What to Expect Throughout Each Stage of Bankruptcy Proceedings
What is bankruptcy?
If you are considering filing for bankruptcy, maybe you already know the answer to this question, but do you know everything that is involved in the process and what your responsibilities are?
If not, you are not alone. Bankruptcy is a complex legal process that can be difficult to navigate without proper guidance.
So, to help you gain a better understanding of the journey that you are in for, we’ll walk you through what the bankruptcy process involves by breaking down each step and your required obligations.
We’ll also give you an idea of what life looks like after bankruptcy, because contrary to what you may be feeling right now, there is, in fact, a light at the end of the tunnel.
But first, let’s back up a few steps and get down to basics.
What Is Bankruptcy?
Bankruptcy is a legal procedure available to those who are over-burdened by debts they are unable to pay, and gives them a fresh start.
It’s important to note that bankruptcy only eliminates unsecured debts such as:
- Credit cards
- Personal lines of credit
- Personal loans
- Payday loans
- Tax debts
- Business debts that were personally guaranteed
In exchange for the elimination of these unsecured debts, you will have to perform certain duties. As well, assets that are not statutorily exempt from the process must be surrendered to the Licensed Insolvency Trustee (“LIT”) and sold by the LIT to pay back your creditors.
By filing for bankruptcy:
- Most, if not all, unsecured debt will be eliminated
- Collections and lawsuits will cease
- Wages will no longer be garnished
- You will gain a fresh financial start
Now that we’ve got that out of the way, here are the various steps you can expect when filing for personal bankruptcy.
Steps in the Bankruptcy Process
Deciding to Get Help
The first, and often most difficult step in the road towards financial recovery, is coming to terms with the fact that you need help.
When struggling with a large amount of debt, and facing the possibility of bankruptcy, taking that first step of admitting to yourself that you have a problem and asking for help is no easy feat.
So, if you have conquered this part, congratulations! Pat yourself on the back.
Contact a Bankruptcy Trustee
Once you have decided to start working towards tackling your debt, your next step is to contact a LIT, who will explain to you everything you need to know about the bankruptcy process, and help you decide if personal bankruptcy is something you wish to proceed with.
If you do decide to file for personal bankruptcy, the LIT will start the formalities of the process and be by your side every step of the way.
Provide Trustee with Required Information
At this stage, you will need to sit down with the LIT and provide them with all the required information about yourself. This includes:
- All relevant personal information (name, address, date of birth, etc.)
- Details of your creditors and their claims
- Full details of your assets
Trustee Files for Bankruptcy
Once the LIT has received all of the required documentation, they will prepare the initial paperwork, review it with you, and ask you to sign it. The LIT will then register the bankruptcy with the federal government bankruptcy office, officially marking the beginning of the bankruptcy process.
Stay of Proceedings
Once your bankruptcy is filed, you will be automatically protected from your creditors’ collection actions by a “stay of proceedings” that prevents your unsecured creditors and debt collectors from commencing or continuing lawsuits, garnishing your wages, and contacting you to request payment.
Within five business days of the start of your bankruptcy, the LIT will send a copy of some of the signed bankruptcy paperwork to your creditors, and inform them of the stay of proceedings.
Of note, the stay of proceedings also applies to debts owed to CRA on account of income tax and HST.
Non-Exempt Assets Are Sold
A downside to bankruptcy is that you must surrender certain assets to your LIT, who must realize (sell them) on behalf of the creditors.
This typically includes:
- A property that isn’t your primary home
- Your home, if the equity in it exceeds $10,000
- A vehicle with equity in it that exceeds $6,600
- Musical instruments that are not required for your business
- A stamp, coin, or other valuable collection
- Cash and investments
- Artwork and other household assets that exceed $13,500 in value
- Expensive designer clothing
- Valuable jewelry
However, some assets are exempt, meaning you get to retain them despite the bankruptcy.
Assets that are exempt from seizure include:
- Heating fuel
- Health aids
- Necessary clothing
- Furniture and appliances valued up to $13,500
- Your car, if the equity in it is less than $6,600
- Your home, in some instances
- The tools of your trade or profession to a maximum value of $11,300
- Farming animals, equipment, and supplies to a maximum value of $29,100
- Registered pension plans
- RRSP and RIF balances, except for contributions in the 12 months preceding the bankruptcy
- Term life insurance policies, and other life insurance polices that have a designated beneficiary
If you own your house, you will be able to keep it if the equity in it does not exceed $10,000.
If your equity exceeds $10,000, you will have to reach an agreement with the LIT to buy back the equity or surrender it to the LIT who will put it up for sale.
Performing Certain Duties
As previously mentioned, bankruptcy requires you to fulfill certain obligations.
The most important duties that you must fulfill to be eligible for a discharge include:
- Disclose to the LIT particulars of all property in your possession or you have an interest in, as well as details of all debts and sources of income
- Surrender non-exempt assetsto the LIT
- Give all credit cards to the LIT for cancellation
- Provide the LIT with all documents it requests such as tax returns, tax information slips, insurance policies, etc.
- File monthly income and expense reports with the LIT
- Make all required payments to the LIT
- Attend 2 mandatory credit counselling sessions
- Attend any meeting you are directed to attend by the LIT, or the government official over- seeing your bankruptcy, called an Official Receiver
- Keep the LIT abreast of your address and contact details
The final step in the bankruptcy process is the discharge, which takes place after all bankruptcy obligations have been fulfilled.
This means you will be officially released from your obligation to repay your debts and you will be given a fresh start.
A few types of debts survive a discharge and must still be paid. The LIT will discuss this with you.
How Long Does Bankruptcy Take?
In Canada, the minimum waiting period to obtain a discharge is 9 months, plus a day, after the bankruptcy was filed and registered with the federal government.
This means that if all bankruptcy obligations have been completed, and it is your first bankruptcy, you may be able to have your bankruptcy discharged in less than one year after filing.
You must also meet the following requirements for a 9 month discharge:
- Neither your LIT, a creditor, or the Office of the Superintendent of Bankruptcy (OSB) office has opposed your discharge
- You attended the required financial counselling sessions and completed your duties
- You paid what was owed to the LIT, and you were not required to pay surplus income over the required 21 months
Life after Bankruptcy
While bankruptcy does provide you with a fresh financial start, you will have to put in a bit of work to repair your credit after your discharge.
When you file for bankruptcy, this, along with the date of filing, the name of the LIT, and the debts declared in the filing will all be noted on your credit report for 6 years post-discharge, leaving behind a negative R9 rating. For a second, or subsequent bankruptcy, the information remains on your credit report for 14 years.
However, this doesn’t mean you’re in for a long road of credit denials and financial insecurity.
- Disputing credit report errors
- Obtaining a secured credit card
- Not missing any debt payments
- Not obtaining too much new debt
- Working towards building a history of positive credit use
- Asking for modest credit increases but not using much of the newly available credit
When filing for bankruptcy, it’s important that you have a firm understanding of how the process works and what your obligations are before deciding to file.
This is where the LIT becomes an invaluable resource. A LIT will be with you on this journey every step of the way, helping you understand what is being done, and assisting you through the entire process.
Baker Tilly Ottawa Ltd. is a professional debt management firm and Licensed Insolvency Trustee. Since 2002, we have assisted thousands of individuals and couples find relief from financial stress. Our mission – our passion – is your health and well-being!