Legal Ease, July 27
Personal Bankruptcy in Canada
Sometimes people get so far into debt that there is no way they can ever pay back all they owe.
The law recognizes this and makes provision for people to start again through a process called “bankruptcy.” Through bankruptcy, a person hopelessly burdened with debt gets a chance to start fresh.
Bankruptcy is not the end of the world—in fact it allows people to rebuild their lives and move on.
Someone who is bankrupt has all their experience and knowledge and even if they do not have a lot of money, they do have a chance to get work and save up for a better future.
In a bankruptcy, you give almost everything you own to a Licensed Insolvency Trustee in exchange for having your debts cancelled. Note I said you have to give up almost everything—you can keep a few necessities of life.
What you can keep after a bankruptcy varies across the country, but in Nunavut the things you can keep are:
• food and fuel: twelve months’ supply;
• clothing: no dollar limit;
• household furniture and appliances, up to $200;
• tools and animals of your trade, including motor vehicle, up to $600;
• principal residence, up to $3,000; and,
• RRSPs associated with insurance policies.
Giving up your assets may sound harsh but as a trade for getting rid of your debts, it can make sense.
Personal bankruptcy is a legal process, governed by federal law (the Bankruptcy and Insolvency Act.)
The law is designed to permit an honest but unfortunate debtor to obtain relief from his or her debts while treating creditors equally and fairly.
The last point is important—bankruptcy is not just for people who owe money.
It is also designed to be a fair process for allowing creditors to be paid something reasonable so they do not have a pure loss. It’s a balance in which the assets that do exist are distributed in an equitable way.
Bankruptcy usually lasts about nine months if you have not been bankrupt before. During that time you are supervised by your trustee, cannot borrow money except in very special circumstances, and may need to give some of your income to the trustee.
After your bankruptcy is over, your credit rating may be poor, but you are legally free to go on as if most of your debts were never there.
The credit ratings point is worth mentioning in more detail. A bankruptcy does make for a very bad credit rating—but so do unpaid debts.
Most people who go bankrupt already have a bad credit score, so the bankruptcy doesn’t do much to make things worse.
Some debts are not eliminated by bankruptcy. Examples include student loans less than seven years after you stopped going to school as well as any spousal or child support. A debt arising from fraud is also not extinguished.
All that said, bankruptcy does allow for people to put bad financial times behind them and become productive citizens.
James Morton is a lawyer practicing in Nunavut with offices in Iqaluit. The comments here are intended as general legal information and not as specific legal advice.