How the Bankruptcy Filing Process Works
As discussed in a previous post about the alternatives of declaring bankruptcy, filing for bankruptcy should be a last resort when mired in insurmountable debt.
After careful consideration and consultation with knowledgeable people, if the situation still warrants a bankruptcy filing, then the following post will provide some details about the process in Canada.
Working with a Trustee
A bankruptcy filing can only be made through a trustee licensed by the Office of the Superintendent of Bankruptcy (OSB) to administer the bankruptcy process. Hence, the primary step of the process involves finding a trustee from the Trustee Registry (firms and individuals are listed). Once a trustee is finalized, the subsequent meetings will help them understand the financial situation and recommend a solution (or provide options).
Sometimes, if a trustee cannot be found or if paying for their service is a deterrent, the OSB’s Bankruptcy Assistance Program may be helpful, provided the applicant:
- Contacted at least two bankruptcy trustees (participating in the Program) and was not able to retain their services;
- Is not in jail;
- Is not involved in commercial activities; and,
- Does not have surplus income.
The Filing Process
Once the necessary forms are completed by the individual and filed by the trustee, a representative of the OSB may examine the applicant under oath to evaluate their conduct, causes for the bankruptcy and the disposition of property. As part of the proceedings, the applicant will also be required to attend two financial counseling sessions to help them manage their financial affairs better in the future.
Once all formalities are completed, the individual will be declared bankrupt, which is the transition point from whereon the trustee will deal with all creditors on the individual’s behalf. The trustee will notify all creditors about the bankruptcy and the transition also means that the individual will stop making payments directly to creditors, garnishments against salary, if any, will terminate and any pending lawsuits by creditors will be stopped. Assets held by the individual will be sold by the trustee and the proceeds will be held in trust for distribution to creditors.
Surplus Income Payments
Apart from the fees due to the trustee, the individual may be required to make ‘surplus income’ payments for distribution to creditors. The surplus income is calculated as the redundant earnings (determined using the copies of pay stubs and other income documents that are submitted to the trustee) that exceed the amount of money needed by a family to maintain a reasonable standard of living as dictated by the OSB annually.
Discharge from Bankruptcy
A bankruptcy discharge releases an individual from the legal obligation to repay the debts that were due as of the date of the bankruptcy application, except for the following types of debts:
- Alimony and/or child support payments;
- Student loans, if less than 7 years have passed since the individual stopped being a full-time or part-time student;
- Fines or monetary penalties imposed by the Court; and,
- Dues arising from fraud.
There is a lot more information to be gleaned from the ‘bankruptcy discharge’ link above. The consequence of not being discharged may include not being able to borrow more than $1000 without informing the lender about the bankruptcy filing.
Do you have any suggestions for someone on the threshold of bankruptcy?
About the Author: Clark works in Saskatchewan and has been working to build his (DIY) investment portfolio, structured for an early retirement. He loves reading (and using the lessons learned) about personal finance, technology and minimalism. You can read his other articles here.