One of the processes of settling or coming out of debt situations in Canada is declaring bankruptcy. Filing bankruptcy involves a legal process in which an individual or entity who is unable to pay outstanding debts to creditors, seeks relief from the debt, subject to some conditions.
As part of debt settlement procedures in Canada, a debtor can file for bankruptcy after going through a debt assessment session with a debt counselling agent/agency. The debt counsellor will explain all the relief options, including bankruptcy. If the debtor, after understanding the available alternatives, decides to go ahead with bankruptcy, then the process of filing bankruptcy will commence.
In Canada, bankruptcy is regulated by the Bankruptcy and Insolvency Act (BIA) and must be filed through a licensed insolvency trustee. When you file bankruptcy, the trustee assumes the role of your administrator in terms of your properties and assets, by selling them and subsequently use the funds generated to pay off your creditors.
Who Can File for Bankruptcy in Canada?
Bankruptcy procedure has nothing to do with being a citizen or not. To be eligible to file bankruptcy in Canada, you must
- Have lived or done business in Canada, at least within the last year.
- Owe at least $1000 in debt.
- Owe in debt more than the value of your assets.
- Have been unable to pay your debts as they are due to be paid.
Types of Bankruptcy
In Canada, there are two significant types of bankruptcy – personal bankruptcy and business bankruptcy (small business and corporate).
This is the most common type of bankruptcy in Canada. Your trustee will review your financial information to help you make informed decisions in your debt solutions.
Small Business Bankruptcy is sometimes treated as personal bankruptcy, especially if your business is a sole proprietorship or a partnership, and the business is not incorporated. Legally in this type of business, the assets and debts of the business are not separate from the owner’s assets.
Corporate bankruptcy involves when a business is incorporated, and as a result, the business becomes a legal entity. All assets and liabilities of the business are separate from that of the business owner when filing bankruptcy.
Debts Covered By Bankruptcy Discharge
- Credit card debt
- Payday loans
- Tax debt to Canada revenue agency (CRA).
- Unsecured lines of credit
- Finance company loans
- Certain student loans (of over seven years)
- Unpaid bills
- Loans from individuals.
How Bankruptcy Works In Canada
Filing bankruptcy in Canada involves the following procedures and steps.
Consultation with a Licensed Professional Trustee
Sequel to your decision to file bankruptcy after considering all other debt solution options, you are to work with a bankruptcy trustee in fulfilling your bankruptcy processes. A licensed trustee will review your financial and debt situation and equally assess your income and expenditures.
Complete Your Documentations
Following this, your trustee will request for the required information to file your bankruptcy. This can include information on your assets, creditors, income, and others. With the information gathered, you will have to fill and complete all the necessary paperwork and forms prepared by your trustee, such as the bankruptcy application form. Besides, your trustee will draft other statutory documents that are to be submitted to the government. These include:
- The Assessment Certificate Form – This document ascertains your consultation with a licensed trustee, and that the option of bankruptcy which you have chosen is well understood.
- The Monthly Income and Expenses Statement (Form 65) – This document indicates your financial status information and your monthly budget.
- The Statement of Affairs (Form 79) – This document lists your personal information, assets, debts, income, and expenses.
- The Assignment for the General Benefit of Creditors (Form 21) – This document assigns all your eligible assets to your creditors. It officially begins your bankruptcy.
Document Filing and Notification of Creditors
After completing the required forms, your trustee will file your bankruptcy documents electronically with the office of the superintendent of bankruptcy. Furthermore, a file number is issued by the court, and your bankruptcy status will be transmitted to your creditors, either through the mail, email, or fax.
Perform Bankruptcy Duties
The bankruptcy process also requires you to complete certain duties before your bankruptcy discharge. These include:
- Making monthly payments to the trustee to cover the cost of your bankruptcy.
- Disclose all assets in your possession and deliver the same to your trustee.
- Surrender your credit cards to the trustee for cancellation.
- Attend two compulsory credit counselling sessions.
- Provide the trustee with the necessary information to file your tax returns.
- Report your monthly income and expenses to the trustee.
Receive Your Bankruptcy Discharge
At the completion of your bankruptcy process, you are eligible to receive a bankruptcy discharge. With this, your debts are officially eliminated, and you can begin the process of rebuilding your credit, as well as your finances.
Impacts of Bankruptcy
The impacts of bankruptcy are both positive and negative. You must speak to a Licensed Insolvency Trustee/bankruptcy trustee to weigh your bankruptcy options and alternatives. In reality, the moment you receive your bankruptcy discharge from the bankruptcy court, your creditors will cease from calling or collecting any debt from you.
Some of the effects of bankruptcy are:
- Opportunity for a fresh financial start.
- Elimination of certain unsecured debts.
- Bankruptcy stops wage garnishment order.
- Bankruptcy does not take away all your assets, as you can start a new life with the remaining assets and live a debt-free life.
- Opportunity to learn about money and financial planning.
- Bankruptcy costs money, like payment of administrative charges.
- Bankruptcy lowers your credit rating, and it will be on your credit report for up to 6 or 14 years for the first-time or second-time bankrupt, respectively.
- With bankruptcy, you will lose any non-exempt assets, like a tax refund.
There are alternatives to bankruptcy in solving your debt issues, speak with your debt counsellor to know your options. However, if you conclude that filing bankruptcy might be the correct solution, you need to talk to a licensed insolvency trustee on how to go about the process and the cost.