If you are considering bankruptcy as a possible solution to your debt problems, understanding the exactly how it works based on your own situation is critical to making an informed decision. Bankruptcy in Canada is not an informal arrangement. It is a serious step covered by Federal law, overseen by both the Office of the Superintendent of Bankruptcy and the Bankruptcy courts. To make this work for the Federal government licences professionals known as LITs (short for Licensed Insolvency Trustee) and they are your starting point to access the system.
Knowing what to expect enables you to approach the process with clarity rather than uncertainty.
The starting point: a financial assessment
The process begins with a review of your financial situation. This includes your income, expenses, assets, debts, and a few other items that brings the picture of your situation into clear focus so the LIT firm can provide you with quality information based on your fact situation.
The purpose of this step is to determine whether bankruptcy is appropriate or whether another option, such as a consumer proposal or a non-Bankruptcy and Insolvency Act solution may be more suitable.
At most LIT firms your fact situation information and some basic information is usually shared with you by an administrator (also known in the profession by titles such as: Debts Solutions Manager or Advisor) experienced and trained on this aspect. Where necessary the administrator will check with a LIT for any unusual or complex issues so that you are properly informed. When your decision is to proceed with bankruptcy protection, you must (required by law) also review the situation and have the opportunity to ask all questions to a Licensed Insolvency trustee in a meeting known as an Assessment. The licensed insolvency trustee, will explain how each option applies to your specific circumstances and you confirm your decision.
Filing for bankruptcy
If bankruptcy is determined to be the appropriate option, the trustee prepares the required documentation. This includes a detailed statement of your affairs which includes a list of what you own, what you owe, other required information and a budget) along with certain acknowledgments. You will be required to sign these documents and swear an oath before a Commissioner of Oaths that your statement of affairs is true, correct and complete to the best of your knowledge. While this may sound complicated the Trustee and his/her team do the work – your job is to feed the Trustee the information and provide supporting documentation as requested.
Once the documents are completed and signed, they are filed by the trustee with the Office of the Superintendent of Bankruptcy who issues the Trustee with a certificate that officially starts your protection through.
This step marks the transition from managing debt informally to entering a formal legal process.
Immediate effect: stay of proceedings
The Trustee will notify your creditors (“Notice”) and attend to all the creditor queries.
The creditors have to file proof with the Trustee that you owe them money, and the Trustee must review these claims and disallow them if they are not correct.
One of the most important aspects of filing for bankruptcy is the protection provided to you under the bankruptcy and known as a stay of proceedings (“Stay”). The Notice tells the creditors of the Stay.
The Stay is a legal protection that requires most creditors to stop collection activity. Calls, letters, and legal actions are generally halted once the bankruptcy is filed. For most creditors, even if they have already obtained court judgment against you and have started to enforce, they need to stop.
This can include wage garnishments. If you are currently dealing with collection pressure, this can provide immediate relief and allow you to move forward in an organized way where the rules are to be followed by all sides.
If you are experiencing this type of situation, speaking with a licensed insolvency trustee in Alberta or Ontario can help clarify how these protections can work for you.
Your responsibilities during bankruptcy
The main objective is for you to get out of bankruptcy and there are some duties you need to do to get to that point.
These duties include:
- Providing monthly income and expense reports with support for the income
- Making payments to the Bankruptcy Estate as required
- Attending two financial counselling sessions held one-on-one with a licensed financial counsellor that the Trustee must arrange and pay for
- Completing all tax returns for the year prior to the bankruptcy year filing and for the year in which the bankruptcy was filed.
- Attending any meetings called by the Trustee or any court appearances.
- Ensuring you disclose to a lender that you are in bankruptcy if you borrow more than $1,000
- Cooperating with your trustee and providing requested information
These steps are designed to ensure transparency, that your creditors receive what is fair under the law and to support your financial recovery and the right to become debt free through the discharge from bankruptcy process.
Understanding income reporting and surplus income contribution requirements
During bankruptcy, you are required to report your income on a monthly basis. This allows the trustee to determine whether surplus income contribution requirements apply.
Surplus income contribution requirements are calculated based on thresholds set by the Office of the Superintendent of Bankruptcy that consider your household size, income level and permits the deduction of certain expenses such as medical related, childcare, child or spousal support payments (see the Trustee for a full list and explanation). If your income exceeds these thresholds, a portion will be required to be contributed during the bankruptcy period.
This is not the same for every individual. The specifics depend on your financial situation and will be explained clearly during your initial consultation and assessment meeting with the Licensed Insolvency Trustee.
What happens to your debts
Once bankruptcy is filed, most unsecured debts are included in the process. This can include credit cards, personal loans, shortfalls on repossessed assets, etc. It does not include secured debt for assets such as mortgages or car loans unless you choose to surrender the asset (house or car for example) to the Trustee. This happens when, for instance, the house value is a lot less that the mortgage or the car is no longer suitable for your needs or budget. If there is any shortfall that is covered as an unsecured debt.
At the end of the bankruptcy, these debts are discharged, meaning you are no longer legally required to repay them.
There are certain types of debt that may not be discharged, depending on the circumstances. These details are reviewed as part of your assessment so that you understand how the process applies to your situation.
What happens to your assets?
Most people are concerned that they will lose the things that they own or finance that are important to their lives – such as home, vehicle or even boats and skidoos.
In Canada, certain assets are protected (sometimes only partially) through exemption rules, which vary by province. These exemptions allow you to retain essential items up to defined limits.
If you have assets with value above those limits, there are usually options to keep those assets through arrangements with the Trustee that account for any value the Trustee would receive by selling the assets.
This is a detailed area that depends on your specific situation. A trustee will review your assets with you before any decision is made so that you have a clear understanding.
Counselling and financial education
As part of the bankruptcy process, you are required to attend two financial counselling sessions.
These sessions are designed to provide practical guidance on budgeting, credit use, and financial planning. The goal is to answer your questions and reduce the likelihood of future financial difficulty.
Timeline and discharge from bankruptcy
The length of a bankruptcy depends on several factors, including whether it is your first filing and whether all your duties were properly done.
A first-time bankruptcy can be over in as little as 9 months, provided there are no complications and all your obligations are fulfilled.
A second time bankruptcy would be for 24 months.
There is an important aspect that increases the time of the bankruptcy from 9 to 21 months and from 24 to 36 months. If you are required to make surplus income contribution requirements the law keeps you in bankruptcy an additional 12 months to be fair to your creditors – if you are above the income guidelines then the law considers it fair that you contribute for the additional 12 months.
A creditor can also oppose your discharge from bankruptcy, and the Licensed Insolvency Trustee must oppose your discharge if you fail to do your duties and/or you have other conduct issues (these details are too complex for this blog so please speak with the trustee). If your discharge is opposed the Trustee loses his/her authority to sign the certificate of discharge and must refer the decision to a bankruptcy court. The court makes the decision of when and on what conditions your bankruptcy discharge will occur.
Discharge marks the completion of your part of the process. At that point, eligible unsecured debts are eliminated, and you are no longer responsible for them.
What happens after discharge?
After discharge, the focus shifts to rebuilding (which likely has already begun).
This includes re-establishing credit and maintaining a stable financial position. Many individuals begin this process by using tools such as secured credit cards and using the budgeting and financial tips received in their two financial counselling sessions.
While bankruptcy affects your credit profile, it also provides a fresh start without debt.
Common misconceptions about the process
There are several misconceptions that can create hesitation.
One is that bankruptcy is indefinite. In reality, it is a process with a defined timeline.
Another is that all assets are lost. As said above, exemptions and specific arrangements often allow individuals to retain essential assets.
A third misconception is that bankruptcy is the only option once debt reaches a certain level. In many cases, alternatives such as consumer proposals are more appropriate and your Trustee will discuss these with you.
Understanding these points allows you to evaluate bankruptcy based on facts rather than assumptions.
A process designed to resolve debt
Bankruptcy in Canada is designed to provide a clear and regulated framework for resolving debt. It replaces uncertainty with a defined sequence of steps and a measurable outcome.
While it is not the right solution for every situation, it is an effective and appropriate option when repayment is no longer feasible.
Speak with a professional to understand your situation
If you are considering bankruptcy or even just wondering if it can help you, the practical next step is to review your situation with a licensed insolvency trustee.
Baigel Corp. works with individuals across Ontario and Alberta to provide confidential, no cost consultations. The goal is to help you understand how the process would apply to your situation and whether it is the appropriate option.
If you would like clarity on what comes next, speaking with a licensed insolvency trustee can provide a path forward. Visit www.baigel.ca
*Baigel Corporation is a federally regulated Licensed Insolvency Trustee