Deciding if and when to file for bankruptcy in Canada is an enormous decision. Here’s what filing means and how you can take steps to avoid it.

Deciding if and when to file for bankruptcy is one of the most difficult decisions a person can face. You’re not alone. 44,000 households consult an insolvency trustee to file for bankruptcy in Canada every year.

We’re exploring bankruptcy and its alternatives in a three-part series. By the end of this series, you will be able to consider your options and determine whether filing for bankruptcy can help or hinder your situation.

In part one of our series, we will examine what bankruptcy means in Canada and provide some basic facts.

What is bankruptcy?

In accordance with the Canadian Bankruptcy and Insolvency Act (BIA), bankruptcy is the process when a person whose debt has become unmanageable will sign all of their assets, except for those exempted by law, over to a licensed insolvency trustee (LIT). The LIT will sell these assets to satisfy any outstanding obligations.

Once the person has been declared formally bankrupt, they will be granted relief from their debt in three ways:
1. Immediate protection from your collectors
2. Stop wage garnishments and lawsuits
3. Begin to eliminate debts

Who does bankruptcy affect?

Debts can accumulate over large spans of time, so it feels like bankruptcy is sneaking up on you. When you do realize that you can no longer honour your financial obligations, your first instinct may be to blame yourself. You should know, however, that only one third of all bankruptcy filings are due to mismanagement of finances alone.

In fact, most bankruptcies are actually caused by a life-altering event outside of your control, such as divorce, illness, or job loss. 28% of people who file for bankruptcy are either divorced or separated at the time of filing.

Unfortunately, your debts usually won’t go away on their own. Filing for bankruptcy can eliminate most, if not all, of your debt. The flip side is that your ability to get credit will be significantly impaired in the future.

How do I file for bankruptcy?

As mentioned above, filing for bankruptcy in Canada requires you to obtain a LIT. The LIT will manage every aspect of your bankruptcy filing, however, you will need to provide certain information to ensure all of your debts are properly addressed.

You will need to ensure that you supply the LIT with your tax information so that your taxes can be filed, including for the year you file bankruptcy. Also, be sure to provide the LIT with proof of income, including all pay stubs during the period of time which applies to your bankruptcy.

The downside to filing for bankruptcy

Although in many cases bankruptcy can be inevitable, we strongly encourage you to explore all the alternatives first. Here’s a quick list of the implications of filing:

• You will lose your “non-exempt” assets, such as your car and possibly your home. You will also lose your tax refund for the current year and for any year that you have not yet received payment.
• Your credit rating will be pushed down to the lowest setting (R9). A note will be on your record for 6 – 7 years for your first bankruptcy and 14 years for a second. You will have difficulty obtaining credit from most lenders and you will likely pay a higher interest rate for any credit you do obtain.
• You will need to report your income to your trustee every month. If your earnings are higher than the level set by the government, you will be required to pay more.

Avoiding bankruptcy altogether

One ongoing strategy to avoid bankruptcy is to keep your debts small and manageable. Instead of continuously adding on to your credit card or line of credit, consider paying for unexpected bills or deficits quickly, over a controlled time interval. For instance, payday loans are repayable within a specific time frame. A payday loan is one way to stay accountable, keeping your balance from growing into a monster.

We’ll explore payday loans and other alternatives to bankruptcy in parts two and three of this series. Keep reading to find out which option is right for you.

Read Part 2 of our series on bankruptcy in Canada here.

Read Part 3 of our series on bankruptcy in Canada here.

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