Declaring bankruptcy

“I was drowning in debt, so I met with an insolvency trustee. I’d figured going bankrupt would wipe me out. But then I learned that I could keep some of my property, and be back on my feet in less than a year. Yes, it’s going to take time to rebuild my credit, but it feels like a weight has been lifted off my shoulders.”

– Jay, Kamloops, BC

The most common way for a debtor to go bankrupt is to voluntarily declare bankruptcy. Under Canadian law, this is called making an assignment in bankruptcy. It starts a legal process in which you give up most of what you own to get rid of (most of) your debts. Going bankrupt can take a year or more, and has serious consequences, so it’s a drastic measure. (There are other options for getting out of debt to consider first.) 

A first step in making an assignment in bankruptcy is to meet with a licensed insolvency trustee. This is a professional who will guide you through the process, selling most of your assets to pay off your creditors. Once the process is complete, you’re “discharged” from bankruptcy. This releases you from your debts — except for a few types of debt, such as support payments, which under the law cannot be discharged. 

When you make an assignment in bankruptcy, any legal actions brought against you by your creditors are stopped. Creditors can’t sue you or enforce a judgment while you’re in bankruptcy unless they get the court’s permission, or unless the debt is secured.

Less commonly, you can go bankrupt by an order of the court. Under the law in Canada, a creditor can apply to court for an order that a debtor be declared bankrupt. A creditor can make this application where:

• the debtor owes the creditor at least $1,000, and

• the debtor committed an “act of bankruptcy” within the last six months.

“Acts of bankruptcy” include:

• leaving Canada to avoid having to pay creditors,

• making a fraudulent transfer of property, or

• failing to make debt payments as they come due.

Usually, creditors will only do this when it’s unlikely they’ll be paid by other means. It’s used more frequently against companies than individual debtors. 

Under Canadian law, to be eligible to declare bankruptcy, you must be an “insolvent person." That means you live or own property in Canada, and you owe at least $1,000 to creditors. Plus, you must meet one of these criteria:

• you can’t pay your debts as they come due,

• you’ve stopped paying your debts, or

• the value of your property would not be sufficient to pay all your debts.

Most people going bankrupt owe money to more than one creditor. However, debtors with only one creditor are still eligible to declare bankruptcy. 

Under bankruptcy laws, when you go bankrupt, most of your assets will be sold to pay off your creditors. 

However, you can keep some things. Exempt assets include any money you’ve had for more than one year in a Registered Retirement Savings Plan (RRSP), a Registered Retirement Income Fund (RRIF), or a Deferred Profit Sharing Plan (DPSP). 

As well, BC law exempts these assets from bankruptcy proceedings:

• Necessary clothing for you and your dependants.

• Household furnishings and appliances, up to a value of $4,000.

• One car, up to a value of $5,000.  

• Tools and other personal property you use to earn income, up to a value of $10,000.

• Medical and dental aids required by you and your dependants.

• Your principal residence, if your equity in the residence is less than $9,000 ($12,000 if the residence is in the Metro Vancouver or Victoria areas).

If any exempt assets are covered by a security agreement, they can still to be sold. For example, say you purchased a car for $4,000. The seller financed your purchase, and in return you gave the seller a security interest in the car. This allows the seller to take back the car and sell it if you “default” under your agreement. Declaring bankruptcy is typically a default under a security agreement. 

In this case, as soon as you declare bankruptcy, the seller can take back the car and sell it. The car isn’t protected — even though it qualifies as exempt property — because you put it up as collateral for the car loan. 

Under the law in Canada, only a licensed insolvency trustee can file a bankruptcy application. Insolvency trustees are professionals regulated by the federal government who provide advice to people and businesses with debt problems. 

Bankruptcy proceedings begin when you meet with an insolvency trustee to discuss your financial situation. To find a licensed insolvency trustee in your area, search this database.

What the trustee does

The insolvency trustee prepares the assignment in bankruptcy and files it with the government office that oversees bankruptcies. Usually, the trustee is then appointed to handle your bankruptcy proceedings. From that point, all your assets technically belong to the trustee. The trustee holds the assets (called “the estate”) for the benefit of your creditors. Throughout the bankruptcy process, the trustee’s duty is to the creditors, not to you. 

The main work of the trustee is to locate all of your creditors, determine how much each is owed, and divide up the estate to distribute to them. Each creditor is paid an amount proportional to their share of the total debt.

Your duties to the trustee

Under the law, a bankrupt individual owes these duties to their trustee:

• To disclose and deliver all their property to the trustee.

• To deliver all their credit cards to the trustee to be cancelled.

• To deliver all documents relating to their affairs to the trustee (for example, tax records, insurance policies, and so on).

• To inform the trustee of any “material change” in their financial situation.

While you’re going through bankruptcy proceedings, the insolvency trustee will determine whether you have surplus income you need to pay to your creditors. Surplus income is the portion of your income that exceeds what you need to maintain a “reasonable standard of living."

Under bankruptcy laws, in determining whether you have to make surplus income payments, the insolvency trustee must look at the income standards set by the federal government, as well as your personal and family situation. The government’s income standards are based on the size of the family. If your income exceeds the income standard, the surplus goes towards paying your creditors. 

The insolvency trustee must follow this directive on how to calculate your income. 

Bankruptcy laws provide that you’ll be “automatically discharged” from bankruptcy after a certain period of time. Discharged means you’re released from your debts (except for a few types of debt which under the law cannot be discharged; see below). 

The amount of time before you’re discharged depends on two main factors:

• Whether you’ve been bankrupt before.

• Whether you have to pay surplus income.

If you’ve never been bankrupt before and you don’t have to pay surplus income, you’ll be discharged nine months after filing for bankruptcy.

If you’ve never been bankrupt before and you have to pay surplus income, you’ll be discharged 21 months after filing for bankruptcy.

If you’ve been bankrupt before and you don’t have to pay surplus income, you’ll be discharged 24 months after filing for bankruptcy.

If you’ve been bankrupt before and you have to pay surplus income, you’ll be discharged 36 months after filing for bankruptcy.

You won’t be automatically discharged

In some situations you won’t be automatically discharged from bankruptcy. These include the following:

• You’ve been bankrupt more than once before.

• You refused, or didn’t attend, financial counselling.

• You have more than $200,000 in income tax debt that makes up 75% or more of your total debt.

• Someone objects to your discharge from bankruptcy.

In any of the above circumstances, a hearing to consider your discharge is held before a court.

Objections to your discharge

Your creditors, the insolvency trustee, or the superintendent of bankruptcy (the government office that oversees bankruptcies) can object to your discharge at any time before you’re automatically discharged. 

The most common reason for creditors to object is because they want the court to make a conditional order. This is where a court tells you to pay each creditor some of what they’re owed. You aren’t discharged from bankruptcy until the payments are made. But the court can also decide to ignore the objection, and grant you an “unconditional discharge” from bankruptcy.

The insolvency trustee may also have reasons to object to your discharge. They may be concerned about the reason for your bankruptcy (for example, gambling or overspending on credit cards). Or, they may object due to your conduct during the bankruptcy. For example, if you:

• don’t tell the trustee about all of your assets or income

• don’t provide documents required by the trustee, such as income tax information or expense statements

• don’t pay the trustee your surplus income

Under bankruptcy laws, an order discharging you from bankruptcy doesn’t release you from certain types of debts. These include:

• debts arising from spousal or child support payments

• court fines or penalties

• debts resulting from fraudulent activity

• student loans, if you filed for bankruptcy less than seven years after you left school (see more on the "seven year rule")

An order of discharge doesn’t release a person who co-signed a loan with you from the debt. 

Before you apply for an assignment in bankruptcy you must fully understand your financial position. Your first step should be to list your assets and debts. Assets are anything you own that can be exchanged for money. Some types of assets include vehicles, land, jewelry and investments.

You also need to know whom you owe and how much. Make a list of all your current bills and debts. Some types of debt include:

• mortgage

• car loan

• credit card debts

• lines of credit

• bills you pay every month and are behind in the payments (for example, phone or utility bills)

Make a note of how far behind you are in any payments. Also note the interest rate you pay on each of your loans or overdue debts. 

Next, do up a monthly budget showing all the money you expect to earn and spend each month. In our page on budgeting out of debt, we walk you through how to make a budget.

Under the law in Canada, only a licensed insolvency trustee can file an assignment in bankruptcy. You can find a licensed insolvency trustee near you to meet with and guide you through the process.

Bring to the meeting as much information about your finances as you can. For example, have a list of assets and debts, your monthly budget, and any credit card statements, loan documents, and mortgage records. 

The trustee will review your finances to confirm that you’re insolvent. Usually, the first meeting is free. 

The insolvency trustee will prepare the assignment in bankruptcy and file it with the government office that oversees bankruptcies.

You’re required to submit a sworn statement with your application, setting out:

• property you own that can be sold to pay your creditors

• the names and addresses of all your creditors

• the amount you owe to each creditor

Once the assignment in bankruptcy is filed, a trustee is appointed to handle your bankruptcy. Usually, this will be the insolvency trustee who prepared your application. The trustee becomes the legal owner of your assets (your “estate”), and holds your estate for the benefit of your creditors.   

The trustee locates your creditors and sends them notice of your bankruptcy. Some assets may be sold and the sale proceeds put back into the estate. The trustee’s responsibility is to divide up the estate and pay it out to your creditors. 

Under bankruptcy laws, a bankrupt individual must attend two financial counselling sessions before being discharged. Usually, counselling services are provided by the insolvency trustee who handles the bankruptcy. A debtor can’t be discharged if they’ve refused or neglected to attend two counselling sessions. 

In most cases, you’ll receive an automatic discharge from bankruptcy after the period of time provided under bankruptcy laws has passed. For the time periods and other possible outcomes, see “What you should know," above. 

Not if they’re unsecured creditors. The moment you file for bankruptcy, your unsecured creditors can no longer sue you for repayment. And any of their existing lawsuits are stopped. Once you declare bankruptcy, your insolvency trustee will deal with your creditors on your behalf.  

Your secured creditors can still proceed to seize assets covered by their security once you’ve declared bankruptcy. 

No. While you may have to give up most of what you own, certain assets are exempt from the bankruptcy process. See "What you should know," above, for details. 

The fees insolvency trustees charge for handling the bankruptcy proceedings are regulated by the federal government. Most bankruptcies cost around $1,800. The insolvency trustee’s fee is paid by the bankrupt individual.

In addition, the bankrupt individual must pay for the two mandatory counselling sessions. 

If you can’t afford a trustee’s fees, ask the federal government about the Bankruptcy Assistance Program. This program connects debtors with trustees who are willing to take bankruptcy files on easier terms. 

Usually, the money your creditors receive from your estate is enough to discharge you from bankruptcy. However, in some cases a court may make what is called a "conditional order" of discharge. This means you'll only be discharged from bankruptcy once you satisfy certain conditions. 

The condition will most often be that you pay your creditors a percentage of what you owe them. Courts see the repayment of certain types of debt as more important than others. For example, a court is likely to order you to at least partially repay any income tax debt. The payment goes to the insolvency trustee to distribute to the creditors. It's usually an amount set by the court, which may be paid in monthly installments. 

A court is more likely to make a conditional order where you are uncooperative during the bankruptcy process. A conditional order is also more likely where you have a high income, even if you were well behaved.