Debt Relief Experts
Filing for bankruptcy affects both the person filing (the debtor) and those they owe money to (the creditors). Understanding how bankruptcy works from both perspectives can help you make informed decisions about your financial future.
Table of Contents
Bankruptcy and Debtors
Bankruptcy in Canada is a debt relief solution designed to help the honest but unfortunate debtor eliminate the burden of overwhelming debt. It’s a legal process legislated under the Bankruptcy and Insolvency Act (BIA) that provides protection from creditors while ensuring fair treatment of everyone involved.
What is a Debtor in a Bankruptcy Case?
A debtor is someone who owes money and cannot pay their debts as they come due. To be eligible for bankruptcy in Canada, you must meet three requirements: you owe at least $1,000, you live or have assets in Canada, and you are insolvent.
Being insolvent means two things: you cannot pay your bills when they’re due, and your total debts exceed the value of all your assets combined. For example, if you added up everything you own and it’s worth less than what you owe to creditors, you would be considered insolvent.
Before You File Bankruptcy
A bankruptcy can only be filed with a Licensed Insolvency Trustee. Your first step is meeting with an LIT for a free consultation. During this meeting, your trustee will review your debts, assets, income, and expenses to determine if bankruptcy is your best option. They may also discuss alternatives like a consumer proposal if that better suits your situation.
There are several actions you should avoid before filing:
- Transferring or selling assets to family or friends
- Taking on new debt or maxing out credit cards right before filing
- Paying some creditors while ignoring others
- Hiding information about potential inheritances or assets
- Making large purchases on credit
These actions could cause problems with your filing. The law requires your trustee to review transactions before bankruptcy, and unusual activities could affect your ability to receive a discharge.
The Bankruptcy Process for Debtors
If you decide to file bankruptcy, you’ll sign legal documents, including an “Assignment in Bankruptcy” and a “Statement of Affairs” listing all your assets and debts. Your bankruptcy officially begins when these documents are filed with the Office of the Superintendent of Bankruptcy.
Filing bankruptcy immediately protects you from creditor actions through a legal “stay of proceedings.” This means creditors must stop collection calls, wage garnishments, and legal actions against you. If a creditor continues to contact you, let your trustee know, and they will handle the situation.
- Surrender non-exempt assets to your trustee
- Report your monthly income and expenses
- Attend two credit counselling sessions
- Make monthly payments as required
- Assist your trustee in administering your bankruptcy
Your trustee will sell any non-exempt assets and distribute the proceeds to your creditors. However, you’ll be able to keep basic necessities, including:
- Basic household furnishings and personal effects
- Tools needed for your work
- A vehicle worth up to the provincial exemption limit
- Most pension and RRSP savings
Effect of Bankruptcy on Debtors
Filing bankruptcy has several effects on your financial life. The most immediate benefit is that collection calls and legal actions against you stop. Bankruptcy protection, through a stay of proceedings, gives you breathing room to deal with your debts through bankruptcy.
A discharge from bankruptcy legally releases you from the obligation to repay debts that existed when you filed bankruptcy. Most people filing a first bankruptcy with no surplus income will receive an automatic discharge after 9 months if they have completed all their duties. Not all debts are eliminated by bankruptcy. Some debts survive bankruptcy, including support payments, court fines, and student loans if you left school less than seven years ago. Your trustee will explain which of your debts will be discharged and which will remain.
Bankruptcy will affect your credit rating; however, this impact is temporary. The bankruptcy will appear on your credit report for 6 years after your discharge in a first bankruptcy. You can begin to rebuild your credit rating immediately by getting a secured credit card and making all payments on time.
Unless you have joint debts, your bankruptcy will not impact your spouse or their credit report. If you have joint debts (both names are on the debt), you may want to discuss filing a joint bankruptcy or proposal with your trustee.
Role of the Licensed Insolvency Trustee
A Licensed Insolvency Trustee is an officer of the court who must remain impartial during the bankruptcy process. An LIT is neither debtor nor creditor-friendly but acts as a neutral administrator. They ensure bankruptcy laws are followed fairly by both debtors and creditors. While they guide you through the bankruptcy process, they also have legal duties to investigate your finances and protect creditor interests.
At the start of bankruptcy, the Licensed Insolvency Trustee:
- Reviews your financial situation and will explain all debt relief options
- Prepares and files bankruptcy documents
- Notifies all creditors about the bankruptcy filing
- Takes control of non-exempt assets
During the bankruptcy, the trustee:
- Collects monthly payments from the debtor
- Ensures the debtor completes required counselling and duties
- Reviews and accepts claims from creditors
- Investigates the debtor’s financial affairs
- Sells non-exempt assets for maximum value
- Distributes available funds to creditors
- Responds to questions from both debtors and creditors
At the end of bankruptcy, the trustee:
- Reviews whether all duties are completed
- Applies for the debtor’s discharge
- Issues the Certificate of Discharge
- Makes final distribution to creditors
Throughout the process, the LIT protects the rights of both debtors and creditors while maintaining the integrity of the bankruptcy system.
Understanding Creditor Rights
Who is a Creditor in Bankruptcy?
A creditor is any person or company you owe money to when you file bankruptcy. There are two main types of creditors in bankruptcy: secured and unsecured. Secured creditors hold rights over specific property, like a bank with a mortgage on your house. Unsecured creditors, like credit card companies, have no claim on specific assets.
When you file bankruptcy, unsecured creditors must immediately stop trying to collect from you directly. Instead, they need to file a claim with the Licensed Insolvency Trustee to get a share of any money available from the bankruptcy. The amount they ultimately receive depends on funds realized by the trustee and how many other creditors file claims.
Secured creditors do not lose their rights under your loan agreement. If you want to keep property that serves as collateral – like your house or car – you must continue making regular payments on these secured loans, even during bankruptcy.
How Creditors Get Paid in Bankruptcy
Creditors receive payment from two main sources in bankruptcy: the sale of non-exempt assets and the debtor’s required monthly payments. The trustee collects these funds and distributes them according to a legal priority system set out in bankruptcy law. To receive payment, creditors must file a proof of claim with the trustee.
How Creditors Are Notified
When you file bankruptcy, your trustee must notify all your creditors within five business days. The notification includes information about the bankruptcy and instructions for filing claims. Creditors must stop all collection actions immediately due to the legal stay of proceedings.
Creditors have the right to:
- File a claim for money they are owed
- Request a meeting of creditors
- Ask questions about your financial affairs
- Object to your discharge if they have grounds
- Continue collection on debts that survive bankruptcy (such as support payments or court fines).
Your employer is not notified that you filed bankruptcy unless you have a wage garnishment. In that case, your trustee will notify the payroll department to ask them to stop taking money from your pay.
The OSB will also notify the credit bureau when you file, including the date of filing and type of proceeding (a bankruptcy or consumer proposal). They update the credit reporting agencies at the end of your bankruptcy with the date of discharge.
Other than that, there is no public advertising or publication that you filed for bankruptcy in Canada.
How Do I Claim or Declare Bankruptcy?
Before you file, the trustee will review all your debt relief options so you can decide if bankruptcy is right for you.
The trustee will ask questions about your income, assets, and debts (who you owe). If you cannot afford to repay your debts in full, the trustee may recommend bankruptcy, but they might also suggest you consider filing a consumer proposal as an alternative to bankruptcy if this makes more sense for your financial situation.
If you are considering bankruptcy, talk with a Licensed Insolvency Trustee today.
