Should You File for Bankruptcy If You’re Unemployed?

Losing your job while dealing with overwhelming debt creates significant stress and uncertainty. Yes, you can file for bankruptcy while unemployed – but while bankruptcy can provide relief, timing matters. The benefits of bankruptcy need to be weighed against your ability to manage living expenses while out of work and what creditors can do to collect if you have no income.

Is Bankruptcy an Option If I’m Unemployed?

Yes, you can file for bankruptcy without having a job. Unemployment does not disqualify you from filing for bankruptcy in Canada, and it doesn’t change how your bankruptcy is administered. The bankruptcy process works exactly the same whether you’re employed or not.

To file for bankruptcy in Canada, you must:

• Owe at least $1,000 in unsecured debts
• Be unable to pay your debts as they become due (be insolvent)
• Either live, own property, or do business in Canada

Your employment status does not affect your eligibility. You can qualify for bankruptcy while laid off, receiving Employment Insurance, pension income, or other government benefits.

The question is not are you eligible to file, but rather whether or not filing for bankruptcy while unemployed makes sense.

Can You Afford the Bankruptcy Payments?

When you’re unemployed or dealing with reduced income, your first priority should be covering essential living expenses like housing, food, and utilities. If you choose to file bankruptcy while unemployed, you will need to be able to make the required bankruptcy payments. The minimum cost to file bankruptcy in Canada is approximately $250 a month. The key is finding a balance between managing your basic needs and meeting your bankruptcy obligations, which your trustee can help you assess based on your specific financial circumstances.

Are You Creditor Proof?

Being unemployed may make you “creditor proof” – meaning most creditors cannot take collection action against your income. Regular creditors cannot:

• Garnish Employment Insurance benefits
• Seize pension payments
• Take money directly from government benefits

However, having no income doesn’t protect you from all collection activities. If you have tax debts, the Canada Revenue Agency can still collect tax debt directly from these income sources. Regular creditors may still be able to freeze bank accounts and seize or place liens on assets. Filing bankruptcy stops all these collection actions immediately, including CRA collections. Again, your LIT can help you review your assets and income sources to confirm if there is an immediate need to file bankruptcy.

Even if you are creditor proof, if you’re struggling with the stress of constant collection calls while trying to cope with job loss, bankruptcy can provide immediate relief by legally requiring all creditors to stop contacting you. This can give you the mental space needed to focus on your job search and getting back on your feet.

What About Tax Refunds?

If you’re considering bankruptcy while unemployed, be aware that you lose your tax refund for the year of bankruptcy, and any prior years for which you have not yet received your refund.  If you are recently unemployed, you may receive a tax refund based on the taxes you paid while you were employed.  You also lose other government benefits such as the Canada Carbon Rebate.

Since tax refunds can provide helpful emergency funds when you’re out of work, you may want to file your taxes and receive your refund before filing for bankruptcy. Your trustee can help you time your bankruptcy filing to best manage your tax refunds and other financial resources.

Do I Need to Have Income to File for Bankruptcy?

No, you don’t need to have employment income to file for bankruptcy. However, you do need to be able to make the required bankruptcy payments. When calculating the cost of your bankruptcy, your trustee considers all sources of income, including:

• Employment Insurance benefits
• Pension payments
• Income from other family members
• Support payments
• Part-time or temporary work income

Your required bankruptcy payments are calculated based on your total household income and the government’s surplus income limits. This means your bankruptcy payments consider all income coming into your household, not just your personal income. For example, if you’re unemployed but your spouse works full-time, their income will be included in calculating your required payments. The same applies if you live with a common-law partner or have adult children living at home who contribute to household expenses.

To illustrate: if you’re unemployed and receiving $2,000 monthly in Employment Insurance benefits, but your spouse earns $4,000 per month, your trustee will consider the total household income of $6,000 when determining your bankruptcy payments. This could affect whether you have surplus income and how long your bankruptcy lasts:

• First bankruptcy with no surplus income: 9 months
• First bankruptcy with surplus income: 21 months
• Second bankruptcy with no surplus income: 24 months
• Second bankruptcy with surplus income: 36 months

What Happens If I Get a New Job During Bankruptcy?

Finding employment during your bankruptcy will affect your required payments and possibly the length of your bankruptcy. During any bankruptcy, you must report your total household income to your trustee every month. Your trustee uses these monthly income reports to calculate if you have surplus income. If your new job increases your income above the surplus income limit, you will:

• Will need to make higher monthly payments
• Have your bankruptcy extended (from 9 to 21 months for a first bankruptcy)

This is why many trustees recommend waiting to file bankruptcy until you’ve returned to work if possible. When employed, you can:

• Better predict your income and required payments
• Plan for the length of your bankruptcy
• Avoid unexpected payment increases
• Make more informed decisions about alternatives.

Steps to Take Before Filing for Bankruptcy

Before filing bankruptcy while unemployed, take these important steps:

Assess Your Financial Situation

When considering bankruptcy, begin with a review of your debt and assets and determine if you may be creditor proof. Understand which assets are protected under bankruptcy law. Avoid cashing out RRSPs to pay off debts, as most RRSPs are legally protected in bankruptcy proceedings and don’t need to be surrendered to creditors. Making hasty decisions about liquidating protected assets could leave you in a worse financial position, so it’s essential to fully understand your rights and protections before taking any action.

Seek Professional Advice

When making decisions about bankruptcy, it is essential to consult with a Licensed Insolvency Trustee (LIT) to properly evaluate all your financial options. LITs are federally licensed and regulated by the government and can provide a comprehensive assessment of your unique financial situation, helping you understand the full range of debt relief solutions available to you.

Explore Alternatives

A Licensed Insolvency Trustee can help you explore several alternatives to bankruptcy, each designed to address different financial situations:

• Consumer proposals allow you to make fixed monthly payments that fit your budget, offering a structured way to resolve your debts while potentially reducing the total amount you owe and protecting your assets. If you expect to return to work resulting in surplus income, it may be better to wait and file a consumer proposal once your income stabilizes.
• Debt consolidation loans, if you qualify, can help simplify your finances by combining multiple debts into a single loan, often with a lower interest rate and more manageable payment schedule.
• Debt management plans through credit counselling provide a way to work with your creditors to potentially reduce interest rates and create a structured repayment plan, all while receiving financial education and support. However, credit counselling has no legal authority to stop collection actions and cannot settle your debt for less than the amount owing.

Benefits and Risks of Filing After Job Loss

Filing bankruptcy while unemployed provides immediate protection from creditors and can relieve significant stress. However, consider these factors:

Benefits:

• Immediate stop to collections calls
• Eliminates high interest debt payments
• Allows you to focus on job search without creditor pressure

Risks:

• Inability to afford minimum bankruptcy payments
• Uncertainty about future income and potential surplus income
• Loss of tax refund for the year you file and tax refunds during your bankruptcy
• Possible extension of bankruptcy if you find work

Your Licensed Insolvency Trustee will help you determine the best timing for filing bankruptcy based on your specific situation – whether that’s while you’re unemployed or after you return to work. Contact Hoyes Michalos for a free consultation to understand all your debt relief options, whether you’re currently employed or not.

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1. Why Surplus Income Is an Important Part Of Your Debt Recovery
2. How Much Debt Does it Take to File Bankruptcy in Canada?
3. Can a Medical Doctor in Canada File for Bankruptcy and Still Practice Medicine?
4. Avoid The Surplus Income Penalty With A Consumer Proposal
5. What Happens to My Wages When I File for Bankruptcy?