directly guaranteed or co-signed the debt, marriage or common-law status doesn’t automatically impose liability.

Keeping You in Canada

Once the bankruptcy process begins, you’re not obligated to stay in Canada. You can travel abroad for vacation or even relocate permanently without hindrance from the bankruptcy proceedings. If you move out of the country during bankruptcy, you’ll simply fulfill any remaining requirements from your new residence.

Declaring bankruptcy in Canada is a significant decision that can provide relief from overwhelming debt. Understanding the bankruptcy process, the absence of a specific debt threshold, the duration of bankruptcy, and its impact on your credit score is vital for making informed choices. Consulting with a licensed insolvency trustee will help you navigate the complexities of bankruptcy and develop a plan for a brighter financial future.