Here’s What Happens When You Declare Bankruptcy

When debt becomes unmanageable, bankruptcy is one of the legal options available to help Canadians reset their finances. 

While it may seem complex, bankruptcy follows a clear structure. Understanding how it works—and what it could mean for your daily life and future—can help you feel more prepared if you're considering this option. In this article, written by a local Licensed Insolvency Trustee from MNP LTD., we’ll walk you through each stage of bankruptcy in Canada, including the steps involved, impacts on assets and credit, and life after discharge.

The Bankruptcy Process in Canada

• Initiating Bankruptcy

Filing for bankruptcy begins with a Licensed Insolvency Trustee (LIT)—like the professionals at MNP. We’re federally licensed, highly regulated, and the only professionals in Canada authorized to administer bankruptcies. Our role is to assess your financial situation, explain all your options, and help you decide whether bankruptcy is the best solution for you. While Bankruptcy might seem like the only option, a Consumer Proposal or other informal solutions might be the right fit for your specific needs. 

To qualify for bankruptcy, you must owe at least $1,000, be unable to meet your debt payments as they come due, and have debts that exceed the value of your non-exempt assets. However, it may be beneficial to review other financial options to help deal with your debt if the amount is relatively low.

• Filing and Documentation

Once you've made the decision to file for bankruptcy, your LIT will guide you through the completion of several required documents. These include a Statement of Affairs (which lists your assets, debts, and brief financial history), your monthly budget, as well as an Assignment for the General Benefit of Creditors — the legal document that officially declares your voluntary bankruptcy. You’ll also be asked to sign additional forms acknowledging your responsibilities during the bankruptcy process.

These documents are typically completed with our assistance during a meeting or series of meetings with your Licensed Insolvency Trustee (LIT). It’s important to be as accurate and thorough as possible when providing financial information, as this will form the basis of your bankruptcy file.

After you’ve reviewed and signed the forms, your LIT will file them electronically and notify your creditors. At this point, your bankruptcy is officially in effect.

Immediate Effects of Declaring Bankruptcy

• Stay of Proceedings

One of the immediate protections you receive when you file for bankruptcy is called a stay of proceedings. This legal measure stops creditors from continuing or starting any collection actions against you. That means no more collection calls, wage garnishments, or legal action related to your debts.

• Impact on Assets

Many people worry they’ll lose everything when they file for bankruptcy, but that’s not the case. While certain assets will be sold to help repay your creditors, Canadian bankruptcy laws protect items you need to live and work. These exempt assets can vary depending on province and personal circumstances, but your LIT will explain what applies to you.

Responsibilities During Bankruptcy

• Duties of the Bankrupt Individual

When you declare bankruptcy, you’ll be required to attend two mandatory credit counselling sessions to help you build stronger money habits for the future. You will also need to submit monthly income and expense reports so your LIT can monitor any changes to your financial situation and determine your surplus income obligation (if any). To make sure the process goes smoothly, it’s important to cooperate with your LIT and provide any documents or information they require.

• Surplus Income Payments

If you’re earning more than a certain amount needed to maintain a reasonable standard of living, the government may require you to make surplus income payments. These are additional monthly payments based on how much your income goes over that limit. The idea is to ensure the process is fair for both you and your creditors. Your LIT will calculate the amount based on your income reports and let you know if surplus income applies.

Discharge from Bankruptcy

• Automatic vs. Court-Ordered Discharge

In most first-time bankruptcies, the process ends with what's called an automatic discharge. This means you're released from your debts without needing to go to Court, as long as you've met all your obligations like attending credit counselling, submitting monthly budgets, and making any required payments. Depending on whether you have surplus income and it’s your first bankruptcy, this typically happens after nine or 21 months.

However, a discharge isn’t always automatic. You may need to appear in court if a creditor objects, if you haven’t completed your duties, or if it’s not your first bankruptcy. In these cases, the court will review your situation and decide when and how your discharge will happen.

• Debts Not Discharged

While bankruptcy clears most unsecured debts, there are some exceptions. Certain types of debt cannot be eliminated, even after you’re discharged, including:

• Court-ordered support payments, like alimony or child support
• Student loans if it has been less than 7 years since you were last a full- or part-time student
• Court fines, penalties, or restitution orders
• Debts arising from fraud, misrepresentation, or embezzlement

Your LIT will go over any debts that fall into these categories and help you understand how they’ll be handled.

Life After Bankruptcy

• Rebuilding Your Credit

Bankruptcy will remain on your credit report for six years after your discharge (up to 14 years if it’s not your first Bankruptcy) and on the public record. During this time, you may find it more difficult to obtain new credit, and if you are approved, it could come with higher interest rates or stricter conditions. Regular financial tasks, such as setting up a new cellphone plan or utility account, may also require additional steps or upfront payments.

Despite these challenges, it is possible to rebuild your credit. Many start by applying for a secured credit card, which requires a cash deposit that acts as your credit limit and collateral for the lender. When rebuilding credit, remember to always pay all your bills on time, keep balances low, and check your credit report regularly for errors. By doing this consistently, you’ll see steady improvements over time. 

• Financial Management

One of the main goals of bankruptcy is to help you reset—not just financially, but also in how you approach money going forward. Once you're discharged, consider exploring financial literacy programs in your community or online or speak to your LIT about any recommendations or resources they may have. These programs can help you create a realistic budget, manage expenses, and set long-term financial goals. The more confident and informed you are about your finances, the more likely you’ll be to avoid insolvency in the future. 

Alternatives to Bankruptcy

• Consumer Proposals

The most common insolvency filing in Canada is a consumer proposal. It’s a good alternative, especially for those with steady income or non-exempt equity in assets. This is a formal agreement arranged with a LIT to repay a portion of your debt (based on what you can afford) over a period of up to five years, interest-free. Once your repayment term is complete, the rest of your debt is forgiven (with the same exceptions as a bankruptcy). Similar to bankruptcy, a consumer proposal offers protection from creditors and stops collection actions, but has slightly less impact on your credit and allows you to keep your assets.

• Orderly Payment of Debt Program

This option is not offered in every province, so speak to your local LIT to see if it’s available where you live. It’s like a formal debt consolidation with a Court Order that provides for a stay of proceedings while you pay back all of the debt that you owe through one monthly payment, generally over 5 years. 

Similarly, Quebec has a unique program called a “dépôt volontaire” or a voluntary deposit, which is registered with the Court and provides creditor protection while payments are made towards the total debt amount. 

• Debt Consolidation

Another option is debt consolidation. This involves combining multiple debts into one payment, often with a lower interest rate. You can do this by enrolling in a Debt Consolidation Program (DCP) through a non-profit credit counselling agency like Credit Canada. A DCP does not add new debt. Instead, the agency negotiates with your creditors to simplify your debt payments and reduce or eliminate interest. You’re still required to repay the full amount, but this can make it easier to manage payments.

You can also consolidate debt through a debt consolidation loan, which involves taking out a new personal loan to pay off your existing debts, leaving you with just one monthly payment. However, you’ll need good credit and steady income to qualify. Because every situation is different, it’s a good idea to speak with a credit counsellor or LIT.

Get Expert Advice

Filing for bankruptcy is a big decision, and it's important to understand how it works, what to expect, and how it will affect different parts of your life. It’s also important to know what alternatives may be available.

Whether you’re considering bankruptcy or wondering if another option like a Consumer Proposal or debt consolidation might be a better fit, we can help you make sense of it all. Contact a certified Credit Counsellor or LIT today to explore your options.