What happens when you declare bankruptcy?

Posted on 6 March 2023

Written by Chris Galea

In order to file bankruptcy in Canada, you need the support of a Licensed Insolvency Trustee who will file for you. Licensed Insolvency Trustees are the only professionals in Canada legally able to file all forms of debt relief, and they will help you throughout the process. Bankruptcy is the process of assigning any non-exempt assets you may have over to your Licensed Insolvency Trustee. The sale of these assets will go towards repaying your debts, and the remainder of your debt will be cleared. Although many Canadians fear that bankruptcy means they will end up with nothing, this is far from the case. Bankruptcy is intended to enable you to begin a fresh financial future, and so leaving you with nothing would be counterintuitive. Each province has its own list of non-exempt assets – see for example Ontario’s bankruptcy exemptions. Even if you have assets outside of the exemption limit, you can arrange to ‘buy back’ the asset from your creditors by increasing your payments. Although bankruptcy can seem like a complicated process, a good Licensed Insolvency Trustee will walk you through the journey from beginning to end. So, what happens when you declare bankruptcy? In this article, we share all you need to know.

How long does bankruptcy last?

If it is your first time filing bankruptcy and you comply with the bankruptcy obligations assigned to you (including sharing details of your monthly income and attending two credit counselling sessions), bankruptcy will last around 9 months. If, on the other hand, you have surplus income, your bankruptcy could last up to 21 months. Surplus income is calculated by your income, expenses, and household dependents. If your income exceeds a certain threshold, you will need to pay surplus income which can extend the period for which you need to make a monthly payment. If you have filed bankruptcy previously, your second bankruptcy will likely last between two to three years. Should you have not complied with your bankruptcy obligations previously, the length of your bankruptcy will be determined by the court. From this end point, your bankruptcy will be discharged.

What does a bankruptcy discharge mean?

A discharge from bankruptcy means that your bankruptcy has ended. Once you have received an Absolute Discharge from bankruptcy, you will be cleared of your unsecured debts for good. You will no longer need to make payments towards the debts you owed, and you can finally apply for credit once again. Discharge will come about if you listen to your Licensed Insolvency Trustees and meet the duties of your bankruptcy. If you do not, you will not be discharged from bankruptcy and your Licensed Insolvency Trustee will need to close your file. This means that once again, your creditors can pursue you in order to collect their payments. Do note that even once you have been discharged from bankruptcy, it will remain on your credit report for around six to seven years, depending on your province of residence. At Spergel, we can help you to rebuild your credit.

What happens to your debt when you declare bankruptcy?

You are able to file most types of debt when you file bankruptcy – it can cover unsecured debts like credit card debt, tax debts, and payday loans. Once you are discharged from bankruptcy, any unsecured debts you included as part of your bankruptcy are cleared. Secured debts, on the other hand, cannot be included in bankruptcy. This covers debts associated with an asset, like car loan debts and mortgages. Other debts you are not able to include are court fines, fraudulent related debts, alimony, damages, and student loan debts (only if you studied within the last seven years). If any of these debts are causing concern for you and cannot be included in bankruptcy, there are likely many other debt relief options for you. A consumer proposal is a popular bankruptcy alternative. At Spergel, our Licensed Insolvency Trustees will work with you to review your financial situation and recommend the best option for you.

What happens to your income when you declare bankruptcy?

Your paycheque sits separately to your bankruptcy, although one of your bankruptcy obligations is to share your household monthly income and outgoings with your Licensed Insolvency Trustee. You should also inform them of any changes to your situation, for instance, if you lose or gain a dependent. Based on the information you share, you may need to make monthly payments to your Licensed Insolvency Trustee – also known as surplus income payments. Surplus income will come about if your income exceeds the thresholds of your province, for instance if you get a raise. Surplus income is essentially any income you may have that goes above and beyond what is needed for a basic standard of living.

What happens to debt collectors when you declare bankruptcy?

You may be relieved to know that as soon as you file bankruptcy, a stay of proceedings is generated. This is a legal formality whereby any collection activity must stop. This puts an end to collection calls, and any threats of legal action like a wage garnishment or freezing your bank account. To many Canadians looking to file bankruptcy, this is a huge weight off their shoulders. While this applies to any creditors behind the unsecured debts you are filing as part of your bankruptcy, you should note that it does not affect the impact on your secured debts – including mortgages, car loans, and alimony. That said, by clearing your unsecured debts via a bankruptcy, it should make paying your secured debts much simpler.

Can you have a bank account and credit card when you file bankruptcy in Canada?

If you have $1,000 or more in your bank account and would like an overdraft, you need to inform your bank that you are bankrupt. So that creditors do not try to take money from you, you should open a bank account at a new bank where you do not owe any money. You should use this account and not use any that you used before filing bankruptcy. Once you file bankruptcy, however, you should note that you need to abandon your credit cards to your Licensed Insolvency Trustee. Your credit cards will be cancelled. It is important to note also that your credit score will be affected by bankruptcy. Canada’s two primary credit bureaus – TransUnion and Equifax – will have a note about your bankruptcy for six to seven years, depending on your province of residence.

Can you keep your house and car when filing bankruptcy?

This is a key concern of many Canadians looking to file bankruptcy. Contrary to popular belief, you do not lose everything you own when you file bankruptcy. The Canadian government views bankruptcy as a way for individuals to gain a fresh financial future. If, therefore, everything was taken away from you, it would be incredibly counterproductive. For this reason, each province has a list of bankruptcy exemptions. This includes assets like your home, a vehicle, and clothes. Each of these assets will have a value threshold set by the government. Provided your assets do not exceed this value, you can keep each of your assets. If they do exceed the value (and therefore have equity), your Licensed Insolvency Trustee will work with you to make an arrangement with your creditors to enable you to keep the assets and continue paying off your mortgage or car loan debt. Assets like your home and vehicle are secured assets, and work differently to the unsecured assets you can file as part of bankruptcy. Provided you can continue to make the monthly payments on these assets, you can keep them. Often, individuals filing bankruptcy will find that having their unsecured debts eliminated makes it much easier to make the payments for their secured debts. Learn more about keeping your house when filing bankruptcy, and keeping your car when filing bankruptcy in Canada.

How much does filing bankruptcy cost in Canada?

Some Canadians are surprised to learn that there is a cost associated with filing bankruptcy in Canada, and it can be a deciding factor as to whether or not to pursue filing bankruptcy. You may wish to opt for a cheaper bankruptcy alternative instead, like filing a consumer proposal. You should first review your options with an experienced Licensed Insolvency Trustee. When filing bankruptcy, you will need to pay a base contribution cost, as well as a surplus cost and asset cost where circumstances apply. A base contribution cost covers the administrative fees associated with filing bankruptcy, including the expertise and knowledge required to lead the process. This cost is split into affordably monthly payments. Surplus income costs are for any situations where you are earning over the government threshold, and asset costs are when the value of your assets exceed the provincial threshold. Arguably, these costs are a small price to pay when bankruptcy can free you of your debts and offer peace of mind. Bankruptcy costs are regulated by the Canadian government, and your Licensed Insolvency Trustee can walk you through all of the details in your free initial consultation.

What happens when you declare bankruptcy in Canada?

As you can see from this article, there are various moving parts to filing bankruptcy in Canada. You gain a fresh financial future, and are freed of any unsecured debts you have. This alone can offer peace of mind and relieve an enormous amount of stress and anxiety. It will also offer protection from your creditors, and put an immediate end to any collection calls or legal activity like freezing your bank account or wage garnishments. For all of the details around filing bankruptcy, we recommend you speak to a Licensed Insolvency Trustee for advice on your unique financial circumstances, and all of your options. At Spergel, unlike other bankruptcy firms, you are assigned your very own Licensed Insolvency Trustee throughout the debt relief journey, instead of being passed from person to person.

To learn more about what happens when you declare bankruptcy in Canada, book a free consultation with one of the experienced Licensed Insolvency Trustees at Spergel. We know that bankruptcy is a complex topic, but we are here to break it down and explain the process to you. To learn more about whether or not bankruptcy is a good option for you, reach out today. You owe it to yourself.


Chris Galea

Chris Galea is a Chartered Accountant and Insolvency and Restructuring Professional with over 20 years’ experience as an LIT (Licensed Insolvency Trustee). He is also our resident expert on tax debt, COVID debt, and the region of Saskatchewan, Canada. When he’s not at the office educating people about bankruptcies and consumer proposals, Chris is playing pick-up hockey with his friends, spending time with his family, and learning Spanish!

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