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Published on November 21st, 2009 | by Canadian Credit Expert

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Definition of Bankruptcy

Bankruptcy in CanadaBankruptcy Definition

In Canada bankruptcy is a form of financial protection that both businesses and individuals can use to absolve debt and protect themselves from creditors. Filing bankruptcy in Canada is usually a last resort used to wipe out debt and start over fresh.

Once bankruptcy is complete, all of the debt included in the bankruptcy is considered absolved or wiped. The bad credit history leading up to the bankruptcy and the bankruptcy itself are not wiped and will remain on the individuals credit bureau for 7 years.


Filing bankruptcy in Canada grants the consumer protection from their creditors their collection methods (e.g. bankruptcy will force creditors to stop making collection calls) and wipes away debt. Bankruptcy does not give Canadians a free pass. Because bankruptcy recorded is reporting to their credit file, most bankrupts or former bankrupts in Canada have trouble obtaining new credit or loans.

Filing Bankruptcy in Canada

In order to file personal bankruptcy in Canada an individual must be considered insolvent. Being insolvent means you have debts of at least $1000 and you cannot afford to repay them. If a person qualifies for bankruptcy and is certain they should file bankruptcy, then a trustee in bankruptcy will help them administer and make an assignment in bankruptcy.

While bankruptcy can offer protection from creditors, free up debt and grant a fresh financial start, there is still a negative side to it. Bankruptcy is often considered the worst kind of bad credit and can be associated with financial weakness. Although a poorly timed or unnecessary bankruptcy can be a bad decision it’s important to remember that bankruptcy done right can be a good thing.

Debtors

The debtor (the individual filing bankruptcy) has a number of responsibilities in bankruptcy, here are some of the most important:

  • Successfully Complete Bankruptcy – Bankruptcy is a tool used to help correct bad credit, protect consumers from creditors, repay bad debts and give debtors a second chance. The number one job of anyone in bankruptcy is to finish bankruptcy by completing all of their bankruptcy responsibilities.
  • Bankruptcy Payments – Every month a bankrupt is required to make a regular payment to their trustee in bankruptcy. Missing a payment or making a late payment to the trustee is a bad idea. In order to complete a bankruptcy the trustee payments must completed on time.
  • Bankruptcy Counselling – A major part of the “credit rehabilitation” process in bankruptcy involves bankruptcy counselling. Regular meetings with a trustee in bankruptcy allow the trustee to mark the bankrupts progress as well as provide financial and credit counselling. This “credit counselling” is an opportunity for the trustee to closely monitor the bankruptcy as well as help the bankrupt learn how to avoid credit problems in the future and prevent another bankruptcy.

Creditors

Bankruptcy protection isn’t just for the individual filing bankruptcy. It is also for their creditors. Although filing bankruptcy almost always means a financial loss for the bankrupts creditors and lenders, it can also help the creditors receive funds they wouldn’t otherwise. For instance, if a consumer writes off a credit card or has an auto loan repossessed and refuses to settle on their bad debt or make payment arrangements, then the creditor might take a 100% loss.

In bankruptcy some of the money owed to the trustee can be repaid through the debtors bankruptcy. Part of a trustee in bankruptcy’s job is to negotiate a fair settlement for both the debtor and the creditor.

How Long is Bankruptcy?

In Canada the length of your bankruptcy is determined by many variables, including your bankruptcy payment history, number of bankruptcies filed and total monthly income. Here are a few examples of bankruptcy length in Canada:

  • 9 Month Automatic Bankruptcy Discharge – If an individual files a personal bankruptcy for the first time and does not have surplus income, then they may qualify for an automatic discharge after 9 months in bankruptcy. This is based on the bankrupt meeting all of their financial and bankruptcy obligations (ie. paying the trustee on time).
  • 21 Month Discharge (or Greater) –  This scenario is also based on a well paid first time bankruptcy. If the bankrupt make “excess income” (surplus income) then their bankruptcy can last 21 months or longer if the courts decide.
  • Multiple Bankruptcies – If an individual without surplus income has filed bankruptcy more than once in Canada then their bankruptcy will last 24 months. If they file a 2nd bankruptcy and they have surplus income then the bankruptcy will last 36 months.

Other Bankruptcy Definitions

For more Canadian bankruptcy information check out the Any Bad Credit Canada Bankruptcy Page. See our Canada’s New Bankruptcy Laws article for information on the that took affect on September 18th 2009. After that read Mixed Reaction’s to New Bankruptcy Laws to get some insider opinions on bankruptcy law in Canada.

There are ways to avoid bankruptcy in Canada, such as credit counselling or consumer proposal. Please read out definition of consumer proposal for bankruptcy alternatives.

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About the Author

The Canadian Credit Expert most recently worked in sales financing for a major bank in Canada but has done everything from working at a new car dealership to collecting on past due loans for a Canadian auto lender.



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