Key Takeaways
Bankruptcy is for honest but unfortunate debtors to find relief from their debts. Declaring bankruptcy is a significant decision that can impact you now and in the future. Best to speak with a Licensed Insolvency Trustee to review all your options and see if bankruptcy is right for you.
Who Qualifies to File Bankruptcy?
To file for bankruptcy, specific eligibility criteria must be met. Generally, individuals overwhelmed by their debts and unable to repay them within a reasonable time frame may qualify for bankruptcy. In Ontario, specific requirements include being a resident or having property in the province and having at least $1,000 in unsecured debts.
Additionally, individuals must complete credit counselling sessions with a BIA counsellor. It is essential to consult with a Licensed Insolvency Trustee to determine eligibility and explore alternative options before deciding.
How Long Does Bankruptcy Last?
Bankruptcy can last from only 9 months to 36 months or more. The length of period for a personal bankruptcy depends on whether you have been previously bankrupt and your monthly income for determining the surplus income calculation. A first-time bankruptcy can last for 9 to 21 months, while second or more bankruptcies will last at least 24 to 36 months.
What Happens To My Debt if I Declare Bankruptcy in Canada?
When you declare bankruptcy in Canada, the process initiates a legal framework to address your outstanding debts. An automatic stay of proceedings is put in place upon filing for bankruptcy, which halts most collection actions from your creditors. A Licensed Insolvency Trustee is appointed to oversee your bankruptcy proceedings and mediate between you and your creditors. However, it's important to note that not all debts can be discharged through bankruptcy, such as court fines, student loans (less than 7 years from completing studies), and spousal/child support.
What is Bankruptcy Process in Canada?
Navigating the process of declaring bankruptcy requires following several crucial steps. The first and foremost step is to seek guidance from a Licensed Insolvency Trustee. They will evaluate your financial situation, explore alternative options, and assess whether bankruptcy is the most suitable action.
Once you decide to proceed, you must gather and provide all necessary financial documentation, including details about your assets, debts, income, and expenses. The Trustee will then prepare and file the required paperwork with the Office of the Superintendent of Bankruptcy, initiating the legal process.
Subsequently, you must attend two mandatory credit counselling sessions to receive guidance on managing your budget, spending habits and rebuilding credit. You will work closely with the Trustee throughout the bankruptcy period to address any queries, attend meetings, and cooperate in liquidating assets if required.
Finally, once the bankruptcy period is completed and all obligations are met, you will receive a discharge, providing a fresh start to rebuild your financial life.
What Happens to My Income if I Declare Bankruptcy in Canada?
When you declare bankruptcy in Canada, your regular income is subject to specific rules and guidelines. A portion of your income, known as surplus income, may be required to be contributed towards repaying your debts. The surplus income calculation is based on predetermined thresholds set by the government, considering your family size and certain allowable expenses.
The Licensed Insolvency Trustee will work with you to determine the surplus income you must contribute. Apart from surplus income contributions, your regular income remains under your control and can be used to cover your day-to-day expenses. The Trustee will guide you through the process, ensuring compliance with the rules and helping you manage your finances effectively during bankruptcy.
Understanding Surplus Income in Bankruptcy
While in bankruptcy, you need to make payments to your creditors for your debts owing. To determine a fair amount for a debtor to pay, surplus income payments is a calculation set by the Office of Superintendent of Bankruptcy.
The calculation of surplus income payments considers various factors, such as the individual's family size, monthly income, whether this is your first bankruptcy and certain non-discretionary expenses. These non-discretionary expenses include medications, spousal and child support.
Once the surplus income payments are determined, individuals must make monthly payments to their bankruptcy trustee, who then distributes the funds to the creditors. The surplus income payment is in addition to any other obligations the individual may have, such as rent, groceries or car payments.
Understanding surplus income is vital because it helps individuals plan their budget during bankruptcy and ensures they fulfill their obligations to their creditors.
What Happens to My Assets When I File for Bankruptcy
When you file for bankruptcy, what happens to your assets depends on several factors. In Canada, bankruptcy laws allow for certain exemptions, meaning some of your assets may be protected and not used to repay your debts. These exemptions vary by province but typically include essential items like clothing, furniture, and necessary household items. On the other hand, non-exempt assets may be sold by a Licensed Insolvency Trustee to generate funds for your creditors.
Examples of non-exempt assets include a house, RRSPs (contributions more than 12 months ago) and investments. It's important to note that the Trustee's primary goal is to ensure a fair distribution of funds to creditors. Working closely with the trustee, you can understand which assets are exempt and which may be subject to liquidation. It's crucial to disclose all your assets accurately to the trustee to facilitate a transparent and fair process.
Exceptions to the Surrendering of All Assets
When you file bankruptcy, you're not expected to give up all your assets as you still need assets to live your life and earn an income. Below is a listing of the exceptions in Ontario for assets you can keep:
Clothing - No limit
Vehicle - $7,117
Household Furniture - $14,180
RRSPs, excluding payments made up to 12 months before the date of bankruptcy
Home Equity - Only if your home equity is $10,783 or less
Pension plans
Can Debt Collectors in Canada Keep Calling Me if I Declare Bankruptcy?
No, all of your unsecured creditors are stayed or prevented from contacting you while in bankruptcy. They can no longer call, email or text you to collect on your debts owing to them. They will instead file a proof of claim with the Licensed Insolvency Trustee and then receive dividends from your bankruptcy. If you still receive calls after filing bankruptcy, you can contact your Trustee for assistance.
How Does Bankruptcy Affect My Credit Rating?
When you file for bankruptcy, your credit report will be given an R9 rating. This tells anyone who views your credit report that you are bankrupt. This will likely reduce your credit score. The R9 rating will stay for the length of your bankruptcy plus 7 years after completion. If you file a second or more bankruptcy, the R9 will stay for 14 years after completion. This can make it much more challenging to qualify for credit in the future.
Can I Get a Credit Card if I Declare Bankruptcy in Canada?
When you file bankruptcy, your credit cards will be included and cancelled. While in bankruptcy, you cannot obtain any new debts, including credit cards. Once completed and discharged from bankruptcy, you can then apply for new debt again.
Will My Canadian Student Loans be Discharged if I Declare Bankruptcy?
Canadian student loans generally only get discharged if you declare bankruptcy if you meet specific criteria. In most cases, student loans are considered non-dischargeable debts in bankruptcy or consumer proposal if you have been out of school for less than seven years. This means that even if you declare bankruptcy, you will still be responsible for repaying your student loans.
If it has been over 7 years since you completed your studies from declaring bankruptcy, you no longer need to make monthly payments during bankruptcy and after you are discharged. So, it's important for you to contact National Student Loans to determine your last date of study before you file for bankruptcy.
Additional Factors to Consider When Deciding If You Should Declare Bankruptcy
Below are some additional factors to consider before declaring personal bankruptcy:
How it will affect your credit rating - Bankruptcy will have a worse and likely longer-term impact on your credit score than choosing another option to reduce your debt, such as a consumer proposal. If you plan to qualify for credit in the future, you should avoid going bankrupt now.
Will your income increase or decrease in the near future? If your income increases in the next year, your bankruptcy payments may be higher than initially calculated with the Trustee. If this is the case, you should be prepared for increased payments during your bankruptcy. However, if your income decreases, your monthly payments may decrease.
Can you afford a consumer proposal and avoid bankruptcy? If you can afford the monthly payments in a consumer proposal, you should try that option first. The monthly payments are generally less per month in a proposal, but it will be for a longer period. If you can't keep up with the payments, you can file personal bankruptcy in the future.
Conclusion
Bankruptcy is generally the last option to consider after trying all the others to manage debt problems. No one wants to go bankrupt, and it will negatively impact your credit rating. We recommend you ask all your questions so you are prepared for the bankruptcy process so there are no surprises after your bankruptcy filing.
If you are considering bankruptcy, contact Litvack Group today for a Free Consultation to review your options for managing your debts.