Bankruptcy is a legal process that helps individuals and businesses manage their financial struggles by eliminating or restructuring their debt. However, it doesn’t clear all types of debt, and understanding what can and cannot be discharged is essential. Here, we’ll explore the types of debt that bankruptcy can erase, its duration, and its effects on your credit.

What Debts Can Be Cleared Through Bankruptcy?

In Canada, bankruptcy can wipe out most unsecured debts. This includes credit card balances, unsecured loans, overdrafts, and certain taxes owed to the Canada Revenue Agency (CRA). However, secured debts, such as mortgages and car loans, are not cleared through bankruptcy. These are tied to physical assets like property or vehicles, so they remain intact.

Additionally, student loans cannot typically be included in bankruptcy if they are less than seven years old. For student loans between five and seven years old, a bankruptcy trustee may apply for hardship relief to include them in the bankruptcy process. Other debts, such as court fines, child support payments, and government overpayments, also remain unaffected by bankruptcy.

How Long Does Bankruptcy Last in Canada?

The bankruptcy process in Canada usually lasts for 9 months, but it can extend up to 21 months if necessary. This time frame is typically for individuals who are filing for bankruptcy for the first time. During this period, surplus income—based on a formula that considers family size and income—is directed to creditors. In some cases, assets may also be sold off to help settle debts.

After the bankruptcy process concludes, the individual is considered “discharged.” However, the impact of bankruptcy lingers. For instance, a record of the bankruptcy remains on the person’s credit report for 6 years with a negative rating. This severely impacts their ability to obtain credit. Additionally, a permanent record of the bankruptcy is kept by the courts, accessible online.

Bankruptcy vs. Insolvency: What’s the Difference?

Insolvency refers to a state in which an individual or business can no longer meet their financial obligations. In Canada, insolvency is addressed through legislation known as the Bankruptcy and Insolvency Act. This Act provides two primary solutions: bankruptcy and consumer proposals. While insolvency is the financial problem, bankruptcy is one of the remedies to resolve that problem.

How Much Does Bankruptcy Cost?

Filing for bankruptcy comes with a base cost, typically starting at $1,800. The minimum monthly payment is usually around $200 if the bankruptcy process lasts 9 months. However, the cost can increase if the bankruptcy is extended beyond the standard period. This fee covers the filing process and administrative costs with a government-licensed trustee.

In addition to the basic filing fee, individuals must also contribute their surplus income during the bankruptcy process. This means that someone with a higher income will pay more towards the bankruptcy than someone with a lower income. It’s also important to note that the sale of non-exempt assets could be required, though this is a one-time event rather than a recurring cost.

Can You Own Property After Bankruptcy?

Bankruptcy does not prevent you from owning property in the future. However, obtaining a mortgage or loan to buy property might be difficult for several years after a bankruptcy. In the first 6 years following bankruptcy, your credit report will show a record of the bankruptcy and the debts that were written off, making it challenging to secure new credit.

To improve your chances of securing a mortgage, you may need a co-signer with strong credit, or you could seek out private lenders willing to take a higher risk, though this can be costly.

Does the Government Fund Bankruptcies?

The Canadian government does not cover the costs of an individual’s bankruptcy. Instead, the person filing for bankruptcy is responsible for the process, including the costs associated with the filing and any surplus income payments. The only role the government plays is overseeing the bankruptcy process through the Office of the Superintendent of Bankruptcy (OSB).

Can You Rebuild Your Credit After Bankruptcy?

Yes, it is possible to rebuild your credit after bankruptcy, but it takes time. The bankruptcy will remain on your credit report for 6 years after you are discharged, making it difficult to access mainstream credit during this time. However, you can take steps to start rebuilding your credit, such as applying for a cash-secured credit card or a loan.

Once the bankruptcy record is removed from your credit report, you can begin fresh, and if you’ve been using credit responsibly during the 6 years, your credit score can improve rapidly.

How Long Does It Take to Recover From Bankruptcy?

It typically takes 7 to 8 years to fully recover from bankruptcy in Canada. This includes the bankruptcy process itself (9 to 21 months) and the subsequent 6 years for the bankruptcy notation to be removed from your credit report. While this may seem like a long time, there are ways to rebuild credit during this period, such as through secured credit cards or loans.

Is It Difficult to Get Credit After Bankruptcy?

Yes, obtaining credit after bankruptcy can be very challenging. The bankruptcy will leave a significant mark on your credit report, making it difficult to qualify for regular loans or credit cards. However, there are alternative methods to start rebuilding credit, such as applying for a cash-secured credit card. This card acts as a form of collateral, helping you demonstrate responsible credit use.

Additionally, if you need a loan or mortgage, a co-signer with strong credit may increase your chances of approval. While the road to recovery is not easy, there are ways to navigate the challenges and improve your credit over time.

Conclusion

Bankruptcy can offer a fresh start for individuals overwhelmed by debt, but it is not a quick fix for all financial problems. It can eliminate many forms of unsecured debt, but certain debts, such as mortgages and student loans, will remain. The process itself takes several months, and its effects linger for years. Understanding the long-term impact of bankruptcy on your credit and financial future is essential when considering this option.