Q & A

What is Bankruptcy?

Bankruptcy is a legal proceeding available to a person or corporation in order to cope with a financial crisis. One of the main purposes of the bankruptcy legislation is to give a person who is hopelessly burdened with debt, the opportunity to make a fresh financial start.

What is the difference between a Consumer Proposal and Bankruptcy?

Consumer Proposal – you will not lose your assets but you must maintain payments to your secured creditors such as your mortgage payments and your car payments. A Consumer Proposal allows you to extend the time you need to repay your unsecured creditors (up to five years), or allows you to settle with your unsecured creditors at less than the full amount of what you owe. When the Consumer Proposal is finished, you are released from the unsecured debts that were included in your Consumer Proposal. In Ontario, the filing of a Consumer Proposal will be noted on your credit report for three years after it is completed.

Bankruptcy – your trustee will be able to review with you the impact that a bankruptcy will have on the assets that you currently own. Assets such as clothing and personal effects, household furniture, a motor vehicle, work tools and RRSP’s and pensions are generally not lost after filing for bankruptcy. The funds from any assets that are not protected and that your trustee sells will be distributed to your creditors. At the completion of your bankruptcy, you will be legally released from the unsecured debts that existed at the time you filed for bankruptcy. A first time bankruptcy will normally last between nine and twenty-one months, depending on the income level of the household. In Ontario, a personal bankruptcy will remain on your credit report for six years after the bankruptcy process is finished.

How can I tell I need to file for Consumer Proposal or Bankruptcy?

  • Finding it difficult to pay your bills and make payments on your credit cards and other debts
  • Having your wages garnisheed
  • Borrowing money to make it to your next payday
  • Receiving threatening letters or phone calls from creditors or collection agencies
  • Being sued by a creditor

Will my credit be effected if I file Consumer Proposal or Bankruptcy?

A common concern that people have when contemplating filing a Consumer Proposal or Bankruptcy is what impact it will have on his or her credit rating. After a Consumer Proposal or bankruptcy is filed, the credit bureau is notified and keeps a notation of this on your file. In Ontario, a first time bankruptcy will stay on your credit record for six years after your bankruptcy is finished. A second time bankruptcy will stay on your credit record for fourteen years after your bankruptcy is finished. A Consumer Proposal will stay on your credit record for three years after the Consumer Proposal is completed.

While it is true that filing a Consumer Proposal or bankruptcy will have a negative impact on your credit rating, it is important to keep in mind that one of these options may be the only tool available to help you deal with your immediate debt problems.

How about Credit Counselling Agencies?

Some Credit Counseling companies offer debt education and guidance, others provide consolidation mortgages, and others provide DMP, Debt management plans. These are firms that are not governed by any official body or legislation. However, in Ontario they need to be licensed as Debt collectors. These firms are either for profit or not for profit, this does not mean they don’t make money, they all make money, as they charge you for their services including to prepare DMP for your creditors regardless whether those creditors accept them. If the creditors reject the DMP then credit counselors can no longer assist you. Your creditors will continue on recovery of the debt, harassing phone calls, legal action or wage garnishment.

Credit counseling companies cannot file a DMP with your creditors if you have no income or have lost your job. offering no real creditor protection. Government of Canada issued a consumer alert, to beware of prepaying a fee to have your debt reduced.

What is the difference between Personal and Business Bankruptcy

When we talk about small business bankruptcy , there’s not much difference between personal bankruptcy and that of a small business.

If a person’s business is a sole proprietorship or a partnership, legally, they are their business, so when they face the prospect of bankruptcy, all their assets are involved and the bankruptcy procedures are the same. In other words, the assets of the business cannot be held separate from their personal assets, so a small business bankruptcy is in effects a personal bankruptcy.

Small business bankruptcy is different for incorporated business, because corporations are independent legal entities. Running an incorporate business give a small business owner liability protection it is the business assets that are forfeit not the individual’s.

The bankruptcy procedures are essentially the same, however, the company is forced into or voluntarily seeks bankruptcy protection, all of the company’s assets are turned over to the Trustee in Bankruptcy who sells them and distributes the funds to the creditors.

Will my creditors stop bothering me after I file?

Yes. By filing for bankruptcy your creditors are no longer legally allowed to continue to pursue you for repayment. While your creditors will be stopped from contacting you, you are expected to continue to make payments such as a mortgage payment or a car loan or car lease payment if you intend to keep the asset.

Will I lose my house and my car?

No. Filing for bankruptcy does not mean that you will have to give up all of your assets. You are allowed to keep certain categories of assets up to an allowable value. The categories include clothing and personal effects, household furniture, a motor vehicle, work tools and RRSP’s and pensions.

If you do own a home or have a financed or leased vehicle you will have to continue making your monthly payment if you intend to keep the asset. However, if there is any equity available in the asset, you may be able to pay the value of the equity to your trustee for distribution to your unsecured creditors.

Do I have to include all of my debts in my Consumer Proposal?

Yes, you cannot pick and choose which debts are to be included in your Consumer Proposal or bankruptcy. All debts must be listed including Canada Revenue Agency debts, credit card debts, student loans and loans from friends or family. Certain debts however may still need to be repaid after your Consumer Proposal or bankruptcy is finished. These debts include:

  • Alimony and maintenance
  • Child support
  • Student loans, if you were a student within the last seven years
  • Debts obtained by fraud or misrepresentation
  • Court fines and penalties

Am I unable to get credit again for seven years? No, this is not the case. Your bankruptcy will be noted on your credit report for six years after your bankruptcy ends. But immediately after the end of your bankruptcy, you can take steps to obtain credit again (e.g. by obtaining a secured credit card) and start to rebuild your credit rating.

How is my spouse affected if I file a Consumer Proposal or file for bankruptcy?

Generally speaking, your spouse will not be affected if you file a Consumer Proposal or bankruptcy. A spouse will be affected however if you have joint debts or your spouse has co-signed or guaranteed a debt. Your filing does not impact your spouse’s credit rating, and any assets in your spouse’s name are also not affected.

If your spouse is jointly liable for any of your debts, or has co-signed or guaranteed any debts, then he or she may also have to consider filing a Consumer Proposal or bankruptcy.

Does my spouse have to file a Consumer Proposal or file for bankruptcy if I am?

Your spouse is not required to also file simply because you are, but as mentioned above, if your spouse is also responsible for some of your debts, he or she may have to consider filing as well.

Credit counseling – requirement for discharge of bankruptcy

In a bankruptcy, the Bankruptcy and Insolvency Act requires that you attend two counseling sessions in order to be eligible for a discharge from bankruptcy. These counseling sessions are usually one-on-one between you and your Trustee. In general, counseling sessions deal with budgeting, financial planning, the cause(s) of your bankruptcy, and any other issues that are relevant to your situation.

The first counseling session must be held between 10 and 60 days following the date of bankruptcy; the second counseling session must be held no later than 210 days following the date of bankruptcy. The cost for each individual counseling session is included in the fees you pay for your bankruptcy and there is no additional out-of-pocket cost.