What is Bankruptcy and is it Right for You?

Let’s face it—nobody wants to talk about bankruptcy. It is a heavy word that often brings up feelings of fear, uncertainty, and, let’s be honest, a bit of confusion.

But here is the thing: understanding bankruptcy does not have to be overwhelming. In fact, it is just one tool in the financial toolkit for people who find themselves in deep debt and need a fresh start.

Whether you are at the end of your financial rope or simply exploring options, this guide will walk you through everything you need to know about bankruptcy in Canada. From understanding the basics to exploring alternatives like consumer proposals, we will break it down so you can make the best choice for your financial future.

Bankruptcy 101: What It Actually Means

First things first: what exactly is bankruptcy? In Canada, bankruptcy is a legal way to get some relief when you are drowning in debt and cannot keep up with payments. It is all governed by something called the Bankruptcy and Insolvency Act (BIA), which lays out the rules for how bankruptcy should be handled.

Think of the BIA as the guidebook for making sure things are done fairly – it helps you get a fresh start while ensuring creditors (the people you owe money to) still get what is owed to them as best as possible.

When you file for bankruptcy, you are basically saying, “I cannot pay my debts.” But do not worry – it is not the end of the world!

You will be paired with a professional called a Licensed Insolvency Trustee (LIT). This person is like your bankruptcy tour guide, walking you through the entire process. The LIT will help sell off any non-essential assets and use the proceeds to repay creditors. The best part? Once it is all done, most of your remaining debts are discharged.

But here is the kicker: not all debts go away with bankruptcy. Things like certain taxes, student loans (in some cases), and any spousal or child support payments are still on the table.

What Kind of Bankruptcy Are We Talking About?

Not all bankruptcies are created equal. Depending on your situation, there are different types of bankruptcy and insolvency proceedings in Canada. Understanding these options is key to knowing what might work for you.

Personal Bankruptcy

This is the most common kind and is used by individuals who just cannot keep up with their personal debts such as credit cards and personal loans. In this case, non-exempt assets are sold off, and after about nine months – assuming you stick to the terms – you will likely be discharged from most debts. Consider it your financial reboot.

Business Bankruptcy

Businesses can also file for bankruptcy if they are financially underwater. Depending on whether the business has a chance of bouncing back or is on its last legs, the process might involve liquidating assets to repay creditors or restructuring through insolvency.

Consumer Proposal

Not ready for bankruptcy just yet? Enter the consumer proposal. If you have unsecured debts under $250,000, you might be able to offer creditors a deal through a legally–binding debt settlement agreement: you repay part of what you owe over a span of up to five years, and they agree to forgive the rest. It is like hitting the pause button on your debts without going all the way into bankruptcy.

Division I Proposal

Think of this as the “big leagues” version of a consumer proposal, designed for businesses or individuals with debts over $250,000. It lets you reorganize those debts into something more manageable without diving into full bankruptcy.

The Liquidation Process

If you go the bankruptcy route, liquidation is part of the deal. But do not worry, it is not as scary as it sounds. Liquidation is just a fancy way of saying that your non-exempt assets are sold to help repay creditors.

Each province in Canada has different rules about what assets you can hang onto, but generally, everyday necessities like clothing, essential household items, and a modest car are safe. The vacation homes, boats, and extra cars? Those will probably have to go.

The liquidation process involves your Licensed Insolvency Trustee assessing what you owe and selling off your non-exempt assets. Creditors get their slice of the pie from those proceeds and once that is all done, your remaining debts are typically discharged. This could give you that fresh financial start you have been dreaming of. But to qualify for bankruptcy, you need to owe more than $1,000 and be unable to meet your debt payments as they come due.

The Bankruptcy Filing Process: Step-by-Step Breakdown

So, how does filing bankruptcy actually work? Let’s walk through the main steps so you are not in the dark if this becomes something you are considering.

1. Consult a Debt Expert

Your first stop is a chat with a Debt Solutions Manager. They will look at your financial situation and help you decide whether bankruptcy is the best option or if something else—like a consumer proposal—might work better.

2. File the Paperwork

If bankruptcy is the way to go, a Licensed Insolvency Trustee will handle the paperwork. You will need to provide details about your debts, assets, and income, and they will file everything with the Office of the Superintendent of Bankruptcy (OSB).

3. Automatic Stay of Proceedings

This sounds super official, but it is a good thing. The minute you file for bankruptcy, something called an “automatic stay” kicks in, which means creditors have to stop reaching out to you to pay your debts.

4. Credit Counselling Sessions

As part of the bankruptcy process, you will need to attend two mandatory credit counselling sessions. These are designed to help you build better money habits and avoid ending up in the same situation again.

5. Discharge from Bankruptcy

If you follow the rules and attend the counselling sessions, you will be discharged from your bankruptcy, and most of your debts will be wiped away.

Working with a Bankruptcy Attorney

While working with a Licensed Insolvency Trustee is a requirement for filing bankruptcy in Canada, consulting with a bankruptcy attorney can also be a good idea, especially if your financial situation is complex. A bankruptcy attorney can provide additional legal guidance, help protect your assets, and ensure that your rights are upheld throughout the process.

The attorney can also advise you on the best strategy, whether that involves bankruptcy, a consumer proposal, or another form of debt relief.

Having an expert—even more than one—in your corner can make the process smoother and help you avoid costly mistakes.

The Impact of Bankruptcy on Your Financial Future

Filing for bankruptcy has both short-term and long-term consequences on your financial life. In the short term, it may provide immediate relief from creditors and stop wage garnishments or lawsuits. However, the long-term effects can be more significant, particularly when it comes to your credit rating and borrowing ability.

• Credit Rating: Bankruptcy will significantly impact your credit, and the bankruptcy will remain on your credit report for six to seven years, depending on the type of bankruptcy and your province.
• Borrowing Ability: It may be difficult to obtain credit immediately after bankruptcy. When you do qualify for credit, you may face higher interest rates and stricter borrowing terms.
• Eliminate Your Debts: On the positive side, bankruptcy can eliminate most of your debt, providing you with a clean slate to rebuild your finances and start fresh.

Rebuilding Credit After Bankruptcy: How to Bounce Back

Okay, so you have gone through the bankruptcy process. Now what? It is time to rebuild that credit. Yes, filing for bankruptcy will negatively impact your credit, but you can absolutely recover with time and effort. Here is how to get started:

• Make a Budget and Stick to It: It is time to get cozy with a budget. Track your expenses, cut out unnecessary costs, and make sure you are living within your means.
• Open a Secured Credit Card: A secured credit card is a great tool for rebuilding credit. You put down a deposit, and that amount becomes your credit limit. Pay it off on time, every time, and you will start seeing improvements in your credit score.
• Pay Everything on Time: This goes for all bills – not just credit cards. Whether it is your rent, utilities, or phone bill, paying on time will slowly but surely boost your credit score.
• Monitor Your Credit Report: Keep an eye on your credit report for errors and check your progress as you rebuild your financial profile.

Bankruptcy Alternatives

Bankruptcy is not the only game in town. Before you make any decisions, you should speak with a Licensed Insolvency Trustee to discuss other debt-relief options to consider.

Consumer Proposal

As mentioned earlier, a consumer proposal lets you offer creditors a portion of what you owe in exchange for avoiding bankruptcy. It is a popular choice for those who want to keep their assets and regain control of their financial future. Learning the differences between consumer proposals and bankruptcy will help you make an informed choice.

Debt Consolidation

Debt consolidation involves rolling all your debts into one loan with a lower interest rate. You will make one payment instead of juggling several, which can make life a lot easier. However, as convenient as these loans sound, they are not for everyone and can be hard to qualify for if your credit has already been damaged. They also usually involve higher interest rates and can lead to greater financial strain in the long run.

Debt Settlement

This can sometimes be another way of saying debt consolidation or debt negotiation. With debt settlement, you negotiate with creditors to pay off a portion of your debt rather than the whole amount. It is a bit like bargaining at a garage sale but for your finances.

It is important to note that debt settlement firms, as capable as they may be, are not licensed by the federal government to file proposals and bankruptcies as Trustees can. This means that they may not be able to get rid of all your debt problems.

The Big Takeaway

At Farber, we have been helping Canadians take control of their financial future for decades. Whether you are considering bankruptcy, exploring alternatives like a consumer proposal, or just looking for professional advice on how to get back on track, we are here to guide you every step of the way.

Our team of Licensed Insolvency Trustees is experienced, compassionate, and ready to help you find the best path forward. We will take the time to understand your unique situation, explain all your options in simple, easy-to-understand language, and help you make the most informed decision for your financial well-being.

We offer free consultations, so you can ask questions, discuss your concerns, and get expert advice with zero pressure. Whether it is through bankruptcy or a consumer proposal, we will work with you to create a solution that makes sense for your life.

Ready to take the first step? Book a free consultation and start your journey towards building a better relationship with money. You deserve peace of mind, and we are here to help you find it!