In Canada, bankruptcy can be declared by filing a formal application with a Licensed Insolvency Trustee (LIT), who will assess your financial situation and assist with the legal process. The LIT will guide you through the necessary paperwork, including a Statement of Affairs, and submit the bankruptcy to the federal government for approval.
Despite the stigma, bankruptcy can provide the fresh start that you and your family need. Most unsecured debt can be forgiven, whether it be personal loans, credit cards, overdue bills, or otherwise, and you'll be free to start over.
Before you make this decision, take the time to educate yourself about the bankruptcy process, personal requirements, and the long-term effects.
Key Takeaways
- Declaring bankruptcy involves meeting with a Licensed Insolvency Trustee, undergoing a debt assessment, having discussions with your creditors, and several other steps.
- Declaring bankruptcy means giving up your assets in exchange for debt relief.
- Bankruptcy will stay on your credit report for at least 6 years.
- You may be able to keep your home if you file for bankruptcy, but it isn't guaranteed.
What is bankruptcy in Canada?
Simply put, bankruptcy means that you can't meet your financial obligations. When someone declares bankruptcy, they're essentially declaring insolvency, which means they owe more than they're worth.
The federal government defines bankruptcy in Canada as a legal process that discharges you from the majority of your debts.
This happens more often than you may think. In fact, in 2023 alone there were 128,043 insolvencies filed in Canada.
How do you declare bankruptcy in Canada?
1. Undergo a debt assessment
A credit counselling agency or LIT (Licensed Insolvency Trustee) can conduct a debt assessment and recommend next steps.
In a debt assessment, a credit counselor evaluates your debt, provides guidance and advice, and suggests the most appropriate solution for your situation. This may involve filing for bankruptcy or exploring other options entirely.
There are plenty of places in Canada where you can get a debt assessment for free. Some credit counselling agencies even offer an online debt assessment quiz to help you decide whether or not you need and/ or are ready for a professional debt relief solution.
2. Gather and sign paperwork
You'll want to be as prepared as possible when meeting with an LIT, so finding and putting together a folder of paperwork is necessary.
This table shows examples of the documents you should gather for your LIT to review:
| What you'll need | Examples |
|---|---|
| Proof of what you own | * Investments * Real estate * Vehicles * Furniture * Household goods |
| Proof of what you owe | * Credit card statements * Loan information |
| Personal information | * Birth certificate * Drivers license * SIN * Proof of employment * Separation agreements |
| Tax returns | * At least 2 years worth of tax returns and transcripts |
| Income documentation | * Bank statements * Proof of government assistance payments * 6 months of pay stubs (minimum) |
| Insurance documents | * Life insurance statements * Home insurance policy |
3. Meet with your LIT
Once you've found a LIT to advise you, they'll need your assistance filling in the various forms, disclosures, requests, etc.
For example, two documents you'll need when filing for bankruptcy in Canada are the Assignment and Statement of Affairs. The Assignment is where you declare that your trustee is now in charge of your property and assets, and the Statement of Affairs is an actual list of your assets, income, expenses, etc.
The LIT will file this legal paperwork on your behalf.
4. Meet with your creditors
If a creditor requires it, a meeting between you, them, and your trustee is held to discuss details about your assets and liabilities.
Your trustee will draw up a report regarding your assets and liabilities to be presented at the meeting. After considering this information, the creditors will vote on whether your current trustee should be officially appointed or if you should use someone of their choosing.
This step isn't always necessary – it usually only takes place if you have significant tax debt.
5. Fulfill your responsibilities
After your trustee submits the necessary forms, you'll be required to file monthly reports and make payments, including surplus income payments or administrative fees.
You may be required to regularly meet with your LIT as a form of financial counselling. They'll help you develop better financial habits and create a budget.
You may also need to meet with the Official Receiver for an examination. If so, you'll be asked questions about the nature of your debts and other details of your bankruptcy claim.
6. Receive the Certificate of Discharge
The Certificate of Discharge is an official document provided to you by your trustee that announces your release from all debt repayment obligations.
The LIT you've worked with must confirm that you've taken all the necessary steps, completed any requested counselling, and finished any surplus payments.
There are a few types of discharges you can be granted:
| Type of discharge | Description |
|---|---|
| Absolute discharge | Declares that you've been released from having to repay certain debts – although there may be exceptions. |
| Conditional discharge | Requires that you fulfill specific conditions before obtaining an absolute discharge. This might mean you have to make payments over a period of time, or there could be other details for you to take care of. |
| Suspended discharge | Similar to an absolute discharge except it's post-dated, so the official discharge will happen sometime in the future. |
| Refused discharge | The court might issue this refusal if you've continued to live beyond your means or have otherwise shown that you haven't "rehabilitated." For instance, if you continued to apply for and use credit during your bankruptcy, the court might deem this irresponsible behaviour. |
What happens if you declare bankruptcy?
By declaring bankruptcy, you give up your assets in exchange for relief from your unsecured debts. A Licensed Insolvency Trustee, or LIT, sells your assets and uses that money to pay off your creditors.
Some assets are exempt from bankruptcy. Each province and territory has specific regulations regarding these exemptions.
Once you've filed for bankruptcy, creditors can’t contact you. Any associated wage garnishment and lawsuits from creditors will be discontinued.
However, some debts cannot be eliminated with bankruptcy, including these:
- Student loans (fewer than 7 years)
- Spousal support
- Child support
- Court fines
How long does bankruptcy stay on your credit report in Canada?
In most areas of Canada, bankruptcy claims stay on a person's credit report for 6 years but can be as long as 7 years.
| 6 years | 7 years |
|---|---|
| Alberta | New Brunswick |
| British Columbia | Newfoundland and Labrador |
| Manitoba | Ontario |
| Northwest Territories | Prince Edward Island |
| Nova Scotia | Quebec |
| Nunavut | |
| Saskatchewan | |
| Yukon |
However, if you declare bankruptcy more than once, it will show up on your credit report for double this length of time – 14 years.
Approximately 10% of all bankruptcy filings in Canada represent those who've had to file multiple times.
How much does it cost to file for bankruptcy in Canada?
There's no upfront cost for filing bankruptcy. The associated costs are different for everyone.
The costs associated with filing for bankruptcy include:
- Base contribution: This covers things like government fees, mailing costs, your trustee's time, etc.
- Surplus income costs: You're allowed to make a certain amount of money to maintain your standard, but every dollar you make above this threshold requires a payment of 50% of the surplus amount.
- Lost assets: This isn't an out-of-pocket expense, but you'll need to sell or relinquish most of your assets during the bankruptcy process.
Can you keep your house after bankruptcy in Canada?
You may be able to keep your home after declaring bankruptcy, but it's not a certainty. It depends on how much equity you have in your home.
If you only have a small amount of equity built up and your debts far outweigh it, you may be able to keep your house. You'll have to pay your LIT the amount of equity you have, minus any provincial exemptions – but you can keep your home.
If you've already paid back a large portion of your mortgage and have therefore built up significant equity, bankruptcy is likely not the right choice for you. A consumer proposal or even a HELOC may be a better option.
$75 GeniusCash + Unlimited transactions for $0 + Ding-free non-affiliated ATM usage.
$25 GeniusCash + $50 bonus for funding a new account, and $0 commissions on stocks & ETFs
$12 GeniusCash + Access trusted news coverage 24/7 + Digital and home subscription options.
$25 GeniusCash + Delicious meal choices with fresh ingredients + Front-door delivery.FAQ
What is bankruptcy?
Put very simply, bankruptcy is a legal process that allows you to be released from most of your debt. You work with a Licensed Insolvency Trustee to reassign your assets and clear your debts and give yourself a fresh start.
What happens if I declare bankruptcy?
Declaring bankruptcy means working with a Licensed Insolvency Trustee to surrender your assets, discharge your debts, and prevent creditors from contacting you. Afterward, your credit will be affected and your bankruptcy will go on public record.
Do I need a bankruptcy attorney?
No, an attorney isn't specifically necessary, but you'll likely need the assistance of a Licensed Insolvency Trustee (LIT). These are federally regulated professionals who work with and provide valuable assistance for individuals and businesses dealing with significant debt.
Is filing for bankruptcy in Canada common?
Unfortunately, yes, it's quite common – a total of 128,043 insolvency claims were filed in 2023 in Canada. It's getting worse, too. Stats Canada says that insolvencies were up by 13.9% in October 2024 vs. October 2023.
How long after bankruptcy can I get a mortgage in Canada?
The earliest a bank will consider your mortgage application after bankruptcy is 18 months, sometimes 2 years. It can still be difficult, but talking to an LIT before approaching a lender or mortgage broker can help prepare you.
How many times can you declare bankruptcy in Canada?
There's no limit regarding how many times you can file for bankruptcy, but the process gets more complicated with each subsequent filing. It can take up to 36 months for discharge after a second bankruptcy, longer for subsequent bankruptcies.
Does bankruptcy affect my spouse?
If your debts are in your name and completely owed by you alone, declaring bankruptcy won't directly affect your spouse. If you have jointly-owned debts, your spouse will be pursued by creditors even if you declare bankruptcy.
Does bankruptcy clear student loans in Canada?
Declaring bankruptcy can clear student loans, but only if you file seven years or more after finishing school. Otherwise, the federal government's Repayment Assistance Plan can help you to pay back your student loan expenses.
Leave a comment
Comments