How to file for bankruptcy in Canada for the first time

Filing for bankruptcy for the first time? Here’s how to do it in Canada. 

Bankruptcy is a legal form of debt forgiveness governed by the Bankruptcy and Insolvency Act which is legislation that protects honest debtors who can no longer pay their debts. Some people may find the formality of bankruptcy intimidating, but in practice, having a regulated solution can eliminate confusion for you, while ensuring your lenders and creditors are treated fairly. The only person qualified and authorized to manage a bankruptcy file is a Licensed Insolvency Trustee. An LIT represents you, as a debtor, but is also legally required to disclose all financial facts and information to the courts and your creditors, while helping you to resolve your debts and get a fresh financial start.

1. Meet with a Licensed Insolvency Trustee for a debt assessment  

Many people experience financial problems, and this has been especially common with the added personal and financial stress of COVID-19. The effects are far-reaching: of the nearly 4-in-10 Canadians who are worse off financially due to the pandemic, almost half (46%) admit it has caused overwhelming personal debt. 

If you are experiencing any of these warning signs of financial problems, it’s best to meet with a Licensed Insolvency Trustee as soon as possible. During your first meeting, an LIT will assess your financial situation and discuss available debt relief options. Bankruptcy is not right for everyone and is always considered a last resort after all other solutions are eliminated. If you’re unable to manage your debt and keep up with your payments, an LIT may find that you are insolvent as defined in the Bankruptcy and Insolvency Act. Being insolvent simply means that you are not able to pay the debts that you owe.  

2. Complete and file the formal paperwork to declare bankruptcy in Canada 

 
The LIT you choose to work with will be with you for the entire bankruptcy process. He or she will ensure you understand your rights and obligations, and will communicate with your lenders and creditors. If you choose to file for bankruptcy, an LIT will draw up the necessary paperwork, which you will need to sign. Your LIT will then file your paperwork with the Office of the Superintendent of Bankruptcy Canada.  

When you file for bankruptcy, a stay of proceedings is put in place, which provides you with protection from your unsecured creditors. These creditors cannot take any further legal action against you once they’ve been legally notified that you’re working in good faith with the LIT to resolve your debts. Wage garnishments, collection activity and credit calls will stop. Even the Canada Revenue Agency should stop contacting you to collect unpaid taxes once they’re notified of your bankruptcy filing.  

Certain debts aren’t covered by a stay of proceedings, such as car loan debt from a secured creditor. In that case, the creditor may be able to take your vehicle if you can no longer make your payments. If you make support payments, such as child or spousal support, you’ll be required to continue to do so. Many fines or penalties are also not covered. When you are reviewing your debts with an LIT, he or she will inform you what can be included in your bankruptcy filing and what cannot.  

While it doesn’t happen often, your creditors and lenders have the legal right to dispute the LIT’s assessment. In this situation, a judge will review the filing and determine whether or not the stay of proceedings should be upheld. Once the stay of proceedings is in place, people often feel a huge sense of relief. 

3. Complete your duties required under the Bankruptcy and Insolvency Act 

 
During the term of your bankruptcy, you will have certain responsibilities in order to be eligible for a discharge, including the following: 

• Surrender non-exempt assets: You will have to give up certain assets to help pay your creditors what you owe, but each province has its own set of rules about what assets you may keep. An LIT will review your assets before you file and let you know which possessions you may keep. You can learn more about your province’s list of exemptions here. 
• Provide ongoing proof of income and expenses: As part of the bankruptcy process, you’ll be required to provide monthly income statements to your LIT, who must regularly review your finances. If your financial situation changes (for example, you get a new job with a higher income, receive a payout or large gift of money), you may need to make additional monthly payments during the term of your bankruptcy. 
• Attend credit counselling sessions: You’ll also complete two credit counselling sessions with your LIT or a licensed credit counsellor. You and your counsellor will discuss your financial challenges and you’ll learn money and debt management strategies that will help you rebuild your finances and improve your credit score. Filing for bankruptcy in Canada results in an R9 rating on your credit file for six years after you are discharged from your bankruptcy, but rebuilding your credit is possible. 
• Provide your LIT with details for tax returns: your LIT will file tax returns on your behalf before and after the bankruptcy. 

4. Review of bankruptcy file to discharge you and eliminate debts 

 
Typically, you will be automatically discharged from bankruptcy after nine months if you are a first-time filer. Assuming you complete all of your duties under the bankruptcy agreement, you’ll receive a certificate of discharge. If the LIT recommends that you should be discharged with conditions, or if a creditor/lender is opposed to your discharge, there may be other conditions put in place to help you avoid future financial problems and satisfy your creditors. Sometimes, if you have surplus income (greater than $200 a month), your bankruptcy can be extended to 21 months, and you will continue to make payments as determined in your filing.  

Filing for bankruptcy in Canada doesn’t have to be confusing or stressful. If your debt has become overwhelming and you want to know what solution is right for your situation, meet with a Licensed Insolvency as soon as possible. If you’d like to read more about the bankruptcy process, check out this list of bankruptcy Q&As. 

If you want relief from your debt and are considering filing for bankruptcy in Canada, schedule a free no-obligation meeting with a BDO Licensed Insolvency Trustee today.

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