Personal Bankruptcy in Canada

No one wants to file for bankruptcy, but for many Canadians, it can be the best way to get out of overwhelming debt and start fresh. At Hoyes Michalos, our Licensed Insolvency Trustees (LITs) have been helping individuals eliminate debt since 1999.

This guide explains how bankruptcy works, what happens when you file, and whether it’s the right solution for you.

What is Bankruptcy?

A Guide To Bankruptcy In Canada video thumbnail, click to play

Bankruptcy is a legal process designed to help individuals who can no longer pay their debts. Once you file, your unsecured debts are eliminated, and you get protection from creditors. The bankruptcy process is regulated under the Bankruptcy and Insolvency Act (BIA) and administered by Licensed Insolvency Trustees (LITs). At the end of the bankruptcy, your debts are legally discharged, meaning you are no longer required to pay them back.

Key Benefits of Bankruptcy:

  • Eliminates most unsecured debts (credit cards, payday loans, tax debt etc.)
  • Stops collection calls and wage garnishments through a stay of proceedings
  • Quick path to debt relief (can be completed in as little as 9 months)
  • Essential assets are protected under provincial exemption laws

However, there are negative consequences. Bankruptcy stays on your credit report for six years after you are discharged.

Generally, most people feel relief as soon as they declare bankruptcy. The advantages of bankruptcy often outweigh the downsides for anyone struggling with significant debts.

Who Can File for Bankruptcy?

You qualify for bankruptcy in Canada if:

  • You owe at least $1,000 in unsecured debt
  • You can’t afford to pay your debts as they come due
  • You live in or have assets in Canada

You do not need to be a citizen to claim bankruptcy. You can be a permanent resident or even live abroad but have property here.

What Happens When You File For Bankruptcy?

When you file for bankruptcy in Canada:

  1. You work with a Licensed Insolvency Trustee who guides you through the process
  2. Most unsecured debts are eliminated and collection calls and legal action must stop
  3. You may need to make monthly payments based on your income
  4. You are required to surrender non-exempt assets
  5. You must complete two credit counselling sessions
  6. After 9-21 months, your debts are discharged
  7. Your credit report will show an R9 for 6-7 years after filing

Life after bankruptcy offers an opportunity for a fresh financial start. Credit counselling sessions during your bankruptcy will teach you new financial management skills and help you build better money management habits. Combined with being debt-free, these new skills provide a foundation for long-term financial stability.

How Much Does Bankruptcy Cost?

There is no upfront fee to file bankruptcy in Canada, but your total costs will depend on your income and assets.

Base Cost of Bankruptcy

The minimum cost to file bankruptcy in Canada is $2,250, paid in monthly installments of $250 for 9 months. This covers government administration fees and trustee costs.

Surplus Income Payments

Bankruptcy law in Canada is based on the principle that the more you make, the more you will pay.

If your income is above the government’s threshold, you will have to make surplus income payments (50% of income over the limit). This can extend your bankruptcy to 21 months for a first time bankruptcy.

Use our Surplus Income Calculator to estimate your costs.

If you are worried that your income might make bankruptcy expensive, consider a consumer proposal as an alternative to bankruptcy.

Will You Lose your Assets?

Bankruptcy does not mean that you lose everything. Canadian bankruptcy laws protect certain essential assets, including:

  • Clothing & personal items (unlimited)
  • Household furniture (up to $14,180)
  • One vehicle (up to $7,117 in Ontario)
  • Tools of the trade (up to $14,405)
  • Most pensions and RRSPs (except contributions in the last 12 months)

If you have assets that are worth more than the provincial exemptions you may want to consider a consumer proposal instead.

You will also lose your tax refund for the year of bankruptcy, plus any tax refunds for previous years that you have not yet received.

What Debts Are Discharged in Bankruptcy?

Bankruptcy eliminates most, if not all, of your unsecured debts including:

Some debts are not forgiven through bankruptcy including alimony and child support, court fines and penalties, debts from fraud and student loans under seven years.

Secured creditors (like your mortgage or car loan) are not affected by bankruptcy. Secured creditors retain their rights to the collateral or assets you pledged against the loan if you are behind on payments. As long as you can keep up with your monthly payments, it is possible to keep assets like your car and your home in a bankruptcy.

How Long Does Bankruptcy Last?

The length of bankruptcy depends on whether you have surplus income and how many times you have filed bankruptcy. You bankruptcy will last:

  • 9 months for a first time bankruptcy with no surplus income
  • 21 months for a first time bankruptcy with surplus income
  • 24 months for a second time bankruptcy without surplus income
  • 36 months for a second time bankruptcy with surplus income

Once your bankruptcy is finished, you will receive your discharge certificate. This is the bankruptcy step that releases your obligation to pay back your remaining debts.

How Bankruptcy Affects Your Credit

A bankruptcy remains on your credit report for 6-7 years (first-time filing) and 14 years for repeat bankruptcies.

Will you ever get credit again?

Yes. With consistent, responsible credit use, you can see your credit score improve within 2 years of discharge.

Depending on the reasons you filed, and what your payment history looked like before your bankruptcy, some creditors will even offer an existing bankrupt person a credit card.

You can start rebuilding your credit immediately after discharge by:

  • getting a secured credit card
  • making on-time payments on bills and utilities
  • keeping your credit utilization below 30%
  • After 6-12 months of good payment history, consider applying for a second credit card or other credit product.
  • Regularly review your credit report for errors and to track your progress but don’t be obsessed about it. Rebuilding credit takes time.

Will Bankruptcy Affect Your Spouse?

If your debts are your own, your spouse is not affected by your bankruptcy. Your bankruptcy does not appear on their credit report.

If you have joint debt, your creditor will pursue your spouse for collection. In this case, you may want to talk to your trustee about a joint bankruptcy.

Only your share of any assets you own is included in your bankruptcy. If you own any assets jointly, such as a marital home, it is essential to discuss options with your trustee including a consumer proposal to protect shared assets.

Alternatives to Bankruptcy

Bankruptcy is an option of last resort. It is just one solution available for Canadians struggling with debt. Before filing for bankruptcy, consider other debt relief options including:

Consumer Proposal: Settling your debt through a consumer proposal has significant advantages over bankruptcy: it can eliminate up to 80% of your debt while you keep your assets and has a lower impact on your credit score than bankruptcy.

Debt Consolidation: A debt consolidation loan allows you to combine multiple debts into one lower monthly payment. However, you must have good credit capacity and a steady income to qualify at a reasonable interest rate.

Credit Counselling: If you struggle with monthly payments but can afford to repay your debt in full, a credit counsellor can help you work out a debt repayment plan. However, a debt management plan does not provide creditor protection so can’t stop garnishments, lawsuits or collection calls unless your creditor voluntarily agrees. You must also pay back 100% of your debts with a credit counselling agency.

As a Licensed Insolvency Trustee in Canada, we have the experience to help you evaluate and compare your alternatives to bankruptcy and make the best choice for your situation.

Should You Declare Bankruptcy?

Bankruptcy may be the best option if:

  • You can’t afford your debt payments
  • You are only making minimum payments and don’t see your balances falling
  • You’re facing a wage garnishment or lawsuit
  • Collection agencies won’t stop calling

If you have assets or can afford partial repayment, a consumer proposal might be a better choice.

A good trustee does not assume declaring bankruptcy is what you should do. The goal of talking with a Licensed Insolvency Trustee is to discuss your personal financial situation to determine if personal bankruptcy is the right debt solution for you.

At Hoyes Michalos, we help Canadians become debt-free with no pressure, no judgment, and no upfront fees. If you have questions, speak with one of our experienced Licensed Insolvency Trustees about bankruptcy so you can make an informed decision.

✅ Free, confidential consultation
✅ No obligation to proceed
Offices across Ontario & virtual appointments available

Find an Office Near You

Offices throughout Toronto and Ontario

google logoHoyes, Michalos & Associates Inc.Hoyes, Michalos & Associates Inc.
4.9 Stars - Based on 2101 User Reviews