We are a debt law firm licensed by the Law Society of Ontario — we work exclusively for you, not your creditors, with a legal duty that runs entirely to your interests. We help Canadians reduce or eliminate serious unsecured debt through legal processes like Consumer Proposals, Division 1 Proposals, and debt settlement, and we only get paid when we save you money. Learn more about our team on our About page.
This article explains personal bankruptcy in Canada clearly, including what it covers, what it costs, what it takes from you, and how long it follows you. It also explains why, for most people who qualify for bankruptcy, a Consumer Proposal is a more protective path worth exploring first.
The most important thing to know: In Ontario, most people who qualify for personal bankruptcy also qualify for a Consumer Proposal. A Consumer Proposal lets you settle your debt for a reduced amount without surrendering assets, with a lesser credit impact, and with full legal protection from creditors. Bankruptcy is not the only way out.
What Is Personal Bankruptcy in Ontario?
Personal bankruptcy is a legal process governed by the Bankruptcy and Insolvency Act (BIA). It allows an individual who cannot pay their debts to have most of those debts legally discharged in exchange for surrendering certain assets and meeting a set of obligations during the bankruptcy period.
Bankruptcy is not something that happens to you quietly. It is a formal legal proceeding. It is registered with the federal government, it appears on your credit report, and it involves a Licensed Insolvency Trustee who administers your file on behalf of both you and your creditors.
There is no minimum amount of debt required to file for bankruptcy in Canada. You must simply be insolvent, meaning you cannot pay your debts as they come due, and your total debts exceed the value of your assets.
How the Bankruptcy Process Works
Here is how personal bankruptcy unfolds in Canada, step by step.
- You meet with a Licensed Insolvency Trustee (LIT).
Only a licensed insolvency trustee can file bankruptcy on your behalf. In your initial meeting, they review your debts, income, assets, and expenses to determine whether you are insolvent and what your options are. - Bankruptcy documents are signed and filed.
If you decide to proceed, you sign a sworn statement of affairs and an assignment of your assets. The trustee transmits this to the Office of the Superintendent of Bankruptcy electronically. - A Stay of Proceedings takes effect immediately.
The moment bankruptcy is filed, a Stay of Proceedings is in place. This is a federal legal order that stops most unsecured creditors from contacting you, suing you, or garnishing your wages. Collection calls must stop. Legal proceedings against you are paused. - Your creditors are notified.
The trustee sends notice to all of your creditors. They have the right to file a proof of claim to participate in any distribution from your estate. - Non-exempt assets are surrendered.
The trustee takes control of any assets that are not protected by provincial exemptions. These assets are liquidated and the proceeds are distributed to your creditors. - You make surplus income payments (if required).
If your income exceeds a threshold set by the Office of the Superintendent of Bankruptcy, you are required to make monthly contributions to your estate. These are called surplus income payments. Your bankruptcy period is extended if you have surplus income. - You attend two mandatory credit counselling sessions.
All bankrupts are required to complete two counselling sessions with their trustee or a designated counsellor. These cover budgeting, money management, and the factors that led to your insolvency. - You receive your discharge.
If you have met all obligations, you are discharged from bankruptcy. Your debts are legally released. You are free to start rebuilding.
What Debts Does Bankruptcy Clear?
Personal bankruptcy can discharge most types of unsecured debt, including:
- Credit card balances
- Personal loans and lines of credit
- Income tax debt owed to the CRA
- HST and GST debt
- COVID benefit repayments (including CERB)
- Medical bills
- Payday loans
- Utility arrears
- Most other unsecured personal debts
What Debts Does Bankruptcy NOT Clear?
This is one of the most important things to understand before considering bankruptcy. Not every debt is dischargeable. The following survive bankruptcy and must still be repaid:
Debts that are NOT discharged by bankruptcy in Ontario:
- Child support and spousal support: All arrears and ongoing obligations remain in full.
- Student loans (if you left school less than 7 years ago): If you have been out of school for 7 years or more, student loans can be discharged. Less than 7 years, they survive bankruptcy.
- Court-ordered fines and penalties: Traffic fines, restitution orders, and other court-imposed financial penalties are not dischargeable.
- Debts arising from fraud: If a creditor can prove the debt arose from fraud, misrepresentation, or breach of trust, that debt will not be released.
- Debts from obtaining property under false pretenses.
If a significant portion of your debt falls into one of these categories, bankruptcy may not solve your problem the way you expect. This is worth discussing with a lawyer before proceeding.
What Assets Can You Keep During Bankruptcy?
Each province sets its own exemptions: the assets a bankrupt person is allowed to keep. In Ontario, the main exemptions include:
| Asset Category | Ontario Exemption Limit |
|---|---|
| Home equity (principal residence) | $10,783 |
| Motor vehicle | $7,117 |
| Tools of the trade | $14,405 |
| Household furniture and appliances | $14,180 |
| Clothing | $5,650 |
| RRSPs | All contributions except those made in the 12 months before filing |
| Life insurance (certain policies) | Exempt if beneficiary is a family member |
Any equity or asset value above these limits belongs to your trustee for the benefit of creditors. If you own a home with significant equity, a vehicle worth more than the exemption, or investments outside of registered accounts, those assets may need to be surrendered or bought back from the trustee.
This is one of the most significant differences between bankruptcy and a Consumer Proposal. In a Consumer Proposal, you do not surrender any assets. Your home, car, savings, and property remain yours.
Surplus Income Payments: What Are They?
If your monthly income exceeds the threshold set by the Office of the Superintendent of Bankruptcy, you must make surplus income payments throughout your bankruptcy. The threshold changes annually and is based on family size.
Surplus income is calculated as 50% of the amount your net income exceeds the threshold. For example, if your net monthly income is $500 above the threshold, your monthly surplus income payment is $250.
If you have surplus income, your bankruptcy is also extended. A first bankruptcy with no surplus income lasts 9 months. With surplus income, it extends to 21 months. These payments go to your creditors.
How Long Does Bankruptcy Last?
| Situation | Minimum Duration |
|---|---|
| First bankruptcy, no surplus income | 9 months |
| First bankruptcy, with surplus income | 21 months |
| Second bankruptcy, no surplus income | 24 months |
| Second bankruptcy, with surplus income | 36 months |
These are minimums. If you do not fulfill your duties (attending counselling sessions, making required payments, providing information to the trustee), your discharge can be delayed or opposed by your trustee or a creditor.
How Bankruptcy Affects Your Credit
Bankruptcy is recorded on your credit report as an R9 rating, which is the worst possible rating. For a first bankruptcy, this notation remains on your Equifax credit report for 6 years after your discharge date. On TransUnion, it is 7 years after filing. For a second bankruptcy, the record remains for 14 years.
During and after bankruptcy, obtaining credit, a mortgage, or even renting a home can be difficult. Some employers and regulated professions also check credit history. The long-term credit impact of bankruptcy is one of the main reasons people explore alternatives first.
By comparison, a Consumer Proposal results in an R7 rating, which is removed 3 years after the proposal is completed. That is a significantly shorter impact on your financial record.
Bankruptcy vs. Consumer Proposal: A Direct Comparison
For most Canadians with unsecured debt under $250,000, both bankruptcy and a Consumer Proposal are legally available. Here is how they compare directly.
| Factor | Bankruptcy | Consumer Proposal |
|---|---|---|
| Debt limit | No limit | Up to $250,000 unsecured (excluding mortgage) |
| Assets | Non-exempt assets surrendered | You keep all assets |
| Monthly payments | Surplus income payments (if applicable) | Fixed payment agreed in proposal |
| Duration | 9 to 36 months minimum | Up to 5 years (you choose) |
| Credit impact | R9 for 6-7 years (first), 14 years (second) | R7 for 3 years after completion |
| Stops creditor collection? | Yes (Stay of Proceedings) | Yes (Stay of Proceedings) |
| Reduces debt? | Yes (discharged) | Yes (settled for reduced amount) |
| Employer notification required? | Not required, but often discovered | Not required |
For a deeper look at how these two options compare across more specific scenarios, our article on Consumer Proposal vs. bankruptcy covers the question in detail.
Why Most Canadians Do Not Actually Need to File Bankruptcy
The Consumer Proposal was designed specifically to give people an alternative to bankruptcy. It was introduced as part of the Bankruptcy and Insolvency Act precisely because lawmakers recognized that bankruptcy was too blunt an instrument for most people’s situations.
If you have unsecured debt under $250,000, a steady income (even a modest one), and assets you want to protect, a Consumer Proposal is almost always worth exploring before bankruptcy. You can settle the debt for less, keep your possessions, and walk away with a lighter credit impact in a shorter timeframe.
For a broader look at the full range of options available in Canada, our guide on debt relief options in Canada covers each path clearly.
What If Your Debt Exceeds $250,000?
If your unsecured debt exceeds $250,000, a Consumer Proposal is not available. In that case, a Division 1 Proposal may be the right alternative. This is a court-supervised process under the BIA that allows individuals and businesses with higher debt loads to formally propose a settlement to creditors. It provides the same Stay of Proceedings and creditor-binding outcome as a Consumer Proposal, but through a more complex process. Our Division 1 Proposal service explains how this works.
Why Working with a Debt Lawyer Matters
A Licensed Insolvency Trustee administers the insolvency process. They are licensed by the government and act as an officer of the court. They have a duty to act impartially. That means their job is to run the process fairly for all parties, not to advocate exclusively for you.
We are a debt law firm. Our role is different. We provide legal representation and legal advice throughout the process. We help you understand which option truly protects your interests, how to approach creditors, what your rights are, and how to navigate the process so you come out in the strongest possible position. We work for you, not for the process. Learn more about our team and our approach on our About page.
Frequently Asked Questions
How much debt do you need to file for bankruptcy in Ontario?
There is no minimum debt amount required to file for personal bankruptcy in Canada. You simply need to be insolvent, meaning you cannot pay your debts as they come due and your total debts exceed the value of your assets.
Can bankruptcy clear CRA tax debt?
Yes. Most CRA debt, including unpaid income tax, HST/GST arrears, and COVID benefit repayments like CERB, can be discharged through personal bankruptcy. However, certain CRA debts related to fraud or misrepresentation may not be releasable.
What is the difference between bankruptcy and a Consumer Proposal?
Both stop creditor collection immediately and can reduce your debt. The key differences are that in a Consumer Proposal you keep your assets, pay a fixed amount you negotiate, and face a shorter credit impact. In bankruptcy, you may surrender assets, make income-based payments, and carry a longer credit record. Consumer Proposals are generally the preferred option for those who qualify.
What happens to my home if I go bankrupt in Ontario?
In Ontario, you can keep home equity up to $10,783. If your home equity exceeds that amount, the trustee may require you to pay out the excess or sell the home. If you want to keep your home, a Consumer Proposal is typically a better path because it does not require surrendering any assets.
Does bankruptcy clear student loans in Ontario?
It depends on how long ago you left school. If you have been out of school for 7 or more years, student loans can be discharged through bankruptcy. If it has been less than 7 years, student loans survive bankruptcy and remain your obligation after discharge.
How long does bankruptcy stay on your credit report in Ontario?
For a first bankruptcy, the record stays on your Equifax credit report for 6 years after discharge, and on TransUnion for 7 years after filing. For a second bankruptcy, it remains for 14 years. By comparison, a Consumer Proposal is removed from your credit report 3 years after it is completed.
You May Have More Options Than You Think
Most people who consider bankruptcy qualify for a Consumer Proposal, which protects your assets, reduces your debt, and carries a shorter credit impact. Before you decide anything, let us walk through your situation together.
