What is bankruptcy in Canada and is it right for me?

So what is bankruptcy? Bankruptcy is a legal process that wipes out some of your debt. The legal system might assign you a new plan with different terms to pay off your remaining debt. After you file, the courts might seize and sell off some of your assets to cover the debts you owe.

How does bankruptcy work?

According to the Office of the Superintendent of Bankruptcy Canada (OSBC), if you are considering bankruptcy, you should meet with a Licensed Insolvency Trustee (LIT). LITs are located in all provinces and territories and can evaluate your financial situation and discuss options with you. LITs are the only professionals authorized to administer bankruptcies and your first meeting with one is usually free.

Insolvency vs bankruptcy guide

Who can file for bankruptcy?

To be “insolvent”, you’ll need to:

• Owe at least $1,000.
• Be unable to meet your debts as they are due to be paid.

What’s covered by bankruptcy?

• Unsecured debts. Most unsecured debts including credit card debt, personal loans, unpaid income taxes and overdrafts.

What is not covered by bankruptcy?

• Any secured debt. Bankruptcy typically only applies to unsecured debt, so any secured loans, car loans, mortgages or secured credit cards you have may not be included. For these debts, lenders or creditors may choose to seize and sell the collateral securing these debts to satisfy any balance – any shortcomings will be dealt with in the bankruptcy.
• Student loans. Student loans of less than seven years after you stopped going to school are not discharged in bankruptcy.
• Priority debts. Child support, alimony and other priority debts are not discharged in bankruptcy, as well as any debts arising from fraud.

Types of bankruptcy

You’ve probably heard of Chapter 7 and Chapter 13 bankruptcies. These are terms applicable to US rules and do not apply in Canada. That said, there are some basic similarities with the rules in Canada. According to the website Bankruptcy Canada, a Chapter 7 is the US solution to personal debt problems most similar to a Canadian bankruptcy. A Chapter 13 is the US solution to personal debt problems most similar to a Canadian consumer proposal.

• Consumer proposal

  According to the OSBC, if you are an individual and your total debts do not exceed $250,000 (not including your mortgage), a consumer proposal might be the right choice for you. Think of a consumer proposal as an agreement with your creditors on how exactly you will pay them back. It is also administered by a Licensed Insolvency Trustee and generally involves paying back all the debt over time at a reduced rate. According to bankruptcy specialists MNP Ltd., a consumer proposal is less severe. A consumer proposal requires regular fixed payments, whereas monthly payments with a bankruptcy may vary depending on your income.

Loans after a consumer proposal

• Personal bankruptcy

  A bankruptcy relieves you of your debt. The LIT takes over your assets and monitors your progress in your bankruptcy duties. The MNP website lists these duties as attending crediting counselling sessions and filing monthly reports on your income and expenses. You are typically discharged from your debt in 9 or 21 months.

When is bankruptcy right for me?

Bankruptcy is a last resort and comes with serious consequences. While it gives you a fresh start, you could lose some or all of your personal assets. And it hurts your credit. According to the website bankruptcy-canada.ca, a first bankruptcy can stay on your credit report for six years from the date of your discharge. A second one can stay on for 14 years.

According to Hoyes Michalos, a Canadian company specializing in debt relief, filing for bankruptcy can prevent creditors from contacting you to collect debt or from taking legal action against you. It also halts most wage garnishments – i.e. when the courts award creditors a portion of your wages. It also provides a clear target date for being discharged from bankruptcy and starting to rebuild your credit report.

How does bankruptcy affect my credit?

The OSBC website states that a person who declares bankruptcy is assigned the lowest possible credit score. That said, the information in your credit report that affects your credit score is usually removed after a certain period of time. The amount of time depends on what’s in the report and where in Canada you live. Generally, it is removed after 6 or 7 years for a first filing and after 14 years for subsequent bankruptcies.

Getting credit after you are discharged from bankruptcy will depend on whether you can convince lenders you can repay debt.

How to get your credit score right now

Bankruptcy alternatives in Canada

Settle or negotiate with your creditors

You might be able to reach out to your creditors yourself, explain the situation and negotiate a modified repayment plan. If successful, it’ll likely affect your credit less than bankruptcy and will allow you to keep your assets. You can also enter a consumer proposal to formalize this process. For more information, read our consumer proposal guide here.

Get help from a credit counselling agency

These nonprofit agencies can help you go over your finances and figure out your best path out of debt.

Sell your assets

Got a luxury car? An expensive home? Selling your valuables to pay off debts might help you avoid filing for bankruptcy – and avoid losing even more of your possessions.

Ask family and friends for help

If you haven’t already, reach out to your friends and family for help. You don’t necessarily have to rely on the generosity of a few people; you can start a crowdfunding campaign to raise small donations from a large group. Or, if you’re uncomfortable taking a gift, you can refinance your debt with a loan from a friend or family member.

Consolidate your debts

You might be able to get a handle on your repayments by taking out a debt consolidation loan with more manageable rates and terms.

Compare your debt relief options

• Debt Consolidation Loans
• Build your credit

Sort by:

Name	Product	Interest Rate	Max. Loan Amount	Loan Term	Fees	Min. Credit Score	Link
Loans Canada Debt Consolidation Loan		Secured from 2.00%, Unsecured from 8.00% to 46.96%	$50,000	3-60 months	No application or origination fees	300	Go to site More Info	Compare	loading Fetching your data...
Fairstone Debt Consolidation Loan		19.99% - 39.99%. Varies by loan type and province	$35,000	6 months - 10 years	None	560	Go to site More Info	Consolidate your debt up to $20,000 for an unsecured loan and $35,000 for a secured loan.	Compare	loading Fetching your data...
LoanConnect Personal Loan		Secured from 1.90%, Unsecured from 10.00%-46.96%	$50,000	3-60 months	No application or origination fees	300	Go to site More Info	LoanConnect is an online broker that matches borrowers to lenders offering loans in amounts from $500 to $50,000. Get approved for multiple loan offers from different lenders in as little as 60 seconds with any credit score.	Compare	loading Fetching your data...
Mogo Personal Loan		9.90% - 47.42%	$35,000	9 months - 5 years	NSF fee - $20 - $50	540	Go to site More Info	Mogo offers loans up to $35,000 on flexible terms.	Compare	loading Fetching your data...

loading

Compare up to 4 providers

Clear selection

Compare

Sort by:

Name	Product	Interest Rate	Max. Loan Amount	Loan Term	Fees	Min. Credit Score	Link
Refresh Financial Credit Builder Loan		19.99%	$25,000	3-5 years	No administration or origination fees.	300	Go to site More Info	No funds are provided by Refresh upfront. Instead, funds are placed into a secured account to be accessed later. Your payments are reported to the credit bureaus, potentially impacting your credit score.	Compare	loading Fetching your data...

loading

Compare up to 4 providers

Clear selection

Compare

Bottom line

Bankruptcy can be an efficient way to eliminate debt, but it can also seriously damage your credit rating. You should explore all options available before you make a financial decision of this magnitude.

Frequently asked questions

• How does bankruptcy affect my spouse in Canada?

  No. Your debts are your own. If you have joint debt, the creditor could pursue your spouse for his or her portion of the debt. But only assets you own are included in your bankruptcy.

• Will I lose my salary if I declare bankruptcy?

  No, your wages are not affected. However, depending on how much money you earn, you might have to pay a certain percentage of your earnings to your creditors.

• Can my student loans be wiped clean?

  Yes, but there’s a big caveat here – this only applies if you haven’t attended school within the past seven years.

• Can I keep my car if I file for bankruptcy?

  It depends. There are some assets you are allowed to keep if you file. Each province has different exemption limits and vehicles worth up to a certain amount may qualify. It also depends on whether you have a car loan and are able to make those payments.