Bankruptcy and Insolvency Basics in Canada

Insolvency in Canada is regulated by the Office of the Superintendent of Bankruptcy (OSB), part of Innovation, Science and Economic Development Canada. A consumer proposal lets you repay a percentage of your debts over a term of up to five years, while a first bankruptcy typically ends in nine months if you have no surplus income payments.

When debts become unmanageable, Canadian law offers two formal insolvency options for individuals: a consumer proposal and bankruptcy. Both are administered by a Licensed Insolvency Trustee (LIT), and both are supervised by the Office of the Superintendent of Bankruptcy (OSB), which is part of Innovation, Science and Economic Development Canada and administers the Bankruptcy and Insolvency Act.

Who regulates insolvency in Canada

The OSB supervises all estates and matters under the Bankruptcy and Insolvency Act and certain matters under the Companies' Creditors Arrangement Act. It licenses and regulates the insolvency profession, supervises the administration of estates, keeps a public record of filings, and investigates complaints. Only a Licensed Insolvency Trustee, licensed by the OSB, can file a consumer proposal or a bankruptcy application in your name.

Consumer proposal versus bankruptcy

A consumer proposal is a formal, legally binding offer to your creditors to pay a percentage of what you owe, or to extend the time you have to pay, or both. The LIT files the proposal, and creditors have 45 days to accept or reject it. If it is accepted and you complete the terms, you are legally released from the debts included in the proposal. A bankruptcy is different: your assets, with some exceptions, are used to pay your outstanding debts, and what you pay depends on the value of those assets and on any surplus income payments you are required to make.

How long each process lasts

The term of a consumer proposal cannot exceed five years. A bankruptcy lasts longer when you have surplus income. For a first bankruptcy with no surplus income obligation, the automatic discharge is nine months after filing; with surplus income above the threshold it extends to 21 months. A second bankruptcy is 24 months with no surplus income and 36 months with it. For a third or later bankruptcy there is no automatic discharge and the court sets the terms.

Surplus income and discharge

Surplus income is the part of your earnings that exceeds the amount a family needs to maintain a reasonable standard of living, and the OSB sets that standard annually. If your surplus income is more than $200 per month, you must contribute 50 percent of that amount to your LIT for distribution to creditors. You receive an automatic discharge if no one opposes it, you complete the mandatory financial counselling sessions, and it is your first or second bankruptcy. If you do not qualify for an automatic discharge, the LIT asks the court to hear your application.