Filing for Bankruptcy in Canada: Pros & Cons

Imagine staring at a mountain of unpaid bills, feeling like every paycheque disappears before you even get it. You are not alone. Thousands of Canadians face this same uphill battle every year. When you have exhausted all other options, filing for bankruptcy in Canada might seem like the last resort. But is it really the best path forward?

Before making such a big financial decision, it is important that you understand the pros and cons that come with it.

This blog will break down the pros and cons of filing for bankruptcy in Canada so you can decide if it is the right way to get your financial life back on track.

What You Need to Know About Bankruptcy in Canada

So, what exactly does filing for bankruptcy in Canada look like? Basically, it is a legal process that wipes out most of your debt when you cannot afford to pay it back. Sounds like a magic button, right? Well, not exactly. There are some things you will need to consider as they can have a big impact on you, your credit rating, and your assets.

To start, you will need to go through a Licensed Insolvency Trustee (LIT) who will guide you through the process and deal with your creditors for you. They will work with you to explore all your debt-relief options to see if bankruptcy is the right one for your unique financial situation. Bankruptcy is usually only considered as a last resort if other options, such as a consumer proposal, are not right for you.

The rules around bankruptcy are laid out in the Bankruptcy and Insolvency Act, which means it is heavily regulated by the government to make sure everything is done fairly—for both you and your creditors (the people you owe). Plus, there are some eligibility criteria you need to meet, like having a certain amount of debt and no realistic way to pay it off.

Pros of Filing for Bankruptcy in Canada

In some cases, filing for bankruptcy might be the best option for you. We will go over some of the reasons why you would consider filing for one, however, it is important to note that some other debt-relief options also share similar or the same benefits. This is why we always recommend that you speak with a Licensed Insolvency Trustee first.

You Eliminate Your Debt and Get a Fresh Start

One of the biggest reasons people consider filing for bankruptcy is the chance to wipe the slate clean. When you file, most of your unsecured debts—like credit card bills, payday loans, and personal loans—get erased.

That means you can finally breathe again without the constant worry of how to pay off what feels like a never-ending mountain of debt. In short, bankruptcy can give you a fresh financial start.

However, it is important to note that not all debts disappear. Some debts, like student loans (if it has been less than seven years since you stopped attending school), court fines, or spousal and child support, do not get wiped out in bankruptcy.

But if you are buried under credit card debt, personal loans, or payday loans, this can be a life-changing relief.

You Have Legal Protection from Creditors

Another major benefit is the legal protection bankruptcy provides. As soon as you file, something called an “automatic stay” kicks in. This means your creditors have to stop all collection efforts immediately. No more harassing phone calls, wage garnishments, or legal threats. It is like hitting the pause button on all the financial pressure you have been under.

The protection is one of the most appealing aspects of bankruptcy because it gives you breathing room. You will not have to worry about losing your paycheque to wage garnishments or getting served with lawsuits while you figure out how to manage your financial situation.

But remember, other options like a consumer proposal offer the same legal protections! Bankruptcy is not the only debt-relief solution that can stop collection calls and wage garnishments.

It is a Simple Process, With Guidance

Unlike other debt-relief options, bankruptcy tends to be a relatively straightforward process. Sure, it involves paperwork and meetings with a Licensed Insolvency Trustee, but the path is clear.

You will have someone guiding you every step of the way, which can make the process feel less overwhelming. Unlike debt settlement or debt consolidation, where negotiations and compromises can stretch out for months or years, bankruptcy often offers a quicker resolution.

It is a Chance to Rebuild Your Financial Health

Bankruptcy gives you a chance to rebuild. Once you have received your bankruptcy discharge and your debts are forgiven, you are no longer shackled by the financial burdens that held you back.

Instead, you can start focusing on rebuilding your credit, learning to budget better, and preparing for a more stable financial future. For many, bankruptcy is the restart they desperately need.

Disadvantages of Filing for Bankruptcy in Canada

Of course, it is not all sunshine and rainbows. Filing for bankruptcy in Canada also has some serious downsides that can affect your financial future.

It Has a Negative Impact on Your Credit Rating

While the idea of wiping out debt might sound appealing, the damage to your credit rating is a serious downside. Filing for bankruptcy will hurt your credit rating, and it can stay on your credit report for six to seven years. This black mark makes it difficult to get credit in the future, whether it is a loan, a mortgage, or even a rental application.

It may be a little harder to rebuild your credit after bankruptcy, although it is not impossible!

Getting Loans After Bankruptcy Is Tough

One of the biggest hurdles after filing for bankruptcy is trying to get credit or loans. Banks, mortgage lenders, and even landlords can be hesitant to work with someone who has a bankruptcy on their record. You might get approved, but be ready for high interest rates or less favourable terms. And this can go beyond big things like loans—even trying to get a cell phone plan or rent an apartment can become more complicated when you have filed for bankruptcy.

You Could Lose Assets

When you file for bankruptcy, you might have to give up some of your non-exempt assets, like your house, car, or other valuable belongings. Every province has different rules about what you can keep, and your Licensed Insolvency Trustee will help you figure that out.

But here is the thing: if you have significant equity in your home or other assets, you may have to surrender those as part of the bankruptcy process.

In some cases, if you are going through a separation or divorce, bankruptcy could also complicate things like equalization payments. These payments, which are meant to ensure both parties receive a fair share of marital assets, could come into play when assessing what you owe or what assets you may lose.

It is a complex situation, so having legal and financial guidance can be key if equalization payments are part of the mix.

There is a Stigma and Emotional Stress

And it is not just about money. Unfortunately, there is still some social stigma around filing for bankruptcy. Even though it is a legal and valid way to deal with crushing debt, people can feel embarrassed or ashamed about it. And that emotional toll is no joke. It can be tough to shake the feeling that you have failed, even though bankruptcy is designed to give you a fresh start, not punish you.

Filing Again Is Not as Easy

If you file for bankruptcy once, it is definitely not a decision to take lightly. But filing a second time? That is even more serious. The consequences are harsher, including a longer wait time before you can get discharged (up to 24 months!).

Plus, having two bankruptcies on your record makes it even tougher to rebuild your credit and can signal to lenders that there is a pattern of financial trouble. You do not want that hanging over your head.

Is Bankruptcy the Best Option for You?

Filing for bankruptcy is not a one-size-fits-all solution, and it is certainly not the only option. You should consider other debt-relief options—like a consumer proposal—before deciding that bankruptcy is the way to go. A consumer proposal allows you to settle your debts by paying back a portion of what you owe, without the more severe consequences of bankruptcy.

So, how do you know if bankruptcy is the best choice for you? Ask yourself these questions:

• Are you facing overwhelming debt with no realistic way to pay it off?
• Are your creditors constantly calling, sending letters, or taking legal action against you?
• Would you prefer to eliminate your debts, even if it means a hit to your credit?
• Have you considered all your options, including filing for a consumer proposal?

If you answered yes to most of these, bankruptcy could offer a way out.

How Farber Can Help

Filing for bankruptcy in Canada can be a lifeline when you are buried in debt and have nowhere else to turn, but it is not without its drawbacks. While it can erase most of your unsecured debt and give you legal protection from creditors, the hit to your credit and the potential loss of assets are major factors to consider.

Take your time to explore all your options, including consumer proposals and other bankruptcy alternatives, before making a final decision. If you are still unsure, do not hesitate to reach out to a Licensed Insolvency Trustee to help you navigate the process.

The Licensed Insolvency Trustees at Farber can help you weigh the pros and cons of filing for bankruptcy in Canada, explore other options like consumer proposals, and figure out the best way to handle your specific financial situation.

Connect with us today for a free consultation to see which solution works best for you!