The Mortgage Doctor
The concept behind Bankruptcy in Canada is this:
You assign (surrender) everything you own to a trustee in bankruptcy in exchange for the elimination of your debts. Through bankruptcy, a person hopelessly burdened with debt gets a chance to start fresh.
Personal bankruptcy is a legal process, governed by federal law (the Bankruptcy & Insolvency Act). The law is designed to permit an honest but unfortunate debtor to obtain relief from his or her debts while treating creditors equally and fairly.
To go into bankruptcy in Canada, a person must live or do business in Canada, and must be insolvent. To be insolvent means:
1. To owe at least $1,000.
2. Not to be able to meet your debts as they are due to be paid.
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Bankruptcy Trustees are federally licensed. Their fees are regulated and moderate, so the cost of bankruptcy is reasonable.
Because bankruptcy is a legal process, there is a “stay of proceedings” that prevents a garnishment or any legal action from happening, and stops your creditors from calling.
You may be entitled to an automatic discharge from bankruptcy in 9 months, the minimum time set by the Court to be bankrupt, provided you have never been bankrupt before and you complete various duties and responsibilities.
Your ability to obtain credit in the future could be affected, since bankruptcy will remain on your credit report for several years.
Exceptions to the discharge of all debts
Some debts are not erased. Bankruptcy only deals with unsecured debts – things like credit cards, personal loans, income taxes, overdrafts, etc.
A secured debt, such as a car loan or mortgage, is not included. Since you have given an asset as collateral, your creditor does not need the bankruptcy process to recover the amount owing to them.
Some unsecured debts are also not discharged in a bankruptcy, such as student loans less than 10 years after you stopped going to school and/or any alimony or child support.
Exceptions to the surrender of all assets
Some assets are not taken from you in bankruptcy. These are the “exemptions” that the government has determined you need to survive.
A list of exemptions is set by each provincial or territorial governments in Canada. For example, in Ontario, a car worth less than $5,650 is exempt, also personal items such as clothing worth less than $5,650 and household items worth less than $11,300.
For most people the assets they must surrender include their investments, RRSPs, and RESPs, as well as their house.
Exceptions to discharge from bankruptcy in nine months
The length of your bankruptcy will be nine months, unless one of the following is true:
- You fail to perform all your bankruptcy duties, such as regular payments of surplus income to the trustee.
- You have surplus income (see below).
- You have been bankrupt before.
How much longer your bankruptcy period will be depends on the details of your case.
Surplus income adds to cost of bankruptcy
On top of the trustee fee and your loss of assets, a bankruptcy may cost you some of your income, depending on how much you earn and the size of your household. The principle is that, if you earn more than your household needs to survive, you must pay the “surplus income” to your trustee for the creditors. The formula used is prescribed by law. The more you earn, the more expensive filing for bankruptcy will become.
This article is courtesy of Bankruptcy Canada
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