Bankruptcy in Canada: what it is and how it works

What bankruptcy is

Put simply, bankruptcy is a formal, court-recognized process that clears most of your unsecured debts. You assign your assets, above what the law lets you keep, to a Licensed Insolvency Trustee, who deals with your creditors on your behalf. At the end, once you meet your duties, you are discharged, and the included unsecured debts are cleared.

It is governed by the Bankruptcy and Insolvency Act, the federal law that sets the rules. That is why only a Licensed Insolvency Trustee can administer a bankruptcy, and why the core process is consistent across the provinces where it applies, even though some details, like which assets you keep, vary by province.

Surplus income, explained plainly

Surplus income is the part of your income that sits above the standard the Office of the Superintendent of Bankruptcy sets for a reasonable standard of living, adjusted for your family size. The rule is set out in the OSB's surplus income directive.

Here is how it works. If your surplus income is $200 or more per month, you pay 50% of the surplus into the estate during your bankruptcy. If it is under $200 per month, no surplus payment is required. The exact thresholds change a little each year, so the trustee calculates the current figure for your household.

What happens to your assets and your credit

On assets, bankruptcy lets you keep certain exempt property, and the exemptions vary by province. What is protected in Ontario is not identical to what is protected in Alberta or British Columbia, so the trustee confirms what applies where you live. Secured debts, like a mortgage or car loan, are treated separately from the unsecured debts the bankruptcy clears.

On credit, bankruptcy is reported as an R9 rating, which is the lowest rating. According to the Financial Consumer Agency of Canada, a first bankruptcy is removed from your Equifax report six years after your discharge. On TransUnion it is also six years after discharge in most provinces, but seven years after discharge in Newfoundland and Labrador, Ontario, Prince Edward Island, and Quebec. Subsequent bankruptcies stay on your report for 14 years.

You can read more about what happens to your assets, and about rebuilding your credit afterward, on our related pages.

Common myths, corrected

A few things people believe about bankruptcy are not accurate, and the fear they cause is worse than the facts.

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  "I will lose everything." Not true. The law lets you keep certain exempt assets, and what you keep depends on your province.
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  "It lasts forever." A first bankruptcy can be discharged in as little as 9 months, and it comes off your credit report after six or seven years.
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  "It clears every debt." It clears most unsecured debts, but some obligations, like certain court fines, child support, and student loans within a set period, are not discharged.

Bankruptcy tends to make sense when your debts are well beyond what you could realistically repay, even with a proposal, and when you do not have significant non-exempt assets to lose. For many people, though, an alternative fits better, which is why it is worth understanding the other options before deciding.

Alternatives to bankruptcy