What is bankruptcy?

To file for bankruptcy, you would work with a licensed insolvency trustee (LIT), who will advise you through the process and walk you through your options. Once you file, your creditors will get paid back according to your court-approved bankruptcy agreement. Your bankruptcy agreement may require you to attend a “meeting of your creditors,” where they go over the proposed terms.

Your credit cards will be cancelled, and you will be unable to apply for credit. In some situations, the trustee may collect money from your employment earnings and/or sell your assets to pay creditors. You will be asked to attend credit counselling sessions and file regular reports of your income and expenses. You’ll also have to pay costs related to the bankruptcy, such as administrative expenses and taxes.

Filing for bankruptcy eliminates credit card debt, medical bills, payday loans, money owed to the Canada Revenue Agency (CRA) and certain other debt.

Secured loans are excluded, although the trustee can sell those assets (car, home) to raise money to pay your creditors. They can also take your registered education savings plan (RESPs), tax refunds and registered retirement savings plan (RRSP) contributions for the past 12 months and other certain holdings. The items that cannot be sold by the trustee, typically work tools and household items, vary by province and territory.

Note that filing for bankruptcy does not eliminate any of the following:

• Secured debts, like a car loan or mortgage
• Child and alimony support payments
• Debt incurred by fraud
• Student loans within seven years of attending school

The bankruptcy period typically lasts anywhere from nine to 36 months, depending on whether you’ve filed before, whether you have employment earnings to help pay your creditors, and other factors. For instance, only first-time bankruptcies are eligible for the nine-month resolution period.

When the period ends, you will be discharged from bankruptcy. This means you have complied with the terms of your agreement. Your debts are settled and you can apply for credit again. Your bankruptcy will stay on your credit report for up to nine years, depending on the rules in the province or territory where you live.

Example: “Milo declared bankruptcy a few months before he got a new job. His income was now high enough that he had to make surplus income payments to his licensed insolvency trustee. The amount of each payment was based on his household’s monthly income and expenses.”

Read more about debt:

• Debt demystified: How to calculate your debt
  Many Canadians carry credit card, loan or mortgage debt. Here’s how to calculate how much debt you have, plus strategies for paying it down.
• 6 things you didn’t know could be hurting your credit rating
  You pay your bills on time, so that means your credit score is in good shape—right? Not necessarily. Here’s how you may be negatively impacting your score.
• How to consolidate debt in Canada
  If you’re having difficulty repaying multiple loans and credit card balances, consolidating the debts can help. Here are six effective strategies.
• Compound interest calculator: How to use one and how interest grows
  Watch your money grow—or calculate how much money you will owe in total—with the MoneySense compound interest calculator. Here’s how it works.

About MoneySense Editors

MoneySense editors and journalists work closely with leading personal finance experts in Canada. Since 1999, our award-winning magazine has helped Canadians navigate money matters.

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