FAQs

Frequently Asked Questions About Peronsal Bankruptcy in Canada

1. What are the criteria for filing personal bankruptcy in Canada?
2. How does filing personal bankruptcy in Canada protect me from my creditors?
3. How much does filing for personal bankruptcy in Canada cost me?
4. How long will I be bankrupt?
5. Can my creditors prevent me from filing personal bankruptcy?
6. Will filing personal bankruptcy in Canada affect my spouse?
7. What debts are not affected when filing personal bankruptcy in Canada?
8. How are government-guaranteed student loans affected by filing personal bankruptcy in Canada?
9. What happens if I previously filed for personal bankruptcy in Canada?
10. Are there any alternatives to filing personal bankruptcy in Canada?
11. How are the bankruptcy trustee’s fees paid?
12. What are a bankruptcy trustee’s professional qualifications?
13. How are bankruptcy trustees regulated?

1. What are the criteria for filing personal bankruptcy in Canada?

You can file personal bankruptcy in Canada if:

• You are a residing in Canada;
• Have at least $1,000 in debts;
• You are unable to pay your debts as they generally become due; and
• You would be unable to pay off all your debts if you sold all your assets.

2. How does filing personal bankruptcy in Canada protect me from my creditors?

Upon filing personal bankruptcy in Canada, your creditors are subject to what is called a “stay of proceedings”. Your creditors will be legally barred from: (1) making any further contact with you; and (2) commencing or continuing any legal proceedings against you.

3. How much does filing for personal bankruptcy in Canada cost me?

The answer to this question depends on 2 factors:

1. Your assets
2. Your income

Your assets

When you file for personal bankruptcy in Canada, the trustee in bankruptcy becomes the legal owner of all your assets with certain exceptions, which shall depend on the province where you reside. In Ontario, you can keep the following assets:

• Household furniture up to $11,300
• Personal effects up to $5,650
• Tools of the trade up to $11,300
• A personal use vehicle valued up to $5,650
• Pensions
• Other special exemptions for farmers
• Certain life insurance policies
• RRSPs

The bankruptcy trustee’s job is to liquidate your assets and deposit the proceeds into his or her trust account for the benefit of your creditors.

Your income

In addition to liquidating your assets, the bankruptcy trustee is required by law to collect a portion of your monthly net income during the time you are bankrupt. This payment you are required to pay to the bankruptcy trustee is called “surplus income”.

The surplus income that the bankruptcy trustee is required to collect will depend on your income and the number of people you have to support, which includes your spouse and children less than 18 years old.

The Canadian bankruptcy act requires the bankruptcy trustee to use a formula in calculating your required monthly surplus income payment. Before trying to explain how the formula works, it would be best to illustrate using some examples:

Example 1:

Andrea Logan has filed personal bankruptcy. She earns $3,000 net per month (after taxes, CPP and EI). She is single and has no dependents.

How much is Andrea required to pay to her bankruptcy trustee each month?

The “Superintendent’s Standard” is a minimum cost of living set out in the Canadian bankruptcy act for a given family size. “Surplus Income” is the difference between net monthly income and the Superintendent’s Standard.

In Andrea’s case, she supports a family of one – namely herself. According to this calculation, Andrea should be able to support herself on a monthly net income of $1,836 per month. That is, $1,836 should be enough to pay for her food, shelter, clothing, transportation costs, etc.

Anything over and above that is considered “surplus” income, and she’d be required to pay 50 percent of this surplus income to her bankruptcy trustee for the benefit of her creditors.

Example 2:

Bob Smith has filed personal bankruptcy. He earns $5,000 net per month (after taxes, CPP and EI). He is married to Jane, who is a homemaker. They have two under-aged children, Jack and Jill.

How much is Bob required to pay to his bankruptcy trustee each month?

In Bob’s case, he supports a family of four people, including himself, his wife, and his two underage children. According to this calculation, Bob should be able to support himself and his family on a monthly net income of $3,414 per month. Anything over and above that is considered “surplus” income, and he’d be required to pay 50 percent of this surplus income to his bankruptcy trustee for the benefit of his creditors.

Here is schedule illustrating the Superintendent’s Standard for various family sizes:

Now you’re probably thinking to yourself – “This is ridiculous! I’m single and living in (name of city) – how can I be expected to survive on only $1,836 per month?”

These minimum cost of living standards are calculated based on national data compiled by Statistics Canada. These standards are based on national averages and don’t take into account regional differences in the cost of living. Our view is that this is an inherent flaw in the bankruptcy system, but one that we are required to work with.

If you have neither assets or surplus income (for example, if you are single and earn less than $1,836 net per month, you wouldn’t have any surplus income obligation), then the trustee would charge you a basic fee for administering your personal bankruptcy. This fee will vary from trustee to trustee, depending on local market conditions, but is usually in the range of $1,600 to $2,000 and can be paid over a 9-month period.

4. How long will I be bankrupt?

Generally speaking, if you are filing personal bankruptcy in Canada for the first time, you are bankrupt for 9 months. During the 9-month period, you are required to:

• Perform credit counselling with the trustee
• Keep a monthly budget
• Make monthly payments to the trustee where required; and
• Generally do anything the trustee requests of you.

If you do everything that is required, you shall be automatically discharged from bankruptcy, 9-months plus one day after you filed.

5. Can my creditors prevent me from filing bankruptcy?

This is a common question, and the general answer is no. Filing a personal bankruptcy in Canada is your decision only – you do not need the consent of your creditors. The only situation where you would be prevented from filing personal bankruptcy is if you’ve previously been bankrupt and have not been discharged from the previous bankruptcy.

However, your creditors and the trustee can prevent you from being discharged from bankruptcy if you fail to perform your obligations listed in Question 4. In this case, they would oppose your discharge from bankruptcy and you would be required to attend bankruptcy court to explain to the court why you haven’t performed your obligations. The court would make your discharge from bankruptcy conditional upon the performance of your outstanding obligations.

6. Will filing personal bankruptcy in Canada affect my spouse?

Your spouse will not be directly affected by your bankruptcy. We generally recommend that both spouses come to see us to explore their options in solving financial difficulties.

7. What debts are not affected when filing personal bankruptcy in Canada?

There are certain debts that are not discharged in a bankruptcy. The most common ones are highlighted below:

8. How are government-guaranteed student loans affected by filing personal bankruptcy in Canada?

This is a very common question. If you’ve been out of school for less than 7 years, filing personal bankruptcy will not affect your student loans. That is, you are still responsible for paying them after your discharge from bankruptcy.

If you finished school more than 7 years ago and file for personal bankruptcy in Canada, filing bankruptcy discharges your student loan debt. If you haven't met the 7-year benchmark, but did finish school more than 5 years ago, and you file personal bankruptcy, you have the right to apply to the bankruptcy court and request that an Order be issued discharging the student loan debt. Whether the court will issue such an order will depend on the following factors:

1. Have you acted in good faith in connection with your student loan debts? The court may look at the following matters:
• Was the money used for the purposes of the loan?
• Did you complete your education?
• Did you derive any economic benefit from your education?
• Have you made reasonable efforts to repay the loan?
• Have you made use of available options, such as interest relief to reduce the burden of the loan?
2. Will you continue to experience financial difficulty to such an extent that you won’t be able to pay the student loan debt? For example, do you have any physical or mental disability that would prevent you from working?

9. What happens if I previously filed for personal bankruptcy in Canada?

The bankruptcy process is generally the same regardless of whether you’ve filed bankruptcy before or are filing for the first time. There are however, some key differences:

• If you are looking to file personal bankruptcy in Canada, you must be discharged from your previous bankruptcy.
• You will not be eligible for a 9-month automatic discharge. About 8 months into your current bankruptcy, the bankruptcy trustee shall be required to arrange a discharge hearing with the bankruptcy court which will require your attendance. The purpose of the hearing is to review the reasons for current bankruptcy and the circumstances of your previous bankruptcy. After reviewing these facts, the court then decides whether you will be discharged from your current bankruptcy, and if so, under what conditions.

10. Are there any alternatives to filing personal bankruptcy in Canada?

You may attempt to get a debt consolidation loan to pay off your creditors. However, for many individuals, this option isn’t viable either because of a bad credit history or an inability to service the payments on the consolidated loan.

Another option is to negotiate a settlement or new payment terms with your creditors. This option may be ideal when there are a small number of creditors. However, if you have many creditors, it may be difficult to get all of them to agree to payment terms favourable to you. You may want to consider dealing with your creditors through a credit counselling agency under a Debt Management Plan (DMP). However, you should be very careful in choosing the agency you’ll be dealing with, for reasons explained in this article.

A more practical alternative to repay your creditors may be a consumer proposal to your creditors with the assistance of a trustee in bankruptcy. A trustee will work with you in determining how much you can afford to pay and what payments will be acceptable to your creditors.

If none of the above options are viable, you may want to consider filing for personal bankruptcy with the assistance of a bankruptcy trustee.

11. How are the bankruptcy trustee’s fees paid?

Please review Question 3 (How much does filing for personal bankruptcy in Canada cost me?). As explained in that section, a bankruptcy trustee is required to liquidate a debtor’s assets and collect monthly payments from the debtor. The money from these assets and payments are deposited into a trust account by the bankruptcy trustee.

A trustee’s fees are paid from the money in that trust account according to a government tariff, as set out in the Canadian Bankruptcy and Insolvency Act. There is a maximum amount the trustee can draw against the trust account for her fees, and if there are funds left in the account after her fees are paid, the balance gets distributed to the bankrupt’s creditors.

12. What are a bankruptcy trustee’s professional qualifications?

Bankruptcy trustees in Canada are licensed by Industry Canada, a division of the Canadian federal government. Any individual aspiring to become a trustee in bankruptcy must go through a rigorous 3-year study program and series of examinations before she can be successfully licensed.

Most bankruptcy trustees also have a professional accounting designation, such as a CA, CGA or CMA designation. Therefore, bankruptcy trustees are extremely well-qualified to provide sound advice to individuals facing financial difficulty.

13. How are bankruptcy trustees regulated?

As members of the public, we are all concerned with the trustworthiness of the people that we deal with. As a professional body, trustees in bankruptcy are regulated by the following organizations:

• Industry Canada, which licenses bankruptcy trustees, performs periodic reviews of client files and audits of trustee trust accounts to ensure their compliance with regulatory laws. If there was any disciplinary action taken against a bankruptcy trustee, the reasons for the action will be published on their website, which can be accessed here.
• The Canadian Association of Insolvency & Restructuring Professionals (CAIRP) is a professional body to which most bankruptcy trustees belong. A member of CAIRP is granted the professional designation of a Chartered Insolvency & Restructuring Professional (CIRP). To maintain her CIRP designation, a member must attend a minimum number of professional development courses and seminars in order to be current on developing issues regarding bankruptcy law.