CanLaw Guides to the Law for Laypersons.
What is bankruptcy?
Bankruptcy is a legal proceeding that is available to help a person cope with a financial crisis. You can go into bankruptcy if you owe more than $1000 and are not be able to meet your debts as they are due to be paid. One of the main purposes of bankruptcy legislation is to afford the opportunity to a person, who is hopelessly burdened with debt, to free himself of the debt and start fresh - "a new lease on life."
125,000 People Declare Bankruptcy each year. You are not alone.
What debts are not erased in a bankruptcy?
How do I go into bankruptcy?
There are two ways a person can go into bankruptcy. The first and more common way is to have the person make an assignment in bankruptcy (voluntarily go into bankruptcy). The second, and rarely used way, is for creditors to ask the Court to make an Order that a person is bankrupt. In both these cases a Trustee in Bankruptcy is required to administer the bankruptcy.
Will my creditors stop harassing me?
Yes, they will. By law, all actions against a bankrupt must cease once the documents are filed. This does not apply to secured creditors such as banks holding, for example, a lien on a car.
What does it cost?
About $2000.00 Trustee fees, filing fees and counselling fees are regulated by the government. The trustee normally is paid out of the funds arising from the liquidation of the bankrupt's assets. If the bankrupt has no assets available, then the trustee will require a retainer or require the bankrupt, over time, to pay the trustee's fees and disbursements. In the simplest cases this amounts to $1,347 plus taxes and counselling costs. Most firms have a payment plan that, ironically, allows you to pay the costs over time.
What about my wages during bankruptcy?
Earnings of a bankrupt after the start of a bankruptcy, such as wages and salaries or commissions, belong to the bankrupt person and are not interfered with by the trustee in the ordinary course of events. There are standards supplied to the trustee by the Superintendent of Bankruptcy which instructs the trustee to collect funds, for the benefit of creditors, from any earnings above what is reasonable for the number of people in the family and the bankrupt's personal situation.
Certain kinds of debt are not erased by the bankrupt's discharge. They are:
- Fines imposed by a Court;
- Money owing for things stolen;
- Things obtained by misrepresentation;
- Alimony or maintenance payments.
- Award of damages by a court for intentionally inflicting bodily harm or sexual assault.
- Student loans if bankruptcy is filed prior to or within ten years after the finish of studies.
When is my bankruptcy over?
For those people who have not been bankrupt before, an automatic discharge will take place after nine months if the creditors, Superintendent of Bankruptcy or trustee have not opposed your discharge and you have received counselling. Occasionally, creditors do object and the matter goes to mediation or is heard before a Registrar or a Judge. The discharge is usually granted where the bankrupt is only earning sufficient income to keep himself and his dependents reasonably provided for. It is the discharge of the bankrupt, with minor exceptions, that cancels the bankrupt's debts. In the event that you have been bankrupt before, your discharge will not be automatic and must be heard before a Judge or a Registrar.
Who Will Know?
In a bankruptcy, where there are significant assets, a notice is placed in the "legals" section of the newspaper notifying creditors of the date of the meeting of creditors. If there are minimal assets, the creditors are notified by mail only - there is no advertisement in the "legals" section of the newspaper. Any legal filing of a bankruptcy is a public document which the general public has access to. From this documentation, the Credit Bureau is notified and the bankruptcy is recorded and will remain on your credit record for 6 years. This does not mean that you cannot obtain credit during this time. Any granting of credit is the responsibility of the creditor to approve.
How is my spouse affected?
Your spouse, whether common law or married will not be affected by your bankruptcy if he or she is not responsible for any of your debt (did not sign an agreement or contract for any of your debt). If they have a supplemental credit card they are probably responsible for that debt. Your spouse's credit rating will not be affected by your bankruptcy and any assets in the spouse's name will not be part of the bankruptcy. If your spouse is responsible for any of your debt or has his own debt then the spouse may have to file bankruptcy too.
Can my bank refuse to let me open a bank account or cancel my existing account?
No. They cannot. If your bank cancels or refuses to open a bank account for you because you have been or are in bankruptcy they are breaking the laws of the land.
How much am I allowed to keep?
The property exempt from seizure is set by the provinces and territories. Consult a lawyer or trustee for current amounts in your area.
Canadian Bankruptcy Information - FAQ'S
Information On All Aspects Of Insolvency On CanLaw
What don't I keep?
In a bankruptcy, assets in excess of your allowed personal exemption, such as, real estate, automobiles and boats that are the property of the bankrupt as at the date of bankruptcy and anything that the bankrupt acquires during the bankruptcy vests in the trustee for the benefit of the creditors of the bankrupt. This would include inheritances received or to which the bankrupt might become entitled, by the death of someone during the time of the bankruptcy. It also includes such things as lottery winnings and anything that the bankrupt might accumulate, such as assets bought with any surplus income. Tax refunds outstanding, as at the date of the bankruptcy, also vest in the trustee for the benefit of the creditors.
What if I have the cash flow to make a proposal?
If a person has the ability to make a proposal (i.e. his or her income exceeds living expenses), then he or she should consider making a proposal. If any person files for bankruptcy when he or she has the ability to make a proposal, it is the Trustee's duty to oppose the bankrupt's discharge. In this case, the bankrupt may be in bankruptcy up to an additional 12 months beyond the usual 9 months. The bankrupt will be required to make payments in each of these months.
What is counselling and do I have to take it?
You must take counselling in order to be eligible for an "automatic nine month discharge". The counselling can be one-on-one, with yourself and your trustee, or if you prefer, it can be in a group consisting of other bankrupts and your trustee. The first counselling session must be held between 10 and 60 days following bankruptcy; the second counselling session must be held no later than 210 days following the date of bankruptcy. The cost for this is currently $85, plus sales tax, for each individual counselling session.
What happens during the bankruptcy?
The bankrupt must keep the trustee informed as to where the bankrupt is living and also must respond to the trustee's requests and assist him as required and provide whatever information is requested. The bankrupt must also provide the trustee with reports as to earnings and living expenses and any change in the bankrupt's family situation. The trustee will provide the bankrupt with appropriate forms to be filled in that will provide the trustee with the necessary information. A meeting of creditors is not required unless requested by the Superintendent of Bankruptcy or creditors with an aggregate of at least 25% of the proven claims. These meetings are usually held at the office of the trustee.
What about alimony, support and maintenance?
Alimony, support or maintenance payments are not affected by bankruptcy. These payments must be kept up to date. A bankruptcy does not stop any actions for collection. Alimony and maintenance are provable claims and will be paid as a preferred claim for amounts incurred in the year before bankruptcy.
What about student loans?
If the date of bankruptcy is more than ten years after the finish of studies, the debt will be wiped out upon the bankrupt's discharge. A discharge from bankruptcy does not release a student loan if the bankruptcy occurs within ten years after finishing studies. A Court can order the discharge from a student loan at any time after ten years of ceasing to be a student, and after being discharged from bankruptcy, if the person has acted in good faith and the person will continue to experience financial difficulty in paying the student loan.
About your income tax
Income Tax law requires a bankrupt to file two tax returns for the year of the bankruptcy. The first (pre bankruptcy tax return) covers the period January 1st through to the date of bankruptcy. The second (post bankruptcy tax return) covers the period starting with the date of the bankruptcy and ending December 31st. Pre bankruptcy tax rebates vest in the trustee for the benefit of the creditors. You will be asked to volunteer any refunds, receivable from your post bankruptcy return, to the trustee for distribution to the creditors. While you are not legally obliged to give up these funds, the trustee or creditors may apply for a Court Order in this respect or it may be reported to the Court at the time of your discharge.
What about Canada Revenue Agency debt?
CRA's position is that they, after taking appropriate steps, can register as a secured creditor against real property (real estate) or personal property (furniture or a vehicle, etc.) of a debtor.
What does CRA have to do in order to effect a secured claim? Ninety days after an assessment, if there is no appeal lodged, CRA can make application to the Federal Court to have a judgment issued. CRA then must register a secured claim under the person's name under the Personal Property Security Registry. CRA, if real property is involved, will also register under Land Titles.