10 commonly asked questions about personal Bankruptcy

When you hear the word Bankruptcy, what comes to mind? If you’re like many Canadian debtors, the term can leave you with a lot of questions.

Let’s clear some of those questions up today. Here are the answers to some of the most commonly asked questions about Bankruptcy.

How can filing for Bankruptcy help me?

There are a number of ways that Bankruptcy can be helpful, including:

• Providing relief from the financial stress you’ve been feeling
• Silencing the majority of creditor and collections calls
• Halting most legal proceedings against you. By filing an assignment in Bankruptcy under the Bankruptcy and Insolvency Act (BIA), a statutory automatic stay of proceedings will be placed against your unsecured creditors (with certain exceptions), preventing them from taking legal recourse against you for the collection of debt.
• Lifting wage garnishments (with certain exceptions)
• Discharging most, if not all, of your unsecured debt
• Providing a fresh financial start
• Allowing you to focus on new financial goals that you’ve put off because of your debts

Can I file for Bankruptcy if I don’t live in Canada?

The BIA sets out the requirements to file an assignment in Bankruptcy in Canada. Those requirements include:

1. Applicant must not be a bankrupt.
2. Applicant resides or carries on business in Canada or has property in Canada.
3. Applicant i) owes $1,000 to one or more creditors, ii) is unable to pay debts as they become due, iii) has ceased paying debts in the ordinary course of business as they become due, or iv) has debts that exceed the fair market value of the individual’s property.

If these three eligibility requirements are met, a non-Canadian resident may file an assignment in Bankruptcy on their Canadian debts without having to travel to Canada to execute the documents.

What happens to my assets in a Bankruptcy?

When you become bankrupt, most of your property — no matter where it is located — transfers to a Licensed Insolvency Trustee (LIT) to be used for the benefit of your creditors, except for assets that are protected by law. In some cases, you may keep an asset by paying the LIT the value of your equity in it. 

Can I file a second Bankruptcy if I haven’t been discharged from my first Bankruptcy?

You can’t file a second or subsequent Bankruptcy until you’ve received a discharge from your current Bankruptcy. However, you can annul your existing Bankruptcy by making a proposal to your creditors.

If the proposal is accepted, or deemed accepted, by your creditors and approved, or deemed approved, by the court, your Bankruptcy will automatically be annulled. If you opt to continue with the undischarged Bankruptcy, it will come to an end when you have complied with all the outstanding matters, and the court issues an order of discharge.

Will a Bankruptcy erase all my debts?

Under section 178 (2) of the BIA, once your Bankruptcy has been discharged, you’ll be released from all liabilities, except for those outlined under section 178 (1) of the BIA. Section 178 (1) of the BIA lists debts that are not released by an order of discharge.

Since interest on these debts will continue to accrue during the Bankruptcy, you may opt to voluntarily agree to make payments toward these debts during the Bankruptcy to mitigate the total amount of debt that may be outstanding on the date of your discharge.

How will my personal income tax return be treated in a Bankruptcy?

When you file a Bankruptcy, your taxation year is split into two periods: pre-Bankruptcy and post-Bankruptcy. Your taxation year comes to an end on the day before the date of Bankruptcy (pre-Bankruptcy) and a new taxation year begins on the date of Bankruptcy and ends on December 31 of that year (post-Bankruptcy).

The significance of the pre- and post-Bankruptcy periods has consequences for the discharge of tax debt. Tax debt incurred before you file for Bankruptcy may be discharged, but tax debt incurred after filing is not. As a result, you will remain responsible for paying any post-Bankruptcy tax debt to the CRA.

What happens if I owe the CRA more than $200,000 in personal income tax (PIT) debt?

If you have PIT debt exceeding $200,000 (excluding GST/HST) and your PIT debt represents 75 percent or more of the total unsecured proven claims, you will not be eligible for an automatic discharge from Bankruptcy.

Instead, your discharge must be decided by a court hearing. As a high-tax debtor, the timing of the hearing, the type of discharge orders the court may impose, and the factors to be considered when determining your discharge application can differ from a standard discharge. To avoid the court hearing and its potential consequences, you may choose to file a proposal to creditors rather than file for Bankruptcy.

How long is a Bankruptcy report on my credit file?

If you have filed for Bankruptcy or a Consumer Proposal in Canada, Equifax and TransUnion will disclose a record of this on your credit report for the maximum period allowed by provincial laws.

In the province of Ontario, for instance, if you are filing your first Bankruptcy, Equifax will keep a record of it on your credit file for a period of six years from the date of your discharge. For your second (or multiple) Bankruptcies, a record of your Bankruptcy will be reported on your credit file for a period of 14 years from the date of your discharge for each Bankruptcy filed.

TransUnion, on the other hand, will keep a record of first-time Bankruptcies for a period of seven years from the date of discharge.

What is the Bankruptcy Assistance Program (BAP) and how can I learn more about it?

The BAP was designed to making access to Bankruptcy affordable for a debtor who can’t afford to pay the typical fees of an LIT. The Office of the Superintendent of Bankruptcy’s (OSB) information on the BAP can be found on the OSB’s website. You can contact the OSB to request a BAP registration form and a list of local, participating LITs.

You will then need to contact two LITs from the list and schedule a meeting with each for an assessment and their signature attesting to your inability to pay the LITs typical fees. This is a condition of eligibility to the BAP. The LIT will work with you in outlining a monthly payment plan that is affordable to you.

What other options are available if I don’t want to file for Bankruptcy?

You have four other options to consider:

1. File a Consumer Proposal if your total debts (excluding your principal residence mortgage but including any debt owed on motor vehicles, mortgage on rental property, etc.) are less than the current threshold of $250,000. This will assume that you have the financial ability to make payments to the Consumer Proposal over a period of time or that a third-party agrees to make the payments on your behalf.
2. File a Division 1 Proposal if your total debts, excluding your principal residence mortgage, exceed $250,000.
3. Sell or refinance your assets (i.e., your house). This is assuming that you can refinance or that the proceeds from the sale will be sufficient to pay out all your debts.
4. Do nothing and continue dealing with your debts on your own. While this is an option, it may not be a viable one if you can’t afford to make payments to your creditors as the debts become due.

Want to know more?

You don’t have to leave your debt management to guesswork. Our team of experienced LITs are here to answer your questions and help you regain control of your finances.

Reach out today for a free, confidential consultation.