Common Questions about Personal Bankruptcy

Filing for bankruptcy is a legal process that provides debt relief for people who cannot pay their debts. When you file, most of your unsecured debts are eliminated, collection actions must stop, and wage garnishments end immediately. You’ll work with a Licensed Insolvency Trustee who manages the process and your creditors.

A Licensed Insolvency Trustee (LIT) is a federally regulated professional authorized to administer bankruptcies and consumer proposals in Canada. LITs are the only professionals legally allowed to file these documents. They assess your financial situation, explain your options, and handle all aspects of your bankruptcy or consumer proposal.

To qualify for bankruptcy in Canada, you must:

• Be insolvent (unable to pay debts as they come due)
• Owe at least $1,000
• Be a resident of Canada
• Not be currently bankrupt

There’s no minimum or maximum income requirement, but your income affects your monthly payments.

The main alternatives to bankruptcy include:

• Consumer proposals: A legal agreement to repay a portion of your debt
• Debt consolidation: Combining multiple debts into a single loan
• Credit counselling: Working with a credit counsellor to create a debt management plan
• Debt settlement: Negotiating directly with creditors
• Orderly Payment of Debts (OPD): Available in some provinces to pay debts in full with no interest

A consumer proposal allows you to keep your assets while offering to pay creditors a percentage of what you owe over up to 5 years. Bankruptcy requires surrendering certain assets and typically lasts 9-21 months. Proposals are an R7 on you credit report while bankruptcy appears as an R9. Proposals are removed from your credit report the earlier of six years from filing or three years from completion, while bankruptcy affects your credit report for 6-7 years after discharge. Proposals have fixed monthly payments, while bankruptcy payments can increase with income changes.

For more, read our article consumer proposal vs bankruptcy

The base cost of bankruptcy in Canada is $2,250, typically paid as $250/month for 9 months. However, your total cost depends on:

• Your income (surplus income may increase payments)
• Your assets (you may need to pay to keep certain assets)
• Whether it’s your first bankruptcy
• The length of your bankruptcy

Your LIT will provide a detailed cost breakdown before you file.

Surplus income is what you earn above the government’s monthly income threshold for your family size. In bankruptcy, you must pay 50% of your surplus income to your estate. For example, if the threshold is $2,400 and you earn $3,000, your surplus is $600, meaning you pay an additional $300 monthly on top of your base payment.

You can use our surplus income calculator to estimate your potential surplus income payments.

In bankruptcy, you may have to surrender:

• Non-exempt equity in your home
• Investments
• RRSPs contributions made in the last 12 months only
• Tax refunds for the year of bankruptcy and any prior years for which you have not received your refund
• Excess equity in a vehicle above provincial exemption limits
• Valuable collections or luxury items
• Inheritance received during bankruptcy

Provincial exemptions protect basic assets needed for living and working.

You do not lose everything when you file bankruptcy in Canada. There are certain assets that are exempt from seizure by the trustee. In Ontario, provincial exemptions are high enough that most people do not lose anything unless they have high dollar value assets. Ontario exemptions from seizure include:

• all personal clothing,
• most household furnishings (up to a maximum)
• a vehicle below a certain dollar value
• tools of the trade used to earn a living or run a business (up to a maximum)
• your home if the equity is less than $10,000

You keep all RRSP, RRIF and DPSP (Deferred Profit Sharing Plan) savings except contributions made in the 12 months before your bankruptcy.

Yes, you can keep your house in bankruptcy if you:

• Continue making mortgage payments
• Have no more than $10,000 equity in most provinces
• Make arrangements with your LIT to pay for equity above exemption limits

If you have significant equity, a consumer proposal might be a better option.

Read more in this article about bankruptcy and your house.

A mortgage is a secured loan and as such is not included in a bankruptcy. If you are not behind on your payments your mortgage lender cannot cancel your mortgage or foreclose on your home just because you file bankruptcy. If you are current on your payments most mortgage holders will renew your mortgage even if you are bankrupt or in a consumer proposal.

Yes, you can usually keep your vehicle if it is worth less than your province’s exemption limit and you continue making any car loan payments. If your car has equity above the exemption limit, you can pay the excess value to keep it or file a consumer proposal.

You lose your tax refund for the year you file bankruptcy and any prior years you have not received your refund. You also lose your Canada Carbon Rebate.

No, you must surrender all credit cards when you file bankruptcy and your credit card accounts will be cancelled. During your credit counselling sessions, your LIT will provide information on how to rebuild your credit after bankruptcy including how to apply for a secured credit card.

Your wages aren’t directly seized, but:

• You must report monthly income to your LIT
• Income above government thresholds results in surplus income payments
• 50% of surplus income must be paid to your bankruptcy estate
• Existing wage garnishments stop when you file. Your employer is not  notified of your bankruptcy unless there’s a wage garnishment to stop.

Yes, any inheritance, bonus, lottery or other windfall received during bankruptcy must be reported and goes to you bankruptcy estate to be distributed to your creditors.

Bankruptcy only affects your spouse if:

• You have joint debts (they become fully responsible)
• You share assets (their portion is protected)
• Their income affects household income calculations

Your spouse’s separate debts and assets remain unaffected, and their credit rating isn’t directly impacted by your bankruptcy.

It depends on your situation. If you owe money to your bank, you must switch banks. If you don’t owe them money you can usually keep your account. Your LIT will advise if it is better for you to open a new bank account.

The length of your bankruptcy is affected by how much you make and if you have filed bankruptcy before.

First bankruptcy duration:

• 9 months (if no surplus income)
• 21 months (if you have surplus income)

Second bankruptcy:

• 24 months (if no surplus income)
• 36 months (if you have surplus income)

Extensions can occur if you don’t complete required duties.

Bankruptcy typically doesn’t impact most employment situations, and employers are not automatically notified when you file. However, certain professions, particularly in the financial sector, may require you to report your bankruptcy to professional associations or licensing bodies.

A bankruptcy discharge is the legal release from your bankruptcy debts and marks the end of your bankruptcy. Once discharged, you’re no longer legally responsible for the debts included in your bankruptcy.

If you don’t complete your bankruptcy payments you will not received your discharge. This means your debts will not be released and the bankruptcy will remain on your credit report.

Bankruptcy eliminates most unsecured debts including credit cards, lines of credit, payday loans, personal loans, utility bills, cell phone contracts, income tax debt, and old student loans. Secured debts like mortgages or car loans can be included if you surrender the asset.

Bankruptcy clears most tax debt owed to CRA including income tax, GST, and HST debts. There may be additional duties required to obtain your bankruptcy discharge including the requirement to keep all tax filings and installment payments current. Any new tax debt that occurs after filing bankruptcy is not included.

Student loans can be cleared in bankruptcy if you’ve been out of school for more than seven years. If you’ve been out of school for five to seven years, you can apply to court for hardship relief. Student loans less than five years old cannot be discharged through bankruptcy.

There is no specific amount of debt required to file bankruptcy beyond owing at least $1,000. The decision to file depends on your ability to repay the debt, your income, and your assets. Consider bankruptcy if you can’t pay your debts as they come due and other options like a consumer proposal or debt consolidation aren’t feasible.

Bankruptcy doesn’t eliminate court-ordered support payments, alimony, recent student loans, secured debts like mortgages or car loans unless you surrender the asset, fraud-related debts, court fines, and penalties. Some government overpayments and debts from luxury purchases made just before filing may also survive bankruptcy.

If a spouse, parent, friend or other family member has co-signed a loan for you, the lender will look to that person to repay the full amount of the loan even though you filed bankruptcy. This includes co-signed loans, joint credit cards, and guaranteed debts. 

Yes. Filing bankruptcy immediately stops most wage garnishments through a legal stay of proceedings. Your Licensed Insolvency Trustee will notify your employer and creditors to halt the garnishment. Only garnishments for child or spousal support continue during bankruptcy.

Collection calls must stop as soon as you file bankruptcy. The stay of proceedings prevents creditors from contacting you directly. If you receive collection calls after filing, provide the collector with your Licensed Insolvency Trustee’s contact information and file number. Your Trustee can help if collectors persist.

A first bankruptcy stays on your credit report for six years after discharge from Equifax, and seven years from TransUnion. For a second bankruptcy, the record remains for 14 years after discharge.

You can acquire property after filing bankruptcy, but any assets or windfalls received before discharge must be reported to your Trustee. After discharge, you can own property without restrictions, though rebuilding credit to qualify for a mortgage will take time. Some lenders may require a larger down payment or charge higher interest rates.

You you can apply for a credit card while bankrupt although you must disclose your bankruptcy status to any lender if you are applying for $1,000 or more. Certain secured credit cards are available to active bankrupts.

You can apply for new credit immediately after you discharge. Your trustee can advise which credit card companies will approve applications for recently discharged bankruptcies.  Major loans like mortgages typically require 2-3 years of credit rebuilding. Car loans may be available sooner but often with higher interest rates.

See our articles:
Can I get a car loan after a bankruptcy or consumer proposal?

Can I get a mortgage with bad credit?

Start rebuilding credit by getting a secured credit card, making all payments on time, keeping credit utilization low, and maintaining steady employment and housing. Apply for a small loan or line of credit after establishing positive payment history. Check your credit report regularly and ensure your bankruptcy discharge is properly recorded.

Hoyes Michalos has a free online video course on rebuilding credit.

The Office of the Superintendent of Bankruptcy (OSB) is the federal government agency that oversees the bankruptcy and insolvency system in Canada. They license and regulate Insolvency Trustees, ensure compliance with bankruptcy laws, maintain public records of bankruptcies, and investigate complaints about the bankruptcy process.

Approximately 30,000 Canadians file for bankruptcy each year. A further 110,000 file a consumer proposal as an alternative to bankruptcy.  This number fluctuates based on economic conditions.