Who pays for bankruptcies in Canada?

Posted on 10 October 2023

Written by Gillian Goldblatt

Bankruptcy is a legal process designed to offer relief to individuals and businesses overwhelmed by debt, allowing them to re-organize or liquidate their assets to repay creditors. Individuals assign any non-exempt assets that they may have over to their Licensed Insolvency Trustee in exchange for clearance from their debts. These assets will then be sold, with any proceeds going towards the repayment of creditors. Bankruptcy is the best way to gain a fresh financial future. Given that it clears unsecured debts, you might be wondering who pays for bankruptcies in Canada? In Canada, like in many countries, the cost of bankruptcy is spread across various stakeholders, including the debtor, creditors, and the government. In this article, we share who pays for bankruptcies in Canada, and help you to understand how the financial burden is distributed in the Canadian bankruptcy system.

How much does bankruptcy cost in Canada?

In Canada, the cost of bankruptcy is a minimum of $1,800. This takes the form of a fee paid to your Licensed Insolvency Trustee, covering the administration and costs associated with filing bankruptcy with the court. Fees paid to Licensed Insolvency Trustees are regulated by the Office of the Superintendent of Bankruptcy, so fees are consistent across the country. Depending on your income and assets, and the nature of your debts, you may need to pay extra towards your debts in order to be discharged. This additional amount is known as surplus income, essentially a tax for earning over the threshold. This amount is paid to your Licensed Insolvency Trustee, who then distributes the fee accordingly to your creditors. In these scenarios, it might be more affordable for you to file a consumer proposal instead. At Spergel, unlike other bankruptcy firms, you are assigned your very own Licensed Insolvency Trustee from the beginning of your debt relief journey, instead of passing you from person to person.

How much does the debtor pay for bankruptcy?

The initial burden of bankruptcy falls on the individual or business that has filed bankruptcy. When filing bankruptcy, the debtor will appoint a Licensed Insolvency Trustee to lead and file the process. Their assets will also be assessed, and often sold for any proceeds to go towards the repayment of creditors. In Canada, the costs associated with filing bankruptcy, including legal fees, administrative expenses, and any repayment plans, are usually covered by the debtor’s assets, be it any savings, vehicles, valuables, or property. Individuals filing bankruptcy may need to make payments based on their income (earning over a threshold leads to surplus income payments) via a court-approved repayment plan. In some cases, any remaining debt might be discharged.

How much do creditors pay for bankruptcy?

Creditors play an important role in the bankruptcy process, and are key stakeholders. They are the individuals or businesses owed money by the debtor. While most hope to gain as much repayment as possible, not all creditors always receive what they are owed. Repayment to creditors is organized based on a priority system in bankruptcy. This is the typical priority order in which they will get paid:

Secured creditors

Secured creditors have a specific interest – and a pledge – in specific assets, like vehicles or property. They are given priority over other types of creditors, and are the first in line to be paid from the sale of the secured assets.

Unsecured creditors

Unsecured creditors do not have an interest in assets, and they are usually paid from the remaining assets once the secured creditors have been paid. The amount that unsecured creditors receive may be much less than the total debt that is owed to them.

Priority creditors

Some debts – like tax debt and wages – might be prioritized over other debts. These will be paid out before other unsecured creditors.

Shareholders or equity holders

In most bankruptcies, shareholders or equity holders will receive little if nothing at all. This is especially true if the assets are not enough to cover both secured and unsecured debt.

How much does the government pay for bankruptcy?

The Canadian government plays an important role in the bankruptcy process by regulating and overseeing bankruptcy proceedings through the Office of the Superintendent of Bankruptcy (OSB). The OSB appoints and supervises Licensed Insolvency Trustees, reviews the conduct of the parties involved in bankruptcy, and sets rules and guidelines for the bankruptcy process. Government involvement in bankruptcy proceedings is funded by taxpayers, indirectly spreading the cost of bankruptcy to the Canadian public. These costs are, however, generally considered necessary to maintain a well-functioning bankruptcy system that ensures fairness and order.

Who pays for bankruptcies in Canada?

As you can see, who pays for bankruptcies in Canada will differ from bankruptcy to bankruptcy. In some instances, the debtor may be able to cover a large part of their debts from selling their assets. In other instances, some individuals may not have any income or assets. This can mean that creditors and the government ultimately end up paying for the bankruptcy.

How is society affected by bankruptcy?

You might think that bankruptcy only really affects the debtor filing bankruptcy, and the associated creditors. Yet bankruptcy has broader implications on society as a whole in Canada. It affects employment and economic stability. When businesses file bankruptcy, it can lead to job losses and disruptions to the economy. This can further lead to negative consequences on the livelihood of families and their overall financial wellbeing. Consumer spending is also likely to decrease as bankrupt individuals try to regain financial stability, further impacting the economy.

So, who pays for bankruptcies in Canada? The financial burden is distributed among the debtor, creditors, and the government. The debtor bears the initial costs, while creditors face potential losses based on their standing. If you have further questions about filing bankruptcy, book a free consultation with Spergel. Our expert Licensed Insolvency Trustees have been helping Canadians to begin fresh financial futures for over thirty years.

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Gillian Goldblatt

Gillian Goldblatt is a Chartered Professional Accountant and Insolvency and Restructuring Professional. She is also an award-winning LIT (Licensed Insolvency Trustee) and Vice-Chair of the Ontario Association of Insolvency & Restructuring Practitioners Board. As Spergel's resident expert on debt consolidation and financial literacy, you can find Gillian being interviewed regularly on popular Canadian news programs when she's not at the office helping individuals and businesses get back on track.

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