When financial troubles strike, it’s easy to feel like the walls are closing in, especially when debts pile up. Bankruptcy and insolvency can be a lifeline in these situations, providing a fresh start when the burden becomes too much. Understanding the general rules of bankruptcy and insolvency in Canada is crucial if you’re navigating through tough financial waters. Let’s break it all down.
What Is Bankruptcy?
Bankruptcy is a legal process where individuals or businesses who are insolvent and unable to meet their financial obligations can declare bankruptcy and seek relief from their debts. It’s often seen as a last resort but can provide a clean slate by eliminating most debts.
What Is Insolvency?
Insolvency happens when a person or company can’t pay their debts as they come due. It’s not the same as bankruptcy, but it’s a key precursor. You can be insolvent without being bankrupt, and insolvency is often the trigger that leads people to file for bankruptcy or seek other debt-relief options.
Bankruptcy vs. Insolvency: What’s the Difference?
Bankruptcy is a formal legal process, while insolvency refers to the state of financial distress. Think of insolvency as a financial warning sign. If not addressed, it can lead to bankruptcy.
The Role of a Licensed Insolvency Trustee (LIT)
A Licensed Insolvency Trustee is a professional licensed by the Canadian government to oversee the bankruptcy process. They act as intermediaries between debtors and creditors, helping to navigate the rules and ensure everything follows the law.
When Should You Consider Filing for Bankruptcy?
Filing for bankruptcy isn’t something you jump into lightly. It’s typically considered when other debt relief options, like a consumer proposal or debt consolidation, aren’t viable. A few signs include constant calls from creditors, missed payments, and an inability to cover living expenses.
The Bankruptcy and Insolvency Act (BIA)
The Bankruptcy and Insolvency Act is the legal framework governing bankruptcy in Canada. It sets out the rules for the process, ensuring a fair and orderly resolution of debts.
Eligibility for Bankruptcy in Canada
In Canada, to file for bankruptcy, you must owe at least $1,000 and be unable to meet your financial obligations. While that might sound like a low threshold, filing for bankruptcy is generally more appropriate when you owe significantly more.
The Costs of Filing for Bankruptcy
Bankruptcy isn’t free. There are administrative fees and payments to your Licensed Insolvency Trustee, plus surplus income payments are required if your income exceeds certain thresholds. The more you earn, the higher your payments might be.
Assets You Can Keep in Bankruptcy
Contrary to popular belief, filing for bankruptcy doesn’t mean you’ll lose everything. In fact, Canadian law allows individuals to keep certain exempt assets, such as basic household items, clothing, and in some provinces, a vehicle up to a certain value. Each province has its own rules on what assets are protected.
What Happens to Your Credit Score After Bankruptcy?
Your credit score will take a significant hit after filing for bankruptcy. A bankruptcy will remain on your credit report for an additional six years (14 years for a second time bankrupt) after your discharge. However, the impact on your credit can be a small price to pay for relief from overwhelming debt. Once you have been discharged from your bankruptcy, you can begin rebuilding your credit right away even with the bankruptcy notation on your report.
The Process of Filing for Bankruptcy
The process starts with a consultation with a Licensed Insolvency Trustee, who will evaluate your financial situation and determine if bankruptcy is the best option. If you proceed, they will file the paperwork, notify your creditors, and oversee the liquidation of your non-exempt assets. You will be required to perform the duties of a bankrupt in order to remain eligible for a discharge. Duties of a bankruptcy include filing monthly income and expense reports, making the required payments, attending two counselling sessions and providing the Trustee with your applicable income tax information.
The Impact of Bankruptcy on Your Life
Bankruptcy affects more than just your finances. It may also impact your ability to obtain credit, rent an apartment, or even get certain jobs in the future. However, it also comes with relief from the constant pressure of mounting debt.
Alternatives to Bankruptcy: Consumer Proposal
If bankruptcy feels too drastic, a consumer proposal might be a better option. This is a formal agreement with your creditors to pay back a portion of what you owe over a set period. It allows you to avoid the stigma and long-term effects of bankruptcy while still dealing with your debt.
Bankruptcy and Your Creditors
Once you file for bankruptcy, creditors can no longer contact you or take legal action against you to recover debts. This is known as a stay of proceedings, and it provides much-needed breathing room as you go through the bankruptcy process.
Surplus Income and How It Affects Your Bankruptcy
Surplus income is the required payment into your bankruptcy if your income exceeds certain government-set thresholds based on your family size. The more you earn, the more you might be required to contribute toward your debts during bankruptcy.
Discharge from Bankruptcy: What It Means
A discharge from bankruptcy is what you’re aiming for. It’s the official end of your bankruptcy, releasing you from most, if not all, of your debts. For a first-time bankruptcy, you’re typically eligible for an automatic discharge after nine months, or 21 months if you have surplus income, provided you meet all the requirements.
Debts That Aren’t Covered by Bankruptcy
Not all debts are wiped out by bankruptcy. Certain obligations, like child support payments, alimony, court fines, and student loans (under specific conditions), will survive bankruptcy. It’s important to know what debts you’ll still be responsible for after your discharge.
Rebuilding Your Financial Future Post-Bankruptcy
Once your bankruptcy is discharged, rebuilding your financial life is entirely possible. Start by budgeting, saving, and slowly rebuilding your credit by using secured credit cards or small loans.
FAQs about Bankruptcy and Insolvency General Rules
1: How long does bankruptcy last in Canada?
For a first-time bankruptcy, it typically lasts nine months. However, if you have surplus income, it could extend up to 21 months.
2: Can student loans be discharged in bankruptcy?
Student loans can only be discharged in bankruptcy if you’ve been out of school for seven years.
3: What happens to my tax debt if I file for bankruptcy?
Tax debt is included in bankruptcy, meaning it can be wiped out along with your other unsecured debts.
4: How does bankruptcy affect my spouse?
Filing for bankruptcy doesn’t affect your spouse unless they’ve co-signed a loan or credit card with you, in which case they’ll be responsible for the full debt.
5: Can I keep my car if I file for bankruptcy?
It depends. In some provinces, you can keep your car if its value falls under a certain threshold. Otherwise, it may be sold to pay off your debts. In BC the exemption for a vehicle is $5,000.
6: What are the alternatives to bankruptcy?
A consumer proposal, debt consolidation, or a debt management plan might be better alternatives if you want to avoid the consequences of bankruptcy. It is important to speak with a licensed insolvency trustee to find out the options available to you.
Conclusion
Bankruptcy and insolvency are daunting topics, but understanding the general rules can help you make informed decisions about your financial future. It’s essential to explore all your options, whether it’s filing for bankruptcy, negotiating with creditors, or considering a consumer proposal. With the right guidance and a solid plan, you can overcome your financial challenges and start fresh. Remember, bankruptcy is a legal tool meant to help you regain control, not something to be ashamed of.
Require Assistance?
At Crowe MacKay & Company, we have over 60 years of experience and offer free initial consultations. If you have any questions regarding the information above, contact our office today and start your debt relief journey.
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This article has been published for general information. You should always contact your trusted advisor for specific guidance pertaining to your individual needs. This publication is not a substitute for obtaining personalized advice.
If you require corporate or personal insolvency services, Crowe MacKay & Company provides custom solutions for clients, allowing you to live debt-free.
