Bankruptcy allows a person to get a fresh start when he/she is burdened hopelessly by debt. The idea in Canada that powers personal bankruptcy is that a person surrenders everything they own to a Licensed Insolvency Trustee. In return, all of the person’s debts are eliminated.
Federal law (the Bankruptcy and Insolvency Act) governs bankruptcy. The law allows debtors who are honest yet unfortunate relief from their debts, at the same time treating creditors fairly and equally.
Being a legal process, bankruptcy involves a ‘stay of proceedings,’ preventing any legal action and garnishment from happening, at the same time stopping creditors from calling.
In Canada, certain requirements have to be met before one can file for personal bankruptcy. The person filing for personal bankruptcy has to have done business or lived in Canada for the period of the previous year and has to be insolvent, meaning they owe a minimum of $1,000 and be unable to meet their debts in the time that their payment is due.
In Canada, a bankruptcy can be administered only by a Licensed Insolvency Trustee, who are licensed federally; their fees are moderate and regulated, ensuring that the costs of bankruptcy do not go beyond reasonable bounds.
Debts that are not eliminated
Bankruptcy does not eliminate every single debt. It deals only with debts that are unsecured, such as overdrafts, income taxes, personal loans, and credit cards.
It is perfectly possible that secured debts, such as mortgages and car loans, will not be included. Where an asset has been offered as collateral, creditors can recover whatever amount is owed to them. Bankruptcy deals with the shortfall.
Assets that are not surrendered
You retain some assets even if you go bankrupt, assets referred to as ‘exemptions,’ determined by the government as being essential for your survival. The purpose of bankruptcy is not to humiliate or punish a person, but to provide them with a fresh start. Furnishing and personal items will usually be retained even after bankruptcy.
The territorial or provincial government sets the list of exemptions. In Ontario, to give one example, any care under the value of $6,600 is exempt, as well as personal items, including household items, provided that they are worth under $13,150 and clothing and RRSPs and equity within your residence not more than $20,000 in value.
The assets that most people have to surrender include their RESPs and investments.
Surplus income and bankruptcy costs
Trustee fees and asset loss are two components of bankruptcy. However, it can cost an individual his/her income, dependent on the amount they earn and their household’s size.
The principle that applies is that if one earns a greater amount of money that is required for the survival of one’s household, a part of that ‘surplus income’ must go to the trustee so that it can be forwarded to one’s creditors. The exact mechanisms and mathematics are laid down by the law. Obviously, the greater one’s earnings, the more one has to pay the creditors.
Consult a trustee
If you are wondering whether bankruptcy is the solution you are looking for, consult a trustee, discussing the details of your personal circumstances, getting answers to your question, receiving advice, finding out if there is a better alternative out there.