Bankruptcy Law in Canada: Your Complete Guide to Debt Relief

Bankruptcy law in Canada provides a legal process for individuals facing insurmountable debt to eliminate most of their financial obligations and start fresh. Under the Bankruptcy and Insolvency Act, this process involves assigning your assets to a Licensed Insolvency Trustee, who then distributes them to your creditors.

Declaring bankruptcy can stop creditor calls, legal action, and wage garnishments, offering immediate financial relief. However, it’s a serious legal step with long-term consequences for your credit history and borrowing capacity.

Key Features of the Bankruptcy Process

When you file for bankruptcy in Canada, several legal steps and conditions come into play:

  • A Licensed Insolvency Trustee (LIT) is appointed to manage your file

  • Collection activities are suspended (automatic stay of proceedings)

  • Most unsecured debts are eliminated after discharge

  • You must attend mandatory credit counselling

  • Some assets may be exempt from seizure

  • You’ll be released from most debts within 9 to 21 months, depending on income and prior filings

Common Non-Dischargeable Debts

Some debts cannot be eliminated through bankruptcy, including:

  • Court fines or penalties

  • Alimony and child support

  • Student loans less than seven years old

  • Fraudulently obtained debts

Always speak with a Trustee to understand how your specific debts are treated.

What Assets Are Exempt During Bankruptcy in Canada?

Bankruptcy doesn’t mean you’ll lose everything. The law protects certain necessities so you can rebuild after discharge.

Common Exempt Assets May Include:

  • Personal clothing and basic household furnishings

  • Tools or equipment used to earn income (up to a certain value)

  • Registered retirement accounts (RRSPs, RPPs, LIRAs), excluding recent contributions

  • Public benefits such as Employment Insurance and disability payments

  • Limited equity in your primary home (varies by province)

Exemption amounts vary by province. It’s crucial to review the rules in your jurisdiction or consult a Licensed Insolvency Trustee.

How Long Does Bankruptcy Stay on Your Credit Report?

The impact of bankruptcy on your credit file depends on how many times you’ve declared:

  • First-time bankruptcy: remains for 6 years after discharge

  • Second-time bankruptcy: remains for up to 14 years from filing

Although it affects your credit, many people begin rebuilding their credit within a year of discharge using:

  • Secured credit cards

  • Credit-builder loans

  • Co-signed financing agreements

Timely payments and responsible credit use can help you regain lenders’ trust over time.

Can You Be Denied Bankruptcy?

Yes, bankruptcy in Canada is not automatically granted. You must meet specific criteria to qualify:

Reasons Bankruptcy May Be Denied:

  • Owe less than $1,000 to creditors

  • Have sufficient income or assets to pay debts

  • Have previously filed for bankruptcy within the past 7 years

  • Attempted to hide, transfer, or dispose of assets

  • Involved in financial misconduct (fraud or false reporting)

The Licensed Insolvency Trustee reviews your application and may decline to proceed if the requirements are not met. In such cases, alternatives like a consumer proposal may be a better option.

Key Rules Under the Bankruptcy and Insolvency Act

The Bankruptcy and Insolvency Act (BIA) outlines the legal framework for bankruptcy filings in Canada. Here are essential rules every debtor should understand:

  • Eligibility threshold: Must owe at least $1,000 and be unable to meet debt obligations

  • Legal protection: Filing triggers an automatic stay of legal actions from creditors

  • Duties of the debtor: Includes disclosing assets and income, attending two counselling sessions, and cooperating with the Trustee

  • Role of the Trustee: Oversees asset liquidation and distributes funds fairly to creditors

  • Timeline for discharge: 9 months (first-time filer), 24 months (second-time filer), unless income is above the threshold

These rules are designed to balance fairness between debtors and creditors while allowing for a financial reset.

How to Search the Bankruptcy and Insolvency Act (BIA)

To access the full text of the BIA, visit:

  • The Justice Laws website and search “Bankruptcy and Insolvency Act”

  • Or search on Google using: Bankruptcy and Insolvency Act site:justice.gc.ca

The legislation can be complex. If you’re unsure how to interpret it, a Licensed Insolvency Trustee can help explain your rights and obligations under the law.

FAQ About Bankruptcy Law in Canada

How long does bankruptcy last in Canada?

For a first-time filer with no surplus income, bankruptcy typically lasts 9 months. If your income exceeds certain limits or it’s your second filing, it could last up to 24 or even 36 months.

Will I lose all my belongings in bankruptcy?

No. You may retain exempt assets like clothing, household items, and some retirement accounts. Asset exemptions vary by province.

Can I declare bankruptcy without a job?

Yes, you can file for bankruptcy even if you’re unemployed, as long as you meet the debt threshold. However, income is considered when determining payment obligations.

Can I keep my car if I go bankrupt?

In many provinces, a personal vehicle is exempt up to a certain value. If the car is financed, you may be able to continue payments and retain it.

Is bankruptcy better than a consumer proposal?

It depends. Bankruptcy eliminates debt faster but affects credit more severely. A consumer proposal allows partial repayment and protects assets. Always consult a Trustee to explore both options.