If You Claim Bankruptcy, What Actually Happens?

Doug Hoyes explains how debt problems build slowly—one credit product at a time.

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Now, walk us through what if you claim bankruptcy, what happens? I mean, I get asked that all the time. What are the ramifications of that and does it vary province by province?

There are minor variations between provinces, but basically you lose your stuff. So there is a list of stuff that you don’t lose. It’s called the exemption limit. It’s all contained in the executions act of each province. So you’re not gonna lose a car that’s only worth a few thousand bucks. You’re not gonna lose your household stuff, your couch, your chair, your clothing, that sort of thing.

You don’t lose your RRSP except for what you’ve contributed in the last year. So the government doesn’t want you dumping a million bucks into it and then going bankrupt. So whatever you contributed in the last year is fair game for the creditors. But everything else you get to keep, if you have investments like TFSAs RESPs, well, sorry, those are not exempt.

You do lose them. But most people, by the time they get to see me, they’ve depleted their investment. So that’s not a big issue. You lose equity in your house. But again, most people, by the time they get to see me, have probably sold the house or never had one in the first place. Um, if you have a car loan, well you can keep paying the car loan and keep your car ’cause it’s not really your car, it’s owned by the bank.

So first thing we do is go through all your assets, see what you’re gonna lose. You would lose your tax refund. For the year of the bankruptcy in any prior years you haven’t filed. But then once the bankruptcy’s done, that’s it. And then the second thing you lose, like we talked about earlier, is a portion of your income.

So again, we help you project forward what your income’s gonna be, what’s the math say, how much are you gonna lose? So we go, okay, well this is what you’re gonna lose in terms of your assets. This is what you gotta pay in terms of your income. That’s how much the bankruptcy is gonna cost, and you can decide then if a proposal would be a, a better option, a first time bankruptcy.

In Canada, if you have no surplus income, meaning your income’s low, you’re eligible to be automatically discharged in nine months. If you have surplus income, an extra year gets added to that. If you’ve been bankrupt before another year on top of that, gets added to it. But there is generally a defined end to it.

Now the creditors can object to the bankruptcy ending if you, they think you haven’t been fully forthcoming or whatever. But in most cases, a bankruptcy is gonna be done in nine or 21 months.