Bankruptcy is the process by which an honest debtor surrenders a portion of their assets in exchange for the elimination of their debt. It is a chance at a fresh financial start.
Filing for bankruptcy in Canada is a legal process. Bankruptcy laws have been established by the Office of the Superintendent of Bankruptcy (OSB) and are enforced through the Bankruptcy and Insolvency Act (BIA). While many of the laws apply across Canada, some bankruptcy regulations are dictated by provincial law. Some important information you should know from the BIA includes:
1. Who Can File for Bankruptcy?
The BIA states that in order to file for bankruptcy, you must work with a licensed Trustee-in-Bankruptcy who will facilitate the filing on your behalf.
2. How Much Does Bankruptcy Cost?
The OSB regulates the fees trustees can charge for their services in a bankruptcy filing. Costs to file include the trustee’s fees, administrative fees and court costs. Depending on what you own and what you earn, your bankruptcy may end up costing you more in the form of asset liquidation and monthly payments to the bankruptcy estate. A trustee can determine definitively how much your bankruptcy will cost.
3. Assignment (or Surrender) of Assets
Canada bankruptcy laws require that the filer’s assets be surrendered to the bankruptcy estate for liquidation and distribution to the creditors. However, provincial law maintains exemption allowances for a variety of asset classes, which lets bankruptcy filers keep much, but not necessarily all, of what they own. These allowances vary a great deal across provinces.
4. The Stay of Proceedings
A bankruptcy filing provides legal protection from your creditors. Once you have filed, the court issues a “Stay of Proceedings” which prohibits your creditors from contacting you.
Am I Eligible for Bankruptcy?
If you have more than $1,000 in debt and are insolvent, you are eligible for bankruptcy in Canada. Insolvent means you can no longer pay your monthly bills on time, either through your current income or through the sale of personal assets.
For example: If you owe $50,000 in debt, have $50,000 or more in liquid investments, and own a vacation home you would not be considered insolvent. You would be able to liquidate those assets and repay your creditors.
Which Debts are Included in a Bankruptcy Filing?
Not all debts are included in a bankruptcy filing but you will be relieved of most of your unsecured debt, including any CRA (Canada Revenue Agency) debt. Secured debt, such as a home or car loan, will not be excused in a bankruptcy filing. In addition, alimony and child support payments, any court imposed fines, debt payments due to fraudulent activity, or student loans less than 7 years old remain your responsibility.
What are the First Steps?
If bankruptcy is the best solution to your debt problems you will need to meet with a licensed trustee in your area who will assess your personal financial condition. The trustee will determine what your options are and review them with you. If bankruptcy is right for you, the trustee will explain how much it will cost and what your responsibilities will be during the bankruptcy.
When you begin the filing process, the first step is to prepare what’s called the “Statement of Affairs”. Simply put, it’s a written documentation of what you own, what you owe, what you make, and what you spend. Formally, it’s an inventory of your assets, liabilities, income, and expenditures.
What Are Your Responsibilities During Bankruptcy?
While in bankruptcy, you will need to meet certain obligations in order to be eligible for discharge.
1. Surrender of Assets:
As part of the bankruptcy process you will need to surrender certain assets to the trustee for liquidation. The proceeds will be distributed to your creditors to partially repay the debts you owe. No one loses everything they own in a bankruptcy filing. Bankruptcy laws have exemption allowances, established by each respective province, for certain personal assets. If your assets are worth more than the allowable value, they may need to be liquidated and you will have to contribute the proceeds from the sale of those non-exempt assets into the bankruptcy estate for payment to your creditors.
2. Provide Proof of Income:
Each month throughout the duration of your bankruptcy, you will need to supply proof of your income and expenses. This bankruptcy paperwork will help the Office of the Superintendent of Bankruptcy determine your family’s financial situation and whether or not you have surplus income.
Bankruptcy laws have established an acceptable monthly income threshold based on your family size and where you live. If your income exceeds that threshold, you are determined to have what’s known as surplus income. A portion of your surplus income needs to be paid to the bankruptcy estate each month for distribution to your creditors.
You must keep your trustee advised of any changes in your status – a move, a promotion, a raise, and so forth. You will be responsible for supplying the trustee any information requested.
3. Attend Two Credit Counselling Sessions
Required credit counseling began in Canada for bankruptcy filers in 1992. You will attend the first session within sixty days of your filing and the second session after 200 days in bankruptcy. Your bankruptcy trustee will arrange for the sessions.
Here is what you can expect:
Session 1: Consumer and Credit Education
This session is strictly educational. You will learn money management techniques and review different spending and shopping habits. You will learn how to get credit and use it appropriately. You’ll also learn to recognize the warning signs of getting into financial trouble again. It’s hard for some people who go through bankruptcy to imagine going through it again but you’d be surprised at the number of Canadians with multiple bankruptcies.
Session 2: Identification of Road Blocks to Solvency and Rehabilitation
This session is a little more personal but can be the most helpful. This time around you’ll look at what caused you to file for bankruptcy in the first place. In addition, your counselor may explore secondary causes that may have helped derail your finances like relationship problems or illness. Your counselor will build on the skills you learned in Session 1 and help you develop the personal skills needed to remain solvent.
Once you have completed your obligations to the satisfaction of your trustee, he or she will petition the court for a discharge from bankruptcy.
First time filers with no surplus income are discharged in as little as 9 months. Those with surplus income will remain in bankruptcy for up to 21 months. Repeat filers with surplus income stay in bankruptcy for 3 years.
Once you have been discharged from bankruptcy, you will have a clean financial slate and can begin the process of rebuilding your credit using the skills you’ve learned during your counseling sessions.