Bankruptcy

HomeBankruptcy

A Simple Guide to Declaring Bankruptcy

The thought of having to file for bankruptcy can be a weighty one. But bankruptcy is a practical solution when you simply don’t have the means to repay your debt. The good news is that despite what you may have heard, you will generally keep all your assets unless you choose to give them up. So, declaring bankruptcy might not be as scary and life-changing as you think it is.

This guide provides an overview of all the basic information you need to know about filing bankruptcy. It will hopefully help clear up a lot of misconceptions you may have, so you can feel more comfortable about filing if it’s the right choice for you. If you have questions or would like to schedule a free debt assessment with Melanie, call (780) 784-8638.

What is bankruptcy?

Bankruptcy is a legal process that allows you to get out of debt when you are insolvent—where you owe more to creditors than the value of your assets.

A Licensed Insolvency Trustee evaluates your finances to determine if you are insolvent. They will also help you see if there are other options available to you, such as filing a consumer proposal.

If bankruptcy is your best option, you will be required to fulfill the duties we outline below. Once you fulfill those duties, the remaining balances on eligible debts will be discharged. And you will be free to move forward in your financial life without the burden of those debts.

Requirements for declaring bankruptcy

The main requirement for bankruptcy is that you must be insolvent. This means:

  1. you are unable to make timely payments on your debt
  2. the value of your liabilities exceeds your assets (i.e. you owe more than your assets are worth)

You must owe at least $1,000 in debt, and reside, do business, or own property in Canada.

What to expect when you declare bankruptcy

There are four basic phases to declaring bankruptcy:

  1. Assessment
  2. Assignment
  3. Duties
  4. Discharge

Step 1: Assessment

The first step is to meet with a Licensed Insolvency Trustee (LIT) and review your finances. This step ensures that bankruptcy is your best option to get out of debt. A trustee like Melanie Leigh will meet with you and provide a free debt assessment.

Together, you will review your finances, including your:

  1. Income
  2. Expenses
  3. Assets (property you own)
  4. Liabilities (debts you owe)

The purpose of this assessment is to determine if you are legally considered insolvent. If the trustee determines you are unable to repay your debts using any other solution and that you owe more than your assets are worth, the trustee will recommend bankruptcy.

The trustee will explain to you during your free assessment which of your assets will qualify for exemption and what you will need to pay. It’s important to note that it’s extremely rare that any assets will be sold through this process. Your assets will generally qualify for exemptions or you will pay equity costs to keep them. We’ll go into more detail about exemptions and equity costs below.

Once you understand the costs and exemptions in bankruptcy and are fully informed of other options that may be available, you can decide if you want to file.

Step 2: Assignment

If you decide to move forward, your trustee will immediately prepare a statement of affairs, where you will swear you are disclosing all your assets, debts, and budgets. The trustee will immediately file the paperwork with the Office of the Superintendent of Bankruptcy (OSB) Canada. This will grant you an automatic stay of proceedings. Creditors cannot commence or continue actions to collect on unsecured debts.

Step 3: Duties

You must fulfill your duties to receive a discharge. This includes:

  • Submitting monthly income and expense statements
  • Provide tax information for all outstanding tax years and the year of your bankruptcy filing
  • Paying your filing fee, as well as any surplus income or equity costs, in installment payments
  • Completing two mandatory financial counselling sessions
  • Attend a meeting of creditors if it’s requested by creditors holding 25% of your debt by dollar amount, or an examination before the OSB. However, this is rare.

The monthly income and expense statements are crucial because they will determine how much you pay during bankruptcy and how quickly you get through it. You want to set aside time each month to prepare these statements and get them to your trustee.

Your trustee will use these statements to determine if you will be required to make surplus income payments, which we discuss in more detail below.

Step 4: Discharge

Once you fulfill all your required duties, the remaining balances on debts that are eligible for discharge will be discharged after a set time.

Type of filing Time to discharge
First time filing, no surplus income 9 months
First time filing, surplus income 21 months
Second time filing, no surplus income 24 months
Second time filing, surplus income 36 months

Get a Free Debt Assessment to find the best way to become debt-free

Types of bankruptcy discharge

The best possible discharge is called an automatic discharge. You complete all your required duties on time and the trustee signs a certificate of discharge. Your balances are discharged with no court appearance necessary.

In some cases, you will get what’s known as a mediated discharge. This happens if you cannot meet the payment schedule for your surplus income payments. You enter an agreement with the trustee where you make lower payments until all surplus income required in your bankruptcy has been paid.  As long as you stick to the conditions of the mediated discharge, the trustee signs the certificate of discharge and you are free and clear.

The only time you would see a court in bankruptcy is for a conditional discharge, an adjourned discharge, a refused discharge, or a creditor opposition.

A conditional discharge happens if you do not fulfill the duties required of you on time. You go to court and the court will read the trustee’s report on the situation. The court will typically order you to meet the requirements of your filing. Once you meet those requirements, you will receive a discharge from the court. 

An adjourned discharge or refused discharge happens when there has been no compliance or significant problems in fulfilling the duties required for the filing. In that case, the court will typically not hear the discharge until all matters have been satisfied.

Please note that creditors have the right to oppose a discharge. This is known as a creditor opposition. They must provide their reasons for the opposition to the court. The court will hear all sides and make a decision.

Protection of assets

One of the biggest misconceptions about bankruptcy is that you will lose all or even some of your assets. But losing assets is very rare.

Each province and territory provides rules for assets that are exempt, and most assets for most people will qualify for these exemptions.

For example, here is what will be exempt if you file for bankruptcy in Alberta:

  • Personal property, such as clothing, up to $4,000
  • Household goods up to $4,000
  • Tools of the trade up to $10,000
  • A primary residence up to $40,000 in equity
  • A vehicle up to $5,000 in equity
  • All savings and contributions to a Registered Education Savings Plan
  • All savings and contributions to a Registered Retirement Savings Plan
  • Life insurance policies where the beneficiary is your spouse, parent, child, or grandchild

What’s essential to note is that the value of any asset is determined by its sale value, not its replacement value. So, while an item may have cost $1,000 three years ago when you purchased it, its value will likely be significantly less now—especially when it comes to things like vehicles and electronics.

It’s also worth noting that tools of the trade are wide-ranging. If you own a small business, your materials and inventory may be exempted. If you are a farmer, then all assets needed for the operation of your farm for the upcoming year will be exempt, including all livestock.

And if you have assets only exempt up to a certain equity value, it doesn’t mean you’ll lose them. Instead, you can pay equity costs and keep them. We’ll cover how those costs work below.

Required bankruptcy payments

It’s important to note a few things about the payments you will make while fulfilling your duties in bankruptcy:

  1. You will not pay anything upfront. There is no charge for meeting with a trustee for a debt assessment. All payments are made after you file.
  2. You will know all the payments you will need to make before you file.
  3. However, your payments may change if your financial situation changes while you are fulfilling your duties.

Keeping that in mind, there are three types of payments associated with declaring bankruptcy. The first is paid by anyone who files. The second two only come up in certain cases, depending on your finances.

Fees

When you declare bankruptcy, there will be a base cost for filing. The base cost is $1,800 if this is your first time filing for bankruptcy. This covers the cost of filing, administration costs for your trustee, as well as government fees.

This fee is not due upfront. Instead, you must make installment payments over a 9-month period.

Surplus income

Surplus income is another cost you may pay, depending on how much income you earn. If your income is above a certain threshold, then these payments come into play.

The Office of the Superintendent of Bankruptcy (OSB) Canada sets out income standards each year based on the size of a household. If your monthly household income exceeds these amounts, then you will need to make surplus income payments.

The current income standards for 2021 are:

Size of Household Monthly Household Income
One-person household $2,248
Two-person household $2,799
Three-person household $3,441
Four-person household $4,178
Five-person household $4,739
Six-person household $5,345
Seven-person (or more) household $5,950

However, there are some key things to note about how your income is calculated:

  1. Not all income gets included in this calculation. Wages from a job will be included, but your child tax benefit would not be.
  2. Some expenses get deducted. Any out-of-pocket medical, dental, or optical expenses get deducted, as would childcare expenses and child support. 

This is where your monthly income and expense statements come in because the trustee uses them to evaluate whether you need to make surplus income payments.

If you do, the trustee will subtract that current income standard for your household size from your calculated monthly income. Then 50 percent of that amount will be your surplus income payment.

Equity costs

This bankruptcy cost comes in when you have a secured asset, such as a home or vehicle. The asset will qualify for exemption up to a certain amount of equity. You pay equity costs on the remaining value. 

The amount you pay depends on the equity of that asset, which is the current market value of that asset minus any remaining balance owed on a loan. Keep in mind that the value of the asset is not its replacement value, it’s the sale value.

For example, let’s say you live in Calgary. You have a home valued at $400,000. The remaining balance on your mortgage is $355,000. You also have a property tax bill of $2,500. The equity in the home would be $42,500. In Alberta, your principal residence is exempt up to $40,000. In this case, you would pay equity costs on the remaining $2,500

As with your income and expenses, your trustee will assess the value of your assets during your free debt assessment. You will be aware of what equity costs you will need to pay before you file.

Debts that will not be eligible for bankruptcy discharge

Certain debts will not be eligible for discharge at the end of a bankruptcy filing. These include:

  • Child support
  • Alimony
  • Court-ordered payments and fines
  • Student loans that are less than seven-years-old

However, these debts will be included in your statement of affairs. They also participate in the bankruptcy to take a dividend of any payments made as part of your duties. That means your bankruptcy will help you pay these debts. But the balances will not be discharged. You will still owe the remaining balances after discharge. However, you will pay them down considerably through your bankruptcy.

Taxes in bankruptcy

By and large, Revenue Canada is just like any creditor. If you owe them a debt, they will participate in your bankruptcy and that debt can be fully discharged.

When you file bankruptcy, you will need to provide your tax information to your trustee. Your trustee will file any taxes that were not filed before your bankruptcy, as well as those for the year of your bankruptcy.

Any debt owed to Revenue Canada up to the date of your filing will be included in the bankruptcy and discharged once you fulfill your duties. Any debt owed to Revenue Canada after you file is your responsibility.

So, let’s say you file for bankruptcy on July 31. The trustee will file two returns for the year on your behalf. One will go from January 1 to July 31 and if a debt is owed, it’s included. Then you will have a return from August 1 to December 31. If you owe Revenue Canada, you will need to repay that amount.

Any tax refunds you get from any years of filing—either for previous years or the current year—will be turned over to your trustee and become part of the estate for the benefit of your creditors.

There are special circumstances if your CRA debt is over $200,000 and that represents more than 75% of your debt. In this case, the process will require court approval. This will be discussed with you by your trustee at your debt assessment.

The impact of bankruptcy on your credit

Bankruptcy will have a negative impact on your credit, but it needs to be taken in context.  Bankruptcy notations will be listed on your credit report for six years from the date your debts are discharged if this is your first time filing. If you’ve filed before, bankruptcy notations remain fourteen years from the date of discharge.

Accounts included in your bankruptcy will each show a status of R9 for revolving accounts and I9 for installment accounts. The “9” shows that the account balance was discharged.

While this will impact your creditworthiness, consider that bankruptcy gives you a definitive end to the financial hardship you are facing. Without bankruptcy, you may continue to incur missed payments, defaults, charge-offs, and collection accounts—all of which also negatively impact your credit for six years. So, in many cases, bankruptcy allows you to take care of debts that are already hurting your credit and move forward much faster.

And once you receive discharge, you can begin rebuilding your credit. Paying debts that you still hold after bankruptcy, such as student loans, your mortgage, or a car loan, will help you build positive credit history. You will also be free to apply for new credit. For example, you may be able to use savings as collateral to get a secured credit card. However, you must wait to receive your discharge before you can apply for any new credit.