Bankruptcy/Declaring Bankruptcy
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What exactly is bankruptcy?
Bankruptcy is one of the options available to help people cope with financial crises. It is a formal legal proceeding governed by the Bankruptcy and Insolvency Act.
Bankruptcy provides a person who is unable to repay their debts (a “debtor”) the opportunity to start afresh. This is done by freeing the person of most of their debt. More specifically:
- the indebted person signs over all his or her assets (except those exempt by law) to a trustee in bankruptcy (at which point s/he is called the “bankrupt”); and
- the trustee will then sell or use those assets it order to pay the bankrupt’s creditors.
In order to file for bankruptcy it is necessary for a person to be “insolvent”. This means:
- to owe at least $1,000; and
- to not be able to meet your debts as they are due to be paid.
Once a debtor files for bankruptcy, actions by unsecured creditors, such as wage garnishments, are immediately stayed (stopped).
Can I be forced to file for bankruptcy?
Yes, but it is not common.
In general, there are two ways a person can go into bankruptcy. The first and more common way is to have the person make an “assignment” in bankruptcy (also known as voluntarily “going into”, “declaring” or “filing for” bankruptcy). The second, and rarely used way, is for creditors to ask the Court to make an order that a person is bankrupt.
In addition, bankruptcy is automatic if the creditors or the court reject a Division 1 Proposal.
How do I voluntarily file for bankruptcy?
You can do this by contacting a trustee in bankruptcy.
A list of a licensed trustees in bankruptcy can be found in the external resources. For more information on the role of a trustee, see here.
How much does it cost to file for bankruptcy?
It depends on the length and complexity of the case. The simplest cases start at $1,500.00, plus GST and counseling costs.
This money does not necessarily have to be paid upfront. Often, the trustee is paid out of the funds arising from the sale of the bankrupt’s assets. If the bankrupt has no assets available, then the trustee can ask for a retainer or require the bankrupt to pay fees and expenses over time. Most firms have a payment plan that allows a bankrupt to pay the costs over time.
Filing fees and counselling fees are all in all cases regulated by the federal government. Trustee fees depend on the value of the estate. If the value of the estate is less than $15,000, the fees are regulated by the government (this is known as “Summary Administration”). If, on the other hand, the value of the estate is more than $15,000, the Trustee’s fee may be based on an hourly rate (this is known as “Ordinary Administration).
If I do this, who will know that I have filed for bankruptcy?
Usually not many people.
In a bankruptcy, where there are significant assets (i.e. exceeding $10,000), a notice is placed in the “legals” section of the newspaper notifying creditors of the date of the meeting of creditors (if there is one). If, on the other hand, there are minimal assets (i.e.: under $10,000) the creditors are notified by mail only.
In addition, any legal filing of a bankruptcy (i.e.: the legal paperwork) is a public document which the general public has access to. From this documentation, the Credit Bureau is notified and the bankruptcy is recorded and will remain on your credit record for 6 years.
Unless you’re a prominent person and the filing is picked up by the media, the chances are very good that the only people who will know about a filing are your creditors and the Credit Bureau.
Once I file for bankruptcy, can my bank refuse to let me open a bank account or cancel my existing account?
No, it cannot.
If your bank cancels or refuses to open a bank account for you because you have been, or are in, bankruptcy they are breaking the law.
If you believe that a financial institution has breached this law, call 1-866-461-3222 or e-mail the Financial Consumer Agency of Canada. You can also lodge a complaint through the Ombudsman for Banking Services and Investments (OBSI). This is an independent organization that investigates customer complaints against financial services providers, including banks.
Does all of my property get transferred to my trustee?
It depends on the nature of the property.
Property that is exempted by federal and provincial laws is not assigned to the trustee for distribution to your creditors. Similarly, property that is encumbered (i.e.: secured, such as by a mortgage) is not assigned to the trustee.
Make sure that, throughout the period of bankruptcy, all of your assets are fully disclosed and properly valued.Once you have filed for bankruptcy, you cannot dispose of any assets assigned to the trustee.
What will happen to my house?
While the laws are slightly different in each province, the basic concepts are the same.
- If your house has little or no equity, you can usually make arrangements to keep paying your mortgage, and keep your house after filing for bankruptcy. The trustee does not get involved with this.
- If your house has substantial equity, your trustee will either seize your house and sell it, or make arrangements with you to re-purchase the equity from the trustee.
You can calculate your home’s equity by subtracting the mortgage and property taxes owing from the value of your house.
The rules regarding houses and bankruptcy are complicated. To find out how they will apply in your specific situation and for details on what would happen in your situation, contact a trustee for bankruptcy. For more information on the role of a trustee, see here.
What property will I “lose”?
In a bankruptcy: all the assets you own at the date of bankruptcy (other that your allowed personal exemptions) go to the trustee for the benefit of your creditors.
In addition, any assets that you acquire during the period of the bankruptcy also go to the trustee for the benefit of your creditors. This includes:
- inheritances to which you might become entitled, by the death of someone during the time of your bankruptcy;
- any tax refunds outstanding as the date of the bankruptcy;
- any pre-bankruptcy tax rebates;
- any award for wrongful dismissal;
- lottery winnings; and
- any significant property that you purchase with any surplus income.
What property can I keep?
If the secured lender allows you to keep the asset, you may keep property that is encumbered (for example, your house).
You also keep those assets that are officially “exempt” by either provincial (or territorial) or federal law. More specifically, the property exempt from seizure applies only to the equity in the asset (and even that can have limits). Equity is the excess that the value of an asset has over any charges or encumbrances against that asset.
Example:
- You have a car worth $10,000.
- There is a $6,000 secured debt against it.
- Therefore the equity in the car is $4,000.
- In Alberta the exemption for a car is $5,000 .
- Therefore, you are entitled to the equity of $4,000 (unsecured creditors cannot take this).
The laws of exemption vary by jurisdiction. Common examples include:
- food required by the bankrupt and his/her dependants during the next 12 months;
- necessary clothing of the bankrupt and his/her dependants (but usually only up to a certain value)
- household furniture and appliances (but only up to a certain value);
- one motor vehicle (but only up to a certain value);
- medical and dental aids required by the bankrupt and his/her dependants;
- where the bankrupt is a bona fide farmer and whose principal source of livelihood is farming, some portion of land, as long as the bankrupt’s principal residence is located on that land and the land in question is part of the bankrupt’s farm;
- equity in the bankrupt’s principal residence (but only up to a certain value). If the debtor is a co-owner of the residence, the amount of the exemption is reduced to an amount that is proportionate to the debtor's ownership interest;
- personal property (i.e. tools, equipment, books) required by the bankrupt to earn income from this/her occupation (but only up to a certain value); and
- where the bankrupt’s primary income is from farming operations, personal property required by the bankrupt for the proper and efficient conduct of the farming operations for the next 12 months.
For more information on exemptions in your province, see a trustee in bankruptcy.
How will all of this affect my spouse; will s/he be held responsible for my debt?
Your spouse, whether common law or married, will not be directly affected by your bankruptcy if he or she is not responsible for any of your debt (in other words, as long as he or she did not sign an agreement or contract for any of your debt). If your spouse is responsible for any of your debt, or has his or her own unmanageable debt, then your spouse may have to file bankruptcy, too.
If your spouse has a supplemental credit card, he or she will probably be responsible for that debt.
I am divorced. What will happen to my on-going child and spousal support payments?
Child support and spousal support payments are not affected by bankruptcy. These payments must be kept up to date.
What are the various steps that I must go through during my bankruptcy?
Many things will happen during the period of your bankruptcy, and there are numerous duties that you must complete. Here are the twelve most common steps. The order is not always the same – it will depend on the situation. No two bankruptcies are exactly the same. Many of these steps occur at the same time.
Step 1: Contact, and meet with, a trustee for bankruptcy.
Step 2: Work with the trustee to complete the required forms. The trustee will then file the bankruptcy with the Office of the Superintendent of Bankruptcy (OSB).You will then formally be declared bankrupt. From that point on, the trustee will deal directly with your creditors.
Step 3: You sign over all of your assets to your trustee (except for the exemptions). The term “assets” includes all the assets you have at the time you file for bankruptcy, including your credit cards, as well as any that you get during the time of your bankruptcy. Once you have filed for bankruptcy, you cannot sell or give away any assets assigned to the trustee.
Step 4: You give the trustee your T-4 slips and any other information necessary to complete any outstanding tax returns to the date of bankruptcy. When you file for bankruptcy, the day you file is treated like the end of your tax year so that in the year you file bankruptcy you actually have to file two different tax returns (one pre-bankruptcy and one post-bankruptcy). Any income tax debt will be included in your bankruptcy, although you may be required to pay it separately. Any refund to which you are entitled will be an asset that will come to your trustee for your creditors.
Step 5: The trustee notifies your creditors. Depending on the expected size of your bankruptcy estate and whether or not there are requests from creditors or the OSB, there may be a meeting of creditors. The purpose of such a meeting is to: allow creditors to obtain information about the bankruptcy; confirm the appointment of the trustee; appoint up to five inspectors to supervise the administration of your bankruptcy; and allow creditors to give directions to the trustee. In most personal bankruptcies, no creditors’ meeting is held.
Step 6: The trustee sells your assets and you make payments to your trustee (for distribution to your creditors). The trustee determines how much you will be required to pay. He or she calculates the amount by taking into account your total income, your family income, income standards issued by the OSB, and your personal and family situation.
Step 7: You may have to attend an examination under oath by an officer at the OSB. The purpose of the examination is to question you about your conduct, the causes of the bankruptcy and the disposition of your property.
Step 8: You pay, and report to, your trustee monthly. Each month, you must report your household income and living expenses and any change in your family situation. You must also provide copies of your pay stubs. From your income and expenses, your trustee determines if your net income was higher than the limit allowed by law for you to live (“surplus income”). If you have any such surplus income, you will be required to make a payment each month to the trustee. The more you earn, the more you are required to give the trustee for the benefit of your creditors. You must also keep your trustee informed as to where you are living, respond to the trustee’s requests, and assist the trustee as required. You should know that if you miss a payment to your trustee, your discharge date will be postponed.
Step 9: You attend two credit counselling sessions. The purpose of these sessions is to help you learn about and understand the causes of your bankruptcy, as well as to assist you in the future management of your finances. In order to be eligible for an “automatic 21 month discharge”, you must take these two credit counselling sessions. This counselling can be one-on-one, with yourself and your trustee, or if you prefer, it can be in a group consisting of other bankrupts and your trustee.
Step 10: Your trustee prepares a report to the OSB describing your actions during the bankruptcy. This report outlines your current financial situation and recommends whether or not you should be discharged from your debts. If either you or a creditor does not agree with the trustee’s recommendations, you or the creditor may ask the trustee for mediation. If, through mediation, you do not reach an agreement on the conditions for your discharge, the trustee must apply to the Court for a hearing.
Step 11: If required, you attend a discharge hearing. Often, a first-time bankrupt is automatically granted a discharge nine months after filing for bankruptcy. If you are granted an automatic discharge, there is no court hearing - your trustee just sends you a copy of the discharge. For those who have been bankrupt before, or who do not qualify for an automatic discharge, the trustee will write to the court for an appointment to hear the application for discharge. The court will then choose one of the following options.
- Absolute discharge. With this, you will not have to repay what remains of the unsecured debts you had at the date your bankruptcy was filed, (except for excluded debts).
- Conditional discharge. This requires that you fulfill certain conditions prior to obtaining your absolute discharge. For example: paying a certain amount of money, possibly over time.
- Suspended discharge. This is an absolute discharge that does not take effect until a future date.
- Discharge refused.
- Discharge could be adjourned “Sine die.” This is a bad situation which essentially means you are stuck in bankruptcy and all the duties remain in force. Once the Trustee closes the file (or gets his discharge from you), you will have no protection from your creditors. This generally only occurs in situation in which the bankrupt has consistently not completed his/her duties.
Step 12: The bankruptcy is discharged. Once you are discharged, you will no longer have to repay what remains of the unsecured debts you had at the date of bankruptcy, except for excluded debts.
I’m having problems with my trustee, what can I do?
As a first step, try to work things out with your trustee.
If that does not result in a resolution, contact the Office of the Superintendent of Bankruptcy (OSB) in your area. The OSB can review and investigate your complaint and attempt to reach an acceptable resolution with your trustee.
A list of offices is available in the external resources.
In the end, will the bankruptcy release me from all of my debts?
Under the Bankruptcy and Insolvency Act, some debts are not discharged by bankruptcy.
These include, but are not limited to, the following:
- spousal and child support payments;
- student loans (if it is less than 7 years since you ceased to be a full- or part-time student);
- fines, penalties and damages owing imposed by the court; and
- debts arising from fraud.
In addition, bankruptcies generally do not affect the rights of secured creditors. If a creditor has valid security against your property (e.g. a car or a house), consult with your bankruptcy trustee. If you can afford monthly payments, financial arrangements can be made with the secured creditor.
When will my bankruptcy be over?
Several factors affect the length of your bankruptcy. Technically, your bankruptcy ends when you receive a discharge (the event that actually cancels your debts).
Most first time bankrupts in Canada are automatically eligible for discharge after the minimum period of 21 months.
However, this discharge will only take place if:
- the creditors, Superintendent of Bankruptcy or trustee have not opposed your discharge (which they may do if you do not do what you are supposed to or if you were not honest during the process);
- you have received credit counseling; and
- this is your first bankruptcy.
Conditions that could prolong your bankruptcy include the following.
- Surplus income. If your income is considerably higher than the limits, it is possible that your bankruptcy will be extended for longer than nine months.
- One or more previous bankruptcies. If you have been bankrupt before, you are not eligible for an automatic discharge. Your bankruptcy will be extended for a period of time that will be determined by a judge or registrar of the bankruptcy court.
- If you owe more than $200,000 of personal income tax debt representing 75% or more of your total unsecured debt.
- Failure to complete one or more of your duties. The exact length of the delay will depend on the seriousness of the failure and how soon you complete the missing duties.
- Opposition to your discharge. Occasionally, creditors, the trustee, or the Superintendent of Bankruptcy oppose a discharge. When this happens, the matter goes to mediation or is heard before a registrar or a judge.
How will bankruptcy affect my credit rating?
It is important to note that, by the time you have reached this point, your credit rating may already be severely compromised. Restoring your credit rating will not be automatic.
When you file for bankruptcy, the Credit Bureau will be notified. The bankruptcy is recorded and you will be assigned the lowest possible credit rating score. The bankruptcy will remain on your credit record for 6 years.
Bankruptcy has a long-term effect on your credit rating. So, too, do the various other options. In the end, it cannot be said that one necessarily has a better, or worse, effect than another. It depends on the circumstances. For example:
- Assume you have a debt problem and you address the issue with a consolidation order that has a five year repayment plan. When you are done, your lowered credit rating score will remain for 2 years after repayment. Total number of years: 7.
- Assume you have a debt problem and you address the issue with a consumer proposal that has a five year repayment plan. When you are done, your lowered credit rating score will remain for 3 years after repayment. Total number of years: 8.
- Assume you have a debt problem, you address the issue with bankruptcy, and you are discharged after 9 months. After your discharge, your lowered credit rating score will remain for 6 years after discharge. Total number of years: about 7.
- Assume a second bankruptcy. After your discharge, your lowered credit rating score can remain for up to 14 years after discharge.
The issue of the effect on your credit rating is a complex one. Consider contacting a trustee in bankruptcy for advice. For more information on the role of a trustee, see here.
This does not mean that you cannot obtain any credit during, or after, this time, but it does make it more difficult. No one is ever required to give you credit. Your ability to obtain and use credit after discharge depends on your ability to convince lenders of your ability to repay the debt. To ensure that your credit record is updated, send a copy of the discharge order to the major credit-reporting agencies. Make sure that you keep all documents relating to your bankruptcy for reference by future lenders.
More Information
| Other FAQs in this section | ||
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| Debt Control in General | Options other than Declaring Bankruptcy | Declaring Bankruptcy |
This page was last updated in November, 2009.
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