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 Insolvency Trustee who will review your financial situation and give you advice on your options.

Some of the options a Trustee may discuss with you are:

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.

Watch 'Discussing your options with a Licensed Insolvency Trustee', from the Office of the Superintendent of Bankruptcy Canada.

What is bankruptcy?

Bankruptcy is a legal process that frees, or “discharges,” you from your debts, with a few exceptions like spousal support, child support and court fines, to name a few.  A bankruptcy does release you from most debts owed to the Canada Revenue Agency such as income tax.  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 legal process, you do not need to see a lawyer to file a bankruptcy. 

The first step is to contact a Trustee who will review your financial situation and explain your options.  Most Trustees offer free initial consultations.  Only a Trustee can administer a bankruptcy or a consumer proposal so don’t be misled by ads or folks claiming that they offer bankruptcy services or that they can complete an application for bankruptcy for you or that they can file a consumer proposal for you.  

To be eligible for bankruptcy you must:

1. Be released, or “discharged,” from any previous bankruptcy;
2. Owe at least $1,000 in unsecured debt;
3. Live, do business or have outstanding business debts, or have property (personal or real) in Canada; and
4. 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 your household income and the number of people in your household.  

If you’ve been bankrupt before, the process will be longer and the record of the bankruptcy will stay on your credit report for a longer period.  For example, if this is your second bankruptcy you’ll likely be in bankruptcy for either 24 or 36 months, depending on your situation and the record of the bankruptcy will stay on your credit report for 14 years. 

When you go bankrupt your creditors must stop contacting you for payment, and any legal action to collect your debts stops.  This is called a ‘stay of proceedings’.

Watch 'What to expect if you file for bankruptcy', from the Office of the Superintendent of Bankruptcy Canada.

Surplus income - monthly payments to the Trustee

You must make monthly payments to the Trustee, called surplus income payments.  Your Trustee uses that money to repay your creditors. Trustees must follow income tables, called Standards, to calculate how much your monthly payments will be during the bankruptcy.  If you file for bankruptcy and your family income is above the Standard, you will need to make surplus income payments. These payments will continue as long as your income is above the Standard while you are bankrupt. 

The Trustee calculates the monthly payment at the beginning of the bankruptcy, based on your current household income.  Your entire family’s income is used to calculate your surplus income payment. This includes your spouse or partner’s income, as well as any other adult who is contributing towards household income.

Surplus income is the amount of money your household makes that is more than the government’s income table Standard - the amount the government says a family with your income and number of dependents should need to live.

How much money you are allowed to keep depends how many people are in your family. “Family” includes anyone who is part of your family and lives in your home.  The Trustee will also ask you if you have certain expenses that would lower the monthly payments that you must make.  Examples of these expenses are child support, spousal support and medical expenses.

During the bankruptcy you submit monthly income and expense reports to the Trustee so the Trustee can make sure that you are making the right monthly payment based on the Standard.  It also makes you more aware of where you are spending your money!  As the monthly payments are based on your household income during the bankruptcy, the amount of your surplus income payment can change if your income changes.  It is therefore very important that you file these monthly reports on time with the Trustee.

If your household income is below the Standard, then the Trustee will charge you a minimum monthly fee to cover the Trustee’s fees and you will most likely be in bankruptcy for a shorter time than if you are above the Standards.

Watch 'Bankruptcy and surplus income payments', from the Office of the Superintendent of Bankruptcy Canada.

Your assets and what is exempt

At the initial consultation, the Trustee will review your assets and determine which assets:

• are exempt – that is, protected by law and cannot be used to pay your debts
• are secured (financed), and/or
• may be used to pay your debts in a bankruptcy.   

Exempt assets

Examples of exempt assets are:

• Personal belongings such as clothing,  food and fuel
• Household furnishings
• Medical aids
• RRSPs, except for contributions made in the 12 months prior to bankruptcy
• Some vehicles, up to a certain dollar value and depending on what they are used for (work or family)
• Any tools you use for your trade, up to $1,000
• Most life insurance policies
• Pensions

A Registered Education Savings Plan (RESP) is not exempt in Nova Scotia.  Not all of an RESP is available to your creditors though - just the portion you would get if you cash in the RESP prematurely.  This usually excludes any government grants or bonds, as well as the income that has been earned on the RESP.

Secured assets

You may be able to keep some or all of your financed (secured) assets, but it is complex so you should speak with the Trustee about your particular situation.  

For financed assets such as vehicles or campers the general rule is that if you wish to keep the asset you must keep making the payments or the secured creditor will seize the asset.  In this sense, a bankruptcy does not usually affect the asset that is financed.

The rules are a bit different for assets that increase (appreciate) in value, such as real property (a house or land). The Trustee will determine if there is any equity in the asset and discuss with you how to deal with the equity during the bankruptcy if your goal is to keep the asset, such as your house.  Commonly, you will make payments to the Trustee during the bankruptcy for any equity so that you can keep the asset.  As the question of dealing with real property can vary depending on your unique situation and whether you wish to keep the asset, a Trustee will explain how the bankruptcy rules would apply to you and your specific assets.  

Other assets

Other assets that a Trustee will discuss with you include things like investments, potential settlements in lawsuits, inheritances - basically everything that you own or have an interest in!  As the law states that the Trustee can deal with assets no matter where they are, a Trustee will discuss the value of your assets with you whether they are in Nova Scotia or somewhere else in Canada.  You must also tell the Trustee about any assets that you get during the bankruptcy as these may also become part of the assets that are available to your creditors. 

Budget counselling sessions

During the course of the bankruptcy, you must go to two budget counselling sessions.  The Trustee must also file your income tax return for the year in which a bankruptcy happens.  You must give the Trustee your income tax information so the Trustee can file your return in that year.  

If you fail to do any of the things you are required to do during the bankruptcy the Bankruptcy Court may extend your bankrtuptcy until you do what is required.

What is a consumer proposal?

A consumer proposal is a new legal contract between you and your unsecured creditors providing for the settlement of debts over a period of time (no more than 5 years).  

To be eligible to make a consumer proposal to your creditors, your debts must not be more than $250,000, not including debts secured by your family home.  If your debts are above $250,000,  a Trustee may discuss filing a commercial proposal or a bankruptcy.  

Like a bankruptcy, a consumer proposal 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. That means if you do not continue making payments to the secured creditor,  that creditor will take possession of and sell that asset.  

You must go to two budget counselling sessions with the Trustee during the administration of a consumer proposal.  

When you have finished all the payments under the proposal, the Trustee will give you a Certificate of Full Completion which means that your debts have been fully satisfied and that you are no longer legally responsible for the debts.

Watch 'Submitting a consumer proposal to your creditors', from the Office of the Superintendent of Bankruptcy Canada.

What are some drawbacks to filing a bankruptcy or consumer proposal?

While a bankruptcy or a consumer proposal provide much needed debt relief and a fresh start, there are consequences:

• If you declare bankruptcy that includes a student loan, you may not be able to get another student loan until at least three years after your discharge from bankruptcy or completion of your consumer proposal
• A bankruptcy or a consumer proposal does not affect a creditor’s right to pursue a joint debtor, co-guarantor or co-signor – either process only affects your responsibility and not that of another person who may also have agreed to be responsible for the debt
• Your credit score will decrease, making it more difficult to get credit at reasonable interest rates until your credit score improves
• You must report your finances on a regular basis to the trustee, and the trustee may make decisions which you might not have made yourself, such as selling a vehicle
• A bankruptcy may affect your ability to keep or get a security clearance for your job
• A bankruptcy may affect your ability to sponsor a family member to come to Canada from a foreign country
• If you are a director of a corporation, you will have to resign if you file a bankruptcy
• A bankruptcy or a consumer proposal may affect your ability to deal with trust accounts
• An insurance company may refuse you life insurance
• An automobile insurance company may charge you a higher premium

How does bankruptcy affect my credit rating?

Although most people who go to a Trustee already have a lower than average credit score, a bankruptcy or a consumer proposal will mean a further decrease.  

If you have only filed one bankruptcy, the bankruptcy will stay on your credit report for 6 years in Nova Scotia.  

If you declare bankruptcy more than once, the bankruptcies will stay on your credit report for 14 years.

A consumer proposal will generally stay on your credit report for 3 years, even if you have filed more than one consumer proposal or have a bankruptcy in your past.  For this reason, some people choose to file a consumer proposal rather then file a bankruptcy more than once.    

During the budget counselling sessions with the Trustee, the Trustee will explain how to rebuild your credit rating, how to use credit wisely and how to manage your money. Your credit rating should improve after bankruptcy if you demonstrate credit worthiness, including a track record of income.  

The Financial Consumer Agency of Canada has information about credit reports and scores, including how long information stays on your credit report, as do the two credit reporting agencies in Canada, TransUnion and Equifax.

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

Your spouse or partner is only responsible for your debts if the two of you owe them jointly.  For example, a joint bank account in overdraft, a joint loan or joint credit card, or a credit card where all cardholders are jointly responsible for the debt, regardless of who incurred  the charges.  It is sometimes difficult to know if a person is also responsible for your debt, such as the situation where two people are using the same credit card account.  If it is not clear, check with the credit card issuer. 

Generally, if a person did not sign to accept responsibility for a debt, they are not responsible to the creditor for the debt.

Will filing a bankruptcy or consumer proposal affect my spouse or partner's credit?

As long as your spouse or partner did not guarantee your debt or is not a co-signor on one or more of your debts, a bankruptcy will not affect your spouse.  However, if your spouse is also responsible for one or more of your debts, their credit will be affected if your spouse does not continue making the payments on the debt.  This is because a bankruptcy or a consumer proposal only affects your legal responsibility for a debt.  It does not discharge the original debt.  Guarantors and co-signors are still responsible for the debt unless they themselves file a bankruptcy or a consumer proposal.

How much does it cost to file a bankruptcy?

A federal law called the Bankruptcy and Insolvency Act sets out the fees a Trustee is entitled to charge for things like budget counselling and filing documents with the government and the court.

Your initial consultation with a Trustee is usually free.

During your bankruptcy the Canada Revenue Agency (CRA) sends any GST rebate cheques and/or income tax refunds to the Trustee.  While the CRA will send the GST rebate to the Trustee during the entire period of your bankruptcy, only the potential refund during the year in which you file a bankruptcy is forwarded to the Trustee by the CRA. 

You  will also have to make monthly payments to the Trustee.  The amount of these monthly payments depend on your level of income. Your monthly income payments are either based on income standards (called surplus income payments, explained above) or are a minimum fee that a Trustee will charge to cover the costs of the bankruptcy.

Lastly, a Trustee will look at the value of your assets, as talked about above.

What if I cannot afford to pay a Trustee?

If you have spoken to at least two separate Trustees and find you cannot afford the minimum fees, contact the Office of the Superintendent of Bankruptcy at 1 877 376-9902 for information about the Bankruptcy Assistance Program. The Bankruptcy Assistance Program may help you find a Trustee who will allow you to make their minimum fee payment over a longer period of time if making the regular payment would cause you a hardship.  

 You might be eligible for the Bankruptcy Assistance Program if all of the following are true:

• You have contacted two Licensed Insolvency Trustees  and are unable to work out a payment plan with them
• You have not recently been involved in commercial activities, like running a business or selling products
• You do not need to make surplus income payments
• You don’t have assets that need to be sold
• You are not in jail 

You should contact a couple of Trustees and set up a meeting. Trustees usually offer a free initial consultation.  At the consultation you and the Trustee will review your financial situation and discuss your options.  The Trustee will let you know if you will need to make surplus income payments, or have assets that a Trustee would need to take and sell.  Whether you need to make surplus income payments depends on the size of your family and your income. Only a Trustee can tell you if you will need to make surplus income payments, and how much they will be.

Student loans and bankruptcy

Seven-year rule

You will be eligible to be released from your obligation to repay your government student loans if you file for a bankruptcy seven or more years after the date you are no longer a part-time or full-time student.  The date you stop being a student is called your period study end date (PSED). Your PSED is determined by the National Student Loans Centre and is not always the exact day that you ended your studies.  You should contact the National Student Loans Centre to confirm your period study end date before filing either a bankruptcy or a consumer proposal.  

If it has been less than seven years since your PSED when you file a bankruptcy or a consumer proposal and you do not qualify for a repayment assistance program with the National Student Loan Centre, filing a bankruptcy or a consumer proposal will deal with your other debts and allow you to focus on making payments on the student loan.  

Hardship - 5 years

If your student loan is most of your debt, then a bankruptcy or a consumer proposal may not give you the debt relief you need.  

If you still have difficulty making payments on the student loan once your other debts are dealt with by a bankruptcy or consumer proposal, you may apply to Bankruptcy Court to ask to have the student loan released once five years have passed since your PSED.  This is called the hardship exception to the seven year rule.

If you apply to court to release the student loan any time after five years you will have to prove to the court that:

• you have difficulties, and will have ongoing difficulties, making the payments on the student loan (called financial hardship)
• you have acted in “good faith” in dealing with your obligation to repay your student loan.  The court will look at things like
  • how you used your student loan money
  • your efforts to finish your schooling
  • your efforts to repay the loans
  • whether you used available repayment assistance programs like the repayment assistance program with the National Student Loan Centre.

The bankruptcy court has a package that will walk you through the hardship application process to ask to have the student loan released. You may contact the Bankruptcy Court at (902) 424-6908

You can get more information about student loans and bankruptcy from a Licensed Insolvency Trustee, and from the Office of the Superintendent of Bankruptcy Canada: https://www.ic.gc.ca/eic/site/bsf-osb.nsf/eng/br02057.html

What is a discharge from bankruptcy?

A discharge from bankruptcy means you are released from your legal responsibility to repay your debts.  Some debts are not discharged in a bankruptcy - see 'Debts that are not discharged' below.

A discharge is commonly thought of as the end of your bankruptcy.  

Most people get an Automatic Discharge from their debts, meaning that the discharge happens after a period of time without the need for a court hearing.  

Other times, the Bankruptcy Court has to decide on your discharge from bankruptcy.  The most common situations where the court has to decide on your discharge are:

1. You have not completed all the requirements during the bankruptcy, such as going to your budget counselling,
2. A creditor or the Office of the Superintendent of Bankruptcy objects to your release from bankruptcy,
3. You have an extraordinarily high debt to the Canada Revenue Agency which makes up most of your debt, or
4. You have been bankrupt at least twice before.

 At a court hearing for your discharge, the court will hear from the Trustee, you, and anyone who opposes your discharge.  

The court may decide to:

• order an Absolute Order of Discharge if you fulfill certain conditions.  This is called a Conditional Order of Discharge 
• put off your discharge for a period of time, called a Suspended Absolute Order of Discharge,  or
• refuse to grant you a discharge.  A Refused Order of Discharge from bankruptcy is usually for situations where there has been a clear abuse of the bankruptcy process.

It is important to get either your Automatic Discharge or an Absolute Order of Discharge from the court. If you do not and the Trustee closes the administration of the file and gets their discharge, your creditors can start to collect the debts again.

Watch "Understanding the bankruptcy discharge", from the Office of the Superintendent of Bankruptcy Canada.

Debts that are not discharged in a bankrupty or consumer proposal

Some debts are not discharged in a bankruptcy or released in a consumer proposal.  This means you will still owe them after your bankruptcy or consumer proposal is over. 

In a consumer proposal, however, if a creditor agrees that their debt will be released after the terms of the proposal are completed and also votes for the proposal, then that debt is released when the proposal is completed.  This does not happen very often.  

The general rule is that the following debts survive both a bankruptcy and a consumer proposal.  While the creditor cannot ask you to make payments on the debt during the bankruptcy, you will still be responsible for the debt when you receive your discharge from the bankruptcy. 

The most common debts that are not discharged:

• Government Student Loans, including loans under the Apprenticeship Act, where your Period Study End Date is less than seven years from when you file the bankruptcy or the consumer proposal.  As talked about above under Student Loans, there is a hardship exception that says you may apply to bankruptcy court if five years have passed since your Period Study End Date, regardless on when you filed the bankruptcy or consumer proposal, if you can prove both good faith and ongoing financial hardship 
• spousal support, if there is a written agreement or a court order
• child support, if there is a written agreement or a court order
• debts where there was fraud, misrepresentation or you misappropriated funds while in a fiduciary capacity
• court-ordered fines, penalties or restitution.

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

Can a bankruptcy or consumer proposal stop a judgment, execution order or a foreclosure?

A bankruptcy or consumer proposal can:

• stop any lawsuits against you by your creditors
• stop (release) enforcement of a judgment a creditor has against you, except if the Canada Revenue Agency got the judgment.  A properly registered judgment where the Canada Revenue Agency is the creditor is a secured debt and cannot be released by a bankruptcy or a consumer proposal.  A creditor would have a judgment against you if they successfully sued you in court  
• stop a garnishment of your wages, including a garnishment by the Canada Revenue Agency

A bankruptcy or consumer proposal will not stop a foreclosure. However, you will be protected if the secured creditor does not get all their money once your property is sold. This is commonly called a mortgage deficiency and simply becomes an unsecured debt in the bankruptcy or proposal. There are strict rules about foreclosure and the effects of bankruptcy, so talk to a Trustee about your particular situation.

Will I lose my house, my land or my car in a bankruptcy?

Most real estate (land, home, buildings) is mortgaged and so may have little value.  As real estate usually gains value ('appreciates') as time goes by, some real estate has value over and above any mortgage(s).  Whatever value there is in a piece of real estate is called “equity” and will be calculated by the Trustee.  The usual practice is for you to “buy back” the equity in your real estate if you wish to keep it.  

Some people do not want to keep their house or land.  In those situations, depending on the value of the asset, a Trustee may offer the land for sale or may turn it over to the bank for foreclosure.  As there are so many different scenarios when it comes to dealing with real estate, talk with a Trustee about your particular situation.

Most vehicles go down in value ('depreciate') as time goes by.   If you have a car that is secured by a loan, as long as you keep up with your car payments, that debt is not part of the bankruptcy.  This means that you must keep making your normal payments on the vehicle during the bankruptcy.  

Tell your Trustee if you no longer want to keep the vehicle.  The Trustee can let the secured creditor know.  The secured creditor will then seize the vehicle and sell it.  If there is still money owing on the car loan after the car is sold, that becomes an unsecured debt and it is discharged in the bankruptcy.

If you own a vehicle that is “free and clear” then the Trustee will determine its value.  The Trustee may ask you to get the vehicle appraised.  The Trustee will then tell you whether or not the vehicle may be claimed as exempt from your creditors.  This would mean that the vehicle is protected in a bankruptcy or a consumer proposal.

Will I have to hand in my passport or have trouble travelling abroad if I file a bankruptcy?

No, you will not have to surrender your passport if you file a bankruptcy.  A bankruptcy does not affect your passport.

Yes, you will still be able to travel abroad if you file a bankruptcy.

Can I have a credit card when I am in bankruptcy?

Many people are surprised that you are allowed to apply for and get credit when you are in bankruptcy.  Most Trustees will recommend that you not get credit during a bankruptcy, but there is no law that says that you cannot.   The only condition is that you must tell the creditor that you are currently bankrupt. 

More information and help

 For more information and help 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 Licensed Insolvency Trustee.  Trustees are listed in the Yellow Pages  under 'Bankruptcies', or search for 'licensed insolvency trustee' online.  You can also get a listing of local Licensed Insolvency 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 Insolvency Trustee for a bankruptcy).  Contact the Debtor Assistance Program at 1 800 670-4357 or 902-424-5200, or online at novascotia.ca/sns/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.