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There are three types of creditors: secured, unsecured and preferred. Unsecured and preferred creditors are included in a bankruptcy; once the bankruptcy starts, you are not allowed to pay them. Secured creditors have security registered against one of your assets, such as a car or a house; if you don’t pay them, they can repossess the asset.

1. What is bankruptcy?
2. Will my creditors stop harassing me?
3. Who will know?
4. How much am I allowed to keep?
5. What debts aren’t affected?
6. What about student loans? Are they different?
7. Will I lose my house?
8. Will I lose my car?
9. Will I lose my RRSPs?
10. Will I lose my income?
11. Will it affect my tax refund?
12. Will bankruptcy affect my spouse?
13. Can I still run my own business?

1) What is bankruptcy?

Bankruptcy is a legal process that frees people from debts.
The law recognizes that honest people can get into trouble with debts. When people’s debts get so heavy they can’t hope to pay them off, they can use bankruptcy to be released from those debts and start over.

Because you can’t pay your debts, the Bankruptcy and Insolvency Act comes into play. It is a legal process that stops people from taking you to court for the money you owe them.

To go into bankruptcy, you must owe at least $1,000 and be unable to pay it.

When you declare bankruptcy, you may have to give up most of your property. A Trustee in Bankruptcy takes that property, sells it off and uses the money to pay off as many of your debts as possible. In most cases, the remainder of your debts are discharged.

After your bankruptcy, you can start over without worrying about those debts. In general, your creditors will not be able to seize your remaining property, or garnishee your wages. Any legal proceedings they have started against you should stop. You will have another chance to make it.

2) Will my creditors stop harassing me?

Yes, they will. The law says all actions have to stop once the bankruptcy papers are filed. This doesn’t apply to secured creditors such as a lien on a car or other property. But in most cases, your creditors are simply out of luck … the bankruptcy means they lose the money they lent you.

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3) Who will know?

If you have a high dollar value of assets, there has to be a notice posted in the newspaper. It will be in the 'Legals' section. In cases where there are not a lot of assets, your creditors are notified by mail and the newspaper message isn’t needed.

The Credit Bureau is notified of your bankruptcy and the bankruptcy stays on your credit record for seven years. That doesn’t mean you can’t get credit, but it could affect you.

4) How much am I allowed to keep?

You get to keep some of your property when you file for bankruptcy. A list of the exemptions you are allowed to hold on to is shown below:

• Personal effects $5,650 in value.
• Household furniture, utensils, equipment, food and fuel in your home worth $11,300 in total.
• Tools, equipment, books and the vehicle you use for work worth $11,300 in total.
• A motor vehicle valued at $5,650 or less.
• Farmers have special exemptions. If you do only farming, you get to keep $28,000 worth of your livestock, tools and farming equipment.

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5) What debts aren’t affected?

Certain types of debts get carried over despite your bankruptcy. They are:

• Fines imposed by a Court.
• Money owing for things stolen.
• Things obtained by misrepresentation.
• Alimony or maintenance payments.
• Damages awarded by a Court for bodily harm or sexual assault.
• Student loans if you have attended school in the last 7 years

6) What about student loans? Are they different?

If you left school more than 7 years ago, your student loans will be wiped out by your bankruptcy. But if you were still in school less than seven years ago, you will have to continue making payments on your student loans.

A Court can order the student loan discharged after a bankruptcy if you continue to have trouble paying it.

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7) Will I lose my house?

In most cases, your house will not be affected by your bankruptcy, although your house is not exempt from seizure by the trustee. Also, your mortgage company can cancel your mortgage contract if you file bankruptcy - legally they can demand full payment. It’s just very unlikely that they will. If you have no equity in the house and you have the approval from the mortgagee, you can keep the house. However, if there is equity you can make arrangements with your trustee to pay the equity in monthly payments, again allowing you to keep the house.

8) Will I lose my car?

The first question is: What is your car worth? You will have to have it appraised to determine its value.

If you are financing the car and there is no equity outside of what is owing and if the financing company agrees you can keep your car and continue to pay them.

If the car is worth less that $5,650 and there are no liens, the car is exempt and will not be seized by the trustee.

If you lease a car the chances are good you will be able to keep the car however certain conditions will apply. Your leasing company is obviously a secured creditor; the car is the asset that they are holding as security; if you don’t pay them, they can seize the vehicle, even though you have declared bankruptcy. Legally then, you can keep a leased vehicle if you go bankrupt, provided you continue making your lease payments, and assuming the leasing company agrees.

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9) Will I lose my RRSPs?

Contributions made to an RRSP, RRIF or DPSP in the 12 months prior to the bankruptcy may be seizable by the trustee.

10) Will I lose my income?

The Office of the Superintendent of Bankruptcy sets a threshold for what a family is allowed to earn without contributing funds to the bankruptcy. The larger the family, the more you are allowed to keep. These limits are increased each year.

As an example, a single person in 2009 is allowed to have take-home pay each month (income after taxes) of $1,870. For every dollar earned that exceeds this limit in a month the person is required to pay half of the amount over the threshold.

If that person earned $2,170 in a month, they are $300 over the limit, so they would be required to contribute an extra $150 to their bankruptcy estate for the current month.

Each month during the bankruptcy process the bankrupt submits copies of their pay stubs and proof of other income to the trustee, and the trustee calculates their surplus income, and the bankrupt contributes the required portion.

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11) Will it affect my tax refund?

You will lose any tax refunds you become entitled to during the bankruptcy period. GST credits are sent to the trustee and are refunded to the bankrupt when the file is closed.

12) Will bankruptcy affect my spouse?

Filing for bankruptcy in Canada does not directly affect your spouse. Your debts are your debts alone. Your spouse is responsible for your debt only if he or she has cosigned or guaranteed your debt.

13) Can I still run my own business?

You can run your own business even though you have filed for bankruptcy. You may however, have to notify people you deal with of your bankruptcy, such as your suppliers or people who may extend you credit about your bankruptcy.

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