What Does it Mean to File for Bankruptcy in Canada?

Bankruptcy is a legal solution to help people get relief from and resolution for their debt. In completing the process of bankruptcy in Canada, a person who previously was unable to manage their debt can get a financial fresh start.

• Working with a Licensed Insolvency Trustee (the professional who will handle the bankruptcy administration and guide you through the process) you may be able to have virtually all your debts forgiven, including but not limited to debts from credit cards, payday loans, taxes, CERB overpayments, student loans and more.
  • No creditor or other party can prevent you from seeking the protection and relief of bankruptcy if you are unable to pay off your debt.
• Most often people complete the process of bankruptcy in only nine months, paying an administrative fee over this time, and completing some basic duties as part of the bankruptcy process.

Once you’ve officially filed for bankruptcy, this triggers what is called a ‘stay of proceedings’ which prohibits creditors from continuing to pursue you for payments, charging ongoing interest, taking collection actions, etc. Because of this stay of proceedings, bankruptcy offers immediate and powerful protection from your creditors, including stopping wage garnishments and other legal actions that can put your assets and income at risk.

Your Assets in Bankruptcy – Bankruptcy Exemptions in BC 

It’s true that most people filing personal bankruptcy in Canada keep all their assets, and this is because each province and territory has laws that specify assets that are legally exempt and therefore safe from seizure by creditors. Here in BC, asset exemptions set through the Court Order Enforcement Act entitle you to claim exemption amounts on the following assets, even when you can’t pay your debts:

• $4,000 for household furnishings and appliances (at resale or liquidation value, like what you could expect to get at a garage sale)
• Clothing and medical aids – up to an unlimited value
• $5,000 for a motor vehicle (this is reduced to $2,000 if you have an outstanding debt owing under Family Maintenance Enforcement Act)
• $10,000 for tools or other personal property used to earn income from your occupation, also known as tools of the trade (again, at a resale or liquidation value – not new or replacement value)
• $12,000 equity in your principal residence if you are within the Metro Vancouver or Greater Victoria area ($9,000 elsewhere in the province)

Inheritances and lottery winnings that you acquire before being released (discharged) from bankruptcy are examples of property that would not be exempt.

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Claiming Bankruptcy and Keeping Your Car (or Other Assets)

When it comes to larger assets like homes and vehicles, not only the value of the asset is considered, but also whether there is a secured debt owed against it and the resulting equity the person has in the asset (essentially the difference between the value of the asset and the value of the loan owed against it).

When it comes to a home or vehicle, many people don’t own these assets free and clear, and if the asset is subject to a secured debt, there are a few options to consider in bankruptcy:

• If you want to keep the asset you could decide to continue with the ongoing payment arrangement (or try to negotiate new terms) with your secured creditor.
  • If your mortgage (or other secured debt) payments are up-to-date and you want to continue with the agreement in place, these are not usually impacted at all by filing for bankruptcy.
    • If your current mortgage is in good standing, generally lenders will honour mortgage renewals that come due during the period of your bankruptcy.
• Or you could decide to walk away from the asset and ongoing financing arrangements altogether, and any equity above and beyond your exemption would be paid into your bankruptcy estate.
  • You may decide to sell the property through the bankruptcy, and each homeowner would be entitled to receive their exempt equity amount (up to $12,000 each) from the sale proceeds.
  • If foreclosure proceedings were underway and the secured creditor was taking possession, any shortfall from the subsequent seizure and sale of your home would be written-off as part of the bankruptcy.

What Do You Lose When You Declare Bankruptcy?

Bankruptcy isn’t meant to be a punishment, it’s a solution to help you solve unmanageable debt, and while assets that are outside the exemptions are intended to form part of your bankruptcy ‘estate’ and be available towards satisfying your debts – the reality is that even if you own something beyond the exemption allowances, non-exempt assets are often kept by individuals and there are a few ways of achieving this, such as by:

Paying in the non-exempt value of your assets to your bankruptcy estate – this is sometimes referred to as ‘repurchasing an asset’ even though you will physically retain it the whole time. For example:

• You own free and clear a vehicle appraised at a value of $8,000, and are entitled to a $5,000 exemption allowance, leaving you with $3,000 non-exempt equity. You could choose to keep the vehicle and pay in $3,000 to your bankruptcy estate by way of monthly payments.

Alternatively, the most common (and often best) way to keep virtually all your assets, while still getting protection from your creditors and a legal solution to manage your debt is to file a Consumer Proposal rather than bankruptcy.

• You will not automatically lose your home or other assets if you file for bankruptcy or make a Consumer Proposal. If you move forward with bankruptcy or a Consumer Proposal, the biggest (and often only) thing you have to lose is your debt!

What is a Consumer Proposal?

A Consumer Proposal is a unique legal debt solution that is considered an alternative to both consolidation loans and bankruptcy. Filing a Consumer Proposal allows you to consolidate your debt without borrowing and cut the amount of debt you must repay down to what you can reasonably afford.

• By making (usually) monthly Consumer Proposal payments administered by your Licensed Insolvency Trustee, many Consumer Proposals are successful in cutting debt by up to 50-70% – with no borrowing costs or added administration fees.
• With a Consumer Proposal you keep all your assets unless you specifically decide to end the ongoing financial commitment through the Consumer Proposal.
  • Like bankruptcy, when it comes to secured debts (a mortgage, vehicle loan, etc.) you have the option of keeping the payment arrangements in place if you want to keep the asset, or you could surrender the asset to end the ongoing obligation. (And if there’s a shortfall this could be included in the Consumer Proposal.)

How Much Debt will a Consumer Proposal Eliminate?

Confidential Debt Advice 

Understanding your situation and ways to deal with debt is best done with the help of a Licensed Insolvency Trustee. We are Canada’s only qualified debt help professionals and can assist you in exploring ALL possible solutions. If you’re struggling with unmanageable debt, or finding it difficult to pay down your debt, connect with a local Licensed Insolvency Trustee to have a free, confidential consultation about your options.

• There are many ins and outs to consumer debts and your rights, responsibilities, remedies can be complex. Avoid troubleshooting what can be a complicated legal subject, incorrectly disqualifying yourself from getting support and solutions, or unknowingly enlarging the problem – take an hour to find out the facts.

Licensed Insolvency Trustees are dedicated debt help professionals who offer impartial expert advice, and we understand how stressful financial troubles can be.

• Sands & Associates serves the entire province of BC, and you can get free, qualified advice and support from a non-judgmental professional in person at one of our local offices, over the phone, or over video chat – whatever is most convenient for you. No judgment, just support and solutions.

Talk with a friendly, local debt expert who cares. Book your free, confidential debt consultation with Sands & Associates today.

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Contrary to popular belief, the truth is that filing a bankruptcy in Canada actually provides protection for your assets and income. Read on to learn more about how bankruptcy protects your assets. 

What is a Stay of Proceedings in Bankruptcy?

Canada’s Bankruptcy and Insolvency Act states that when a person formally files for insolvency (the beginning of the official bankruptcy or Consumer Proposal process), no creditor has any remedy against the person or their property. This means that creditors cannot start or continue any actions to recover the debt balance they are owed, and the stay of proceedings in a bankruptcy or Consumer Proposal is a powerful measure to provide protection from creditors, even government creditors like Canada Revenue Agency.

• Your bankruptcy filing triggers the stay of proceedings, and this legally prevents your creditors from continuing to ask you for payment, from continuing collections or court action, and from seizing your assets, including your bank account or wages.
• In situations where creditors may have been about to begin, or have already begun serious debt collection methods, filing bankruptcy can protect assets that may otherwise be at risk from creditors.

Without being shielded by bankruptcy laws, when a person is unable to pay their debts, they are often quickly subject to collection actions from their creditors, which can lead to creditors attempting to seize assets and even garnish wages. For people who have been harassed with phone calls, texts or letters asking for payments or past due debts by creditors or collection agents, their bankruptcy’s stay of proceedings is always a welcome relief.

Do I Lose All my Assets by Filing a Bankruptcy?

Contrary to what you may have heard and what many people mistakenly believe, most people who file bankruptcy actually keep all their assets. Here’s why:

When you enter into bankruptcy, provincial laws automatically give you entitlement to keep certain assets – these are often referred to as ‘exempt assets’, meaning that they are protected in the event of a bankruptcy.

In British Columbia, the law that gives individuals these exempt (protected) asset allowances is called the “Court Order Enforcement Act”. Each province has its own exemption allowances; in BC the bankruptcy protected assets are:

• Household Goods and Effects
  • Up to a $4,000 value, based on garage sale value (not replacement value)
• A Vehicle, or Equity in a Vehicle
  • Up to a $5,000 value; or
  • Up to a $2,000 value if you are behind on child or spousal support payments
• Home Equity
  • Up to a $12,000 value in Greater Vancouver and Victoria; or
  • Up to a $9,000 value elsewhere in BC
• RRSPs
  • Up to an unlimited value
    • Except for contributions made in 12-month period prior to filing bankruptcy. Note, transfers between RRSP funds are not the same as contributions.
• Clothing and Medical Aids
  • Up to an unlimited value
• Work Tools (Tools of the Trade)
  • Up to a $10,000 value

It’s important to know that even if you have assets that are worth more than these allowances, you do not necessarily have to give the asset up in bankruptcy. There are a few potential avenues that would allow you to keep the assets. Here are two examples:

Repurchase of Asset in Bankruptcy

The non-exempt value of your asset may be paid into your bankruptcy estate, allowing you to retain possession of the asset.

$7,000 – Appraised Value of Vehicle Owned Free and Clear

-5,000 – Exemption Allowance for Motor Vehicle

$2,000 – Balance Paid Over 9 Months

File a Consumer Proposal

Filing a Consumer Proposal is the number one alternative to personal bankruptcy in Canada. In a Consumer Proposal your assets are not impacted, which can make it an attractive option for someone who may otherwise have a significant amount of non-exempt equity in an asset.

• Consumer Proposals work by consolidating your debts into one settlement and offering your creditors a partial repayment of the debt – the amount you can afford to repay.
  • Your debts may be cut down to as little as 20-50% of the balance with no interest charges and no requirement to surrender assets.
• A Consumer Proposal is not the same as bankruptcy, although it does offer an individual the benefit of the stay of proceedings when it comes to shielding you from creditors.

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How Does Bankruptcy Provide Income Protection from Creditors?

Because a bankruptcy filing will act as a barrier between you and your creditors, your income remains protected from wage garnishments and bank account seizures. Even if a creditor has already begun garnishing your income or has frozen your bank account, filing a bankruptcy will remove the ongoing garnishment or freeze.

This applies to virtually all creditors, including Canada Revenue Agency. In general Family Maintenance Enforcement Program collecting on child or spousal support payments is one of the few creditors who can continue a wage garnishment despite a bankruptcy filing.

Throughout the period of your bankruptcy income you earn would continue to go directly to you via your employer, pension provider etc.

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Home Equity is an Exempt Asset

Every province in Canada gives people a set of exemption allowances. What this means is that there are laws that protect certain assets (including household furniture, RRSPs and more) in the event you file bankruptcy.

The idea behind exemptions is that each individual is entitled to retain a certain base level of assets in all circumstances, regardless of financial hardship and/or a bankruptcy filing.

If your home is in the Greater Vancouver or Victoria area each person is automatically allowed to keep home equity up to a value of $12,000 (and up to a value of $9,000 elsewhere in the province).

If You Declare Bankruptcy What Happens to Your Home Equity Over the Exemption Allowance?

If the equity in your home is more than the provincial exemption allowance this doesn’t mean you’ll automatically lose your home if you declare bankruptcy.

When the homeowner wants to keep their home, the equity value over and above the protected amount could be dealt with in a few ways, such as:

• Buying-out the equity as part of the bankruptcy (this is sometimes referred to as “repurchasing” home equity, although the homeowner doesn’t actually move out/lose the home);
• Filing a Consumer Proposal instead of a bankruptcy.

If a homeowner doesn’t want to keep their home, they may decide to sell the property through the bankruptcy – the homeowner would still be entitled to receive their exempt equity amount (up to $12,000) from the sale proceeds.

Will my Mortgage be Impacted by Declaring Bankruptcy?

If your mortgage payments are up-to-date and you want to continue with the mortgage in place, your mortgage will not typically be impacted by declaring bankruptcy. In most bankruptcies there are two “types” of debts – unsecured debts (like a credit card or payday loan) and secured debts (like a vehicle loan or mortgage). Whether a debt is unsecured or secured can change how it is dealt with under a bankruptcy:

Unsecured Debts: These types of debts do not hold any assets as collateral, so the creditor does not have any additional ‘power’. Unsecured debts are written-off through a bankruptcy. 

Secured Debts: Creditors (like a mortgage lender) who have a secured debt (like a mortgage) hold an asset as collateral, meaning they have a registered lien or charge on property. In this situation, you have a few choices. You could choose to carry on with the credit arrangements in place (ie. your mortgage); try to negotiate new terms; or choose to walk away from the asset altogether and let the secured creditor have the asset. 

Can I Make a Consumer Proposal if I Have a Mortgage?

Even if you have a mortgage you can be eligible to make a Consumer Proposal. A Consumer Proposal can be used to consolidate debt, cut debt balances and keep assets intact, while avoiding bankruptcy. If you can make some payment towards your debt each month, you may be able to make a legal debt settlement with your creditors using a Consumer Proposal filed by a Licensed Insolvency Trustee.

A Consumer Proposal allows people to retain assets (such as a home), and in addition to consolidating all your debts:

• Interest automatically stops;
• Debts can often be reduced by up to 30-80% of the balance due;
• Consolidate government debt and consumer debt.

Consumer Proposals normally do not include (or affect) an existing mortgage.

Can I Renew my Mortgage During Bankruptcy?

If your current mortgage is in good standing, generally lenders will honour mortgage renewals that come due during the period of your bankruptcy.

What About Foreclosures?

Sometimes the start of a bankruptcy is a good time to evaluate whether you want to continue with an existing mortgage that is falling behind. If you decide that you don’t want to keep the home and decide to let the bank move forward with foreclosure proceedings, any shortfall from the subsequent seizure and sale of your home would be written-off as part of the bankruptcy.

Learn more about how these and other legal debt options work when you have a mortgage. Book your confidential free debt consultation with Sands & Associates today!

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