Bankruptcy is a legal status of a person or other entity that finds itself in a position where it is unable to repay debts to creditors. In Canada, bankruptcy is also referred to as insolvency and is governed by the Bankruptcy and Insolvency Act, which is applicable to businesses and individuals.
The office of the Superintendent of Bankruptcy, a federal agency, is responsible for overseeing that bankruptcies are administered in a fair and orderly manner by all licensed Trustees in Canada. Bankruptcy is filed when a person or company becomes insolvent and cannot pay their debts as they have become due if they have at least $1,000 in debt.
1. Personal Bankruptcy
Although there are different types of bankruptcy, that depend on the type of debt and the payment status, the concept behind personal bankruptcy is relatively simple. When a person files for bankruptcy they are obliged to surrender all of their assets in return for the discharge of debts.
In principle, bankruptcy discharges only unsecured debts, because the creditor in a secured debt has a special right to the security, which is the asset. For example, if a mortgage is worth more than the amount currently outstanding, the excess (equity) must also be surrendered. Conversely, just as there are some exceptions to the discharge of all debts, there are bankruptcy exemptions from losing all assets also.
2. Unsecured Debts
Generally speaking, bankruptcy will discharge all unsecured debts, but it important to make note of a few specific exemptions that the law makes for certain debts which will stay. These include, student loans less than 10 years old, child and spousal support, debts that arise as a result of fraud or theft, some fines and court awarded damages, and certain government overpayments.
Debts that will go away include credit card balances, unsecured lines of credit and personal loans, income and municipal house taxes, unpaid utility bills insurance premiums past due, medical bills and payday loans.
3. During Bankruptcy
Once the decision has been made and the paperwork has been signed, the trustee will electronically transmit your bankruptcy information to the Office of the Superintendent of Bankruptcy in Ottawa (a division of the federal government). The next monthly report from the Superintendent to the credit bureaus will inform them of your bankrupt status.
Within five days of this statement, your trustee will send a copy of your bankruptcy paperwork to each of your creditors so they can file a claim. Your trustee will file your outstanding tax returns up to the date of the bankruptcy and any money you owe to the Canada Revenue Agency will be included.
4. Duties as a Bankrupt
During your bankruptcy, you must make sure you fulfill all your duties as a bankrupt. These include, attending a meeting of your creditors if such a meeting is requested, sending your trustee proof of your income each month, make month statements if you have surplus income, and attend two credit counselling sessions, to learn budgeting and money management skills.
5. After Bankruptcy
If you have never been bankrupt before and have no surplus income, you are eligible to be automatically discharged in nine months. Otherwise, the length of your bankruptcy will be longer, which is important to consider because the discharge is what ultimately cancels your debt.
A note about your bankruptcy will remain on your credit report for a minimum of six years after the date of the discharge, but during this time you may still be able to get credit, depending on the individual lenders. There are also resources available to help you take active steps to rebuild your credit during this time.