Canadians carry a lot of debt. We have access to a lot of credit, and we use it. According to an Equifax report from November 2021, the average consumer debt (excluding mortgages) sits at $20,739 in Canada. The reality? For some, access to all of that credit, unfortunately, leads to bankruptcy.
When you have a massive pile of debt, it can feel extremely difficult to see a way of getting it under control. When that happens — when it becomes too much, when you no longer have access to credit and your income is not enough to manage the debt – filing for bankruptcy could be an option for you.
Before we break down the bankruptcy process in Canada, and how it can help you get a handle on your debt, it’s important to point out that this is just one option. Most people think anyone can file. In reality, having too high an income or too many assets ends up being more expensive than simply repaying your debt. One option that we’ll explore further down is consumer proposals — also a legal process, but viewed as slightly less harsh than bankruptcy.
Just remember: everyone’s financial situation is unique, and there are no one-size-fits-all approaches. Make sure you consider what’s best for you, above all.
Table of contents
- What is bankruptcy?
- Consumer Proposals vs Bankruptcy
- Who can file for bankruptcy in Canada?
- Why file for bankruptcy?
- How much does it cost to file for bankruptcy in Canada?
- What happens when you file for bankruptcy in Canada?
- How many times can someone declare bankruptcy in Canada?
- How does bankruptcy work for debtors and creditors?
- How does bankruptcy affect your future?
- How to file for bankruptcy in Canada
What is bankruptcy?
By the time you decide it’s wise to file for bankruptcy, chances are your finances are already out of control. Bankruptcy allows you to transfer the responsibility for your debts (excluding student loans and secured debt) off your shoulders — but at a hefty price.
When you file, a Licensed Insolvency Trustee takes ownership of your assets in order to settle your debts. There are instances where you can hold on to certain necessities — for example, your car to get to work. But those exceptions vary by province. Check the provincial rules so you know exactly what you are getting into.
Filing for bankruptcy is a legal process. The federal government governs the process via the Bankruptcy & Insolvency Act. This act exists to protect lenders and help borrowers. After the bankruptcy is approved, your creditors receive a stay of proceedings. This prevents them from taking any legal action against you to recoup their money.
Ultimately, bankruptcy is not something anyone should enter into lightly.
Consumer Proposals vs Bankruptcy
Both a consumer proposal and a bankruptcy appear on your credit report and impact your credit score. When clients are in unmanageable debt, a trustee may present both options. It can be hard to gauge which one makes the most sense for you.
What is a Consumer Proposal?
A consumer proposal is one of the last steps someone takes to avoid bankruptcy. Like bankruptcy, it is a legal process and affects your credit rating.
A Bankruptcy Trustee facilitates the process of setting up a consumer proposal. The trustee reaches out to your creditors and says something along the lines of: “Mr. Smith is currently carrying $14,000 debt with you that he will never be able to reasonably pay off. He would like to avoid claiming bankruptcy, where you get less, if any, of the money he owes you. If he pays you $X over X-amount of time [typically 4-5 years], will you consider settling the debt?”
That is a simplified version of what happens. But ostensibly, if the proposal is reasonable, creditors accept something over nothing at all. The amount is determined by your income and your assets, and it costs about $1,500 to file.
Related Reading: What is a Consumer Proposal?
Which Is Better?
Both options are legally-binding and both hurt your credit score. However, there are differences. For one, lenders do not view a consumer proposal as harshly as bankruptcy. In addition, you establish a set payment amount with a consumer proposal. Bankruptcy requirements, however, vary with your income. So if you get a raise, guess what? Payments on your bankruptcy go up.
With consumer proposals, there’s always a chance the creditors won’t accept. It’s also a possibility that you’ll need to sell assets. The most important thing to remember is that you need to go through a Licensed Insolvency Trustee for both.
Who can file for bankruptcy in Canada?
Before filing for bankruptcy in Canada, applicants must meet two eligibility requirements. First, you need to have lived, or done business, in Canada within the last year. You also need to be insolvent. This means you owe at least $1,000 and have no ability to pay it before it’s due.
Related Reading: What is Debt Consolidation?
Why file for bankruptcy?
The harsh truth? Bankruptcy will hurt your credit. But, it is also a necessity in many instances. If your credit is taking a hit and you can’t recover financially, it is wise to file for bankruptcy to:
- Eliminate debt
- Stop wage garnishments
- Stop collection calls and processes
- Help free you from debt
Entering into bankruptcy might sound like the end of the world. But really, it is a path to get you back on your feet.
How much does it cost to file for bankruptcy in Canada?
The irony of filing for bankruptcy in Canada is that if you are insolvent — meaning you can’t even afford to repay $1,000 — the cost to file will be at least $1,800. This fee goes directly to the trustee. It covers the cost of their time and the administrative costs of your claim. It’s a fee you must pay to file. That’s because, in Canada, you cannot file for bankruptcy without the help of a trustee.
What happens when you file for bankruptcy in Canada?
Once you have formally declared bankruptcy (i.e. when the necessary forms have been filed with the Office of the Superintendent of Bankruptcy), your Licensed Insolvency Trustee will work with creditors on your behalf. You won’t make payments to creditors directly, any garnishing of wages will stop, and any lawsuits brought to you by creditors will cease.
At this point, your Trustee will sell your assets, placing all funds received in a trust. These proceeds will be distributed to creditors. As per the OSB, you’re required to undergo two financial counseling sessions. Why? So you understand why you ended up declaring bankruptcy and work out a plan for managing your finances in the future.
Let’s look at some common questions about bankruptcy in Canada.
Can you keep your house in bankruptcy in Canada?
Losing your home is not a foregone conclusion if you file for bankruptcy. Often, a borrower makes mortgage payments but perhaps cannot manage to repay other debts. In these cases, if you are up-to-date with your mortgage payments, the house may stay in your hands.
In Canada, there are bankruptcy exemptions. These exemptions protect against the seizure of certain possessions deemed essential. If your home or car, or other assets, are deemed essential, your Licensed Insolvency Trustee cannot access them, or their equity, to pay off your debts.
Does bankruptcy clear tax debt in Canada?
It’s easy to think tax debt will stick around when you’ve filed for bankruptcy. The Canada Revenue Agency is always keen to get what’s owed, and they’ll take measures like garnishing your wages and freezing your accounts to get it.
That said, the CRA is considered an unsecured creditor, similar to a bank or credit card company. As a result, tax debt relief is part of bankruptcy in Canada. If you have more tax debt that you are able to repay, a Licensed Insolvency Trustee can work with you to get relief.
What assets are exempt from bankruptcy?
Filing for bankruptcy is not meant to leave you homeless and starving. There are a number of items protected from repossession in the event of a bankruptcy, including:
- Clothing and other personal items
- Motor vehicles, to a limit. If you have a 2021 Mercedes, they might take it. If you have a 2004 Toyota, they likely won’t touch it.
- Household furniture and food in your home
- Tools necessary for work
- Certain farm property
- Pension or RESP investments made any time before the previous 12 months
How long will a bankruptcy show on a credit report in Canada?
When you file for bankruptcy, you will be assigned an R9 credit rating. This will be on your credit report for six years after you complete the bankruptcy. If you file a second time? It’s on your report for a whopping 14 years.
It’s important to remember that just because the bankruptcy drops off your credit report, it doesn’t mean the impact of it automatically disappears. It can take YEARS to get your credit back to a healthy place.
Another key point is that you end up having to rebuild your credit from the ground up. This starts with creditors who agree to take a risk on someone with poor credit.
This is a big reason why bankruptcy is generally seen as a last resort. It’s a debt solution, but not without some significant downsides.
Are bankruptcies public record in Canada?
Since they are filed with the Office of the Superintendent of Bankruptcy Canada (i.e. the government), they are in the public record. If you pay a small fee (minimum $8.00) to the OSB, you can search for specific records of individual Canadians in their Insolvency Name Search. (Note: you must pay for each search.)
How many times can someone declare bankruptcy in Canada?
Theoretically, there is no limit to how many times you can file for bankruptcy. But, it becomes increasingly difficult each time. Consider the reality of having the bankruptcy show on your credit report for seven years. Then, while it’s on your report it is difficult to qualify for credit. This limits your opportunity to prove yourself as a quality borrower. If you file a second time, now you’re looking at 14 years before you can try to rebuild your credit.
So, while you can continuously file for bankruptcy, your ability to get credit becomes more challenging. In addition, the opportunity for automatic discharge of the bankruptcy disappears.
How does bankruptcy work for debtors and creditors?
In Canada, when you file for bankruptcy, you give up your assets to offer repayment in kind to your creditors. In return, your debts are discharged. Basically, your trustee acts as an intermediary between the debtor and the creditor as a peace offering.
The conversation goes something like this: “Here are funds that you can put towards the debt you may not otherwise receive at all. In return, stop bothering to ask for it, you won’t get it anyway because they can’t pay. Deal?”
How does bankruptcy affect your future?
It’s no secret that your credit score takes a huge hit when filing for bankruptcy. What is less clear to many people is exactly how much of an effect bankruptcy has on someone’s future. Let’s explore in more depth below.
Buying and borrowing power
For as long as bankruptcy appears on your credit report, you are essentially blackballed from borrowing funds. Not all lenders see you as kryptonite, but they definitely consider you high risk — and treat you accordingly. For example, you won’t have access to as much credit. And if you do, it’s at a much higher interest rate. Want to buy a house or a car, or even secure a cell phone line? You face significant challenges when bankruptcy sits on your credit report.
As if the world of employment isn’t competitive enough, potential employers may consider your credit. That doesn’t mean they all will. In fact, it’s rare for companies to review your credit. But, depending on your line of work, it’s could be a possibility.
For example, if you want to work in a bank, you likely need to show a decent understanding of money management. A terrible credit report is likely a death knell on that, or any other job in the financial services industry. Likewise, in other careers, your ability to maintain and manage good credit matters a great deal. But it’s not a foregone conclusion, or even likely, that a poor credit score may affect your employment. However, it doesn’t mean it can’t, either.
How to file for bankruptcy in Canada
So, you decide to file for bankruptcy. What’s next? We reviewed the steps a little earlier, but let’s break them down further.
Understand your debts
Whether you pay for a free debt assessment, or you sit down and go over your own paperwork with open eyes, you need to know what you’re dealing with. Know all the numbers. This includes what comes in, and what you goes out. Once you realize there is no way out of the hole, it’s time to declare bankruptcy.
Not sure where you stand with your debt? Check out our guide to figure out how much is too much.
Bring in a Licensed Insolvency Trustee
You get to pick your trustee. So find someone local who you are comfortable dealing with and trust to handle the process. They are your guide, and can answer questions and concerns you have from the outset, as well as along the way. In addition, they are the liaison between you and your creditors. In other words, they have your back to get creditors off of your back, once and for all.
Working with Bromwich+Smith, Advisorsavvy has a team of Licensed Insolvency Trustees in our roster of financial professionals, ready to help!
Sign and file the documents
Your trustee is in charge of this process and files your signed documents with the Office of the Superintendent of Bankruptcy. Immediately upon filing, you are protected from your creditors and the collection calls should stop.
Complete your ‘bankruptcy duties’
Bankruptcy is not guaranteed, nor is it solely the responsibility of the trustee. You complete Bankruptcy Duties set out by the OSB. These include completing credit counselling courses, making bankruptcy payments, and reporting a monthly budget.
Discharge your bankruptcy
Once you complete all of the duties and requirements of filing for bankruptcy, your Certificate of Discharge officially eliminates your debts. You are now free of consumer debt and ready to get your finances back on track, and on a path to healthy financial management.
Bankruptcy is not the easy way out of debt. As we’ve explained, it’s actually quite the opposite. This process is difficult and damaging, and is typically avoided at all costs. For some, however, it is the best and only option out of a debt hole dug far too deep. Consider asking a financial professional to review your debts and assets, and to recommend the debt solution that makes the most sense for you and your future.
Your financial situation is unique, and we can help you find the best advisor or Licensed Insolvency Trustee for your needs. Just fill out our short questionnaire.