A Step-by-Step Guide on How to File for Bankruptcy in Canada

Posted on January 24, 2024 by Mihir (Mike) Chande, CPA, CA, CIRP, Licensed Insolvency Trustee
how do bankruptcies work in canada

Many Canadians struggle with debt; sometimes, bankruptcy is the last option to escape the crushing burden. This journey begins with filing for bankruptcy with the assistance of a Licensed Insolvency Trustee (LIT), the only professional in Canada licensed and regulated to administer bankruptcies.

Bankruptcy is a legal procedure where you surrender any non-exempt assets to the LIT as part of the process to relieve your debts. Your trustee will then sell these assets and pay the proceeds to your creditors. 

Contrary to popular belief, you don’t lose everything when you file for bankruptcy. Depending on your province, bankruptcy exemptions may include work tools, a car or a part of your house’s value. For example, if the value of your motor vehicle exceeds your province’s limit, your trustee can sell your car to cover all or part of the debt, and you would receive the “non-exempt” amount.

Rights of a Bankrupt

A bankrupt has the right to earn a living. Therefore, the bankrupt can engage in or continue a taxable business outside the estate after a bankruptcy.

Unsecured Debts

Contrary to popular belief, bankruptcy does not clear all debts.

Here are some examples of common unsecured debts that get eliminated:

  • Credit card balances
  • Personal loans (if unsecured)
  • Lines of credit (if unsecured)
  • Unpaid utility bills
  • Medical bills
  • Arrears of income taxes
  • Payday loans
  • Retail store accounts

Bankruptcy will discharge most of your unsecured debts, but the law makes exceptions for these unsecured debts that do not get eliminated:

  • Student loans less than 7 years old
  • Child and spousal support
  • Fines and most court-ordered restitution payments
  • Court-awarded damages for sexual assault or intentionally inflicting bodily harm
  • Debts that arose as a result of fraud, embezzlement or misappropriation
  • Certain government overpayments can be complicated, so if you have received overpayments from the government, you should discuss this with your Licensed Insolvency Trustee.
Debt Relief in Ontario Canada

How to File Bankruptcy: A Step-by-Step Guide

Introduction

Bankruptcy is a multi-step process that will lead you toward a discharge of most of your debts. 

You will need your complete financial information before contacting a Licensed Insolvency Trustee to determine the best way forward, which may include bankruptcy.

Step 1: Review Your Financial Situation

The first step is a thorough review of your financial situation to determine if you really need to file bankruptcy or if other, solutions are available.

While every situation is unique, here are some indicators that may indicate that help is needed:

  • Your credit cards are almost always at their limit.
  • You have used credit card advances to cover bills.
  • You have missed mortgage or loan payments.
  • You are receiving continued calls from collection agencies.
  • You have received notice of legal action against you to collect debts.

If this is the case, you should explore debt relief options up to and including bankruptcy.

Step 2: Contact a Licensed Insolvency Trustee (LIT)

Once you’ve established that you need to take action, the next step is contacting a Licensed Insolvency Trustee. An LIT is the only professional authorized to administer government-related insolvency proceedings, such as consumer proposals or bankruptcies. They have the authority to stop ongoing and pending legal action and collections, which include lawsuits and wage garnishments.

An LIT will review your financial situation and then suggest and explain the different debt solution problems available to you, with their benefits and drawbacks. Contact an LIT at Chande Debt Solutions for a free, no-obligation consultation to learn how we can help you recover financially and get a fresh financial start.

Step 3: File All Paperwork

Once bankruptcy has been identified as the best way forward, your LIT will assist you with completing all required paperwork to declare bankruptcy. The two primary forms to file for bankruptcy in Canada are:

  • The “Assignment” is where you declare that your bankruptcy trustee is taking control of your property for the benefit of your creditors.
  • The “Statement of Affairs” lists all assets, liabilities, income and expenses.

You will also have to provide supporting documents, including proof of income. After this, your LIT will file your bankruptcy with the Office of the Superintendent of Bankruptcy, which supervises the bankruptcy process.

You must ensure the accuracy and completeness of your information. While your LIT will prepare all necessary paperwork, they rely on the correctness of the information you provide. Keep all copies of notices and other bankruptcy documents you receive from your LIT.

Step 4: Bankruptcy Duties

Declaring bankruptcy comes with several mandatory commitments you have to follow:

  • Credit Counselling: You must attend two mandatory credit counselling sessions to help you build better financial habits through budgeting and money management.
  • Report your income: You must file monthly reports on all income and expenses.
  • Payments: Depending on your situation and income, you may have to pay surplus income or voluntary payments, any equity for assets that exceed the exemption amounts in your province.
  • Tax returns: You have to provide all required tax documents to your trustee, who will file your personal income tax return for the year of the bankruptcy.

Step 5: The End of the Process

The final step of the bankruptcy process is the discharge. Once all of your duties are fulfilled, you will be eligible for discharge in nine months (or longer, depending on your situation). This will release you from your obligation to pay the debts included in the bankruptcy. If you have not completed your duties in the requisite time, a court order will be issued to outline all remaining steps before you can be discharged from bankruptcy.

Step 6: Moving Forward

The next step after your debt burden has been lifted will be to begin rebuilding your credit score. This is one of the most essential parts of your mandatory counselling sessions with your LIT.

How Much Does Bankruptcy Cost?

Currently, the minimum bankruptcy cost in Canada is $1,800 (usually paid as $200 per month for 9 months), covering the administrative costs. Depending on your situation, you may have to make surplus income payments instead of the $1,800. This income is everything you and your partner earn above the government threshold. A portion of this surplus income has to be paid to your trustee to  distribute between your creditors.

How Long Does Bankruptcy Last?

If it is your first bankruptcy and you complete all assigned mandatory duties, it will last about 9 months. If you have surplus income, calculated after standards established by the Office of the Superintendent of Bankruptcy Canada, it may last up to 21 months. Your LIT will coordinate any surplus income and distribute it accordingly.

In the case of a second bankruptcy, it will last 24 or 36 months. The court will decide your bankruptcy timeline if you have been bankrupt more than once, have not complied with your duties or committed one or more bankruptcy offences.

Once you have been discharged from your bankruptcy, you will no longer be responsible for any debts included in the bankruptcy. However, your bankruptcy will remain on your credit report for 6 or 7 years, depending on the credit bureau.

What Does “Discharged” Mean?

“Discharged” means you are no longer responsible for the debts included in your bankruptcy and can apply for credit again. It is critical to remember that if you don’t complete your mandatory duties during bankruptcy, your trustee will proceed to close your file, and your creditors can resume their collection efforts against you.

What Happens to My Debt if I Declare Bankruptcy in Canada?

While bankruptcy will discharge you from most of your debts, some debts cannot be eliminated by bankruptcy, including the following:

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

In most cases, income tax debts are covered by bankruptcy. There are some exceptions where the CRA can object to the discharge, mainly if it includes a substantial income tax debt, but your trustee can advise if this could be the case. Any tax refunds you would receive during your bankruptcy will go to the trustee to divide between your creditors.

What About Student Loans?

Student loans are a bit of an oddball regarding debt due to the “Seven-Year Rule.” As mentioned above, if it has been less than seven years since you last attended school, your student loans will not get discharged by the bankruptcy.

Are Debt Collectors in Canada Allowed to Keep Calling Me if I Declare Bankruptcy?

Once bankruptcy is filed, a Stay of Proceedings begins, meaning all creditors and collection agencies must stop contacting you. Creditors also cannot garnish your wages anymore.

What Happens to My Regular Income if I Declare Bankruptcy in Canada?

Bankruptcy does not affect your regular wages. However, part of your mandatory bankruptcy duties is to file monthly reports of your household’s income and expenses. Your trustee will determine if your income exceeds the government guidelines based on your average earnings during the bankruptcy and the number of people in your household. If it does, you must make monthly payments of this “surplus income.”

What Happens When a Bankruptcy is Finished?

Once the court approves your discharge, your bankruptcy is complete. Your trustee will send you the Notice of Discharge. At this point, you are free from your unsecured debts included in your bankruptcy and can begin rebuilding your credit.

Depending on the credit bureau, your notation of bankruptcy will remain on your account for six or seven years, after which it will automatically be removed.

As soon as you have received your Notice of Discharge, you can begin taking steps toward rebuilding your credit. While having the bankruptcy on your credit report will make it more challenging, you can start with a secured credit card or small bank loan, ensuring you make all payments on time.

Am I Allowed to Have a Bank Account if I Declare Bankruptcy in Canada?

Yes, you can have a bank account after declaring bankruptcy in Canada. However, if you have more than $999 in your account and are looking for overdraft protection, you must notify your bank of your bankruptcy. We recommend opening a bank account at an institution where you don’t owe money to prevent creditors from taking money from you. Stop using any active accounts before your bankruptcy, and only use this new bank account.

Can I Get a Credit Card if I Declare Bankruptcy in Canada?

The short answer is no. As soon as you file for bankruptcy, you must relinquish all credit cards to your trustee so they can be cancelled.

Will My Canadian Student Loans Go Away if I Declare Bankruptcy?

As mentioned earlier, student loans have the “Seven-Year Rule.” This means that your student loan will not get discharged (eliminated) by the bankruptcy.

However, in some cases, you can retain a lawyer and make an application to the court even if you don’t pass this rule. You must meet the following requirements:

  • You have been out of school for at least five years.
  • You have acted in good faith regarding the liabilities under your loan.
  • You have and will continue to experience financial difficulty, making it impossible to pay the liabilities under the loan.

Can I Keep My House and My Car Under Canadian Bankruptcy Rules?

Generally, secured debts are not impacted by bankruptcy like a mortgage or vehicle lease, as long as you continue to make the payments as agreed, and there is no equity in your secured assets (equity is the remaining value if the house was liquidated and the mortgage was paid off).

You may also get an exemption of a portion of the house’s value from being included in the bankruptcy to make it easier for people to keep their homes when facing bankruptcy.

Meet with a Licensed Insolvency Trustee

Licensed Insolvency Trustees are the only professionals authorized and regulated by the government to file bankruptcy. They will carefully review your financial situation to determine which debt solution is right for you and explain all possible options with all benefits and drawbacks to allow you to make an informed decision. The initial consultation with an LIT of Chande Debt Solution is free and confidential and is your first step toward financial freedom.

The experienced Licensed Insolvency Trustees of Chande Debt Solutions are focused on personal debt relief and insolvency services. We know that filing a consumer proposal or bankruptcy is a serious matter, and we want to ensure that you are well informed and don’t rush into any solutions. All of our consultations are free, without time limits.
Call us today at 416-366-3328 or fill out our convenient online form to learn how we can help you recover financially.

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Mihir (Mike) Chande, CPA, CA, CIRP, Licensed Insolvency Trustee Mike, a Chartered Accountant, began his insolvency career in the Corporate Insolvency and Restructuring group at one of Canada’s largest insolvency firms. After gaining extensive experience, he founded Chande Debt Solutions to offer personalized and empathetic debt relief services to clients seeking an alternative to traditional solutions.

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