Bankruptcy Questions & Answers
The following is a list of frequently asked bankruptcy questions. To read the answers please follow the links below:
- What is bankruptcy?
- Who may file for bankruptcy?
- How do I become bankrupt?
- What happens to my debts?
- Which assets can I keep?
- What happens to my other assets?
- What happens to my income?
- What are my duties during the bankruptcy?
- Is bankruptcy ever denied a person?
- When am I discharged from bankruptcy?
- What if I have been bankrupt before?
- Can a creditor force me into bankruptcy?
- What happens to tax refunds?
- Will my name be in the newspaper?
- How will bankruptcy affect my cosigned debts?
- Can I leave B.C. or Canada after I file for bankruptcy?
- What about windfalls?
More information on bankruptcy and alternatives to bankruptcy available to you
Depending on your circumstances, it might be that you do not need to file for bankruptcy, that an alternative to bankruptcy, such as a consumer proposal, is a more suitable solution. You can use our Free Case Evaluation tool to find out what your options are and which one fits you best.
What is bankruptcy?
The fundamental principal of bankruptcy is to permit an honest, but unfortunate, debtor to obtain a discharge from his/her debts, subject to reasonable conditions. Because of your inability to pay your debts, you assign all of your assets, except those exempt by law, to a licensed insolvency trustee (formerly “bankruptcy trustee”). This process relieves you of most debts, and legal proceedings against you by creditors should stop.
Who may file for bankruptcy?
In order to file for bankruptcy in Canada, you must live or do business in Canada and be insolvent. To be an insolvent person you must owe at least $1,000 and must:
- Be unable to pay your debts as they become due, and/or;
- Have ceased paying your current obligations as they become due, and/or;
- Have more debts than realizable value of assets.
How do I become bankrupt?
First, you call or meet with a licensed insolvency trustee who will assess your financial situation and explain the options available to you.
Second, you will complete an application form which will provide the trustee with more detailed information about your financial affairs. The trustee will then prepare various bankruptcy documents which you will sign in order to become bankrupt. For more details, please see Filing Bankruptcy & Key Steps in the Bankruptcy Process.
What happens to my debts?
Upon your discharge from bankruptcy (usually at the end of nine months) all your debts are extinguished. However, the following debts are not released by bankruptcy:
- Child support payments, alimony;
- Fines or penalties imposed by the court;
- Debts obtained by fraudulent means or fraudulent misrepresentations;
- Non-declared debts that would have the effect of defrauding creditors;
- Court awards for damages for bodily harm intentionally inflicted; and,
- Student loans where school was last attended less than seven years prior to bankruptcy.
Which assets can I keep?
You are permitted to keep some assets in a bankruptcy. These exemptions are set by various federal and provincial laws. For personal bankruptcy in B.C., the following assets are exempt:
- $4,000 worth of household goods.
- $10,000 worth of Tools of the Trade.
- A motor vehicle worth $5,000 (and $2,000 for maintenance debtors).
- Equity in a home valued at $9,000 ($12,000 if living in the Capital Regional District and the Greater Vancouver Regional District).
- All necessary clothing and all required medical aids (of a debtor or a dependent)
- Registered homestead to a value of $2,500.
- Certain insurance investments, where the designated beneficiary is a spouse, child, grandchild, or parent of the person whose life is insured.
- RRSP investments except for amounts invested in the year prior to bankruptcy.
Where a creditor holds security against any asset, the creditor will normally be allowed to exercise its rights to realize on his security. However, you can often make arrangements with the secured creditor so that you may keep possession of the asset and continue to make payments on the secured loan.
What happens to my other assets?
Upon your assignment in bankruptcy, all of your non-exempt assets automatically vest in the trustee. The trustee has a duty to realize on these assets for the general benefit of your creditors. This includes such assets as non-exempt real estate and vehicles, and financial assets such as RESPs, GICs, term deposits, etc. Personal effects such as jewelry, collectibles, recreational equipment, etc. are also non-exempt and must be turned over to the trustee or you may elect to purchase these assets back from the trustee if you wish to keep them.
What happens to my income?
During the bankruptcy, your income from all sources must be reported to the trustee. A standard level of income is set by the Superintendent of Bankruptcy based on the number of dependants in your household. Any income earned above this amount is considered “surplus income” and a portion of it is required to be paid to the trustee during the period of bankruptcy.
What are my duties during the bankruptcy?
In general, your duties during the bankruptcy are as follows:
- Disclose and deliver to the trustee all non-exempt property in your possession or control;
- Make available to the trustee all books, records and relevant documentation relating to your assets and financial affairs;
- If required, attend for an examination under oath regarding your conduct, causes of bankruptcy and disposition of assets;
- If required, provide the trustee with assistance in realizing on the assets of the estate;
- If required, attend at all meetings of creditors;
- Disclose to the trustee details of all property disposed of during the twelve months prior to bankruptcy and any property gifted or transferred within five years prior to the bankruptcy; and,
- Inform the trustee of any material change in your financial situation.
For more detailed information please see Duties of the Bankrupt (excerpt from the Bankruptcy and Insolvency Act).
Is bankruptcy ever denied a person?
As long as you are insolvent and have been discharged from any previous bankruptcies, you will qualify for bankruptcy and have the right to file. However, you will require a licensed insolvency trustee to agree to act as trustee in your bankruptcy administration. As long as your situation is not overly complex or contentious, that should not be a problem.
Although you may qualify for bankruptcy, your creditors and your trustee do have the right to oppose your discharge from bankruptcy. This usually occurs if you have surplus income or have not complied with your duties.
When am I discharged from bankruptcy?
For first time bankrupts, an automatic discharge will take place either after nine months if you have no surplus income or after 21 months if you do have surplus income.
For second time bankrupts, an automatic discharge will take place after 24 months if you have no surplus income or after 36 months if you have surplus income.
These automatic time periods will apply if you have complied with your duties and neither of the creditors, the Superintendent of Bankruptcy, or the trustee, have opposed your bankruptcy discharge. If there is an opposition to your discharge, the matter is normally heard before a Registrar or a Judge.
If you have large income tax debts ( greater than $200,000 and more than 75% of your total unsecured debts ) you will not be eligible for an automatic discharge and must apply for your discharge in the court after the applicable automatic discharge time period mentioned above.
For more information see Bankruptcy Discharge.
What if I have been bankrupt more than once before?
If you have had more than one prior bankruptcy you will not receive an automatic discharge from bankruptcy. The trustee will arrange for a hearing in the Bankruptcy Court to consider your discharge from bankruptcy. The type of discharge you receive will depend on:
- The circumstances of your current and previous bankruptcy;
- Your conduct during the bankruptcy; and,
- Your current financial situation and earning capacity.
For two or more prior bankruptcies the courts can grant either:
- A “Conditional” order of discharge requiring continuing payments into the bankruptcy estate; or,
- A “Suspended” order of discharge which delays your discharge for a period of time; or,
- In some cases, refuse to grant a discharge.
You should consult with a trustee for more information.
Can a creditor force me into bankruptcy?
For individuals, it is rare that a creditor forces a bankruptcy to occur, but it can happen. The creditor must petition the court for what is called a Receiving Order. In order for the court to grant the Receiving Order, the creditor must be owed at least $1,000 and it must be shown that the debtor has committed an “act of bankruptcy” within the six months preceding the date of the petition. There are a number of “acts of bankruptcy” as defined under the Bankruptcy and Insolvency Act. However, the one most commonly relied upon by a petitioning creditor is that a debtor has “ceased to meet his liabilities generally as they come due”.
The petitioning creditor must fund the legal costs of the petition and possibly also guarantee the costs of the trustee, while any potential net realizations by the trustee will be distributed to all creditors on a pro rata basis. For this reason, bankruptcy petitions are infrequent and are generally restricted to limited companies where substantial debts and realizable assets are involved.
What happens to tax refunds?
During the year of bankruptcy, the trustee must prepare and file an income tax return from January 1st to the date of bankruptcy. This return is called a pre-bankruptcy tax return.
Normally the trustee also prepares a second tax return from the date of bankruptcy to the end of the year. This is called a post-bankruptcy tax return. If a refund is forthcoming from either of these returns, or for any years prior to bankruptcy, it will be forwarded to the trustee by Canada Revenue Agency. Income tax refunds, as well as any GST credits, form part of the estate assets.
Will my name be in the newspaper?
For most bankruptcies, where a person’s financial affairs are not overly complicated and the realizable value of assets available to the unsecured creditors is less than $15,000, there is no requirement for a notice to be published in a local newspaper. However, all bankruptcies are a matter of public record and the trustee is required to make a reasonable effort to identify and provide notification to all creditors. Although this rarely occurs, a trustee could publish a notice if he feels there may be a benefit in doing so, such as identifying assets or creditors not disclosed by the bankrupt.
How will bankruptcy affect my cosigned debts?
When a friend or family member co-signs or guarantees your loan, they are normally taking full legal responsibility for that debt. The exception would be in cases where the loan guarantee is for only a specific limited amount. Assuming the guarantee is not limited, the bank or lending institution has full recourse against the cosigner for any amounts not collected from your bankruptcy. Also, once your loan payments are in default, the bank does not have to first exhaust all collection efforts against you prior to commencing any collection proceedings against the cosigner.
Can I leave B.C. or Canada after I file for bankruptcy?
Filing for bankruptcy does not prevent you from leaving the province or traveling internationally. However, your duties as a bankrupt (such as submitting monthly income and expense forms and attending counseling sessions) must be fulfilled regardless of your location. If you are within Canada, normally a local Trustee or counsellor can conduct the two required counselling sessions. If you are in a more remote area of the country, or are outside Canada, the counselling can be done over the telephone or via email.
What about windfalls?
All property that you obtain or acquire rights to while you are not yet discharged from bankruptcy, vests in your trustee for the general benefit of your creditors. This includes money received from “windfalls” such as lottery winnings and inheritances. (This is different from earnings from employment or business which is dealt with as surplus income.)
If you receive any windfalls or become aware of your entitlement to any, you should advise your trustee immediately. These funds are required to be paid to the trustee for distribution to your creditors. Any funds remaining after payment of your creditor’s claims and bankruptcy administration costs will be returned to you.