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What Happens If You Declare Bankruptcy in Canada? (2025 Edition)


bankruptcy-in-canada

Last Updated On : April 04 , 2025


Understanding Bankruptcy in Canada

Bankruptcy in Canada is a legal process designed to help individuals or businesses who can no longer repay their debts. While declaring bankruptcy may sound intimidating, it is a structured and federally regulated process that relieves those struggling financially. Managed under the Bankruptcy and Insolvency Act (BIA), the process offers a fresh start while balancing creditors' rights.

What Is Bankruptcy in Canada?

Bankruptcy is a legal declaration that you’re unable to repay your debts. Once filed, a Licensed Insolvency Trustee (LIT) takes control of your financial affairs, assets, and debts. The trustee manages your assets (except exempt items), notifies your creditors, and ensures that your obligations under bankruptcy laws are met.

It is not a punishment, but a financial tool.

Who Can File for Bankruptcy in Canada?

To be eligible to file for bankruptcy, you must:

  • Owe at least CAD1,000
  • Be insolvent (unable to repay debts as they come due)
  • Reside, do business, or own property in Canada

Canada Bankruptcy Process: Step-by-Step

Step Description
1. Consult a Licensed Insolvency Trustee (LIT) Only a government-licensed professional can file bankruptcy for you.
2. Evaluation of Finances The LIT reviews your income, assets, and debt obligations.
3. File for Bankruptcy Legal documents are filed; creditors are notified.
4. Asset Management Some non-essential assets are liquidated (sold) to repay creditors.
5. Monthly Payments & Counseling You may need to make surplus income payments and attend credit counseling.
6. Discharge from Bankruptcy Typically after 9–21 months (first-time), your debts are legally erased.

What Happens to Your Assets?

Not all your belongings are taken. Certain assets are exempt from seizure, and these vary by province.

Common Exempt Assets in Most Provinces:

  • Basic household furnishings
  • Personal clothing
  • A modest vehicle (up to a certain value)
  • RRSPs (except recent contributions)
  • Tools of your trade

How Does Bankruptcy Affect Your Credit?

  • A first-time bankruptcy stays on your credit report for 6 years after discharge.
  • During bankruptcy, your credit score drops significantly.
  • You will find it difficult to obtain new credit, rent property, or get favorable loan terms.

That said, many Canadians rebuild their credit within 2–3 years of discharge with responsible use.

Bankruptcy Statistics in Canada (2025)

canadian-insolvency-statistics-bankruptcy

According to the Office of the Superintendent of Bankruptcy (OSB):

  • Over 87,000 insolvency filings were recorded in 2023
  • Of these, 59% were consumer bankruptcies, and 41% were consumer proposals
  • Average consumer debt at filing: CAD 54,000

Alternatives to Bankruptcy

Bankruptcy is a last resort. You might consider:

  • Consumer Proposal: Legally binding debt settlement with reduced payments
  • Debt Consolidation Loan: Combine all debts into one lower-interest loan
  • Credit Counselling: Non-profit agencies negotiate reduced payment plans

Pros and Cons of Filing Bankruptcy

Pros Cons
Debt discharge (fresh start) Damages your credit for years
Stops wage garnishment Loss of non-exempt assets
Legal protection from creditors Court-mandated obligations and counseling
Quick resolution (9-21 months) Public record of bankruptcy

How Much Does It Cost to File for Bankruptcy in Canada?

  • Basic administration fee: ~CAD1,800
  • Surplus income payments: Based on your income (if applicable)
  • Two mandatory credit counseling sessions: Included in filing

Your LIT will break this down during your consultation.

Final Thoughts

Bankruptcy in Canada is not a failure; it's a legal solution when financial obligations become overwhelming. With proper guidance and planning, bankruptcy can offer a much-needed fresh start. However, it's important to fully understand your options and consult a Licensed Insolvency Trustee before proceeding.

Whether you choose bankruptcy or explore alternatives, take the first step towards financial clarity and peace of mind.

FAQs About Bankruptcy in Canada

No. Many essential items are exempt, and you'll retain what’s needed for basic living.
Yes, but only if you've been out of school for 7+ years. Less than that? You’ll still owe them.
Yes, but the second time takes longer (24–36 months) and affects credit more severely.
If it’s under the provincial exemption value or you continue making car loan payments, yes.
Your bankruptcy doesn’t protect your co-signer—they will become responsible for the debt.

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