What is bankruptcy?

Bankruptcy is a legal process that frees, or ‘discharges’, you from some, and very often all, of your debts.  The Bankruptcy and Insolvency Act is a federal law that sets out the procedures and rules for bankruptcy.  The law is administered by trustees and regulated by the federal Office of the Superintendent of Bankruptcy Canada.

While bankruptcy is a serious legal process, you do not need to see a lawyer to go bankrupt.  The first step is to contact a trustee in bankruptcy , also called  Licensed Insolvency Trustee, who will review your financial situation and give you advice on your options.  You can get a free initial consultation with a Licensed Insolvency Trustee, and they will review your options with you, including ways to avoid bankruptcy.

To be eligible for bankruptcy you must:

1.  be released, or ‘discharged’, from any previous bankruptcy;
2.  owe at least $1000 in unsecured debt;
3.  live, do business, or have property in Canada; and
4.  You must be unable to make your regular payments on your debts as they become due, or, the value of all your assets must be less than your total debts.

If you have never been bankrupt before you will likely be in bankruptcy for either 9 months or 21 months, depending on how much money you make and the number of people in your household.  

If you’ve been bankrupt before the process will be longer.  For example, if this is your second bankruptcy you’ll be in bankruptcy for either 24 or 36 months, depending on your situation.When you go bankrupt your creditors must stop contacting you for payment, and any legal action to collect your debts stops.

While you are bankrupt you must report your monthly income and expenses to the trustee.  If your income is below the federal Superintendent of Bankruptcy’s Standards, which are based on Low Income Cutoffs from Statistics Canada, then you will be asked to make a modest contribution to help cover the cost of the bankruptcy administration.  If your income is above the standard, then you have a legal obligation to fund your estate, according to a formula.

The trustee will also sell some of your assets (things you own), either to you or to someone else, to repay as much of your debts as possible.  Some assets may be exempt, and cannot be sold.  Examples of exempt assets are:

• Personal belongings (like clothing), food and fuel;
• Household furnishings;
• Medical aids;
• RRSPs, except for contributions made in the year prior to bankruptcy;
• Some vehicles, up to a certain dollar value and depending on what they are used for (work or family); and
• Any tools you use for your job, up to a certain dollar value.

You may be able to retain ownership of some or all of your financed assets.  The factors determining whether you can keep financed assets are complex, so you should consult with a trustee for information about your particular situation.

During the period of bankruptcy you must perform certain duties such as going to two counselling sessions for money management help, and keeping the trustee informed of your financial situation. If you fail to carry out these or other duties, the trustee or a creditor may oppose your discharge from bankruptcy.

If you are eligible for automatic discharge then the trustee will provide you with a Certificate of Discharge, to confirm the conclusion of your bankruptcy and release from debt.  If you are ineligible for an automatic discharge, on account of conduct, underfunding of the estate or for some other reason then your application for discharge must be made in the Supreme Court before a judge or the Registrar in Bankruptcy.

What happens if I cannot pay my debts?

If you fail to make your debt payments – for example, you miss loan payments or the minimum monthly payments on your credit cards, those debts will go into default. This may mean that:

• You will have to pay a higher interest rate, and additional interest;
• The creditor may demand that you repay the whole amount of the debt;
• The debt may be sent to a collection agency;
• Your credit rating may be downgraded;
• You may face legal action, and have your wages garnished and/or assets seized;
• You will have difficulty getting credit in the future.

In addition, a creditor who has ‘security’ on an asset may seize that asset if you do not make payments on the loan.  Creditors who have a security interest are called ‘secured’ creditors.  Security is sometimes also called collateral, and may include money or goods that you promise to give the creditor if you do not pay the debt.  A common type of security is property, such as your vehicle or your house.  For example, if you default on your car loan the creditor may be able to repossess your car without having to sue you first.  If you do not pay your mortgage the mortgage lender has the right to go through a court process to foreclose on your home. See the page on foreclosure for information about the foreclosure process.

If you are having trouble paying your debts you should get some advice from a licensed trustee in bankruptcy who will review your financial situation and give you advice on your options.
Some of the options a trustee in bankruptcy may discuss with you include:

1) consolidation loans
2) refinancing
3) credit counselling
4) consumer proposal - a formal offer to settle your debts with your creditors
5) Division 1 proposal (another formal way to offer to settle your debts with creditors)
6) bankruptcy.

What is a consumer proposal?

A consumer proposal is an contract between you and your unsecured creditors providing for the settlement of debts over a period of time (no more than 5 years).  Your debts must not exceed $250,000, excluding debts secured by your family home.  For example, you might make a proposal to your creditors to pay 60 cents on each dollar you owe. It does not affect the rights of secured creditors.  An example of a secured creditor is a bank that has given you a loan secured on your home. If your creditors do not accept your consumer proposal or you fail to complete the terms of the proposal they can take legal action against you.  You should contact a licensed trustee in bankruptcy, or Service Nova Scotia's Debtor Assistance Program, for further information about consumer proposals.

What are the drawbacks to declaring bankruptcy?

 There are a number of drawbacks:

• You must report your finances on a regular basis to the trustee in bankruptcy, and the trustee may make decisions, which you may not have made yourself, such as selling a vehicle.
• You lose ownership of all assets that are not exempt from seizure under the bankruptcy process.
• Filing for bankruptcy may make it difficult for you to borrow money - at least in the short term, and will affect your credit rating. 
• Your ability to get credit after your discharge will depend on whether you can convince potential lenders of your financial rehabilitation. 
• If you declare bankruptcy that includes a student loan, you will not be able to get a student loan until at least three years has passed since your discharge from bankruptcy.

How does bankruptcy affect my credit rating?

A bankruptcy will automatically downgrade your credit rating to the lowest level.  During the counselling sessions with the trustee, the trustee will show you how to rebuild your credit rating and use credit in the future. Your credit rating should improve after bankruptcy if you demonstrate credit worthiness, including a track record of income.  The fact that you went bankrupt will show up on your credit report for 6 years after your release from a first-time bankruptcy, and for 14 years for a second time bankruptcy.  The Financial Consumer Agency of Canada has information about credit reports and scores.

My partner or spouse is not bankrupt.  Do I include their assets and debts in my bankruptcy?

You would not include your partner/spouse’s assets or debts unless they are jointly held with your partner or spouse.  Your bankruptcy only involves your assets and debts.

If you own assets jointly with another person, then your portion of the non-exempt assets is part of the bankruptcy.  An example is a house that you own jointly with your partner.  The trustee will advise you on how any jointly owned assets will be dealt with in your situation.

If you and another person took on a debt together – for example, someone co-signed on a debt with you - the other person will still owe the debt even though you will be released from it after your bankruptcy.  If you co-signed a debt for someone else, the creditor will not be able to demand payment from you if the other person stops making the regular payments on the loan. 

It is important to tell the trustee if there are joint assets or debts so the trustee can assess how they should be dealt with.

Is my spouse or partner responsible to pay off my debts?

Your spouse, common law or same sex partner is only responsible for your debts if you jointly owe them, for example, a joint bank account in overdraft, a join loan or joint credit card, or a credit card where all cardholders are jointly responsible for the debt, regardless of who made the charges.

How much does it cost to declare bankruptcy?

The Bankruptcy and Insolvency Act sets out the fees a trustee is entitled to charge, as well as fees for things like counseling and filing documents with the Official Receiver.   

Your initial consultation with a trustee in bankruptcy is often free.

During your bankruptcy the Canada Revenue Agency sends any GST rebate cheques and/or income tax refunds to the trustee, as they are considered to be property of your estate in bankruptcy.  There are limits as to how much GST the trustee is permitted to retain, so at some point during the course of your bankruptcy administration you may once again receive the GST rebates.  

You will also have to make monthly payments to the trustee, the amount of which will depend on your level of income. These are called surplus income payments.

You should talk to a trustee in bankruptcy about the specific fees and costs involved in your situation.

What can I do if I cannot afford a trustee?

You should contact a trustee and set up a meeting. Often trustees will offer an initial consultation at little or no charge. At the consultation you can describe your financial situation and the trustee can discuss options with you.

If you've seen at least two different trustees and still find you can't afford it, contact the Office of the Superintendent of Bankruptcy at 1 877 376-9902 or online at osb.ic.gc.ca for information about their Bankruptcy Assistance Program . The Bankruptcy Assistance Program can help you find an affordable trustee, as long as you have received quotes from at least two different trustees in bankruptcy and cannot hire them.

What happens if I cannot pay off my student loans?

If you fail to make your minimum monthly payments on your student loan, the loan will go into default. This means you may have to pay additional interest, be prevented from applying for a student loan in the future, have your debt sent to a collection agency, potentially have your credit rating downgraded, lose future income tax and GST rebates, face legal action, and lose eligibility for the Federal government's interest relief program.    

If you are having trouble meeting you student loan payments you should apply for the government interest relief program. You can apply for this program any time during the repayment period. This program is designed to eliminate most if not all the interest on your student loan. The creditor holding your loan will have the application forms for this program. 

Go to canlearn.ca for information about the federal government's student loan Repayment Assistance Plan, or, for Nova Scotia student loans, go to studentloans.ednet.ns.ca (Nova Scotia Department of Labour & Advanced Education).

Can I declare bankruptcy on my student loans?

Yes. You may file for bankruptcy on your student loans at any point, but  you cannot be discharged from your student loan until seven years have passed between the time your studies ended and the date of your bankruptcy.

Declaring bankruptcy on your student loans before this seven-year period may not be much help to you, depending on how much other debt you have.

Once you are discharged from bankruptcy you are released from your student loan as long as your date of bankruptcy falls more than seven years after your studies concluded.

If it has been less than seven years since your last semester of school and you are having trouble paying your loan, you could apply for bankruptcy on other debts you may have, and once they are discharged you may be able to concentrate on paying off your student loan.

Depending on the circumstances, after 5 years have passed you may be able to apply to court to have your student loans discharged under the hardship provisions of the law, but you should talk with a licensed trustee in bankruptcy about your specific situation.

Depending on your situation you may also want to consider a consumer proposal as an alternative to bankruptcy.  You should talk with a trustee about your situation.

Contact the Office of the Superintendent of Bankruptcy at 1 877 376-9902 or online at osb.ic.gc.ca for more information about student loans and bankruptcy.

What is a discharge from bankruptcy?

A discharge from bankruptcy is your release from:

• bankruptcy, so you are no longer a bankrupt person, and
• the unsecured debts you brought with you into bankruptcy.

Are there debts that are not discharged in a bankruptcy?

Some debts don’t get discharged.  This means you will still owe them (be liable for them) after your bankruptcy is over. 

Examples of debts that aren’t discharged are:

• student loans where you have not been out of school for 7 years.  In some cases you may ask the court to forgive a student loan once you have been out of school for 5 years. Speak with a trustee about this option;
• spousal support ('alimony');
• child support;
• debts arising out of fraud;
• court ordered fines, penalties or restitution.

Speak with your trustee if you have questions about a particular debt, and whether bankruptcy will release you from that debt.

My loan has gone to a collection agency what can I do?

You have several options if your loan has gone to a collection agency. You can:

• do nothing, and see what action the agency takes
• contact a credit counselling service for help with your debt problems and information about your best course of action
• make a proposal to the collection agency to make payments to them that you can afford
• make a consumer proposal or declare bankruptcy
• see a lawyer. It is especially important to try to see a lawyer if you do not agree that you owe the debt, or if you get any court documents.  

Can a collection agency seize my property?

A collection agency can only seize property if it has a court order, meaning the agency would have to sue you. However, if the government is a creditor, for example, a student loan, tax debt, overpayment of a social benefit, the government may seize GST rebates and tax refunds to recover the debt.

What assets can be seized with a court order depends on your individual circumstances. Provincial laws outline a few basic rules as to what property can or cannot be seized. For example, in Nova Scotia the following property cannot be seized:

• Furniture or appliances that do not exceed a certain amount ($5,000). In most instances, collection agencies are not be interested in seizing used furniture or household appliances anyway.
• An automobile that you need for work if its value does not exceed $6,500, and there is no public transit. If you do not need the car for your work its value cannot exceed $3,000. However, if a financial institution lent you money specifically to buy the car and you fail to make payments on the loan, the car may be seized whatever its value and whether or not you need it for work, as they are a secured creditor.
• Tools or items that you use for your employment to a value of $1,000.

Keep in mind that a collection agency must first sue you in court and get a court order before it can seize any of your goods or money. The collection agency must notify you if they decide to sue you.

Go to the page on Collection Agencies  for more information, or contact Service Nova Scotia, as they regulate collection agencies in Nova Scotia.  The Financial Consumer Agency of Canada also has information about dealing with collection agencies.

More information

 For more information contact:

• Office of the Superintendent of Bankruptcy - regulates bankruptcies, oversees and licenses trustees in bankruptcy (licensed insolvency trustees), and has helpful general information for debtors and creditors
  Website  www.osb.ic.gc.ca
  Industry Canada
  Phone: 1 877 376-9902 (toll free)

• A trustee in bankruptcy, also called a Licensed Insolvency Trustee.  Trustees are listed in the Yellow Pages  under 'Bankruptcies', or search for 'trustee in bankruptcy' online.  You can also get a listing of local trustees  from the Office of the Superintendent of Bankruptcy at 1 877 376-9902 (toll free) or osb.ic.gc.ca

• A credit counselling agency.  Credit counsellors cannot administer bankruptcies or consumer proposals, but can help you in a number of ways, such as a debt management plan, budgeting, wise credit use, and general money management. The Financial Consumer Agency of Canada  - has a fact sheet about how to find a reputable Credit Counselling service: www.fcac-acfc.gc.ca.
  
  
• Debtor Assistance Program, offered through Service Nova Scotia. Provides help with managing your money, dealing with creditors, and consumer proposals, but cannot adminster bankruptcies (you need a licensed trustee for a bankruptcy).  Contact the Debtor Assistance Program at 1 800 670-4357 or 902-424-5200, or online at gov.ns.ca/snsmr/access/individuals/debtor-assistance.asp
  
• Nova Scotia Legal Aid legal information about bankruptcy

• Financial Consumer Agency of Canada - fcac-acfc.gc.ca, or call 1 866 461-3222.  Lots of consumer information on many money related topics.