Can I file for bankruptcy if I am unemployed?

The short answer is yes. Unemployed Canadians can file bankruptcy if they meet the eligibility requirements.

Over the course of the pandemic, many people lost their jobs and had to rely on unemployment benefits as a sole income, making it even more difficult to manage debt. In this scenario, Bankruptcy may be a viable option to access a much-needed financial fresh start.

If you are unemployed and decide to file for Bankruptcy, it will not cause any significant impact to your application process. There is also no practical impact to how your Bankruptcy application is administered — but it may affect how your bankruptcy case plays out.

Factoring surplus income

The contributions you make into your estate in a Bankruptcy is set by the Bankruptcy and Insolvency Act. These are based on the assets you own and income you earn, with amounts calculated on a sliding scale in proportion to your income threshold.

If your only source of income is unemployment benefits, or your income is below a certain threshold, it’s likely your only contributions to the Bankruptcy would be any assets not covered by applicable provincial exemptions. However, if your income comes in above that threshold, the Trustee will be responsible for calculating any additional payment as prescribed by the Office of the Superintendent of Bankruptcy.

Surplus income requirements are calculated twice during the Bankruptcy process — once when you file your assignment in Bankruptcy, and again shortly before you’re eligible for your automatic discharge. If you gain employment or receive any financial windfall during your Bankruptcy, it’s possible this additional income could trigger a surplus income requirement and extend the length of your Bankruptcy.

The time frame a person is in Bankruptcy and the length of payments also varies depending on whether this is your first Bankruptcy. Below is a table of how long a person will be bankrupt, depending on their individual situation.

First-time Bankruptcy with no surplus income: 9 months.

First-time Bankruptcy with surplus income: 21 months.

Second-time Bankruptcy with no surplus income: 24 months.

Second-time Bankruptcy with surplus income: 36 months.

Third-time Bankruptcy: Determined by the court in all cases.

To help you navigate the ins and outs of the Bankruptcy and Insolvency Act, it is essential to get in touch with a Licensed Insolvency Trustee as soon as you suspect that you may be insolvent.

Income beyond income

You must submit monthly income and expense reports throughout your Bankruptcy which the Trustee will use as a basis for calculating your surplus income requirements. Even when you are unemployed, numerous other sources of income can trigger payments owed in the event of Bankruptcy.

For example, rental income from any properties you own will be taken into account when assessing Bankruptcy costs, as will dividends on any shares. Additionally, any money received from your Employment Insurance policy or pension will be included in the calculation. Other assets and income could include vehicles, tools of the trade, RRSP contributions, home equity, and more.

The Trustee may require you to pay the value of these into your Bankruptcy to benefit your creditors. If you’d rather not sell, you will be responsible for paying the amount that would have been given to your creditors had the items been sold. Understandably, most people cannot afford to pay the amounts necessary to keep their assets.

Depending on your income or assets, the Trustee may advise another option such as a Consumer Proposal that might be more personally beneficial. The Trustee will help you take all factors into account so you can make a fully informed decision around the best route forward given your unique financial situation.

A debt-free future of your own design

If you are out of work and debt is weighing you down, you are not alone. Debt is nothing to be ashamed of — and there is no such thing as a one-size-first-all approach. Bankruptcy may be one of several options available. Only you can decide what’s best for you and your family as you work towards a more rewarding, debt-free future.