Putting an end to the myths about personal bankruptcy

When financial worries weigh heavily on your day-to-day life and prevent you from meeting your obligations, it may be time to consider bankruptcy. But before you do, it's important to understand the implications of this process. In this article, we dispel three myths about bankruptcy and sort out the truth from the falsehoods about this ultimate recourse, to help you make an informed decision and free yourself from your financial burden.

What is bankruptcy?

Everyone is entitled to a second chance. It was on this principle that the Loi sur la faillite et l'insolvabilité, which aims to enable an individual or company to discharge the vast majority of its debts by surrendering some of its assets, was drawn up.

But, what is the exact definition of "bankruptcy"? The legal term used to talk about bankruptcy is: "an assignment for the benefit of creditors in general". This expression means that the indebted person hands over his or her assets (except for certain assets that cannot be seized) to the authorised insolvency practitioner (hereinafter trustee), the professional responsible for managing the bankruptcy, for equitable distribution to all creditors.

An overview of the bankruptcy process

To file for personal bankruptcy, an individual must be considered insolvent in the eyes of the law, meet a number of conditions (including being a resident of or owning property in Canada) and follow a number of steps. Here are the main steps in the bankruptcy process:

1. Meetings with the trustee: To draw up an inventory of the bankrupt's assets and debts, declare all transactions carried out in recent months, draw up a monthly budget, receive help in understanding the reasons for the overindebtedness, etc.

2. Filing the forms: The trustee then files the necessary documents and forms with the official receiver.

3. The fate of the debtor's assets : The trustee determines whether some of the bankrupt's assets will be sold in order to reimburse his or her creditors, at least in part. The trustee then determines which assets are to be sold to repay the creditors and acts as a point of contact with the creditors throughout the process;

4. Discharge of the bankrupt's debts: Thereafter, the individual may be discharged from his or her debts, either automatically (9 to 21 months after the date of bankruptcy) or by a court decision.

5. Credit file: A notice of bankruptcy is filed in the bankrupt's credit file and will remain there for six to seven years in the case of a first bankruptcy.

Insolvency in Canada and Quebec

Every year in Canada, between 100,000 and 150,000 insolvencies are filed with the Office of the Superintendent of Bankruptcy (OSB), and more than a third of these end in bankruptcy.

As reported in the OSB's Statistics on Insolvency in Canada 2020 report, in 2020 Quebec recorded the second highest number of insolvencies in the country at 28,282, ranking behind Ontario (34,751 insolvencies received). In terms of demographics, the largest proportion of insolvencies in the country in 2020 (37.6%) came from debtors aged 35 to 49. Finally, 48.2% of insolvencies were filed by women, while 51.8% were filed by men.

Three myths about bankruptcy debunked

Many myths surround bankruptcy, creating misinformation and prejudice about the process. Insolvency cases are often not brought before the courts. Here, we dispel the three myths that we believe are most widespread about insolvency cases filed by consumers.

Myth 1: Government debts cannot be included in a bankruptcy.

Obviously, certain exceptions apply, such as false declarations made to social assistance or employment insurance or students who completed their studies less than seven years before declaring bankruptcy. Generally speaking, however, bankrupts will be discharged from their government debts at the end of their case.

Myth 2: Creditors or the trustee will "barge in" to seize my income and furniture.

False. The objective when declaring bankruptcy is exactly the opposite. The effect of the law is to place oneself under its protection to avoid and stop collection measures as well as seizures on assets.

Under Quebec law, certain assets may not be seized by anyone under any circumstances. The following is a list of assets that cannot be seized:

• The movable property that furnishes the principal residence for a value of $7,000  (market value)

• The work tools essential to the individual's trade, including vehicles

• The individual's RRIFs and RRSPs, except for amounts paid in less than 12 months prior to the bankruptcy (exceptions apply)

• Food, fuel and clothing necessary for the survival of the individual and his or her family

• A portion of the individual's salary determined by law

As long as the trustee has obtained the correct information from the bankrupt regarding the inventory and the fair value of his or her assets and liabilities, no one will arrive at the bankrupt's home to seize anything. On the contrary, if seizures were active, the trustee can put an end to them without delay. Once again, rare exceptions may apply.

Myth 3: After my bankruptcy, my credit rating will be wiped out for seven years and I won't be able to borrow during that time.

Not quite true. It is worth setting the record straight on this point. The duration of a first bankruptcy is generally 9 or 21 months, depending on the bankrupt's income. However, the period during which the bankruptcy will appear on the individual's credit file is longer.