Bankruptcy

Life sometimes throws unexpected events our way that can drive you into debt. Job loss, medical bills, and divorce, can all put a significant damper on your financial life. Once you’re in too deep, it may feel like you can’t get out. That’s when bankruptcy may be a solution to getting back on track.

When you’re in a situation like this, it can make sense to explore debt relief options. Examples of debt relief options include:

• Debt settlement
• Debt consolidation
• Consumer proposal
• Bankruptcy

Consider personal bankruptcies as a last resort debt relief option. When you file, all your debts are forgiven (with some exceptions). You may be giving up your most valuable assets, not to mention you could find it tough to obtain credit for up to seven years. The Bankruptcy and Insolvency Act governs all the federal laws around Bankruptcy. That along with the regulations upheld by the province or territory in which you reside will determine how bankruptcy unfolds for you.

Let’s take a closer look at what filing for bankruptcy means and whether it makes sense for you.

What is bankruptcy?

Filing for bankruptcy is a legal process that affects many different parts of your life. The cost of filing is high, and your credit is negatively affected for many years. Due to the many financial and economic effects it has on an applicant, bankruptcy is considered the last option. However, this is still a viable decision for many people due to various reasons. Even with all the negative effects of bankruptcy, its ability to let filers move forward with their life and get out of debt, makes it worth considering.

How does bankruptcy work?

Bankruptcy allows you to be discharged from a large portion of your debt. There are three different ways to go through the legal process of filing:

• Voluntary Assignment: If you are insolvent, you can choose to make an assignment of your assets.
• Involuntary Assignment: A creditor can file a petition in a provincial court for a receiving order against a debtor’s assets. This is also called being petitioned into bankruptcy.
• Deemed Bankruptcy: This happens when a debtor starts the insolvency process but is unable to fulfil the requirements for filing a Division I proposal under the Bankruptcy and Insolvency Act, or if they are unable to commit to the provisions of the filed and accepted proposal.

Bankruptcy and mental health

If you’re considering filing for bankruptcy, know you’re not alone. In 2022, 103,586 insolvencies were filed with the Office of the Superintendent of Bankruptcy (OSB). For a lot of people, this may be the only viable solution at that point. 

There is increasing acceptance and understanding for people dealing with bankruptcy. With the rising cost of living, and wages not keeping up with inflation, people find it hard to keep up with their debts. There is no singular “type” of people or reason why people end up filing for bankruptcy. In reality, many people who file actually have a decent income, but end up in heavy debt over a period of time.

Getting out of debt can improve your life in many ways, including mental health. Bankruptcy is just one of the ways to reach that point of being debt-free and starting to rebuild your life. It might take longer to rebuild your credit, but it is still better than facing collection calls or wage garnishment. You get a clean slate and peace of mind, and that is a great improvement from a mental wellness perspective as well. 

Bankruptcy’s effects on your credit

One of the reasons bankruptcy is considered a last resort is its harsh negative effect on your credit score. Once approved, a low R9 rating is added to your credit report. This is why, before moving forward, It is advisable to consider whether other debt solutions like debt management or debt settlement are a better fit for you. 

Duration of effect

The first time you file for bankruptcy, this rating stays on your credit report for up to 7 years. Any future filings after that would keep this rating on your credit report for 14 years.

How to rebuild your credit

The good news is that there are different ways to start rebuilding your credit:

• Living within your means is an important first step. Set a budget, and stick to it as much as possible.
• Start building up an emergency fund to avoid relying on debt again.
• Pay all your bills on time, like your phone and utility bills. This shows lenders that you are reliable and pay your dues.
• Get a secured credit card to help build up a history. This shows proof of your “creditworthiness”. 

Over time, these will positively affect your credit. By the time the R9 rating is off your credit report, you may be on your way to a good credit score!

How much does bankruptcy cost?

Financial costs

There is no upfront cost for filing for bankruptcy. Your consultation with the Licensed Insolvency Trustee (LIT) will be free. They will also evaluate your finances and recommend a course of action that may be the right fit for you. 

• If you choose to file, you will need to pay some fees. Administrative fees and expenses come to a minimum of $1,800. This fee is normally taken from the funds earned from the liquidation of assets.
• However, if you earn above a certain amount, you typically have to pay a surplus income cost. It may also extend the time it takes to discharge your debts. The income limit depends on the government’s set limit and can be higher if your family size is larger. 
• Any assets you hold that don’t qualify for exemption under bankruptcy, will be liquidated. The proceeds from the sale will go to your creditors. There are some exemptions for assets like your home (or a portion of its value), car, and work tools. This varies from province to province. 

Learn more about the costs of bankruptcy.

Personal costs

Before filing, it’s important to understand that along with the financial cost, there are personal costs.

The personal costs of filing for bankruptcy include:

• The time it takes you to complete the paperwork and follow-up with your trustee
• The difficulty of finding new loans or renting an apartment
• Lose eligibility for some specific occupations
• Not being able to act as a company director while in bankruptcy

How can you file for bankruptcy?

Paperwork and documentation

When you begin the process of filing for bankruptcy, you need to consult with a Licensed Insolvency Trustee (LIT). The trustee will assess and evaluate your finances to check whether you can pay your debts or not. If they determine you are unable to do so, they can declare you insolvent, and you would be eligible for bankruptcy.

You can then assign your assets to the trustee, who will assess and liquidate them. Accordingly, the money will go towards paying your creditors. By law, each province has different exemptions. In, other words, assets not seized in bankruptcy.

After the assets are liquidated and the creditors repaid from the sale, whatever balance remains is discharged. This means that you no longer owe them any money. Exemptions often include your home or a portion of its value, your car, and your work tools and equipment. With everything said and done, you get a certificate of discharge and are free to restart your life financially, debt-free. It provides a fresh start to an honest but unfortunate debtor. 

Financial qualifiers

If you are a Canadian resident who owes more than $1,000 and is considered insolvent, you are able to file for bankruptcy.

Is filing for bankruptcy the right fit for you?

If your debt payments are as much as, or even more than, your paycheques, you may want to consider bankruptcy as a debt solution. One of the biggest deciding factors is the type of debt you have. Not all debt is equal and not all debt can be absolved by doing a bankruptcy.

Dischargeable debts

When you file for bankruptcy, you give up some of your assets in exchange for having some of your debts erased. But you may be surprised to hear that filing doesn’t get you off the hook for all debts. Generally speaking, you’ll no longer be responsible for unsecured debts, but you’ll usually still be accountable for secured creditors and debts. (We’ll go over that in the next section.)

With a few exceptions, all your unsecured debts will be forgiven, regardless of the discharge date. Debts that will be discharged in bankruptcy include:

• Credit cards
• Personal consumer loans
• Other unsecured loans and lines of credit such as payday loans, past-due medical bills and insurance premiums
• Past unpaid utility bills
• Student loans (if it’s been more than seven years since you were a student)

Essentially, you won’t owe anything on these debts once they grant your discharge.

Non-dischargeable debts

You cannot discharge some debts, generally, secured debts in bankruptcy. Let’s take a look at some examples.

Wage garnishment

Most wage garnishment stops when you file, but not all. Bankruptcy does not discharge wage garnishments for child support or alimony.

Child support

You’ll still be responsible for certain judgments imposed on you before filing for bankruptcy, including child support and alimony.

Student loans

If it’s been less than seven years since you were a student, bankruptcy does not discharge student loans.

Income tax

If you declare bankruptcy, any back taxes, penalties and interest owing won’t go away if the Canada Revenue Agency has placed a lien on your property. You can only get rid of those by filing insolvency with a licensed insolvency trustee.

Bankruptcy exemptions

Bankruptcy is restorative, not punitive. If you qualify, you’re able to keep much of what you own, so you can support yourself after your discharge.

As such, several exemptions let you keep certain assets.

Although the federal government sets the guidelines on bankruptcy from coast to coast, the provinces and territories set their own exemptions.

Despite this, some exemptions are common nationwide. For instance, since 2008, Registered Retirement Savings Plans (RRSPs) have been exempt from all provinces and territories. However, the contributions you made to your RRSP 12 months beforehand aren’t exempt.

Other assets commonly exempt from bankruptcy include home equity, motor vehicle equity, pets, and necessary food and clothing. Note that the total worth of the assets exempt may vary between provinces and territories.
Learn more about bankruptcy exemptions here.

Bankruptcy vs. other debt-relief options

Consumer proposal

Both consumer proposals and bankruptcy come under the Bankruptcy and Insolvency Act of 1985. They have many factors in common, like the “stay of proceedings” and mandatory credit counselling sessions. Consumer proposals are generally considered the preferable alternative, as they have a less damaging effect in comparison.

Before you consider filing for bankruptcy or a consumer proposal, it’s important to understand their r differences nd how they factor in which one is best for you and your situation.

You can file for bankruptcy if you’re a resident of Canada who owes more than $1,000, and you’re considered insolvent. It makes the most sense when you’re looking for immediate financial relief and creditor protection.

To file a consumer proposal, you must owe less than $250,000 (not including your mortgage) and be able to afford to repay a portion of your outstanding debts. Consumer proposals offer more asset protection. However, it’s essential to keep in mind that filing a consumer proposal does not guarantee acceptance. A majority of your creditors must accept it. If they reject it, you’ll need to explore another alternative.

Debt settlement

For debt settlement, you offer creditors a lump sum payment or a few smaller payments over time. This lump sum payment can be anywhere from 20% to 80% of the total owed value. However, you need to have that kind of money available upfront. For a majority of people in debt, that is unlikely. However, if you manage to save up, it is relatively better for your credit score than bankruptcy.

If you’re genuinely unable to put together the funds, consider options like consumer proposals or bankruptcy. Even then, a consumer proposal would be a better option for most debtors. Sometimes, bankruptcy may be worth consideration, especially if you have few assets to your name.

Debt consolidation

Debt consolidation combines all your debts into one monthly payment. Consolidated debts have lower interest rates and hence can be paid off quickly. If you’re able to qualify for debt consolidation with a good credit score, it is a better option. You will still have to pay your debt in full. This will also boost your credit score, as you’re fully paying what you owe.

While bankruptcy may seem like a quick way to be debt-free, it does have an effect on various aspects of life. It is important to consider the whole picture before taking this step. If other debt solutions seem like a good fit, consider them first. Speak to a trustee for more information and guidance.

Insolvency and bankruptcy statistics in Canada

Nationwide
	2023	2022	2021	2020
Insolvency	123,233	100,184	90,092	96,458
Bankruptcy	26,216	24,586	27,461	32,880
Alberta
Insolvency	17,921	14,875	13,956	13,089
Bankruptcy	2,572	2,374	2,731	3,602
British Columbia
Insolvency	12,896	10,167	8,699	8,270
Bankruptcy	2,022	1,821	2,172	2,609
Manitoba
Insolvency	3,623	2,773	2,507	2,527
Bankruptcy	896	734	782	787
Newfoundland & Labrador
Insolvency	2,252	1,928	1,737	1,873
Bankruptcy	686	674	642	768
New Brunswick
Insolvency	3,521	3,128	2,985	3,365
Bankruptcy	875	1,027	1,241	1,486
Nova Scotia
Insolvency	4,299	3,467	3,007	3,498
Bankruptcy	1,183	1,208	1,268	1,599
Northwest Territories
Insolvency	61	56	53	47
Bankruptcy	12	3	9	10
Nunavut
Insolvency	15	13	12	12
Bankruptcy	2	0	1	0
Ontario
Insolvency	43,831	34,736	30,327	33,992
Bankruptcy	8,031	7,133	7,580	9,213
Quebec
Insolvency	30,577	25,433	23,667	26,683
Bankruptcy	9,139	8,795	10,113	11,714
Prince Edward Island
Insolvency	502	443	384	426
Bankruptcy	123	169	169	203
Saskatchewan
Insolvency	3,692	3,116	2,724	2,640
Bankruptcy	668	642	744	878
Yukon
Insolvency	43	49	34	36
Bankruptcy	7	6	9	11

Source: https://www.ic.gc.ca/

Advantages

Filing for bankruptcy isn’t the best choice for everyone, but there are instances when it’s a good idea. Let’s take a look at some of the advantages of filing for bankruptcy.

Automatic “Stay of Proceedings”

As soon as you file for bankruptcy, you are granted a “Stay of Proceedings” automatically. This means that creditors and collection agents must immediately stop contacting you. They can no longer try to extract more money from you. 

This also stops any other attempts of collection, like wage garnishment. If you already have an existing garnishment, it is also stopped. Creditors will no longer be able to take you to court, either. Everything will go solely through your trustee (LIT).

A fresh start

After the bankruptcy is discharged, you will be debt-free with a chance at a fresh start. You will have no more collection calls or creditor pressure. There will be credit damage to deal with for a few years, but further damage is prevented. You can move forward and start rebuilding your credit, instead of having to deal with penalties and constant calls that you are unable to make payment obligations.

Stress relief

Due to the “Stay of Proceedings”, creditors and collection agents will no longer be able to contact you. This alone is a huge source of stress to many honest debtors, who are genuinely unable to make ends meet. Once filed, they will stop all forms of communication and interaction with you. Even before the bankruptcy is complete, you have relief from their demands.

Quick solution to being debt-free

Generally, first-time bankruptcy filings are discharged in as little as 9 months. Income above a certain level is considered surplus income. In such cases, the timeline may extend up to 21 months.

If you’ve filed before, your second bankruptcy may take longer to discharge. If you’re under the surplus income limit, the process takes around 24 months, above it, about 36 months.

Inexpensive

Bankruptcy is a relatively low-cost debt relief option and can make the most sense when you don’t have any non-exempt assets or any surplus income.

Disadvantages

Bankruptcy is a powerful financial reset tool, but it has disadvantages.

Damage to your credit

Your credit report and rating will be affected to a great extent. When you file for bankruptcy, an R9, the most severe, rating is added to your credit report. This, of course, tends to have a significant impact on your credit score. The first time you file for bankruptcy, this rating stays on your report for 6 to 7 years, depending on your province and the reporting credit bureau. The effect of a subsequent filing would last for 14 years.

Non-exempt assets liquidated to pay your dues

Any assets that don’t qualify for an exemption will be assessed and then liquidated by the trustee. The money received from the sale of these assets will be used to pay your creditors. You get an exemption for personal items and certain assets like your home or car (or a portion of its value). 

Matter of public record

Bankruptcy is a legal process, and as such comes under permanent public record. If someone does wish to look you up, they will see you have filed. The good thing is, these rerds are no accessed very often. Albeit, people may check is your credit report if you’re applying for a new place to live or a new loan. Bankruptcy stays on your credit report for 6 to 7 years and drops off after that. Once it’s dropped off, even a requested credit check will no longer show your bankruptcy-related R9 credit rating. 

What are the Pros and Cons of Filing for Bankruptcy >>

What happens after bankruptcy?

Although it may eliminate your debts, one of the side effects of bankruptcy is that it damages your credit and will stay on your credit report for up to seven years. To help mitigate that risk, and to be once again seen as creditworthy in the eyes of lenders, you can do a few things.

If living beyond your means was the cause, you’ll want to learn to live on a budget. Pay special attention during the credit counselling sessions to learn how to get the most out of budgeting.

You’ll also want to get in the habit of paying your bills on time. If you’re late with utility, cell phone or other bills, it’s likely to appear on your credit report and negatively impact your credit score.

If you’re serious about rebuilding your credit, you’ll want to consider getting a secured credit card. A secured credit card is a credit card whereby you make a deposit payment. By responsibly using your secured credit card, it can go a long way to re-establishing your good credit history.

After you complete all your duties related to bankruptcy, you get officially discharged. Once discharged, you are no longer legally liable for most of your debts. Subsequently, you are free to start with a clean slate and rebuild your credit. After a maximum of 7 years, your credit report is cleared of the R9 rating as well.

Key takeaways

It can be very difficult to deal with debt, especially if you’re struggling to make ends meet. Bankruptcy is one of many debt solution options. Bankruptcy is a last resort option due to its severe effects, but sometimes it is truly the most viable option.
However, if there are other debt relief solutions that you feel are better suited, do some research and understand your options. Speak to an expert from our team and discuss your situation and options. They may recommend a different debt relief option as a better fit. On the other hand, they may recommend bankruptcy as your best chance at a debt-free fresh start.

Bankruptcy FAQs