Personal Bankruptcy in Canada
Bankruptcy can be intimidating, but it doesn’t have to be scary or complicated. Living with financial stress has many negative impacts on your wallet, mental health, and ability to plan.
Filing for Bankruptcy can be an emotional decision and process. However, taking back control of your finances helps give you a fresh start and gets you back on a manageable track towards freedom from debt.
Should you file for Bankruptcy?
Do you qualify for Bankruptcy filing?
What is Bankruptcy?
Bankruptcy is a legal process that helps provide immediate financial protection to people experiencing overwhelming financial difficulties.
To file for personal Bankruptcy, an individual must have at least $1,000 in debt that they’re unable to repay. These can include debts such as credit card bills, loan payments, utility bills, payday loans, and mortgage payments.
If you’ve had your wages garnisheed, received past-due notices, or calls from debt collectors, Bankruptcy might be right for you.
Though typically a last resort, Bankruptcy allows you to solve your debt problems fast with the help of a Licensed Insolvency Trustee (LIT) who will guide and support you through the process.
Bankruptcy pros and cons
| Advantages | Disadvantages |
|---|---|
| Immediately stop collection action, interest, and garnishees | Certain assets vest with the LIT |
| Certain assets are exempt from seizure (e.g. vehicles, household furnishings, tools of the trade, certain retirement savings) | Monthly income and expense reports must be submitted to Trustee for review |
| Creditors can’t refuse Bankruptcy | Surplus income payments may fluctuate according to monthly income |
| LIT will often assist with filing outstanding personal income tax returns |
Creditors can oppose discharge and a court hearing may be required to get out of Bankruptcy |
| Process lasts between nine and 21 months if you have never been Bankrupt before, which is less than a typical Consumer Proposal |
Negatively impacts your credit score for six years after completion |
| No limit on the size of debt load to be eligible to file |
Some tax refunds are turned over to the LIT |
| Budgeting and money management counselling are provided |
|
| You repay less than you owe |
Should you file for Bankruptcy?
People often realize they can't pay their debts all at once, after a big financial problem, or slowly over time when they see their current plan isn't working. If you see any of these signs, talk to your local MNP Licensed Insolvency Trustee for a Free Confidential Consultation. Together, you will review your entire financial situation and discuss your options for a financial fresh start.
Do you qualify for Bankruptcy filing?
To file for Bankruptcy, certain conditions must be met:
- Debt must be at least $1,000
- Debtor must be discharged from a previous Bankruptcy
- Debtor must live, carry on business or have property in Canada
- Debtor must be unable to meet regular payments as they become due
- Property owned by the debtor must be insufficient to enable payment of all debts
Meeting these requirements does not mean you must file for Bankruptcy — other options can be explored with the help of a LIT.
Personal Bankruptcy process
Set up a Free, Confidential Consultation
Timeline: Now
The first step in determining whether Bankruptcy is the best choice for you is to meet with one of our Licensed Insolvency Trustees. They will review all your options, which include doing nothing, debt consolidation, credit counselling, Bankruptcy and Consumer Proposals.
This initial consultation includes a summary of your debts, assets, income, and expenses. We will also discuss what assets are exempt in your province and what the term surplus income would mean for you in Bankruptcy.
If Bankruptcy is your ideal debt relief option for your unique situation, we will then review the process with you in detail and make sure you understand all the implications.
Legally file for Bankruptcy
Timeline: Immediately, once information is available
Your Licensed Insolvency Trustee will assist you in preparing and filing all required documents with the federal government's Office of the Superintendent of Bankruptcy (OSB), including a Statement of Affairs (a sworn declaration of your assets, debts, income, and expenses). A Stay of Proceedings comes into effect as soon as this is filed, meaning your creditors can no longer phone or sue you, and any existing garnishees are halted.
Bankruptcy period
Timeline: 9 – 21 months
During the Bankruptcy time frame (which is nine months for your first Bankruptcy unless you have surplus income), you will generally do the following four things:
- File monthly income and expense reports with your LIT to track whether you have surplus income, help you monitor and manage your expenses, and develop a budget.
- Attend two financial counselling sessions — the first within three months, the second before the end of the process. During these sessions, you will discuss the causes of your financial difficulty, budgeting, restoring your credit rating, setting and achieving financial goals, and other long-term debt management strategies.
- Provide your LIT with all required information to complete your tax returns for the year you file Bankruptcy (and prior years if needed).
- Pay any required amounts to your LIT. These payments may be required surplus income payments and/or payments to repurchase an asset that is not exempt. They might also be the minimum amount required to cover administration costs.
Bankruptcy discharge
Timeline: 9 – 21 months
You will automatically receive your discharge (your release from Bankruptcy and the debts you owe) at the nine or 21-month mark. This is only if you have completed all the necessary steps as outlined above and a creditor or other stakeholder does not oppose your discharge.
If you do not complete the required tasks, you will not be released from Bankruptcy until those missing steps are completed. A court order will outline the remaining steps you must follow. The discharge time frames are for a first-time bankrupt person.
Debt-free. For life.
Timeline: The rest of your life
During your financial counselling sessions, your Licensed Insolvency Trustee will discuss ways to restore your credit rating during and after the Bankruptcy period. Improvements to your credit rating will take time but once the Bankruptcy is completed, you will have no remaining unsecured debts (with minor exceptions).
What happens when you file for Bankruptcy?
Credit score
Filing for Bankruptcy or a Consumer Proposal will hurt your credit rating; however, the overall impact may vary. Bankruptcy will likely drop your credit score to the lowest possible level and affect your credit worthiness. It also stops the clock on any damage currently being reported by debt collectors, so you can focus on rebuilding your credit score. A Bankruptcy will remain on your credit report for six years after discharge.
Assets
Provincial guidelines will determine which assets you can keep, such as a car and house, up to a certain value, as well as RRSPs and RESPs.
Debts
A Bankruptcy or Consumer Proposal can clear most, if not all, of your debts. Both options can eliminate unsecured consumer debts like credit cards, lines of credit, store credit cards, payday loans, tax debts, and most judgment debts from past or pending lawsuits. Unsecured debt comes from credit extended without any collateral — an asset provided to the lender as a guarantee of repayment.
Certain debts cannot be cleared through Bankruptcy in Canada for various reasons. These include secured debts, alimony or child support payments, court-imposed fines and parking tickets, student loans under seven years old, and some debts resulting from fraud.
To find out more about what debts survive Bankruptcy, read our blog.
Spouse’s credit score, assets, income, debts
Any debt in both of your names is considered joint and several debt. Whether it's a mortgage, car loan, line of credit, joint bank account with overdraft protection, or joint credit card, you are equally responsible for paying the debt in full plus interest as applicable.
If you have no unsecured debt, but your partner does, this debt is their responsibility as they signed the application and agreed to repay the amounts advanced as approved by the lender. If your partner reneges on repaying that debt, the lender cannot legally go after you to pay in their place.
To learn more about spousal debts, read our blog.
Bankruptcy alternatives
Consumer Proposal
A Consumer Proposal is a federally regulated and legally binding process for insolvent Canadian individuals. It can reduce debt owed to unsecured creditors, provide an extension of time for repayment (up to five years), or both.
To learn more about Consumer Proposals, see our Consumer Proposal Guide.
Consolidation loan
A consolidation loan is provided by a bank, credit union, or finance company to pay out other debts and consolidate several monthly payments into one monthly payment.
A consolidation loan requires an application and approval by a lender, who will consider an individual’s credit rating, income, assets, and debts. Many lenders require the individual to provide security or collateral for a consolidation loan. Interest rates on consolidation loans can be high and vary from lender to lender.
Debt Management Plan
A Debt Management Plan (DMP) is a flexible repayment plan arranged through a licensed non-profit credit counselling organization.
A credit counsellor helps create a more manageable debt repayment plan by consolidating credit cards and similar unsecured debts into one payment. This payment goes to the credit counselling agency, which distributes payments to creditors.
Credit counsellors can negotiate with creditors to reduce or eliminate interest, lowering overall costs. However, certain debts, like unpaid taxes and student loans, cannot be included in a DMP. To qualify, your debts must be in good standing rather than in collections.
Deciding which strategy will work best can be difficult without professional advice, as the right strategy will depend on various factors. A Licensed Insolvency Trustee can assess your situation and explain different ways to repay debts, along with the pros, cons, and costs of each option.
A meeting with a Licensed Insolvency Trustee is free, confidential, unbiased, and can help you find the best debt solution for your unique financial situation.
FAQ about personal Bankruptcy
Licensed Insolvency Trustees (LIT), like those at MNP Ltd., work with you one-on-one to understand your financial challenges, let you know your options, and help you find a solution.
If you declare Bankruptcy or file a Consumer Proposal, the LIT will help you fill in all the required documents and file them with the federal government's Office of the Superintendent of Bankruptcy (OSB). The LIT will also inform your creditors about the Bankruptcy and deal with them on your behalf.
MNP Ltd. and each of our LITs are licensed by the OSB. Only a Licensed Insolvency Trustee can file a Consumer Proposal on your behalf or assist you in declaring Bankruptcy.
Filing for Bankruptcy should not affect your job. Some professional bodies may require you to disclose your Bankruptcy. If you’re bonded in your current position, you may want to contact your human resources department to confirm if there will be any impact on your job/duties.
You can find all forms in our Forms section. Please keep in mind we do not require you to fill these out before your appointment. If you have any questions about any of the forms, feel free to contact us.
There are various duties required of you when you file Bankruptcy. If you do not complete your duties, the Licensed Insolvency Trustee is required to obtain a discharge from administering your Bankruptcy within a certain timeframe, leaving you in Bankruptcy. This will put you back into the same situation as before filing for Bankruptcy. All your unsecured creditors can once again pursue you directly to pay the full amount of their debt.
You may reopen your Bankruptcy file with a Licensed Insolvency Trustee to obtain your discharge. The process will likely cost you more, require more effort, and take longer than it would have if you had complied with your duties on the first attempt.
The federal government provides guidelines to all Licensed Insolvency Trustees to help them determine if an individual or family has surplus income obligations.
Your threshold for surplus income is calculated based on the number of dependents in your household and your net family income.
Net family income refers to how much you earn after deducting income taxes, payroll deductions, essential medical expenses, alimony, child support, and childcare costs. It does not typically include rent/mortgage payments, food, utilities, and other similar day-to-day expenses.
The 2023 guidelines for surplus income statements are:
| Number of people in family | Net family income (monthly) |
|---|---|
| 1 | $2,543 |
| 2 | $3,165 |
| 3 | $3,891 |
| 4 | $4,725 |
| 5 | $5,359 |
| 6 | $6,044 |
| 7+ | $6,729 |
The federal guidelines dictate a household of one person could earn a net monthly income of up to $2,543 and have no surplus income payment obligation to the LIT.
However, if the actual net income was $2,800 per month (for example), the difference of $257 per month is considered surplus income. Half of this surplus income (i.e. $128.50) will be payable to the LIT to benefit the Bankrupt’s unsecured creditors each month during the Bankruptcy period.
The precise calculation of surplus income payments varies based on the number of people in your household. It will be completed with the Licensed Insolvency Trustee twice during your Bankruptcy — once at the point of filing and again shortly before your expected discharge date. *
The surplus income requirement and how it may affect you will be reviewed in detail during your Free Confidential Consultation.
*Surplus income requirements can be triggered at any point where there is a material increase in income (including wage increase or windfall) during the Bankruptcy period. If you are required to pay surplus income payments, your Bankruptcy period will be extended to 21 months for a first-time Bankruptcy.
When you file for Bankruptcy, unsecured creditors will be allowed to file a claim with the LIT for the amount they are owed to receive their share of any funds distributed in your Bankruptcy.
Your creditors will deal directly with the Licensed Insolvency Trustee and are required by law to stop contacting you regarding collections immediately. If a creditor persists in contacting you, you should notify the Licensed Insolvency Trustee immediately.
If a debt included in your Bankruptcy has been co-signed or guaranteed, the co-signer/guarantor will be responsible for making the payments in full. Filing a Bankruptcy only gets rid of your legal obligation to pay the debt.
Once your Bankruptcy is filed, you will typically make monthly payments to the Licensed Insolvency Trustee (LIT), as agreed upon by you and the LIT. The LIT will distribute any funds received through the Bankruptcy to unsecured creditors at the end of the Bankruptcy as required under the Bankruptcy and Insolvency Act.
Click here to learn more about how those payments may be determined.
Once you file for Bankruptcy, the Licensed Insolvency Trustee must notify all your creditors. The Canada Revenue Agency, credit reporting agencies and the federal government's Office of the Superintendent of Bankruptcy will also be informed.
A Bankruptcy is a matter of public record with the federal government's Office of the Superintendent of Bankruptcy, and it will appear on your credit report. Your employer is not usually notified unless the Licensed Insolvency Trustee is required to send a notice to your employer to stop a garnishee of your wages.
The Licensed Insolvency Trustee must file any outstanding income tax returns if they remain unfiled at the date of Bankruptcy, as well as a pre-Bankruptcy income tax return for the period from January 1 to the date of your Bankruptcy. The Licensed Insolvency Trustee will retain any refunds arising from these income tax returns. If a balance is owed on these income tax returns, the amount will be included in your Bankruptcy.
The Licensed Insolvency Trustee will also file a post-Bankruptcy income tax return for the period from the date of your Bankruptcy to December 31. Again, any refund from this income tax return will be retained by the Licensed Insolvency Trustee. If a balance is owed on the post-Bankruptcy income tax return, the amount due is your responsibility as it is considered new debt after your Bankruptcy.
When you file for Bankruptcy, you will need to turn over all your credit cards to your Licensed Insolvency Trustee.
You will be unable to obtain new credit cards until after your discharge from Bankruptcy. However, you may be able to obtain either a prepaid or a secured credit card for use during your Bankruptcy. Only a secured credit card will help you rebuild your credit rating.
A secured credit card is ideal for people with low or no credit. To obtain one, you must provide a deposit to the credit card issuer that serves as collateral. For example, if you deposit $1,000, your credit limit you can charge will also be $1,000.
From there, a secured credit card works like a regular credit card, with required minimum monthly payments. You will be able to make purchases online and in-store, plus you’ll be able to use the credit card to secure costs like a vehicle rental or hotel room.
The initial deposit on your secured credit card will remain there until you close your account, move over to an unsecured credit card upon completing your Bankruptcy or Consumer Proposal, or default on your secured balance (in which case the financial institution would use your deposit to pay off unpaid balance).
Demonstrating responsible practices while using a secured credit card is a positive way to rebuild your credit and earn the trust of your financial institution. Your lender may be more willing to offer you an unsecured credit card upon completing your Bankruptcy or Consumer Proposal. Alternatively, they may increase your secured credit limit without requiring you to make another deposit.
If you are obtaining a secured credit card, carefully review any fees surrounding the card, as they are typically higher than applying for an unsecured credit card.
The Bankruptcy and Insolvency Act requires that all Bankruptcies be filed by a Licensed Insolvency Trustee.
Bankruptcy services are not provided for free. If you are filing for personal Bankruptcy but aren’t financially able to afford the cost, there is a Bankruptcy Assistance Program available through the federal government's Office of the Superintendent of Bankruptcy that may help.
Initiating Bankruptcy proceedings may be appropriate if you’ve considered all your other debt-relief options. If you cannot pay your debt as it comes due and the net worth of your assets is less than the total amount of your debt, Bankruptcy may be an option.
These terms do not mean the same thing.
Bankruptcy is a formal legal process whereby you assign your non-exempt assets to a Licensed Insolvency Trustee to be relieved of your unsecured debts. Insolvency is a term that means you are unable to pay your debts as they come due, or your total assets are worth less than the amount of your debt.
You must be insolvent to file for Bankruptcy but you are not automatically Bankrupt just because you are insolvent.
It is a piece of legislation that governs the administration of a Bankruptcy estate and oversees the distribution of its value to the Bankruptcy estate’s creditors, while providing a financial fresh start for individual debtors. Both Bankruptcies and Consumer Proposals are debt solutions under the Bankruptcy and Insolvency Act.
Consumer Proposal vs Bankruptcy
Consumer Proposals and Bankruptcies are both government legislated options which can provide you with relief from significant debt problems. In addition, both debt solutions can only be administered by a Licensed Insolvency Trustee and provide a legal stay of proceedings which require creditors to discontinue harassing collection calls, garnishment or other legal proceedings.
Determining which, if either, option is an appropriate solution in your own unique situation depends on a number of variables. Let’s explore the advantages and disadvantages of both a Consumer Proposal and a Bankruptcy.
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