What is Bankruptcy?

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Bankruptcy is a formal legal process in which a person or business declares that they are unable to pay their debts. In Canada, this process is overseen by the Office of the Superintendent of Bankruptcy (OSB) and administered by a Licensed Insolvency Trustee (LIT).

When you file for bankruptcy, most (but not all) of your unsecured debts are forgiven. In exchange, you may have to give up certain assets or make regular payments to help repay your creditors.

 

Who Can File for Bankruptcy in Canada?

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To qualify for personal bankruptcy in Canada, you must:

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• Owe at least $1,000 in unsecured debt

• Be unable to pay your debts when they are due

• Be either a resident of Canada, or own property or do business in Canada

 

Types of Debts Included in Bankruptcy

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Bankruptcy mainly deals with unsecured debt, which includes:

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• Credit card debt

• Personal loans

• Payday loans

• Lines of credit

• Tax debt (in many cases)

 

Secured debt (like mortgages or car loans) is treated differently because it's tied to a specific asset. If you don’t make payments, the lender can seize the asset even if you declare bankruptcy.

 

Some debts are not eliminated through bankruptcy, such as:

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• Student loans (if it’s been less than 7 years since you finished school)

• Child support and alimony

• Court fines and penalties

• Debts from fraud or misrepresentation

 

How Does Bankruptcy Work?

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Here’s a simplified overview of the process:

 

Step 1: Meet with a Licensed Insolvency Trustee (LIT)

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Only an LIT can legally file your bankruptcy. They will:

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• Review your financial situation

• Explain your options (including bankruptcy alternatives)

• File the bankruptcy paperwork if you choose to proceed

 

Step 2: File for Bankruptcy

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Once you file:

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• A stay of proceedings goes into effect, which means creditors must stop contacting you, garnishing wages, or suing you

• You will be legally protected from collection actions

 

Step 3: Fulfill Your Bankruptcy Duties

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You will be required to:

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• Surrender certain assets (we’ll explain more below)

• Make monthly payments if your income is above a set threshold

• Attend credit counseling sessions

• Submit monthly budgets and income reports

• Cooperate fully with the LIT

 

Step 4: Discharge from Bankruptcy

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If you meet all your obligations, you may be automatically discharged from bankruptcy in 9 to 21 months (first-time bankruptcies). Once discharged:

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• You’re no longer legally required to repay the debts included

• Your creditors can’t take further action against you

 

What Happens to Your Assets in Bankruptcy?

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You don’t necessarily lose everything. In Canada, each province has exempt assets that you’re allowed to keep. Common exemptions include:

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• Clothing and household items

• Tools of your trade (up to a limit)

• A basic vehicle (depending on value)

• RRSPs (except contributions made in the past 12 months)

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Assets that aren’t exempt may be sold by your trustee to help repay your creditors.

 

How Does Bankruptcy Affect Your Credit?

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Bankruptcy has a major impact on your credit, but it’s not forever:

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• A first-time bankruptcy stays on your credit report for 6 years after discharge

• A second bankruptcy stays for 14 years

 

During this time, it will be harder to get new credit, but not impossible. You can begin rebuilding your credit immediately after your discharge.

 

Pros of Filing for Bankruptcy

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• Immediate relief from collection calls and legal actions

• Most unsecured debts are eliminated

• Legal protection through a stay of proceedings

• You can start fresh financially

• Low or no upfront cost (depending on your income)

 

Cons of Filing for Bankruptcy

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• Severe impact on your credit rating

• You may lose some assets

• You must report your income monthly to the trustee

• Bankruptcy is public record

• You may have to make surplus income payments if you earn over the threshold

 

Alternatives to Bankruptcy

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Before filing, your trustee will review alternatives such as:

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• Consumer Proposal – A legal process where you repay a portion of your debt over up to 5 years, without giving up your assets.

• Debt consolidation loan – Combining multiple debts into one loan at a lower interest rate.

• Credit counseling – A structured repayment plan through a nonprofit agency.

• Informal settlement – Negotiating directly with creditors.

 

These options may be better if you have a steady income and want to avoid the credit damage of bankruptcy.

 

Common Myths About Bankruptcy

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Myth 1: You’ll lose everything.
Not true. Many assets are protected by law.

 

Myth 2: Bankruptcy erases all debts.
Some debts, like student loans under 7 years old or support payments, remain.

 

Myth 3: Only irresponsible people file.
Bankruptcy often results from unexpected life events—illness, job loss, divorce—not poor choices.

 

Myth 4: You’ll never get credit again.
You can rebuild your credit over time. Many people qualify for secured credit cards within months of discharge.

 

Who Should Consider Bankruptcy?

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Bankruptcy might be the right choice if:

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• You’re overwhelmed by unsecured debt

• You’re facing collection lawsuits or wage garnishments

• Your income can’t support a repayment plan

• Other options, like a consumer proposal, aren’t viable

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It’s not a decision to take lightly, but it can offer the reset you need to rebuild your financial future.

 

Final Thoughts

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Bankruptcy is not the end—it’s a new beginning. It exists to give people a way out of impossible debt situations. If you feel trapped, powerless, or constantly behind on payments, it might be time to speak to a Licensed Insolvency Trustee.

 

At Capital Corner, we believe in providing the education and tools you need to make smart financial decisions. Bankruptcy is just one tool—understanding how it works empowers you to make the best choice for your future.

Need help weighing your options? Reach out—we’re here to guide you.