What is Bankruptcy? Understanding the Basics

What is Bankruptcy?

A bankruptcy is a legal process in Canada legislated under the Bankruptcy and Insolvency Act (BIA) that is designed to eliminate most, if not all your debts. A bankruptcy in Canada can only be filed with a Licensed Insolvency Trustee (LIT). This role was previously known as a “Bankruptcy Trustee.”

Bankruptcy law Canada stipulates that there are two types of personal bankruptcy under the Bankruptcy and Insolvency Act:

• A Summary Administration; and
• An Ordinary Administration Bankruptcy

A summary administration applies to individuals or consumer bankruptcies when the realizable assets (the value of assets when sold) will not exceed $15,000. If you are wondering “which bankruptcy should I file,” know that an ordinary administration bankruptcy applies to both consumers or corporations.  If an individual has assets that will exceed the projected realization of $15,000, they will be required to file an ordinary administration bankruptcy. Note that the term “bankruptcy chapter 11” is an American term, not a Canadian one. The rough equivalent to bankruptcy chapter 11 would be a Division 1 Proposal or a CCAA (Companies’ Creditors Arrangement Act) filing.

Pursuant to section 136 of the Bankruptcy and Insolvency Act, proceeds from the sale of assets are distributed to repay creditors in the following order:

• Secured creditors;
• Reasonable funeral and testamentary expenses in respect of a deceased bankrupt;
• Administration costs related to the bankruptcy estate such as the expenses and fees of the Licensed Insolvency Trustee;
• A levy on dividends paid to secured, preferred and unsecured creditors;
• Various types of unsecured but “preferred creditor” claims, including, certain employee claims, certain types of child and spousal support claims, some types of municipal taxes, claims by landlords, and certain claims for pre-bankruptcy execution fees and costs; and
• Unsecured creditors.

One of the most common questions that Licensed Insolvency Trustees are asked is “in a bankruptcy who pays?” This makes sense as you will want to know what your costs will be. The cost of personal bankruptcy in Canada will vary for each individual as it’s based on your monthly income, non-discretionary expenses, the size of your family unit and assets. 

Its best to book a free initial consultation with a Licensed Insolvency Trustee to go over your options and the costs involved. Some believe that a bankruptcy lawyer can assist in these situations, but in Canada, you will need to speak with a Licensed Insolvency Trustee. They can help you understand the bankruptcy meaning, the process involved, and compare a consumer proposal vs bankruptcy.

People are often fearful that filing a bankruptcy or a consumer proposal will affect their spouse or common-law partner.  When you file a bankruptcy, your debts are only your debts. In other words, your spouse or common-law partner is not responsible for them.  However, if you have co-signed any loan agreements with your spouse or anyone else, for that matter, that person will then assume full responsibility for repaying the debt if you file for bankruptcy.

Bankruptcy divorce debt, such as outstanding alimony or child support payments, is not discharged through the insolvency process.

One thing that many people want to know about bankruptcy is when to file for it. As you can see from the bankruptcy definition, the process is designed for those who are unable to repay their existing debts. Is this you? Are you borrowing money to make it from pay cheque to pay cheque?

Do you find yourself taking cash advances from credit cards or only paying the minimum payments? Are you being constantly harassed by collection agencies or creditors for payment? Are your creditors threatening legal action, or worse, garnishing your wages? If you are struggling with your debt, these are some of the questions you need to ask yourself when considering when to file a bankruptcy.

How does a Bankruptcy in Canada Work?

A common question that people ask often is related to bankruptcy in Canada and how it works.

According to bankruptcy law Canada, there are certain duties and responsibilities on both you and the Licensed Insolvency Trustee upon filing bankruptcy.

1. Once the paperwork has been signed, the Licensed Insolvency Trustee will submit the information to the Office of the Superintendent of Bankruptcy;
2. Upon filing a bankruptcy there is an automatic stay of proceedings in place. In other words, the unsecured creditors cannot commence or continue any legal action or wage garnishment.
3. Within 5 business days they will notify all your creditors of the bankruptcy and provide the necessary paperwork and prescribed forms to submit a proof of claim;
4. During the bankruptcy, there are duties that are imposed upon you to fulfill in order to receive a discharge:
   • Attend a meeting of creditors, if a meeting has been requested;
   • Attend an Official Receiver’s examination if requested;
   • Attend two credit counselling sessions within a prescribed period;
   • Report your income to the Licensed Insolvency Trustee each month while in bankruptcy and provide documentary proof of your income; and
   • Make monthly payments to the Licensed Insolvency Trustee
5. Subject to abiding by all duties under the Bankruptcy and Insolvency Act and providing that the Licensed Insolvency Trustee or creditors don’t oppose the discharge, you are eligible for a discharge:
   • First time filing without surplus income in 9 months;
   • Second time filing without surplus income in 24 months;
   • First time filing with surplus income in 21 months; and
   • Second time filing with surplus income in 36 months.

Keep in mind that only a Licensed Insolvency Trustee (LIT) can help you with filing a bankruptcy in Canada. The process is not handled by a bankruptcy lawyer in this country. If you are struggling with debt and looking for help, a Licensed Insolvency Trustee can conduct a free consultation with you.
During this meeting, they will review your situation and provide you with information on consumer proposals, bankruptcies and other debt relief options. They will also answer whatever questions you have, such as explaining the details of a consumer proposal vs bankruptcy.

Upon filing a bankruptcy, a stay of proceedings is automatic. This means your unsecured creditors have no legal recourse against you. Your unsecured creditors cannot commence or continue with any legal proceeding, wage garnishment or contact you for payment.

1. With bankruptcy filing Canada (regardless of province), you surrender your assets to the Licensed Insolvency Trustee for the general benefit of your creditors.  However, you do not lose everything when you file a bankruptcy.
2. There are bankruptcy exemptions that permit you to keep certain assets. In a bankruptcy, assets are considered exempt based on the rules set by the province you live in. For example, in Ontario the following assets are exempt from seizure:
   • Personal effects (i.e. clothing for you and your family), there is no dollar limit;
   • Household furniture and appliances up to the value of $13,150;
   • Tools of trade up to the value of $11,300;
   • One motor vehicle up to the value of $6,600;
   • Equity in your home if the amount is less than $10,000;
   • Most life insurance policies and pension plans are exempt;
   • RRSPs, except for contributions in the 12 months before the date of bankruptcy; and
   • For farmers, up to $29,100 for livestock, fowl, bees, books, tools and implements of the trade.

     The bankruptcy meaning is not to punish you and leave you with nothing. Therefore, each province and territory has its own exemptions to the bankruptcy law that outline which of your assets, and how much equity, you are allowed to retain.

In a bankruptcy, assets are important. Losing a car is a common concern for those considering filing a bankruptcy in Canada. All provinces have laws that exempt one vehicle up to a certain dollar amount from seizure by the Licensed Insolvency Trustee. For example, in Ontario, you can own a vehicle up to the value of $6,600 or less and its considered exempt. If, however, the vehicle exceeds the exemption amount, you may still be able to keep the vehicle. You could opt to buy back the non-exempt portion from the Licensed Insolvency Trustee during the period of bankruptcy. For example, if you owned a car with a value of $8,000, the non-exempt portion of the vehicle would be $1,400 (being the difference between the fair market value and the exemption amount). You could make monthly payments to them during the bankruptcy to keep the vehicle. If you lease or finance a vehicle and file a bankruptcy, you can keep your vehicle if you are current and remain current on your car loan or lease payments. The leasing or financing company can, however, repossess your vehicle if you default on the agreed terms per the leasing or financing agreement.

For most people, this is their number one concern. Filing a bankruptcy doesn’t necessarily mean you will lose your home. There are many factors in determining how a home is handled in a bankruptcy. In general, if your home has little or no equity and your mortgage payments are up to date, you can keep your home. Many bankruptcy filing Canada cases result in people keeping their homes. As with other assets, there are rules on what you can keep and these rules vary by province. For instance, in Ontario, if the equity available in your home does not exceed $10,000 and you have kept up with your mortgage payments you can keep your home when you file a bankruptcy. If your home exceeds the provincial exemption, you may still be able to keep your home.

You would need to make payment arrangements with the Licensed Insolvency Trustee to repay the equity in your home. You may also want to consider filing a consumer proposal or selling your home depending on your household budget and the equity that is available. There are several options, but the best approach would be to speak to a Licensed Insolvency Trustee to determine what’s best for you.

Are You Considering Bankruptcy?

Depending on your financial situation, filing for bankruptcy may make sense for you. However, for many people, bankruptcy is not the only option. By meeting with a Licensed Insolvency Trustee, you can understand all of the options that are available to you and make an informed choice for your unique situation. Contact Farber today to book a free debt relief consultation. This can help you become debt free and give you a chance to rebuild your financial life.

Before you can start a Bankruptcy, we have to investigate at all the available options for debt relief. In order to do this, please schedule a free consultation. The initial consultation is free of charge. During this consultation, you will sit down with one of our debt professionals. He or she will review your financial situation with you, and provide you with information on all debt relief options available to you.