Personal Bankruptcy in Canada: Your Top 10 Questions Answered

What is Personal Bankruptcy in Canada

Many Canadians face significant financial challenges and are unsure how to move forward. One option you may be considering is personal bankruptcy, a legal process that allows those who cannot pay their debts to eliminate most unsecured debts under the supervision of a Licensed Insolvency Trustee (LIT). It can provide a fresh financial start but can also have long-term impact on your financial future.

1. What happens if I declare personal bankruptcy?

While it is important to understand the full bankruptcy process in Canada, you can generally expect to:

• Meet with a Licensed Insolvency Trustee (LIT): They will assess your financial situation and guide you through the bankruptcy process

• File bankruptcy documents: Your trustee will submit the required paperwork to begin the process

• Surrender applicable assets: Certain non-exempt assets may be sold to help repay the creditors

• Set up monthly payments: If you have surplus income, you may be required to make monthly payments

• Attend credit counselling sessions: These will help you understand budgeting and financial planning

• Be discharged: For a first bankruptcy, the process typically lasts about nine months, after which most unsecured debts are discharged.

2. Who’s eligible to file for bankruptcy in Canada?

To file for personal bankruptcy in Canada, you must:

• Owe at least $1,000 in unsecured debts

• Be unable to pay your debts as they become due

• Work with a Licensed Insolvency Trustee to initiate the process

3. How long does personal bankruptcy last in Canada?

• First-time bankruptcy: Typically lasts for nine months if you have no surplus income

• With surplus income: May extend up to 21 months

• Second or subsequent bankruptcy: Duration may be longer  

4. What debts can be discharged through personal bankruptcy in Canada?

• Most unsecured debts: Such as credit card debt, personal loans

• Certain CRA tax debts may be discharged through the bankruptcy process.

• Excluded debts: Student loans (unless older than 7 years), child/spousal support, fines and court-ordered payments are not dischargeable

5. Do I still have to pay child/spousal support if I declare bankruptcy?

Yes. Individuals owing child or spousal support are still responsible for making these payments, even if they declare personal bankruptcy for their other debts.

6. What are the alternatives to personal bankruptcy in Canada?

There are several alternatives to personal bankruptcy, which include:

• Consumer proposals: allows you to negotiate with your creditors to pay back an agreed-upon amount of your debt over a specific period of time

• Debt consolidation or Informal debt settlements: a negotiation-based approach to managing debts outside the formal bankruptcy process

These alternatives may help protect assets and reduce credit impact.

7. How will personal bankruptcy affect my credit score?

Personal bankruptcy will negatively impact your credit score and typically remains on your credit report for six-to-seven years from the date your bankruptcy is discharged. However, it’s possible to start rebuilding your credit rating while in bankruptcy through secured credit cards or small loans.

8. What assets won’t be seized during personal bankruptcy?

While every province has specific exemption limits, it is important to understand the limits in your home province. You can find a full list of bankruptcy exemptions online, but the following are typically exempt:

• Primary motor vehicle (up to a certain value)

• Household furniture or equipment

• Tools required for trade work

• Personal items and necessary clothing

9. Can I be denied personal bankruptcy in Canada?

Yes. A Licensed Insolvency Trustee (LIT) may refuse to accept your application for bankruptcy if you are unable to cover the Trustee’s fees or meet other eligibility requirements. If you can’t find LITs to accept your bankruptcy application, the OSB’s Bankruptcy Assistance Program may be able to help you.

10. How do I know if I should consider filing for bankruptcy?

Deciding if and when to file for bankruptcy is a major financial decision that must be made carefully. You might consider bankruptcy if you:

• Have overwhelming unsecured debt (if your credit cards and loan debts are so high that you cannot realistically repay them)

• Receive collection calls or notices from creditors

• Can’t make your minimum payments

• Use credit to pay for necessities

• Lose income due to job loss or medical issues, making repayment difficult

• Have no plan to repay your debts within a realistic timeframe

Personal bankruptcy may feel overwhelming, and there are alternatives. However, understanding the process is an important first step to deciding if it is right for you.

Check out other insights on Debt and Stress here.