What Happens When You File For Bankruptcy?

Life can throw curveballs—unexpected medical bills, job loss, or even just everyday expenses piling up. When debt feels impossible to manage, filing for bankruptcy in Canada might seem like a way to hit reset.

But what actually happens when you file? How does it affect your finances, your future, and your path forward? Here is a look at what bankruptcy involves, the impact it can have, and how it could help you find your financial footing again.

Understanding Debt Collection

Before diving into the bankruptcy process, it is important to understand debt collection and how it affects your financial situation. Debt collection is the process where creditors try to get back the money you owe. If you fall behind on paying off your debts, such as credit card bills or loans, creditors may send collection notices, hire collection agencies, or even take legal action to get their money back.

Debt collection can be a huge stressor. When bills keep stacking up, it is easy to feel trapped, like there is no light at the end of the tunnel. This is where bankruptcy might offer a lifeline—a legal way to take control of overwhelming debt and start rebuilding your financial future.

The Bankruptcy Process: A General Overview

Filing for bankruptcy is a legal step that can help wipe out debts you cannot pay. While some see it as a last resort, it is a powerful option for individuals looking to get a clean financial slate. The process follows specific laws to help give people a fresh start, while also ensuring creditors are treated fairly.

Steps in the Bankruptcy Process

1. Decide to File: Weigh your financial situation and consider alternatives, such as a consumer proposal.
2. File the Assignment: Submit your financial details to the government with the help of a Licensed Insolvency Trustee (LIT).
3. Automatic Stay: Creditors must temporarily stop most collection actions.
4. Meeting of Creditors: Creditors may ask questions about your finances if requested (rarely occurs).
5. LIT’s Role: A LIT administers the bankruptcy filing and conducts any necessary asset liquidation.
6. Debts Discharged: Most eligible debts are wiped out, giving you a fresh start.

The entire process can take anywhere from nine months to a few years, depending on the type of bankruptcy filed and the complexity of your case.

Things to Consider Before Filing for Bankruptcy

Before deciding to file for bankruptcy, it is important to assess your financial situation thoroughly. Bankruptcy is not always the best solution, and it is important to understand the long-term consequences:

• Assessing Your Financial Situation: Take note of all your debts, assets, income, and expenses. Can you realistically repay your debts within a reasonable time frame? If not, bankruptcy may be worth considering.
• Alternatives to Bankruptcy: Bankruptcy is a drastic step, so it is important to think about alternatives first as there could be better debt-relief solutions.
• Impact on Assets: Consider how bankruptcy will affect your assets. In some bankruptcies, non-exempt assets may be sold to repay creditors, while in others, you may be able to keep your property by agreeing to a repayment plan.
• The Impact on Your Credit: Bankruptcy will have a significant impact on your credit score, and it can stay on your credit report for several years. However, this hit is usually outweighed by relief you will get.
• Bankruptcy Cost: Bankruptcy fees and disbursements for the LIT come out of the realization of asset and income funds during the bankruptcy process. If neither of these applies to you, the LIT recovers some basic amounts from you to cover fees and disbursements.

What Happens When You File for Bankruptcy?

Once you have weighed the pros and cons and decided to proceed, the next step is filing for bankruptcy. The process involves preparing and submitting a formal set of documents to the government department that monitors the bankruptcy process, with the assistance of a LIT. This department is called the Office of the Superintendent of Bankruptcy (“OSB”).

Once the documents have been vetted, the OSB issues a Certificate of Appointment which starts the bankruptcy process. Here is an outline of what happens during this stage:

Step 1: Choosing a Bankruptcy Professional – LIT

You have to work with a Licensed Insolvency Trustee (LIT) in Canada, in order to file a bankruptcy. They will guide you through the legal process, to make sure that all forms are filled out accurately and that you meet all the requirements to file, in addition to meeting all of the required time frames for the process.

Step 2: Preparing the Bankruptcy Filing

The filing of the assignment in bankruptcy is basically presenting a detailed snapshot of your finances, covering everything—debts, assets, income, expenses, and more. You will need to list all your creditors and the amount owed to each one. It is super important to be thorough here. Leaving out information or making mistakes may cause issues down the road, even leading to your case being held up in a court process.

Step 3: Submitting the Assignment in Bankruptcy

Once everything is filled out, you will file the assignment with the Office of the Superintendent of Bankruptcy (OSB) with the assistance of your LIT. At this point, you are officially under bankruptcy protection, which means the automatic stay kicks in. This stops most actions from creditors—no more collection calls and garnishments.

Step 4: Trustee Appointed

The Licensed Insolvency Trustee (LIT) you had chosen to assist you will be appointed to your bankruptcy file. Think of them as the middle person between you and your creditors. They will make sure everything is handled properly, review your financial details, and, if needed, sell off any non-exempt assets to have funds available to provide to creditors.

Required Documentation and Forms

To file for bankruptcy, you will need to provide several forms and documents to the government department that administers the process in Canada. These typically include:

• Income and Expense Statements: Typically bank statements, pay stubs, and prior tax returns are used to provide a detailed account of your income sources and living expenses.
• Assets and Liabilities List: A complete list of your property, vehicles, investments, and other assets, along with the amount you owe to each creditor.
• Tax Returns: Recent tax returns are often required to show your income and financial history.
• Proof of Identity: This could include your birth certificate and a government-issued identification.

Your trustee will help you gather and organize these documents.

Immediate Effects of Filing for Bankruptcy

Once you file for bankruptcy, a few things happen right away:

• Automatic Stay: This temporarily stops most collection actions—no more calls from debt collectors and wage garnishments. Though some actions like child support or spousal support may continue.
• Pause on Legal Actions: Any lawsuits or judgments against you are put on hold, giving you relief from ongoing legal battles for the collection of debts.
• Credit Score Impact: Filing will lower your credit score, and bankruptcy stays on your report for several years, making it harder to get new credit initially.
• Emotional Relief: Many feel an immediate sense of relief, knowing they have a break from creditor pressure.

After filing, your case will move through different stages based on the type of bankruptcy.

The Role of the Bankruptcy Licensed Insolvency Trustee (LIT)

The LIT is important in the bankruptcy process. Their role includes:

• Reviewing your financial documents
• Conducting the Meeting of Creditors, if necessary
• Collection and distribution of funds to creditors

Post-Bankruptcy Considerations

Once your bankruptcy is complete, here is what to keep in mind:

• Debts Discharged: Most unsecured debts, like credit cards and personal loans, are wiped out. But some, like student loans, child support, and other debts, may not be discharged.
• Impact on Credit Report: Bankruptcy stays on your credit report for up to 6 or 7 years after discharge, which can make new credit harder to obtain. However, it also shows creditors you took formal steps to address debt.
• Rebuilding Your Financial Life: Bankruptcy offers a fresh start. Focus on rebuilding by budgeting, saving, and gradually restoring your credit.

Rebuilding Credit After Bankruptcy

After bankruptcy, rebuilding your credit is an important step to moving forward financially. While bankruptcy can significantly impact your credit score, it does not mean you are locked out of the credit system forever. Here are some strategies to help you rebuild:

Obtain a Secured Credit Card

A secured credit card is one of the simplest ways to start rebuilding credit after bankruptcy. With a secured card, you make a deposit that acts as your credit limit. By keeping balances low and paying off the card in full each month, you can gradually improve your credit score over time.

Pay Bills on Time

Your payment history is a major factor in your credit score. To rebuild, consistently pay all bills on time—not just credit cards, but also utilities, rent, and any other monthly expenses you may have. Setting up automatic payments or reminders can help you avoid missed payments.

Monitor Your Credit Report

Regularly checking your credit report is important for tracking your progress and spotting any errors or fraud. You are entitled to one free credit report per year from each of the two major credit reporting agencies (Equifax and TransUnion). Reviewing these reports can help you address any issues promptly.

Keep Credit Utilization Low

Credit utilization is the ratio of your credit card balances to your credit limit. Aim to keep this ratio below 30% to show that you are using credit responsibly. Even with a low credit limit, paying down balances consistently can make a positive impact on your score.

Avoid Opening Too Many Accounts

Opening multiple new accounts at once can make you appear financially unstable to lenders and can temporarily lower your score. Each credit application results in a hard inquiry on your report, so take it slow and only apply for an account if you really need to.

Be Patient

Rebuilding credit takes time and consistent effort. You may start seeing improvements within a year or two with responsible credit management, but it typically takes three to five years to reach a credit score strong enough for more favourable loans and credit cards.

How Farber Can Help

While bankruptcy can provide you relief from overwhelming debt, it is important to have professional guidance during and after the process. One of our Licensed Insolvency Trustees (LIT) can help you navigate the legal complexities of the bankruptcy system. They will help you determine the best course of action, explain your rights, and ensure that you comply with the requirements throughout the process.

Financial education is important for avoiding future financial struggles. Consulting with professionals will not just help you through the bankruptcy process but also provide you with the tools you need to achieve long-term financial success. Remember, bankruptcy is not the end in itself—it is an opportunity to start over, rebuild, and work toward a more secure and prosperous financial future. Contact us for a free consultation on how to best manage your finances today!