Bankruptcy for individuals (for corporate bankruptcy, please click here)
Bankruptcy is your right under Federal law that allows a person that offers individuals struggling with overwhelming debt a way to obtain relief and start fresh financially. By filing for bankruptcy, you can eliminate most debts and work toward rebuilding your financial future under the protection of the law.
In this article, we will explain how bankruptcy works across Canada, who qualifies, and what to expect during the process. Understanding bankruptcy can help you decide if it’s the right option to regain control of your finances and achieve a fresh financial start.
At Baigel Corp, for many years we’ve helped thousands of individuals across Canada find a suitable solution to their debt concerns. If you’d like to discuss your situation over the phone, you can call us on (416) 224-4350.
What is Bankruptcy?
Personal bankruptcy is a legal process designed to help individuals who can no longer manage their debt obligations. It provides a structured way to eliminate most unsecured debts when no other reasonable repayment solution is available.
Filing for bankruptcy requires an individual to surrender certain assets to a Licensed Insolvency Trustee (LIT), who then distributes the proceeds of the individual’s assets to creditors.
The bankruptcy process offers protection from creditors, including stopping wage garnishments, , collection calls, law suits, frozen bank accounts and other horrible experiences. While it does come with some responsibilities and consequences, like impacting your credit rating, it can offer much-needed debt relief and a financial fresh start.
Bankruptcy and Insolvency act
Bankruptcy in Canada is governed by the Bankruptcy and Insolvency Act, a federal law that outlines the rights and responsibilities of both debtors and creditors.
Under bankruptcy law, you may also be forced into bankruptcy if a creditor files a motion for a bankruptcy order against you and the court grants it. This is quite rare, and most bankruptcies start because it makes sense for the debtor and they want the protection (which the creditors cannot refuse – unless you have been fraudulent for example).
How bankruptcy works
Filing for personal bankruptcy in Canada is a legal process that can only be done through a Licensed Insolvency Trustee (LIT). Here’s how the process typically works:
Get advice from a Licensed Insolvency Trustee
The first step is to speak with an LIT, like our team here at Baigel Corp. This free initial consultation will help determine whether bankruptcy is the right option or if other debt relief solutions, like a consumer proposal or debt consolidation, may be more appropriate for your financial situation.
The trustee assigned to your file will review your financial circumstances including income, expenses, assets, and debt levels to provide you with advice based on your facts.
Have a bankruptcy trustee appointed for you
If bankruptcy is chosen, your bankruptcy is registered with the Office of the Superintendent of Bankruptcy (OSB), the federal agency that oversees all insolvency proceedings in Canada and confirms that the protection has started and the LIT’s appointment. The LIT handles all this for you.
The LIT will assist you by preparing all the documents and sending notice to your creditors that they must, by law, now deal with the LIT and cannot pursue you.
Bankruptcy filing
When you file for bankruptcy, you are legally protected from your creditors. This means problems like wage garnishments, lawsuits, and creditor contact should stop immediately.
You must no longer required to make direct payments to unsecured creditors. You may be required to make payments to the LIT (also referred to as the bankruptcy trustee). The law sets how these fiunds are to be used: a formula calculates what the LIT is paid for his/her work and the rest is distributed farly by the LIT to the creditors.
You must also surrender any non-exempt assets (you can make arrangements to buy such assets back from the bankruptcy estate) and provide detailed financial information, including for income tax and monthly income and expense reports.
How to complete the bankruptcy process
When you have completed all your duties you receive a Certificate of Discharge from Bankruptcy. These duties may include:
- Submitting proof of income each month.
- Make all required payments (including surplus income contribution requirements if your income exceeds a set government threshold). Every bankruptcy is different, based on your facts and the law, so please ask your LIT to explain. Generally though, the payments are affordable and fair to you and your creditors.
- Attending two mandatory counselling sessions (at no extra charge).
- Assisting your trustee with asset valuation and recovery if requested.
- Filing and providing documents for your income tax returns.
- Attending meetings of creditors if required.
- Attending for examination under oath – if required.
- Keeping the LIT informed of changes in contact information such as address.
Following these conditions ensures that the process goes as smoothly and quickly as possible.
Discharge from bankruptcy proceedings
A first-time bankruptcy generally lasts nine months, provided you meet all your duties and do not have surplus income. At the end of this period, you may receive an automatic discharge, which legally releases you from the debts included in your bankruptcy.
For repeat bankruptcies or cases involving surplus income, the discharge will take longer. Please discuss with your LIT.
Your discharge certificate can be issued by the LIT unless: you fail to do your duties (as explained above) or another party (usually a creditor) opposes your discharge in which case the LIT must ask the court for a hearing where a Registrar, Master, Associate Judge or Judge will decide when and on what conditions you will be discharged from your bankruptcy.
Who is eligible for bankruptcy in Canada?
Bankruptcy in Canada is a federally regulated process, and to be eligible, you must meet specific legal criteria. You can file for personal bankruptcy if:
- You owe at least $1,000 in unsecured debt.
- You are insolvent, meaning you cannot keep up with regular debt payments as they become due.
- The total value of your debts exceeds the value of your assets.
- You are resident in or have ties to Canada.
Unsecured debts can include credit card balances, personal loans, lines of credit, and payday loans. Tax debts to Canada Revenue Agency are also included and you can also include secured debt (like a mortgage) if the payments are too high but usually because the house is worth a lot less than the mortgage.
If you meet these conditions, you can file for bankruptcy through a Licensed Insolvency Trustee (LIT), like here at Baigel Corp. LITs are the only professionals authorized by the Canadian government to administer bankruptcies.
You do not need to be employed to qualify. However, if you have steady income, you may be required to make surplus income payments depending on your earnings.
What debts are covered by the bankruptcy process?
When you file for bankruptcy in Canada, not all debts are treated the same. Bankruptcy is designed primarily to help individuals eliminate unsecured debt, but some types of debt are excluded or treated differently depending on whether they are secured or ineligible.
Unsecured debt
Bankruptcy can eliminate most unsecured debts. These are where you have not pledged (also called “given security over”) something you own. Common examples include:
- Credit card debt
- Personal loans
- Payday loans
- Lines of credit
- Medical bills
- Outstanding utility bills
- Income tax debt These debts are discharged once your bankruptcy is complete, offering you a clean financial slate.
Secured debt
Secured debts are tied to specific assets, such as a home or a car. Common examples include:
- Mortgage
- Car loans
- Home equity lines of credit
- Instalment purchase loans
If you file for bankruptcy, you must decide whether to continue paying your secured creditors in order to retain the asset, or surrender the asset and eliminate the debt. Bankruptcy does not automatically remove secured debts unless you give up the underlying asset.
Ineligible debts
Certain debts cannot be discharged through bankruptcy. These include:
- Spousal support (Child support payments made by court order)
- Spousal support ordered by a court
- Court-ordered fines or penalties
- Student loans (if it has been less than 7 years since you were a full-time or part-time student)
- Debts obtained by fraud
It’s important to review your debt obligations with a Licensed Insolvency Trustee to fully understand what bankruptcy can and cannot discharge.
What happens to my assets during bankruptcy?
When you file a bankruptcy petition in Canada, most of your property becomes part of the bankruptcy estate, which your Licensed Insolvency Trustee manages. The trustee may sell certain non-exempt assets to help repay your creditors.
However, not everything is lost. You are allowed to keep essential assets required to maintain a basic standard of living. These exemptions vary by province, but often include:
- Household furniture and appliances up to a certain value
- Necessary clothing
- Tools of your trade
- A vehicle, depending on its value
Non-exempt property, like a second vehicle, valuable jewellery, or investments, may be sold by your trustee. Additionally, any tax refunds not yet received for the year of bankruptcy (and prior years) will be collected by the trustee and applied to your debts.
Where you have an asset that is worth more than the loan and the exemption (if any) you can make an arrangement with the LIT so you can keep that asset (if you want) by offering to pay the bankruptcy estate the fair value that the LIT would otherwise get by selling the asset.
How long does bankruptcy last?
In Canada, a first-time bankruptcy typically lasts for 9 months. However, the length can vary depending on your financial situation and whether you are required to make surplus income contribution payments (in which case the bankruptcy discharge cannot be before the end of the 21st month).
For individuals filing for bankruptcy a second time, the process can take 24 to 36 months, depending again on surplus income. Your Licensed Insolvency Trustee will help you understand how long your bankruptcy will last based on your earnings, household size, and applicable thresholds.
For the unfortunate folk who are filing bankruptcy for a third time please speak with your LIT about the discharge. Generally, it cannot be earlier than above and will always require a court hearing to get the discharge certificate.
Surplus income contribution requirement payments
Surplus income contribution requirement payments occur when your average income exceeds the government-set threshold for your household size (and various other factors). The more your income goes above this limit, the more you may have to pay.
Generally, you are required to contribute your proportion of half of the amount by which the household income exceeds the government set standard for 21 months (longer payment terms can be arranged).
These payments ensure that individuals with higher earnings contribute more toward repaying their debts during bankruptcy. Your trustee calculates these payments and adjusts them (up or down) based on changes in your income – which is a reason why you need to send monthly income reports to the LIT.
How will filing brankruptcy impact my credit rating?
Once you declare bankruptcy, a note is added to your credit report indicating that you’ve filed under the Bankruptcy and Insolvency Act. This record stays on your credit report for up to 6 years after your discharge for a first-time bankruptcy, and potentially longer for subsequent filings.
With consistent and responsible use of your credit, you can start to rebuild this within 2 years of discharge.
How do I rebuild my credit after bankruptcy?
Filing for bankruptcy can feel like a setback, especially when it comes to your credit. But it’s important to know that bankruptcy is not the end of your financial story. With time, discipline, and the right support, you can rebuild your credit and move toward a stronger financial future.
Pay bills on time
Your payment history is one of the most important factors in your credit score. After bankruptcy, it’s essential to pay all your bills, like utilities, rent, phone, and any remaining debts, on time.
Even small missed payments can hurt your score. Setting up automatic payments or reminders can help ensure you never miss a due date.
Explore credit options that comfortably fit your budget
While it may seem counterintuitive, using credit responsibly is key to rebuilding it. Start by applying for a secured credit card. These require a deposit but work like regular credit cards.
Use it for small purchases and pay off the full balance each month. You may also consider a credit builder loan or a small line of credit, as long as it fits within your budget.
Check your credit report for mistakes
After bankruptcy, it’s a good idea to request your credit report from both Equifax and TransUnion, the two major credit bureaus in Canada. Review your reports carefully to ensure that discharged debts are marked as “included in bankruptcy” and that no errors remain.
Mistakes can lower your score unnecessarily, so if you find any, file a dispute with the credit bureau to get them corrected. This step can make a meaningful difference as you rebuild.
Create and stick to an affordable budget
A realistic budget is one of the best tools to stay on top of your finances. Track your monthly income and expenses to ensure you’re not overspending. Prioritize essentials, eliminate unnecessary expenses, and include a savings category, even if it’s small.
Having an emergency fund, even with just a few hundred dollars, can prevent future reliance on credit in times of need. Budgeting also helps reduce financial stress and builds confidence in managing money wisely.
Get professional advice
Everyone’s financial recovery looks different, and there’s no shame in asking for help. A Licensed Insolvency Trustee can review your situation, help you create a budget, and offer credit-building strategies tailored to your needs.
Baigel Corp supports individuals looking to rebuild after bankruptcy. Whether you’re recovering from personal or business debt, our experienced team can guide you through the next steps and help you make informed decisions that lead to long-term stability.
Advantages and disadvantages of bankruptcy
Filing for bankruptcy in Canada is a significant decision that comes with both advantages and disadvantages. Understanding both sides of the process can help you decide if it’s the right option for your financial situation.
Bankruptcy pros
One of the main advantages of filing for bankruptcy is the immediate protection it offers. Once you file, creditors are legally required to stop collection efforts, including wage garnishments, lawsuits, and harassing phone calls. Bankruptcy also eliminates most unsecured debts, such as credit card debt, payday loans, and overdue bills, giving you a chance to reset your finances.
Unlike a consumer proposal or settlement the creditors cannot refuse your protection.
While a bankruptcy stays on your credit report for up to seven years (or longer for a second bankruptcy), many people find they can begin rebuilding their credit sooner than expected by making responsible financial decisions.
Bankruptcy cons
On the downside, bankruptcy may require you to surrender certain assets that exceed both a certain value, depending on your province’s exemption limits, and any loans secured by that asset. This might include non-essential property, investments, or luxury items. You may also be required to make surplus income contribution requirement payments if your earnings exceed a government-set threshold.
In addition, not all debts are dischargeable in bankruptcy. Child support, spousal support, and court fines must still be paid, and bankruptcy may not affect some student loans.
Alternative debt relief solutions
Bankruptcy isn’t the only way to handle overwhelming debt in Canada. Here are four alternative debt relief solutions that may better suit your situation:
Consumer proposal
A consumer proposal is a formal agreement between you and your creditors, arranged through a Licensed Insolvency Trustee (LIT). It allows you to make fixed monthly payments over a period of up to five years, usually for a reduced amount compared to what you owe.
One of the biggest advantages of a consumer proposal is that it allows people to protect all their assets, including home and car. Once accepted by creditors, it legally binds all parties and eliminates your remaining debts after successful completion. If you wish to discuss this type of solution, give us a call on (416) 224-4350.
Credit counselling
Credit counselling provides professional guidance from a credit counsellor who will assess your budget and help you understand your options.
Non-profit credit counselling agencies can set up structured payment plans through debt management programs. While this doesn’t reduce your principal balance, it can lead to more favorable payment terms and lower interest charges. These plans require full repayment of the debt and not all creditors have to accept the settlement (which they must in a consumer proposal where the majority of the creditors accept the offer the other creditors are forced into the plan by Federal law).
Debt consolidation
Debt consolidation loans combine multiple debts into one single payment, sometimes at a lower interest rate. It simplifies your finances and can reduce high interest rates, especially on credit card balances.
While this option can help save on interest charges, it usually requires a good credit score and stable income to qualify. Often they ask for a co-signer (which brings its own complications) Consolidation doesn’t reduce the amount you owe but may make budgeting and repayment more manageable.
Debt management plan
A debt management plan (DMP), typically arranged through a credit counselling agency, is a structured repayment plan that consolidates your unsecured debts into one monthly payment based on your monthly income.
This is best suited for people with regular income who can pay back their debts in full over time but need help coordinating payments and negotiating interest rates.
Debt settlement
Debt settlement involves negotiating directly with creditors to accept less than the full amount owed, often through a lump sum payment.
Debt settlement may be an option for people who can access funds upfront, though it can negatively impact your credit score, and may come with tax implications if the forgiven amount is a large sum. The agreements need to be legally enforceable (by you) so you may require the assistance of a lawyer.
You will need to negotiate with each creditor separately. Even if a relatively small creditor refuses to settle and takes legal action to collect, that can end your ability to honor settlement arrangements you negotiated with the other creditors.
Where can I get support with my financial situation?
If you’re feeling overwhelmed by debt, you’re not alone — and you don’t have to face it alone. Speaking with a professional can help you understand your options and take confident steps toward a stronger financial future.
Baigel Corp offers trusted, personalized advice to Canadians dealing with financial stress. A Licensed Insolvency Trustee can assess your situation and guide you through debt relief solutions.
Our professionals will explain to you how each option works and help you choose a path that makes sense for your income, debt level, and goals. If you’re ready to regain control of your financial life, talk to Baigel Corp. today.