Everything You Should Know About Personal Bankruptcy in Canada
While a lot of people have heard of the bankruptcy process, the details aren’t commonly known and there are a lot of myths and rumours. The truth is, if you are unable to pay your bills and meet your financial commitments, filing for personal bankruptcy could make sense. However, it’s important to understand the process and the bankruptcy Canada rules before you proceed as it isn’t the right option for everyone.
A Licensed Insolvency Trustee can help you learn personal bankruptcy rules and regulations, figure out if filing makes sense for you, and more. Whether you’re considering personal bankruptcy in Ontario or in any other region of the country, speaking with a trustee can help.
The word “bankruptcy” sometimes sounds scary to some people. They may see this word as a negative one that means they’ve “failed” or they’re “a deadbeat.” However, this isn’t true. Most people who consider filing personal bankruptcy in Canada are “honest yet unfortunate debtors.” These are people who went into debt and external circumstances conspired to make it difficult to repay their debt: they might have had some large unplanned emergency expense; they might have lost their job; or there might have been a relationship breakdown. What happens when you declare bankruptcy is that you are
given a chance to start fresh.
What is Personal Bankruptcy?
As mentioned, the specifics surrounding the personal bankruptcy rules and regulations aren’t commonly known and understood. If you’re wondering exactly what bankruptcy is, concerned about personal bankruptcy and your assets, or looking for more details on the types of bankruptcy, you’re not alone.
Simply put, personal bankruptcy is a legal process through which an individual who cannot meet their financial commitments can have their debts eliminated. The goal of the process is to provide a person with a fresh start and a chance to rebuild their financial life.
Bankruptcy is not designed to be a punishment. The vast majority of people who find themselves searching for “personal bankruptcy Ontario” or information on the bankruptcy process in any province are “honest yet unfortunate debtors” who can no longer afford to pay their debts. Punishing people who have experienced financial trouble doesn’t make sense and that’s not what bankruptcy does. Bankruptcy gives people a fair way to eliminate their debts and restart their financial lives.
Should You File for Personal Bankruptcy?
The decision to file for personal bankruptcy will depend on your financial situation. While bankruptcy is typically the last debt relief option considered, it can be the right choice in certain circumstances. Speaking with a Licensed Insolvency Trustee can help you determine if filing for bankruptcy is the right choice for you.
The trustee will also help you understand the personal bankruptcy rules and regulations and how filing for bankruptcy will affect you. Many people are concerned about what will happen to their financial life if they file for bankruptcy. That’s why learning about the process is so important.
A trustee will help you understand the situation involving personal bankruptcy and your assets, for instance, as this can be an important point for many. The facts about the personal bankruptcy credit score affects and how filing for bankruptcy could impact your credit are also important to learn and understand. Sometimes filing for bankruptcy can help put you in a better financial position, something we cover more in-depth in our piece on bankruptcies and foreclosures.
Licensed Insolvency Trustees will answer any questions you have. Once you know the facts, you can then make the right decision for your financial future.
Understanding the Bankruptcy Process in Canada
The bankruptcy process is not there to punish you. As mentioned, it is designed to give people a way to eliminate their debt so they can start their financial lives over. Most people who end up trying to understand what happens in bankruptcy and considering how to declare bankruptcy got into their position due to unfortunate circumstances.
For example, if you spend all your money each month on the necessities (your home, food, clothing, transportation, etc.) you won’t be able to save any money. Without savings, unexpected expenses could cause you to go into debt. If your car breaks down and you need to pay an expensive repair bill, this increases your debt. If your roof starts leaking, this increases your debt. If you or your spouse gets sick or loses a job, the reduced income could cause your debt to increase even more. Over time, all these debts start to add up and you find yourself unable to pay them down. This is the situation that personal bankruptcy is designed for.
If you are in such a situation, it’s important to understand how bankruptcies work, the requirements to file bankruptcy, the consequences of bankruptcy, and everything about the bankruptcy process.
How to File/Declare for Personal Bankruptcy
Whether you’re planning to file personal bankruptcy in Ontario or anywhere else in the country, the process must be administered by a Licensed Insolvency Trustee. While in some countries you can file through an attorney, bankruptcy in Canada can only be administered by a Trustee.
If you make the decision to file, the trustee will complete the required forms and send them to all your unsecured creditors. From this point, you receive legal protection from your creditors and all communication with them will take place through the trustee. Creditors cannot contact you, take any actions to collect the debt, and any collection processes that are already in place (such as wage garnishments) must stop.
How to Apply for Bankruptcy
When you first meet with a trustee, he or she will review your financial situation and your assets. Most trustees in Canada offer this initial consultation at no charge. If the trustee determines that bankruptcy could be an option for you, it is your decision as to whether or not you wish to proceed with this option. If you want to know how to go bankrupt, the trustee can help answer any questions you may have. They will also explain what happens when you file bankruptcy as well as give you the information you need on how to declare bankruptcy, if this is the route you choose to take.
What is Involved in Filing for Personal Bankruptcy?
As mentioned, while in some countries you can file for personal bankruptcy with an attorney bankruptcy in Canada must be administered by a Licensed Insolvency Trustee. If you decide to file, the trustee will inform your unsecured creditors.
Only unsecured debts can be included in a bankruptcy. These are debts that are not tied to assets. Examples of unsecured debts are credit card debt, tax debt, lines of credit, personal loans, and other such debts.
Secured debts (such as mortgages and automobile loans) cannot be included in a bankruptcy unless you wish to surrender these assets to the creditor.
Only a small list of certain debts are not discharged (eliminated) with a bankruptcy. Examples are spousal and child support payments, recent student loans, debts due to fraud, and court fines.
The trustee will ensure that all forms are completed correctly and tell your creditors about the filing. They will communicate with the creditors as needed. The trustee will also inform you of your duties during bankruptcy, such as the requirement to attend two financial counselling sessions.
What Happens When You File for Personal Bankruptcy?
If you are concerned about personal bankruptcy and belongings, it’s important to know that you do not lose all of your assets when you file. Each province and territory in Canada has a list of assets that are considered exempt and these assets can be kept. In general, you are able to keep assets that are needed to live a basic lifestyle and to earn an income.
Maybe people have questions about specific aspects of the bankruptcy process, such as personal bankruptcy and marriage. An important point here is that, if your debts are your own, your bankruptcy will not affect your spouse and it will not appear on their credit report. In the case of joint debts, your spouse or anyone who co-signed a loan for you will be responsible for payments.
Once you have filed, you are required to update the trustee if you move, change your phone number, or change workplaces. You are also required to attend two financial counselling sessions. Licensed Insolvency Trustees hold these one-on-one sessions to help people learn about budgeting and how to use credit responsibly. The goal of these sessions is to give people the information they need to avoid future debt problems.
How Long Does Filing for Personal Bankruptcy Take?
The process of filing for personal bankruptcy typically happens quite quickly. While in some countries you may need to speak with an attorney, bankruptcy in Canada is handled by a Licensed Insolvency Trustee who follows a process outlined in the federal Bankruptcy and Insolvency Act. The trustee will ensure that the proper forms are completed and will file them. Today, this process happens electronically.
Once you file, your unsecured debts will be eliminated and you will receive legal protection from your creditors.
In most cases, someone who has filed for bankruptcy for the first time will be automatically discharged in nine months. However, if you earn more than a level set by the government for your family size, you will need to make surplus income payments that will be distributed to your creditors. The trustee will inform you if this is required.
If you need to make surplus income payments, it will be 21 months before you are discharged, if it is your first bankruptcy.
In a second bankruptcy, it takes 24 months to be discharged if you are not making surplus income payments and 36 months if you are required to make these payments.
Your Duties During Bankruptcy
How does bankruptcy work? The bankruptcy process is described by law and the Licensed Insolvency Trustee will help you understand how bankruptcies work, answer your bankruptcy questions, and inform you of your duties and responsibilities.
During bankruptcy, you will be responsible for providing your trustee with monthly income statements as well as proof of expenses. Based upon this information, your trustee may require you to make surplus income payments to your creditors if your income has increased over the allowable limit since filing for bankruptcy.
You will also need to attend two financial counselling sessions. The goal of these sessions is to provide you with valuable information on budgeting and money management so that you will be able to get control of your financial situation now and in the future. You will also be given information on ways that you can rebuild your credit rating once you are discharged from bankruptcy.
It is also your duty to provide your trustee with updated contact information as needed. If you move, change jobs or change your phone number, your trustee must be given this new information.
What is The Difference Between Bankruptcy and Personal Bankruptcy?
Personal bankruptcy is an insolvency process that is available to individuals who are unable to meet their financial commitments. Both individuals and companies can file for bankruptcy, but only individuals can file for personal bankruptcy. If you are wondering about bankruptcy and your business, know that there are different types of bankruptcy for small businesses and for larger corporations.
What Can I Keep After Filing for Personal Bankruptcy?
A major concern for many people is situation regarding personal bankruptcy and belongings. There is a common misconception that you lose everything you own when you file for bankruptcy. This is not true. If you are wondering about personal bankruptcy and your assets, know that you are able to keep certain assets that are considered exempt in your province or territory.
For instance, if you file for personal bankruptcy Ontario, you are able to keep:
- All necessary clothing;
- One automobile, valued up to $6,600;
- Household furnishings and appliances, valued up to $13,150;
- Tools of the trade (items that are required to earn a living), up to $11,300;
- Certain types cash or investments at a life insurance company;
- All RRSP, RRIF and DPSP (Deferred Profit Sharing Plan) savings except contributions made in the 12 months before your bankruptcy;
- Your principal residence if the equity in your home does not exceed $10,000;
- Company pension plans if they are “locked in” until retirement
The assets that are considered exempt will vary, depending on where you live. The trustee will inform you of what will happen to your assets before you file. Any non-exempt assets can be seized by the trustee and their value will be distributed to your creditors, unless you can compensate the trustee for their value.
Bankruptcy Canada Rules
The personal bankruptcy process is a legal process that is outlined in the federal Bankruptcy and Insolvency Act of Canada. This means that for Bankruptcy in Canada, the rules are federally regulated. The Office of the Superintendent of Bankruptcy is responsible for regulating the bankruptcy process which includes monitoring the trustee and the power to intervene in the process when deemed necessary.
While bankruptcy is governed by a federal act, there are certain aspects of the process that differ depending on the province or territory in which you live. One of these differences is in regards to personal bankruptcy and belongings. Each province has its own list of assets that are considered exempt from seizure when you file for bankruptcy.
The purpose of the bankruptcy process is to provide a resolution between debtors and creditors, to allow honest yet unfortunate debtors to discharge their debts, to help debtors avoid future insolvency, and other objectives.
Since part of the process is designed to prevent future financial issues, people who file for bankruptcy are required to attend two financial counselling sessions. These sessions teach budgeting, how to use credit responsibly, and other information that is designed to help people improve their financial lives.
With first- or second-time bankrupts, discharge occurs automatically as long as the person who has filed fulfills their duties. If you have filed for bankruptcy three times or more, you must go to court to be discharged.
Once you receive your bankruptcy discharge, you officially eliminate your debts and are able to start rebuilding your financial life.
Bankruptcy Ontario Rules
As mentioned, while the bankruptcy process is outlined in a federal act, there are some differences in each province. For example, bankruptcy Ontario rules differ from other provinces when it comes to personal bankruptcy and belongings.
In Ontario, the following assets are considered exempt:
- All necessary clothing (no limit)
- One motor vehicle (valued up to $6,600)
- Household furnishings and appliance (up to 13,150)
- Tools required to earn an income (up to $11,300)
- Equity in your home, as long as it is less than $10,000
- RRSP and RRIF savings (except for contributions made in the last 12 months)
- Company pension plans that are “locked in” until retirement
- Investments within a life insurance policies that have a preferred beneficiary
You are allowed to keep exempt assets when you file. This is one of the most important bankruptcy Ontario rules as many people are understandably concerned about what will happen to their assets if they file. The trustee will make sure you know which assets you can keep before you make the decision to file for bankruptcy.
What Types of Personal Bankruptcy are There?
When many people discuss the types of bankruptcy, they are referring to the differences between personal bankruptcy and business bankruptcy.
However, there are two types of bankruptcy detailed in the Bankruptcy and Insolvency Act that could apply to individuals (though one is considerably more common for individuals).
- Summary Administration Bankruptcy
- This refers to bankruptcies where the value of an individual’s assets when they are sold does not exceed $15,000
- Most personal bankruptcies in Canada are summary administration bankruptcies
- Corporations cannot file these bankruptcies.
- Ordinary Administration Bankruptcy
- These bankruptcies are ones where an individual has assets that are projected to be valued at more than $15,000
- Most of these bankruptcies are filed by corporations
- If an individual has a significant number of assets, other debt relief options (such as a consumer proposal) may be a better option than bankruptcy, since other methods do not typically involve losing any assets
How Will Personal Bankruptcy Impact My Credit?
When you file for personal bankruptcy, your credit score is affected. A note is placed on your credit report. If it is your first time filing, this note will remain for six years after you have been discharged. Having this note in place will make it more difficult to get a loan and you will likely have to pay a higher interest rate if you do.
However, you can rebuild your credit by following good credit habits. This includes borrowing reasonable amounts and paying them back on time. Getting a secured credit card (a credit card that is backed by a deposit) can help you rebuild your credit score. Most people who have filed for bankruptcy are still able to get a secured credit card. Note that this card is different from a prepaid card, which works like a gift card rather than a credit card. A prepaid card cannot help you rebuild your credit.
Whether it’s the best time to declare personal bankruptcy or not, know that your financial life is not over once you file for personal bankruptcy. While there are certainly consequences, you can still rebuild your financial life.
Do I Need an Attorney?
In some countries, a person files for personal bankruptcy by dealing with a tax lawyer or bankruptcy attorney. In other areas, people may even be able to file for bankruptcy on their own. However, in Canada, only Licensed Insolvency Trustees are authorized to administer the personal bankruptcy process. For a bankruptcy in Canada the rules are very explicit on this fact.
If you are wondering whether a bankruptcy in Ontario rules or the rules in any other province differ on this topic, the answer is no. You do not need an attorney to file for personal bankruptcy anywhere in Canada. In fact, you cannot file through a bankruptcy attorney in Canada. The personal bankruptcy process is always administered by a Licensed Insolvency Trustee. However, people are always welcome and encouraged to also obtain legal advice from an attorney.
What Happens After Personal Bankruptcy?
As part of the bankruptcy Canada rules, a person can be discharged from bankruptcy after nine months if they have fulfilled their duties, did not have to pay surplus income, and this is their first time filing for bankruptcy.
Once a person is discharged from bankruptcy, their debts are officially eliminated (some exceptions). They are then free to begin rebuilding their financial life. After personal bankruptcy credit score issues will likely be a main concern. Your bankruptcy will be noted on your credit report for at least six years after you are discharged. However, while this can make it more difficult to get a loan, you are able to start rebuilding your credit score once your bankruptcy is over.
One way to do this is through a secured credit card. Secured cards are backed by a deposit. For instance, a person may put down a $500 deposit and then receive a credit card with a $500 limit. With some cards, the limit can be higher than the amount of the deposit, but that depends on the card. You can use a secured credit card like any other card. By making reasonable purchases and paying your bills on time, your credit rating will gradually improve. It’s important to note that a secured credit card is different from a prepaid credit card. Prepaid cards do not allow you to carry a balance or make monthly payments against that balance, and thus they do not help you improve your credit score.
How Often Can I File for Personal Bankruptcy?
According to federal rules, there is no “limit” as to how often you can file for bankruptcy. However, there are consequences for filing more than one.
If you file for bankruptcy a second time, it will take longer for you to be discharged. In addition, the second bankruptcy will be noted on your credit report for 14 years (rather than six, which is the case in a first bankruptcy). This can make it significantly more difficult to get a loan for a long time, which can harm your financial future.
If you are wondering when is the best time to declare personal bankruptcy, that depends on various circumstances. If you have already filed for bankruptcy twice, filing for a third time comes with even more serious consequences.
If you file for bankruptcy a third time, you cannot be automatically discharged. You will need to go to court to receive your discharge, and the court may impose conditions on your discharge. For instance, your bankruptcy may be held open for an extended period or you may be required to make more payments.
How Does Personal Bankruptcy Affect My Business?
If you are concerned about personal bankruptcy and your business, know that in most cases you are able to keep your business when you file. However, this will depend on the structure of the business. Sole proprietorships and partnerships are not distinct entities from the individuals who operate them, so a personal bankruptcy is in effect a business bankruptcy in these cases.
If a business is incorporated, it is a separate legal entity. However, if a person files for bankruptcy, they cannot act as a Director of a company.
If you have concerns or questions about bankruptcy and your business, speak with a Licensed Insolvency Trustee.
Can I Get a Personal Loan After Bankruptcy?
While understanding the personal bankruptcy rules and regulations is important, learning about the affects of filing for bankruptcy is also crucial. When you file, a note is placed on your credit report. If it is your first time filing for bankruptcy, this note will remain for six years after you have been discharged.
A personal bankruptcy credit score note can affect your ability to get a loan. If you have a bankruptcy on your credit report, lenders will likely see you as a greater risk, and this can make it more difficult to get a loan. Getting a personal loan after bankruptcy may be possible, depending on the lender, but you may end up paying a much higher interest rate.
If you follow wise credit habits and pay your debts when they are due, you will rebuild your credit rating over time, which will make it easier to get loans.
How Does Personal Bankruptcy Affect My Spouse/Marriage?
Questions involving personal bankruptcy and marriage are common. People want to know how filing for bankruptcy will affect their spouse. For debts that are your own, your bankruptcy will not affect your spouse. While the bankruptcy will appear on your credit report, it will not appear on theirs.
However, when it comes to joint debts (debts you have taken out together) or debts where a spouse co-signed a loan, know that they will be 100% responsible for paying back these debts once you file. You won’t be responsible for the debt, but the debt will not be eliminated with the co-signer.
Another concern relating to personal bankruptcy and marriage is what will happen to your assets. Only your share of any assets you own will be included in a bankruptcy.
How We Can Help
At Farber, we work to find debt relief solutions that make sense and ones that are fair to both the debtor and their creditors. If you are struggling with debt and unable to pay your bills as they become due, we can help. Talking to one of our Licensed Insolvency Trustees can help you understand your options and make the right choice for your financial future.
If you are:
- Unsure of the types of bankruptcy
- Wondering about personal bankruptcy and marriage
- Want to know more about the bankruptcy process
- Are looking into bankruptcy and your business
- Have questions about personal bankruptcy and your assets
- Want to better understand your options
- Or have nearly any other question about bankruptcy and insolvency, we are here for you.
We can help. Contact us to arrange a free consultation with a Licensed Insolvency Trustee.
Contact Us Today
The team at Farber is here to help. Our Licensed Insolvency Trustees work with people to help find debt relief solutions that make sense. If you are wondering whether bankruptcy is the right choice, or looking for more information on your options, please do not hesitate to contact us today for a free consultation.
If you have any questions about the personal bankruptcy process, Licensed Insolvency Trustees at Farber will answer them during your consultation. We can help you find the debt relief options that work for you.