What Happens When You File Bankruptcy in Canada?

Bankruptcy is a formal legal process that allows certain borrowers to be released from most of their debts in exchange for giving up their assets.

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Even though you might associate the word bankruptcy with financial failure — and it does have serious consequences — it's actually a legal tool that can provide much-needed relief for those who find themselves in overwhelming debt.

How to file for bankruptcy

To declare bankruptcy, you must:

You will then work with a Licensed Insolvency Trustee (LIT) to file the necessary paperwork with the Office of the Superintendent of Bankruptcy (OSB).

Once you're formally declared bankrupt, your debt payments and any wage garnishments will stop; your assets will be seized and sold to repay your creditors; you may need to attend financial counselling; you may need to make "surplus income" payments to your creditors.

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How bankruptcy works

A bankruptcy must be administered by a Trustee, who makes sure that both the debtor and creditors follow the laws set out by the Bankruptcy and Insolvency Act of Canada (BIA).

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You must surrender any non-exempt assets (most personal belongings are excluded — see “Assets debtors may get to keep” below), which are converted into cash and put into a trust. Then, it’s the Trustee’s job to distribute the money to creditors.

You may be required to make specified monthly payments during the term of bankruptcy. These may include the base cost of the bankruptcy set by the provincial government (usually a minimum of $1,800 total, or $200/month over nine months), plus any surplus payments required if your income is above the provincial minimum allowable threshold.

All bankruptcy cases are required to:

When are you discharged from bankruptcy?

A discharge is the end goal of bankruptcy. It means you are no longer required to pay the disclosed debts, and your creditors can no longer attempt to collect.

Most people are automatically discharged from a first bankruptcy (and their unsecured debts) in nine months. If, however, your surplus income is high, it can extend to 21 months. For a second bankruptcy, it can take 24-36 months, depending on surplus income.

You will not receive an automatic discharge if you fail to complete the obligations of your bankruptcy. Your discharge can also be challenged by creditors if they think you are guilty of misconduct under the BIA, or if the proposed payment arrangement doesn’t satisfy them and they think they can get more money in court.

You also will need to go to court to get discharged if this is your third bankruptcy.

What you can keep and what you must pay

You won’t necessarily lose everything because of bankruptcy. Likewise, there are some kinds of debt that bankruptcy can't relieve.

Assets debtors may get to keep:

Debts creditors must continue to pay

Consequences of bankruptcy

While bankruptcy does offer a fresh start financially after discharge, there are several long-term consequences of filing.

During bankruptcy, you won't be able to borrow more than $1,000 without notifying creditors that you’re currently bankrupt. If you don’t, you could face fines or jail time.

After discharge, a bankruptcy filing remains on your credit report for six or seven years, depending on the credit bureau. This will have a negative impact on your credit score.

It will be tough to get approved for any form of credit, especially immediately after bankruptcy, when your credit score may be in the lowest possible range. But it’s not impossible.

For example, you might get approved for a secured credit card, which requires a cash deposit that becomes your credit limit. If you pay it off regularly and on time, it can help rebuild your credit score.

Alternatives to bankruptcy

Instead of bankruptcy, there are several ways to get out from under overwhelming debt that has fewer long-term consequences:

Consumer proposal

A consumer proposal is a lower cumulative monthly payment on a fixed schedule that never goes up and covers all your debts. It’s negotiated with the help of a licensed insolvency trustee, allows you to keep your assets, and your creditors stop calling.

Debt consolidation loan

A debt consolidation loan, provided by a bank, private lender or credit union, covers all your debt for one monthly payment at a potentially lower interest rate for secured loans. These loans require a high credit score, collateral and can have high interest if unsecured.

Debt management program

Consolidates all your credit card, unsecured loan and line of credit payments into one monthly bill paid to a credit counselling organization that distributes the money to your creditors. Your creditors have to agree to enter the program. If they do, they usually offer low or zero interest to a non-profit credit counsellor and regular interest to a for-profit credit counsellor. Fees through non-profit agencies are lower and spread out, whereas they are higher and upfront via for-profit counsellors.

Orderly Payment of Debts (OPD)

If you live in Alberta or Nova Scotia, you can get this service where you pay back the full amount of your unsecured debts, usually over three years, at a rate of five per cent interest. Your creditors must agree to the program and can’t take your assets. The courts must approve the arrangement.