How does Bankruptcy work in Canada?

Bankruptcy can be an extremely freeing experience for those who have struggled with long-term debt and financial issues. Unfortunately, persistent myths and misconceptions cause many people to avoid Bankruptcy, and instead endure months — and sometimes years — of avoidable stress and uncertainty.

But what is Bankruptcy? How does it work? And what are the alternatives? Let’s investigate.

What is Bankruptcy?

Bankruptcy is a government legislated process which can potentially relieve you from significant debt problems. The process typically involves surrendering a portion of your non-exempt assets and potentially some income in return for being relieved of your outstanding debts. A first time Bankruptcy can be over in as little as nine months, and as little as 24 months for a second or subsequent Bankruptcy.

The process is highly regulated and only a Licensed Insolvency Trustee may file a Bankruptcy on your behalf. They will also manage the process throughout, including liquidating your assets, communicating with creditors and the government, and applying for your eventual discharge (if necessary).

Two significant benefits of filing a Bankruptcy include:

• The process provides a legal stay of proceedings that prevents your creditors from contacting or taking legal action against you
• You will attend two financial counselling sessions to help you avoid future debt issues.

When might I file a Bankruptcy?

To qualify for a Bankruptcy, you must be a Canadian resident, owe more than $1,000 in provable debts, and be financially unable to meet your monthly repayment obligations. However, just because you qualify for Bankruptcy doesn’t always mean it’s the best option for you.

Every Bankruptcy proceeding begins with an initial consultation with a Licensed Insolvency Trustee to review your financial situation, understand your financial challenges and goals, and discuss your options. A Licensed Insolvency Trustee may recommend Bankruptcy if you:

• Have missed several debt payments, are using credit accounts to repay your debts, or are otherwise unable to keep up with your monthly payment obligations
• Are experiencing frequent collections calls, subject to a court judgement, or having wages garnished
• Are financially incapable of paying toward a Consumer Proposal or your creditors are unlikely to accept any Consumer Proposal you can afford
• Have few non-exempt realizable assets to surrender in a Bankruptcy proceeding (e.g., real estate, automobile(s), expensive furniture and appliances, etc.)
• Are unlikely to be subject to surplus income requirements that will increase the cost or timeline of a Bankruptcy

Bankruptcy vs. Consumer Proposal

Like Bankruptcy, a Consumer Proposal is a government legislated process that can put a halt to creditor calls and court judgements, and help you resolve unmanageable debt. However, rather than surrendering assets a Consumer Proposal involves a Licensed Insolvency Trustee making an offer to your creditors to settle your debts. This amount is interest free and can often reduce the amount you owe by more than half — though it must be more than your creditors would expect to receive in a Bankruptcy.

Because a Consumer Proposal is based on your income and expenses, it is designed to be affordable for you. There are several options to repay a Consumer Proposal, including a single lump sum and monthly payments over a period of up to five years. 

The qualifying criteria for a Consumer Proposal are similar to Bankruptcy. However, you must also owe no more than $250,000 in unsecured debt (i.e., excluding the mortgage on your principal residence). A Licensed Insolvency Trustee may recommend a Consumer Proposal if you:

• Have missed several debt payments, are using credit accounts to repay your debts, or are otherwise unable to keep up with your monthly payment obligations
• Are experiencing frequent collections calls, subject to a court judgement, or having wages garnished
• Have numerous non-exempt assets which you would prefer to keep (e.g., real estate, automobiles, family heirlooms, etc.)
• Would likely be subject to surplus income requirements in a Bankruptcy
• Are financially able — and would prefer to — repay a larger portion of your outstanding debt than you would in a Bankruptcy
• Can afford the monthly or lump sum payments involved with a Consumer Proposal

Pros and cons of Bankruptcy

The five biggest advantages of filing a Bankruptcy are:

1. Timeline: A first time Bankruptcy can see you discharged from your debts in as little as nine months if there are no surplus income requirements and 21 months if there are. Second and subsequent (uncontested) Bankruptcies will typically last 24 and 26 months respectively.
2. Guaranteed debt relief: Your creditors cannot refuse a Bankruptcy and there is no upper limit on the amount of debt you can include in a Bankruptcy. Provided you fulfill your duties (i.e., complete monthly income / expense reports, attend two counselling sessions, provide relevant tax information to the Licensed Insolvency Trustee), you will be relieved from your debts.
3. Potential cost savings: Depending on your financial and household situation, a Bankruptcy may require you to surrender few assets, and little income over and above the cost to file compared to other debt solutions.
4. Creditor protection: A Bankruptcy relieves you from constant creditor or collections calls, wage garnishments, court judgements and actions. This provides immediate stress relief and allows you to focus on rebuilding your financial situation and your life.
5. Tax debts can be included: Only federally legislated debt solutions (i.e., Bankruptcy and Consumer Proposals) can provide relief from income tax related debts.

The four biggest disadvantages to filing a Bankruptcy include:

1. Surrender assets: A Bankruptcy may require you to give up any real estate property, automobiles, and high value assets you own. This will result in a very different living situation and standard than you may be used to.
2. Legal responsibilities: To qualify for your discharge, you must submit monthly income and expense reports as well as your tax information to the Licensed Insolvency Trustee. You must also attend two financial counselling sessions.
3. Uncertainty: While most people receive an automatic discharge, there is no guarantee this will be the case for you. If your income increases throughout the Bankruptcy, surplus income requirements may apply for an additional 12 months. Your creditors may also oppose your discharge which could require a court hearing.
4. Credit impacts: Bankruptcy registers as R9 (worst) on your credit report for a minimum of six years following your discharge for a first Bankruptcy. Second or subsequent Bankruptcies cause the first Bankruptcy to resurface on your credit report and both will remain for 14 years following your discharge.

Alternatives to Bankruptcy

There are four common alternatives to Bankruptcy, including the Consumer Proposal process discussed in detail above. The others include:

Debt management plans: Offered through a credit counseling service, this process involves making an informal (i.e., non-legally binding) offer to your creditors to settle your debts. Often these can succeed in reducing the interest amount but require you to repay the full principal balance. You make a single monthly payment to the credit counselor, who then distributes funds to your creditors on your behalf.

Creditors are not obligated to participate in a debt management plan and may withdraw from the process at any time. The process also does not put a halt to collections action.

Consolidation order (Alberta, Nova Scotia, PEI, Quebec): Often called Orderly Payment of Debts, or Voluntary Deposit Law in Quebec, this process involves seeking a court order to consolidate your unsecured debts (>$1,000) into a single monthly payment. This is payable over a period of 24 to 36 months at a fixed five percent interest rate. Like Bankruptcy and Consumer Proposals, this process places a stay of proceedings on creditor actions and court judgements — though it is generally much costlier.

Consolidation loan: Depending on your financial situation, you may be able to secure a loan from a bank or private lender to repay the amount of your outstanding debts. This will provide the benefits of both reducing the number of monthly payments you need to manage and ideally reduce the amount of interest you pay. For this strategy to work, you must be able to qualify for the loan at an interest rate lower than the average of the sum of your debts.

Other common debt consolidation strategies include paying debts off with a line of credit or refinancing a mortgage. However, it’s advisable to cancel revolving credit accounts (e.g., credit cards) after consolidating to avoid building up an even larger and less manageable debt burden.

You deserve a fresh start

No one wants to file for bankruptcy but sometimes it’s unavoidable. Licensed Insolvency Trustees must provide an unbiased and informed assessment of your financial situation and your options. They want to put you on the fastest, most affordable, and least disruptive path toward a financial fresh start — and Bankruptcy may just be that for you.

Use this opportunity to enjoy a break from your creditors, build new financial literacy skills and free yourself from the stress unmanageable debt. Schedule a Free Confidential Consultation to review your situation and discuss your options today.