How does someone go bankrupt?

Posted on 2 May 2022

Written by Ashvin Sharma

Bankruptcy is often considered to be the last resort when it comes to gaining debt relief and beginning a fresh financial future, but for many people it is necessary. Perhaps you are drowning in debt, receiving threats for a wage garnishment, or being harassed with collection calls from your creditors. When all other options have been considered, bankruptcy is often the best pathway to clearing your unsecured debts. Bankruptcy has lots of advantages including the clearance of unsecured debts and a stay of proceedings that offers protection from creditors and collection calls. But how does someone go bankrupt in the first place? And how can bankruptcy be avoided? In this article, we discuss how bankruptcy comes about and how you can recognize the warning signs.

How does someone go bankrupt?

In order to go bankrupt in Canada, you must be insolvent. Insolvency is the condition of being unable to repay the debts you have to your creditors on time. When you are insolvent, it is important to begin looking at your debt relief options in order to get your finances back on track. If you are insolvent, the best course of action to take is to speak to a reputable Licensed Insolvency Trustee to discuss your financial circumstances. They will review your finances with you and recommend the most appropriate form of debt relief for you. If no other form of debt relief is suitable for you, including a consumer proposal, they may recommend bankruptcy. Bankruptcy is a legal form of debt relief backed by the Bankruptcy and Insolvency Act. You need a Licensed Insolvency Trustee in order to file bankruptcy. It is the process of assigning your non-exempt assets over to your trustee as part of repayment to your creditors, in exchange for clearance from your remaining debts. At Spergel, our trustees have helped over 100,000 Canadians become debt free, many through bankruptcy. There are many advantages of filing bankruptcy including the clearance of unsecured debt and a stay of proceedings, which offers full protection from your creditors.

What are the causes of bankruptcy in Canada?

In Canada, there are several primary reasons for someone going bankrupt. Although the reasons for bankruptcy are often perceived as being down to carelessness or frivolous spending, this is certainly not always the cause. Here are the top causes of bankruptcy in Canada:

Reduced income or job loss

Sometimes, circumstances beyond our control can affect our income streams. Income reduction or a job loss can make it difficult to stay on top of bills and debt repayments. This can often encourage us to borrow additional funds or rely on credit cards for everyday expenses, which can quickly spiral into further debt. If you are facing reduced income, it is crucial to reduce your spending accordingly. Learning how to save and how to budget are essential skills to help do so.

Unexpected bills

Once again, insolvency can be caused by situations we do not always expect. This might include scenarios like a major car or property repair bill, a flood or a fire affecting our property, or even the death of a family member. Without a plan in place or any emergency funds, unexpected financial burdens can quickly lead to debt and subsequent bankruptcy. At Spergel, we will help you to address these circumstances – the sooner you reach out, the sooner we can get you on track.

Breakdown of a relationship

A common reason for bankruptcy is a divorce or the breakdown of a relationship. As well as being emotionally difficult, bankruptcy can happen when individuals are suddenly forced to cover their living expenses on a single wage instead of two wages. There can also be additional legal costs too. This increased expense can in turn make it difficult to continue without accruing debt, or repaying any outstanding debts. Sometimes, this can lead to a need for bankruptcy.

Medical issues

In Canada, we are fortunate enough that many medical expenses are covered by the government. If you sustain an injury or get sick, however, you could be off work for an extended period of time which can make it very difficult to make repayments on your debt. Healthcare and insurance do not cover all medical costs either. This can lead to using credit cards to pay for medical expenses, and you may not be able to return to work which can lead to bankruptcy.

Poor money management

If you are guilty of spending beyond your means and relying on credit cards, you are not alone. This is the primary cause of bankruptcy in Canada. This could be combined with the breakdown of a relationship or unexpected bills, which can quickly spiral into financial desperation. The best way to avoid bankruptcy from poor money management is to create a budget so that you understand your income and outgoings, and to begin an emergency fund for urgent situations.

How do you file bankruptcy?

Thousands of Canadians file bankruptcy each year due to the reasons above. It can happen to anyone who is unprepared for financial issues or struggling with debt. If you are considering bankruptcy, you are not alone. Understanding what has led you to this position will help you to understand what kind of debt relief is required and how you can go about preparing for a fresh financial future. If you are considering bankruptcy, your first step should be to meet with a Licensed Insolvency Trustee. Trustees are the only professionals in Canada legally able to file all forms of debt relief, so they are a great source of advice. They will discuss your financial circumstances with you, as well as appropriate bankruptcy alternatives. If bankruptcy is the right option for you for a fresh financial start and to offer protection from your creditors, your Licensed Insolvency Trustee will help you to start the bankruptcy process. At Spergel, unlike other bankruptcy firms, you will be assigned your very own trustee to walk you through the entire bankruptcy process instead of passing you from person to person.

How does bankruptcy work?

Filing bankruptcy in Canada is a relatively straightforward process, although it does involve some paperwork and can be time consuming. Your Licensed Insolvency Trustee will first work with you to understand how much debt you have overall. They will need to know your current income, outgoings, and all of the debts you owe and their associated interest rates. This may include mortgages, loan payments, payday loans, and credit card debts. Your trustee will then begin to file your bankruptcy. You will need to fill out some forms with all of your financial information, and your trustee will take on the rest of the work including contacting your creditors on your behalf. A stay of proceedings will be generated in order to offer protection from creditors, stop collection calls, and pause any wage garnishments. In Canada, bankruptcy takes time although most first time bankruptcies are discharged within a year, provided there is no surplus income. Once you are discharged from bankruptcy, the process will end and your debts will be cancelled. At this point, you are able to enjoy life after bankruptcy.

No matter what your financial situation, support is available. If you want to learn more about ‘how does someone go bankrupt?’, book a free consultation with one of our experienced Licensed Insolvency Trustees for information on filing bankruptcy and alternative methods of debt relief. The sooner you reach out, the sooner we can help to get you back on the pathway to financial freedom.


Ashvin Sharma

Ashvin Sharma is a Chartered Insolvency and Restructuring Professional and LIT (Licensed Insolvency Trustee) overseeing all of Spergel's offices in the Greater Vancouver Area and British Columbia. He is also our resident expert on homeownership debt and health debt. In his spare time, Ashvin loves to play sports, spend time with family and friends, and serves as a volunteer coordinator for "Free-Them", a Canadian organization committed to raising awareness about human trafficking.

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