How declaring personal bankruptcy works in Canada

Depending on your financial situation, declaring personal bankruptcy may help you to eliminate most (if not all) of your unsecured debts. In general, if you owe more than you can reasonably repay or you have experienced a major change in financial stability making repayment difficult, bankruptcy may help you.

There are 3 main steps to filing personal bankruptcy:

Step 1 – Review your current situation

Review your financial situation with a credit counsellor or licensed insolvency trustee and confirm that bankruptcy is the best option for your personal situation. The topics they should review with you include:

  • Income
  • Assets
  • Debts
  • Budget
  • Goals

Step 2 – Choose a licensed insolvency trustee

The Office of the Superintendent of Bankruptcy provides a full list of licensed insolvency trustees that are licensed to file consumer bankruptcies in Canada. If you’ve spoken with a credit counsellor and determined bankruptcy is the best option for you, ask them to recommend a licensed insolvency trustee. You should choose a licensed insolvency trustee who you trust to administer your bankruptcy should you choose to file, ensuring that they are both:

  • Local
  • Licensed

Step 3 – File for bankruptcy

If it is decided that bankruptcy is the right (or only) option for you, the last step is to file for bankruptcy. Once filed, you will be required to:

  • Surrender assets/unused credit (if applicable)
  • Attend a minimum of 2 credit counselling sessions
  • Submit monthly proof of income statements
  • Make your agreed-upon payments each month
  • Complete your bankruptcy discharge

What happens when you declare bankruptcy in Canada?

Personal bankruptcy will always be just that—personal. Depending on your specific situation, the cost, time involved, and overall credit impact may vary, but we have provided answers to the most common questions below:

How long does bankruptcy last?

First-time bankruptcies last 9 or 21 months depending on income, assets, and family size e.g. the number of dependents supported by you. Second or third-time bankruptcies will last 24 or 36 months and will have added restrictions.

How much does bankruptcy cost?

A basic, fees-only bankruptcy will cost $1800 for a 9-month bankruptcy and $2000 for a 21-month bankruptcy. However, if your income exceeds the maximum permitted for your family size (you plus your dependents) or you have penalties related to assets or equity, the cost of bankruptcy will increase.

Will bankruptcy ruin my credit forever?

Bankruptcy does not ruin your credit rating forever, but it will negatively impact your credit/borrowing power for a set period. Credit-wise, when you declare bankruptcy in Canada a record of bankruptcy will appear on your credit bureau for the length of your bankruptcy repayment (9 or 21 months) PLUS 6 additional years following your date discharge. During this time, you may find it challenging to secure new credit and you may pay higher interest/borrowing costs.

What debts are included in bankruptcy?

  • Credit card debt
  • Personal/installment loans
  • Unsecured lines of credit
  • Payday loans
  • Past due bills
  • Loans from individuals
  • Non-criminal judgements
  • Tax debts and HST/GST
  • Student loans older than 7 years

What debts are NOT included in bankruptcy?

  • Secured debt (unless surrendered)
  • Student loans less than 7 years
  • Alimony and child support
  • Court-imposed fines or penalties
  • Criminal judgements or restitution orders
  • Tax debts and HST/GST incurred due to fraud

Will debt collectors still call me?

Once informed of your bankruptcy, debt collectors should not continue to call you. If they do, please inform your licensed insolvency trustee right away.

Does bankruptcy affect my spouse or children?

Bankruptcy will not affect your spouse or children unless they are either (a) the co-signer or (b) the guarantor of a joint debt with you or, in some cases, if they are the co-owner of a joint asset with you. In general, if a jointly owned debt or asset will be affected by your bankruptcy, it will affect BOTH parties.

What assets are protected in Canada?

Assets such as a house, car, and certain investments such as RRSPs are either fully or partially exempt in bankruptcy. How much or what you can keep is subject to the exemption amounts in the province where you file bankruptcy.

For example: if the exemption limit for a vehicle in Manitoba is $3000, that means that IF it were sold, the total car worth must be less than $3000 or you may need to (a) pay the cash difference to your trustee or (b) surrender the car.

You can learn more about provincial exemption limits [LINK]

Can you keep your house in bankruptcy in Canada?

The short answer is yes, but the real question is not can you keep your house in bankruptcy in Canada but rather, can you afford to keep it. In a bankruptcy, you must always offer your creditors MORE than what they would receive if you liquidated (sold) your assets to pay them. That means the more equity you have in a property, the more debt you will have to repay in your bankruptcy.

SCENARIO 1: Homeowner with some equity in Ontario

John Hilton owns a house in Toronto. His mortgage is $750,000 but the resale value of his house is $800,000. John has $50,000 ($800,000 – $750,000) in total equity and in Ontario $10,000 of that is exempt from his bankruptcy. This makes John’s unallowed equity $40,000 ($50,000 – $40,000). If John owes MORE than $40,000 total to his creditors, he will need to give them at least $40,000. If he owes LESS than $40,000, he will need to pay 100% of his debt.

SCENARIO 2: Homeowner with no equity in Ontario

Farha Ahmad owns a house in Ottawa. She just purchased her home for $400,000 and due to a sudden change in the housing market, she cannot sell for more than the $400,000 it was purchased for ($400,000 – $400,000). Farha has no equity and therefore, she can keep her home and still file for personal bankruptcy, provided she can still afford her ongoing mortgage payments.

Can you claim bankruptcy and keep your car in Canada?

Unlike homes or property which tend to see an increase in value over time, vehicles tend to depreciate over time. This means that while claiming bankruptcy and keeping your car is typical, you may occasionally have to pay the difference between the value of your vehicle and the vehicle exemption limit in the province where you declare bankruptcy. In most cases if your vehicle is still financed it will likely be exempt, you just keep up the loan payments.

SCENARIO 3: Single vehicle owned with car loan in Alberta

Julia Thompson lives in Alberta and owns a 2015 Honda Civic. In Alberta, the vehicle exemption is $5000. Julia’s vehicle is currently worth $6000 if sold at auction, but she still owes $3000 to the financing company she bought the vehicle from. Julia’s vehicle is exempt from bankruptcy because the value of the vehicle at resale minus the value of the loan is less than $5000 ($6000 – $3000). If Julia continues to pay her car loan, she can keep her vehicle.

SCENARIO 4: Two vehicles owned with no financing in Saskatchewan

Deshawn Martin lives in Saskatchewan and owns two vehicles outright with no financing, a 2005 Ford F150 and a 2014 Jeep Cherokee which are valued together at $9500 ($5500 for the Ford, $4000 for the Jeep). In Saskatchewan, the exemption limit for a vehicle is $10,000 but this applies to ONE vehicle only. Deshawn must either (a) choose one vehicle to keep and surrender the second or (b) pay the value of the second vehicle into his bankruptcy.

Bankruptcy discharge in Canada

After you fulfill the requirements of your bankruptcy, you will need to be discharged. This means that you are no longer bankrupt and can begin to repair and rebuild credit. In most cases, a bankruptcy discharge is automatic—when you’re done, you’re done! However, in more complex situations involving assets, investments, or other restrictions, discharge may require a court hearing.

Bankruptcy Alternatives in Canada

Bankruptcy isn’t for everyone, and it also isn’t the only debt solution. For individuals who earn too much, have too many assets, or simply don’t have enough debt to justify filing personal bankruptcy, alternatives include:

Consumer Proposal

For individuals who wish to keep or protect their assets, Consumer Proposal can help spread out equity/income repayments over a period of 5 years. Although a consumer proposal will cost more start to finish than bankruptcy, it is generally less expensive on a month-to-month basis (depending on the total debt amount) and will have less of a negative impact to credit score.

Debt Consolidation

Sometimes an individual does not need to file a bankruptcy or consumer proposal, they just need more favourable terms or a break from interest. Debt consolidation is the process of repaying your debts using either a loan or other financing arrangement or by participating in an interest reduction plan (A.K.A. a debt management program) through an accredited credit counselling agency.

Credit Counselling

When it comes to managing debt there is no one size fits all. For some, credit education or a personalized budget may be all they need, while for others more direct intervention may be required. Regardless of which, credit counselling sessions are designed to not only provide all your options—yes, including bankruptcy!—but also to explain these options to you from start to finish.

Before any credit-impacting decision, call or click—we can help!