How The Personal Bankruptcy Process Works In Ontario
Before going into the details of personal bankruptcy in Ontario, it’s important to define what personal bankruptcy is.
What is personal bankruptcy?
Personal bankruptcy can be defined as a legal process governed/guided by federal law (the Bankruptcy and Insolvency Act) whose main intention is to give honest but unfortunate debtors the right to obtain relief from their debt/s while treating creditors fairly and equally. Personal bankruptcy gives a hopeless indebted and honest person the opportunity to start fresh without debt.
Who can declare bankruptcy in Ontario?
It’s important to note that bankruptcy laws differ from one country/state/region to the other. In Ontario, Canada for instance, the concept of personal bankruptcy requires debtors to surrender everything they own to licensed insolvency trustees for their debts to be eliminated/cancelled. To declare for personal bankruptcy in Ontario, you must be a permanent resident of Ontario. You must also be insolvent which means; you owe individuals or entities at least $1000 and you are unable to meet your debt repayment obligations.
What Are Insolvency Trustees and What Are Their Fees?
Insolvency trustees in Ontario are federally licensed. Their fees/charges are regulated so the overall cost of filing for personal bankruptcy is fair/reasonable. Because personal bankruptcy is a legal proceeding, there is a stay of proceedings that prevents garnishment or any legal action from being taken against debtors. Bankruptcy laws also protect debtors from harassment.
When Will You Get Discharged Of Bankruptcy?
When you file for personal bankruptcy in Ontario, you may qualify/be entitled to automatic discharge after 9 months which is the minimum time you can be bankrupt according to Ontario bankruptcy laws. It must however be your first time being bankrupt. You also need to complete certain duties and responsibilities to qualify for an automatic discharge after 9 months. Your ability to get credit will however be affected because bankruptcy remains on a person’s credit report for at least 7 years.
Exceptions To Discharging All Debt Through A Bankruptcy
- Some debts aren't erased: It’s important to note that personal bankruptcy and bankruptcy as a whole focuses on unsecured debt only (i.e. credit cards, income taxes, overdrafts, personal loans etc.). Depending on the situation, not all debts will be erased.
- Some secured debts aren't erased: Secured debts like car loans and mortgages aren't included because debtors give assets as collateral. Creditors don’t therefore need bankruptcy processes to recover what is owed to them.
- Some unsecured debts aren't discharged: Some unsecured debts i.e. student loans aren't discharged in personal bankruptcy processes. In Ontario, Canada, student loans which are less than seven years old (from the last day of study) aren't discharged when you file for personal bankruptcy. Also, child support and alimony aren't discharged.
Exceptions to surrendering assets
Personal bankruptcy protects some personal assets which are deemed necessary for survival. The list of exempted assets is prepared by provincial or territorial governments. In Ontario for instance, cars which are worth less than $6600 are exempt. Personal bankruptcy in Ontario also exempts household items that are worth less than $13,150. A house (principal residence) is only exempt where the equity is less than $10,000.
Examples of assets where there is no exemption;
- RRSP's (contributions made in the past 12 months)
- Houses (unless equity is less than $10,000)
Exceptions To Automatic Discharge After 9 Months
Ontario’s personal bankruptcy laws require a person to stay bankrupt for at least nine months. The length of your personal bankruptcy will be 9 months unless;
- You abscond from your bankruptcy duties i.e. making regular surplus income payments to your trustee.
- You have been declared bankrupt before.
- You have some surplus income.
It’s important to note that the length of your bankruptcy period also depends on factors such as case details.
Surplus Income And Cost Of Bankruptcy
It’s worth noting that surplus income increases the cost of bankruptcy. Apart from the trustee charges and loss of assets, personal bankruptcy may also eat into your income depending on factors such as household size and amount of income.
The logic behind this is simple i.e. if you make more money than your household requires to survive, it’s only fair to use the surplus income to pay your creditors. The formula for calculating surplus income is prescribed by law. It is important to note that personal bankruptcy is more expensive if you earn more.
Main Advantages And Disadvantages Of Personal Bankruptcy
Advantages of Personal Bankruptcy
- It protects you from legal action, collection action and wage garnishees.
- It eliminates an individual’s unsecured debts.
- It is relatively quick.
- It is relatively cheaper than most options for dealing with debt.
Disadvantages of Personal Bankruptcy
- It damages your credit history.
- You may be forced to surrender some of your personal possessions to your insolvency trustee.
- You are required to keep extremely detailed income and expenditure records.