Demystifying Bankruptcy: A Comprehensive Guide to Understand How to File Bankruptcy in Canada

“Bankruptcy” is a word everyone knows, and it carries some stigma with it. In reality, the bankruptcy process in Canada is not complicated for most people, and can even be over in as little as 9 months.

While there are other alternatives if you are faced with overwhelming debt, there are situations where bankruptcy is the solution that makes the most sense.

Let’s explore the Canadian bankruptcy process, types of bankruptcies, and how to file a bankruptcy.

What is a bankruptcy?

A bankruptcy is a legal process designed to give an ‘honest but unfortunate’ person a financial fresh start. It is governed by the Bankruptcy and Insolvency Act, administered by a Licensed Insolvency Trustee, and overseen by the Office of the Superintendent of Bankruptcy.

Filing a bankruptcy puts a ‘stay of proceedings’ in place – any legal action by your unsecured creditors to collect the debts must immediately cease. This includes wage garnishment, bank account seizure, and Court proceedings.

Who is eligible to file for bankruptcy?

To file a bankruptcy (also known as ‘making an assignment in bankruptcy’) in Canada, you must:

  • Owe at least $1,000.00 in unsecured debt
  • Reside, do business, or own property in Canada
  • Be unable to pay your debts
  • Owe more than the value of your assets

Only a Licensed Insolvency Trustee can file and administer the bankruptcy proceedings in Canada – a lawyer is not required, although if your situation is complicated, it may be wise to obtain legal advice as well as consulting with a Trustee.

Types of bankruptcies in Canada

Most personal bankruptcies filed in Canada are simplified procedures, known as a ‘Summary Administration’. If an individual files for bankruptcy and has over $15,000.00 in realizable assets (more on this below), their bankruptcy must be filed as an ‘Ordinary Administration’. From the perspective of the person filing the bankruptcy, the process is much the same, but for the Licensed Insolvency Trustee, the Ordinary Administration requires more complicated procedures.

Corporate (business) bankruptcies must all be filed as Ordinary Administrations. Often, the director of the bankrupt company also files a personal bankruptcy at the same time as they have signed personal guarantees for many of the debts of the business.

Filing for bankruptcy

When faced with overwhelming debt, most people are significantly stressed and don’t know where to turn for help. It can be hard to discuss the problems with anyone, as there can be social shame associated with being deep in debt.

A consultation with a Licensed Insolvency Trustee is free, and all of your options will be discussed, including those that don’t involve filing any formal insolvency proceedings.

Acknowledging that help is needed, and reaching out, is a huge step towards a fresh start and a debt-free future, and at Campbell Saunders, we understand how hard it may have been for you to make that first call. We’re here to help!

At your initial consultation, we’ll discuss your situation and your options. It is always your decision whether you feel bankruptcy is the right path for you to take, and when you’re ready to proceed.

If you decide you’d like to explore the bankruptcy option further, we’ll ask you to complete an information form to give us a complete picture of your situation, as well as provide some supporting documents. Once we’ve reviewed these with you, we’ll know how a bankruptcy would look for you, and you can make an informed decision about proceeding.

It’s important to understand that bankruptcy is a ‘fluid’ proceeding that can change if your circumstances change. Your payments in bankruptcy are based on your household income and your assets, and if these change, your payments can be higher or lower, and your bankruptcy may be longer or shorter than initially estimated.

If you’ve decided to proceed with the bankruptcy filing, there are legal documents that must be filed. We’ll prepare those and set an appointment to sign them with you (this can be done in person or virtually). These documents are filed with the Office of the Superintendent of Bankruptcy and sent to all of your creditors, and you have officially made an assignment in bankruptcy.

What to do while in bankruptcy

After you have filed for bankruptcy, there are ‘duties’ that must be completed. The main things you must do are:

  • File an Income and Expense Statement with the Trustee every month until you receive your discharge (release) from bankruptcy
  • Attend two financial counselling sessions
  • Make payments as agreed for either fees, surplus income, or asset repurchases (further information below)
  • Provide the Trustee with information to file your taxes for the year the bankruptcy started, and any prior years that have not been filed
  • Keep the Trustee up to date with any change in your circumstances and with your current contact details

Learn more about how to file your taxes during bankruptcy?

Payments in Bankruptcy

As a bankruptcy is based on your individual circumstances, how much you will pay can vary considerably. A bankruptcy can cost as little as $1,800.00, paid monthly during the bankruptcy period. This applies to a low-income person who has never filed a bankruptcy before.

Surplus Income

Each year, the Federal Government announces the new Low Income Cut-Off (LICO) amounts, and the Superintendent of Bankruptcy uses these amounts to create the Superintendent’s Standard to determine if an individual in bankruptcy has Surplus Income.

If your income is over the Standard amount, you must make Surplus Income payments. When filing a bankruptcy the Trustee must verify your current income, and from that will calculate an estimate of the amount of Surplus Income you will need to pay. This is only an estimate, and it is the reason that submitting the monthly Income and Expense Statements each month is important – if your income decreases, your payments may be lowered, and if your income increases, it is seen as fair that you will pay a little more back towards your debts.

Trustee Fees

If you do not have surplus income, you will instead pay fees as agreed before filing the bankruptcy.

Campbell Saunders’ basic fees are as follows:

First-time bankruptcy: $1,800.00, usually paid at $225.00 per month for 8 months
Second-time bankruptcy: $2,875.00, usually paid at $125.00 per month for 23 months
Third Time Bankruptcy: $4,375.00, usually paid at $125.00 per month for 35 months

Asset Repurchases

Contrary to popular belief, filing bankruptcy does not mean that you’ll lose everything you own. Many assets are protected (‘exempt’) – asset exemptions are set by Provincial legislation. In BC, these exemptions are determined by the Court Order Enforcement Act:

  • Clothing and medical aids of unlimited value
  • Household goods and furniture up to a value of $4,000.00
  • Equity in a vehicle up to a value of $5,000.00 (this is reduced to $2,000.00 if you have a Family Maintenance Order against you)
  • Equity in a principal residence up to $12,000.00 or $9,000.00, depending where in the province the property is located
  • RRSPs and RDSPs, except for any contributions made in the 12 months before filing the bankruptcy

Even if you have an asset that is not protected, you don’t have to lose it during the bankruptcy thanks to the concept of repurchasing an asset from the bankruptcy estate.

For example, if you have a vehicle worth $6,000.00 (and no loan against it), and you wish to keep it, arrangements would be made with the Trustee for you to ‘repurchase’ the extra $1,000.00 portion of the vehicle by paying that amount while in bankruptcy.

Length of time spent in bankruptcy

When a bankruptcy is first filed, the length of the bankruptcy is estimated in the same way that the amount to pay is estimated – if your circumstances change, this can also change. Basic timeframes are:

  • First bankruptcy with no surplus income: 9 months
  • First bankruptcy with surplus income: 21 months
  • Second bankruptcy with no surplus income: 24 months
  • Second bankruptcy with surplus income: 36 months
  • Third or subsequent bankruptcy: length is determined by the Court, usually a minimum of 36 months

If your bankruptcy starts as 9 months, but your income increases so that the average by about the 8th month is above the Surplus Income amount, your bankruptcy must be increased to 21 months (and the reverse can apply as well – it can be shortened if the average is under the Surplus amount by the 8th month).

If your ‘duties’ are not completed, it is possible to remain in bankruptcy indefinitely – understanding your obligations is vitally important to receive your discharge from bankruptcy and be freed from your debts.

Legal Proceedings & Court

Most simple bankruptcies involve no lawyers and no Court proceedings. Some times when the Court will be involved are:

  • For a third or subsequent bankruptcy, a Court application MUST be made for you to be discharged
  • If your income tax debt is more than $200,000.00 and also represents more than 75% of the unsecured claims filed in the bankruptcy, a Court application MUST be made for you to be discharged
  • If your duties in bankruptcy are not completed, the Trustee will make a Court application to adjourn your discharge
  • If a creditor or the Superintendent of Bankruptcy opposes your discharge, a Court application will be made to either adjourn your discharge or set conditions that must be completed before you can be discharged

navigating the complexities of bankruptcy in Canada may seem daunting, but understanding the process is the first step toward financial recovery. Bankruptcy is a legal mechanism designed to provide a fresh start for those facing overwhelming debt. Throughout this comprehensive guide, we’ve delved into the Canadian bankruptcy process, eligibility criteria, types of bankruptcies, and the steps involved in filing. At Campbell Saunders, we recognize the challenges associated with seeking help during such trying times.

Don’t forget to manage your mental health and get the right support through bankruptcy.

If you find yourself grappling with financial difficulties and are contemplating bankruptcy in British Columbia, we invite you to take that crucial step toward a debt-free future. Our Licensed Insolvency Trustees at Campbell Saunders offer free consultations to discuss your unique situation, exploring all available options. Whether you’re considering bankruptcy or exploring alternatives, we are here to guide you.

Don’t let the burden of debt dictate your future. Contact us today to schedule your free consultation and take the first step toward financial freedom. Your journey to a debt-free life begins with a simple call. We understand the sensitivity of your situation and are here to provide the support you need. Embrace the opportunity for a fresh start—contact Campbell Saunders now.