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Bankruptcy is a scary concept, one that most consumers are nervous to consider. However, filing for bankruptcy need not be mysterious or frightening – for many it is the only route out of unmanageable debt. A record number of Canadians filed for bankruptcy or insolvency in 2019, and it’s important for all Canadians, especially Canadians with debt, to know the basics of bankruptcy and how it works.
Firstly, it’s important to know that you’re not alone if you are struggling with debt or considering bankruptcy. The average consumer debt in Canada is nearly $73,000, of which non-mortgage debt averages $23,800. In the first three months of 2020, over 11,000 Canadian consumers filed for bankruptcy.
Data courtesy of OSB Canada
While the numbers for last year represent a slight drop in the number of bankruptcies (-3% overall), insolvencies went up by over 17%; so clearly Canadians are struggling with debt now more than ever, and are seeking ways to find some workable form of debt relief.
When struggling with debt - in any form - you have a choice between insolvency and bankruptcy. These are not the same, so let’s look at both to understand why you might choose one over the other.
Insolvency can be considered a step prior to bankruptcy; if you have debts you cannot pay, then technically you are insolvent. When this happens, you may have the option to consolidate your debt, using a debt consolidation company, or you may be able to file an insolvency proposal with your creditors. This means that you and your creditors (with the help of a Licensed Insolvency Trustee) work out a new agreement as to how you will pay off your debt. It removes the threat of debt collectors or wage garnishment, but still means you have to pay off your debts.
Insolvency proposals are only relevant if your debt is less than $250,000 (excluding mortgages); they benefit consumers in that they protect more of your assets, and are considered less severe than bankruptcy - so your credit score and financial history are less affected.
However, insolvency is not always an option, and for those unable to restructure or renegotiate their debt, bankruptcy is the method of last resort for financial relief. Bankruptcy is a legally protected, structured process, where a Licensed Insolvency Trustee looks at your financial situation, your assets, your debts, your income, and so on. You must surrender your assets to them, in exchange for removal of your debts. The Trustee is responsible for selling eligible assets (some assets are exempt from bankruptcy proceedings) and paying off creditors wherever possible.
All bankruptcy proceedings in Canada are regulated by the Bankruptcy and Insolvency Act, and are enforced by the government. Filing for bankruptcy gives you relief from debt collectors, stops wage garnishment, and also halts lawsuits against you by your creditors.
If you’re in the position of unmanageable, non-negotiable debt, you need to know the details of how bankruptcy works.
Going into personal bankruptcy in Canada is relatively simple. To file for bankruptcy, you must:
If you meet these conditions, you are able to file for bankruptcy, though it’s always best to consider all of your options before deciding on any single route.
Once you have determined that filing for bankruptcy is the best road to get you out of debt, the process becomes very structured. It flows as follows:
Once you are out of bankruptcy, you are released from your debts up until the point of bankruptcy, and given a fresh financial start.
There are many important nuances in bankruptcy law - one of the primary reasons a Licensed Insolvency Trustee is so important - but here are the most important to bear in mind.
Some types of debt are not eligible under bankruptcy law, meaning that even if you go through bankruptcy, you still have to pay them. These include:
Some assets are exempt from bankruptcy proceedings, meaning that your Trustee cannot use them to pay off your creditors and they remain yours. These vary by province, but generally include:
Debts are considered to be personal, so your spouse’s assets are safe unless they are jointly owned; if they are joint assets, only your portion will be taken. For a more detailed list, by province, of exempt assets, see here.
Declaring bankruptcy has long-lasting effects, both positive and negative.
Pros
- Relief from debt collectors, lawsuits, wage garnishments and other distressing, potentially escalating issues
- Removal of most debt after bankruptcy is complete
- Your wage remains unchanged
- Student debt older than 7 years is removed
- Clarity on your future financial situation
Cons
- You may lose some assets
- Not all debts will disappear
- You may be required to make future payments from your wages if you exceed a certain minimum wage threshold; essentially the more you make, the more bankruptcy costs
- People who co-signed your loans become responsible for paying off these debts
- Credit score is reset to lowest possible rating for at least 6-7 years, affecting your ability to borrow in the future
It’s vitally important to understand your options and be aware of the consequences before filing for bankruptcy. Bankruptcy is a realistic option for anyone who:
Remember, if you’re considering bankruptcy or insolvency, talk to a Licensed Insolvency Trustee about your specific situation to understand the best possible route out of debt for you.
Bankruptcy is a structured legal process involving a person who is unable to pay off their debts. It prevents harassment from debt collectors, lawsuits, and wage garnishment, and requires the debtor to relinquish certain assets to the court for sale and distribution to creditors. Bankruptcy can clear a person of significant debt.
Bankruptcy relies on Licensed Insolvency Trustees, who work with you to understand your financial situation, explain to you your options, and manage the bankruptcy process for you. They will submit all of the required paperwork and act as a liaison between you and your creditors. They will use any assets of yours they can to help pay off your creditors, so that when you exit bankruptcy you are free from debt.
Filing for bankruptcy may be your best option if you are in unmanageable, distressing or escalating debt; it alleviates pressure from creditors, halts lawsuits, and allows you to follow a structured, legally protected process to get you out of debt as quickly as possible.
Filing for bankruptcy must be done via your Licensed Insolvency Trustee; if you do not have a Trustee, there are many available. If you cannot afford one, you may apply for one through the Government of Canada. You must complete some paperwork with your Trustee, and they will then file it. You are then required to follow the mandated steps set out as part of your bankruptcy duties.
A Licensed Insolvency Trustee is a federally regulated professional who provides consumers (and sometimes companies) with debt relief advice and assistance. There are a wide range available, and their fees are regulated by the government. Your initial consultation with a Trustee is usually free.
Bankruptcy stays in your credit report for at least six to seven years (depending on the province), for your first bankruptcy. If you have filed for bankruptcy before, this period extends to 14 years.
An automatic process is triggered when you file for bankruptcy; some of your assets will be taken by your Trustee for sale, to help pay off your creditors. You don’t have to worry though - essential items are exempt, so you won’t be left homeless or without personal possessions. All debt collection efforts stop, as your Trustee manages payment of your eligible debts and deals with your creditors. Lawsuits relating to your debts will also be halted. You may have certain duties to perform, depending on your particular situation.
Anyone who has lived or worked in Canada within the past year can file for bankruptcy, as long as they have more than $1000 in eligible debt and are unable to pay their creditors. If you are being harassed by debt collectors or are overwhelmed by debt, then bankruptcy might be an option for you.
Declaring bankruptcy is a relatively simple process, and usually takes four to six months. This is because paperwork is required, a Trustee must be used, and sometimes extra documents are required before you can be officially declared bankrupt.
The minimum cost to file bankruptcy in Canada is $1800, which can be paid in installments over nine months. This fee goes to your Trustee, and covers their time, administrative costs, and government fees. Second or subsequent bankruptcies will cost more.
You can file for bankruptcy at any point, as long as you meet the eligibility requirements. You must have worked or lived in Canada within the past year (from the date you file), and you must have $1000 or more in eligible debts that you cannot pay. As long as you meet these conditions, you may file at any time.
Bankruptcy is a last resort in the face of overwhelming debt, and some people may have the easier option of Consumer Insolvency Proposals. These are proposals agreed to by both you and your creditors (with the help of a Trustee acting as intermediary), which outline how you will pay back your debts. It often means lower rates and can halt upsetting debt collection issues. It also protects your assets. However, this is not always an option, as an agreement must be reached, and it relies on you being able to pay back some part of your debts.
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