Bankruptcy In Canada

Bankruptcy In Canada

Certain financial problems can become too difficult to manage alone, and in such situations, professional assistance may be necessary. The best debt relief option for you will depend on the amount of debt you have and your overall financial situation. If your debt has become unmanageable, filing for bankruptcy might be a viable solution. Although bankruptcy in Canada is considered one of the more drastic debt relief measures, it can also be an effective way to regain control over your finances when you're overwhelmed by debt.

In simple terms, bankruptcy is a legally enforced process you can pursue when you’ve run out of alternatives for managing your debts. The process is governed by Canada’s Bankruptcy and Insolvency Act and must be handled by a court-appointed professional called a Licensed Insolvency Trustee.

Bankruptcy is one of the most powerful ways to eliminate overwhelming personal and household debts. Once you begin the process, it should stop any debt collection actions or legal penalties, such as wage garnishments, late charges, and interest buildup.

Get a free, no-obligation personal loan quote today, with rates starting as low as 9.99%!

You can apply without affecting your credit score.

How Bankruptcy Functions in Canada

In order to finish the bankruptcy process, you’ll need to make a series of required payments to the court over a period of 9 months. This timeline may be extended to 21 months if you need to make surplus income payments. After fulfilling these payment requirements, you will be automatically released from bankruptcy.

Who Can File for Bankruptcy in Canada?

Before filing for bankruptcy in Canada, it’s crucial to determine whether you qualify for the process. It’s advisable to consult with several professionals, such as a financial advisor, credit counselor, and Licensed Insolvency Trustee, to assess if bankruptcy is the right solution for your situation.

To qualify for bankruptcy, you must meet certain criteria, such as:

• Having at least $1,000 in unsecured consumer debt.

• Owing more debt than the total value of your assets.

• Being able to show that you cannot repay your debts through other means.

Additionally, some types of debt can and cannot be included in the bankruptcy process. Typically, only unsecured debts, as well as certain non-credit-related debts, can be discharged.

Unfortunately, secured debts are usually excluded because the creditor has a claim on one or more of your assets (which you originally offered as collateral). Similarly, certain legally or government-mandated debts cannot be included in bankruptcy.

Eligible Debts For Bankruptcy In Canada

• Credit cards

• Payday loans

• Personal lines of credit

• Unsecured loans

• Traditional student loans

• Non-credit bills (utilities, internet, etc.)

Ineligible Debts For Bankruptcy In Canada

• Mortgages

• Home equity loans & lines of credit

• Secured loans

• Federal student loans

• Vehicle loans

• Legal fines (tickets, lawsuits, etc.)

What Happens to Your Home and Mortgage in Bankruptcy in Canada?

Many people believe that filing for bankruptcy automatically means losing their home. While this can be true in some situations, it’s not always the case. Whether you lose your home during bankruptcy depends on the amount of equity you have in it.

Equity is the difference between your home’s current market value and the remaining balance on your mortgage. In most cases, if you have significant equity in your home when filing for bankruptcy, you may have to sell it to pay off creditors, although there are some exceptions. If your equity is minimal, you might be able to keep the home.

What Happens to Your Car and Car Loan During Bankruptcy in Canada?

If you're considering bankruptcy, you may be wondering what will happen to your car. Will you be able to keep it, or will it be taken away?

The outcome depends on several factors, including the value of your car and how much you still owe on your car loan.

If You Own the Car Outright
If your car is fully paid off and you own it outright, you might lose it in bankruptcy if its value exceeds the allowable limit in your province. The trustee will assess the vehicle’s worth.

For example, in Ontario, if your car is valued under $7,117, you may be able to keep it. However, if its value exceeds this amount, it could be sold to pay creditors.

When Is Bankruptcy the Right Option in Canada?

Bankruptcy can be a powerful solution, but it’s not something to take lightly. It’s designed for situations involving severe, unmanageable debt and should only be considered if you:

• Have at least $1,000 in unsecured or non-credit-related debt.

• Are being repeatedly contacted by collection agencies.

• Are prepared to potentially lose certain assets.

• Can manage without access to credit products for several years after filing.

• Are willing to participate in multiple credit counselling sessions.

• Have received proper advice from qualified financial professionals.

• Have exhausted all other less drastic debt relief options.

• Have an income large enough to cover your court payments but not enough to repay your debts within a reasonable time frame.

Pros and Cons Of Filing For Bankruptcy In Canada

What To Expect When Filing For Bankruptcy

When filing for bankruptcy, it's important to understand the process and what to expect. Here's a breakdown of key aspects:

1. Working with a Licensed Insolvency Trustee

A licensed insolvency trustee (LIT) is the only professional legally authorized to handle bankruptcy proceedings. Once you contact a trustee, you will typically receive a free, confidential consultation. This is your chance to understand your options and get advice tailored to your situation. During the process, you'll need to meet regularly with your trustee, follow their instructions, and complete any required tasks to stay on track.

2. Length of the Bankruptcy Process

The duration of bankruptcy depends on various factors such as the amount of debt, your income, and the value of your assets. Generally, first-time bankruptcies can be discharged in as little as 9 months, provided you make all payments on time and fulfill court requirements. However, the process could last longer in certain situations.

3. Surplus Income Payments

In many cases, you’ll need to make surplus income payments if your income exceeds a certain threshold, which differs by province. Surplus income is the amount you earn above this threshold, and the court may require you to pay part of it toward your bankruptcy. These payments typically last for several months or longer, depending on your financial situation.

4. How Long Bankruptcy Payments Last

• First-time bankruptcies: Payments typically last from 9 to 21 months, depending on whether surplus income is involved.

• Second bankruptcies: Payments may last 24 to 36 months.

• Third or subsequent bankruptcies: The court will determine the duration based on your specific case.

5. Exemptions

While many of your assets can be seized during bankruptcy, there are exemptions. For example:

• Personal items such as clothing, furniture, and household goods.

• Work-related items like tools, vehicles, and machinery.

• Personal vehicles, provided their value does not exceed a certain threshold.

• RRSP contributions made over a year ago are exempt.

• Home equity under $10,000 might also be exempt.

Additionally, windfalls like lottery winnings or inheritances earned during bankruptcy may be seized to repay creditors.

Key Takeaway:

Bankruptcy is a structured process with specific timelines, payments, and exemptions that vary based on your situation. Working closely with a licensed insolvency trustee and understanding your rights and responsibilities will help you navigate the process more smoothly.

It’s important to note that bankruptcy is often not the best choice due to the long-term impact it can have on your financial standing. To help you decide if it’s the right path for you, it’s essential to weigh the following advantages and disadvantages.

Advantages of Bankruptcy

• Easy to Qualify: In Canada, there’s no specific maximum debt limit to qualify for bankruptcy.

• Legally Binding: Filing for bankruptcy automatically triggers a legally binding stay of proceedings, meaning creditors and debt collectors can no longer contact you about your debt. Additionally, any ongoing lawsuits or wage garnishments will cease.

• Short Process: If you fulfill all your court obligations, you may be discharged from bankruptcy in as little as 9 months, which is quicker than many other debt relief methods.

• Eliminates Debt: Bankruptcy effectively removes your unsecured debts, allowing you to start rebuilding your finances and improve your credit score over time.

Disadvantages of Bankruptcy

• Surplus Payments: If your income exceeds the court’s designated threshold for your province or territory, you may be required to make surplus income payments for an extended period.

• Fees: Filing for bankruptcy involves various court-related expenses, including a base fee ranging from $1,800 to $2,000, along with additional administrative costs.

• Negative Impact on Credit: Your credit report will suffer significant damage. Typically, your credit rating will drop to the lowest level (R9) after filing for bankruptcy.

• Assets Are Sold: While some personal items may be protected, many of your assets will be liquidated to pay off your debts.

• Public Record: Bankruptcy is a public record, meaning potential lenders and even the federal government may access this information during background checks.

Bankruptcy FAQs

Will My House Be Seized During a Bankruptcy?

Whether your house will be seized during bankruptcy depends on factors like how much debt you have and your location. If your home equity exceeds the threshold set by the court when you file, your house could be sold at auction to pay off creditors. However, this is relatively rare in Canada, though still an important consideration.

Will Bankruptcy Affect My Spouse?

In general, bankruptcy won’t directly impact your spouse or common-law partner’s finances. However, they could be affected if you share a home, jointly hold non-exempt accounts (such as RRSPs), or if they co-signed a loan with you, either before or after your bankruptcy. In those cases, they might be held responsible for part of the debt.

Can My Income Tax Debts Be Included?

A significant benefit of bankruptcy is that unpaid income taxes are treated like other unsecured debts. While there may be exceptions based on your province, a Licensed Insolvency Trustee might be able to negotiate with the Canada Revenue Agency (CRA) to reduce your unpaid taxes, especially if you can prove you won’t be able to pay them in full.

If you miss three or more of your monthly payments, your consumer proposal will be annulled. This means your creditors will be free to pursue the full amount of your debt and can resume collection efforts, including contacting you for payment and taking other actions such as garnishing wages.

How much do you debt?

100% FREE

Thinking of Filing for Bankruptcy in Canada?

If you’ve exhausted all other options and your debt continues to rise, bankruptcy might be your last resort. Don't worry—Loans Canada can connect you with the right debt specialists or help match you with appropriate debt relief services to get back on track.

How Will My Credit Be Affected?

One of the biggest downsides of bankruptcy is the serious impact it has on your credit. All accounts involved in the bankruptcy will be assigned the lowest credit rating (R9). This information will stay on your credit report for 7 years after your discharge, significantly lowering your credit score and making it difficult to access low-interest credit products until your credit improves.

What Alternatives to Bankruptcy Are Available?

Bankruptcy is a serious step and should only be considered once all other debt relief options have been explored. Some alternatives include:

• Borrowing from family or friends

• Withdrawing from home equity

• Applying for a guarantor loan

• Applying for a debt consolidation loan

• Entering a debt consolidation program

• Seeking credit counseling

• Offering a debt settlement to creditors

Why a Loan with us?

Exclusive Offers

FREE Service

Expert tips and Experience

Apply Once and Get Many Offers

Save Time and Money