Bankruptcy
Faillite in French
Quick definition
Bankruptcy is the federal legal process that clears most unsecured debts in exchange for surrendering your non-exempt assets to a Licensed Insolvency Trustee. For a first bankruptcy with no surplus income, discharge can come in as little as nine months.
What bankruptcy actually is
Bankruptcy is a legal reset under Canada's federal insolvency law. You assign your non-exempt assets to a licensed insolvency trustee, who sells them for the benefit of your creditors, and in exchange most of your unsecured debts are wiped out at discharge. Credit cards, unsecured lines of credit, payday loans, most tax debt: gone.
The word carries more fear than the process deserves. It is a structured, supervised procedure with a defined end date, not a life sentence, and it exists precisely so that a person buried in debt can get back to a functioning financial life. That said, it is the heavier of Canada's two formal tools, and for many people a consumer proposal delivers similar relief with fewer side effects, so the comparison is always worth making first.
The process from filing to discharge
The mechanics are consistent across the country:
- You file through a licensed insolvency trustee, and a stay of proceedings takes effect immediately: collection calls, lawsuits and wage garnishments stop.
- Non-exempt assets are surrendered to the trustee.
- You attend two mandatory financial counselling sessions.
- Each month, you report your income and expenses to the trustee.
- At the end of the period, you are discharged: the debts covered by the bankruptcy are legally erased.
| Situation | Discharge after |
|---|---|
| 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 |
Surplus income: the more you earn, the more you pay
Bankruptcy payments are not fixed. The federal government sets income thresholds, adjusted for family size and updated annually, that represent what a household needs for a reasonable standard of living. If your income during the bankruptcy runs above the threshold for your family size, you must pay the estate half of the excess each month. These are the surplus income rules.
Surplus income does two things: it raises the monthly cost of the bankruptcy, and it stretches a first bankruptcy from 9 months to 21 months. This is the mechanism that makes bankruptcy expensive for people with decent incomes, and it is a big part of why higher earners often choose a consumer proposal, where payments are fixed no matter how income changes.
Exempt assets: what you keep, by province
Bankruptcy does not strip you bare. Each province and territory shields a list of basics from creditors, and the details vary by where you live. A short illustrative sample (as of July 2026):
- Everywhere: ordinary household goods and clothing, and tools of your trade up to a set value.
- A vehicle up to a value cap that varies by province, enough to protect a modest car in most cases.
- Home equity, in some provinces: Alberta and Saskatchewan protect a portion of equity in a principal residence, and Ontario exempts a small amount; in most other provinces home equity is not shielded.
- [RRSP](/dictionary/rrsp) savings are protected federally, except contributions made in the 12 months before filing. Locked-in pension money is protected too.
What survives discharge
Discharge is broad but not total. Some debts survive bankruptcy by law: child and spousal support obligations, court-imposed fines and penalties, debts arising from fraud or misrepresentation, and government student loans if you have been out of school for less than seven years. Secured debts are a separate matter entirely: the lender keeps its claim on the asset, so you either keep paying for the house or car or give it up.
What it does to your credit
Bankruptcy is recorded on your credit report with an R9 rating, the lowest on the scale, and a first bankruptcy typically stays on file for about 6 to 7 years after discharge, depending on the bureau and province. A second bankruptcy stays much longer. Rebuilding is entirely possible, and usually starts with a secured credit card and a clean payment record after discharge, but the mark is real and lasts longer than a consumer proposal's.
When bankruptcy beats a proposal
Despite the heavier consequences, bankruptcy is genuinely the better tool in some situations: when your income is low enough that surplus income payments would be minimal or zero, when you have no assets beyond the provincial exemptions to protect, or when your debts exceed the $250,000 consumer proposal limit (as of July 2026). In those cases a first bankruptcy can be faster and cheaper than five years of proposal payments. A trustee will run both scenarios with real numbers before you choose anything.
In Canada
Canadian bankruptcy is trustee-driven and federally supervised by the Office of the Superintendent of Bankruptcy, so most filings never involve a courtroom. In the United States, the closest equivalent is Chapter 7 liquidation, filed through the courts, usually with a lawyer, and with exemptions that vary dramatically by state. Another Canadian distinction: consumer proposals now outnumber bankruptcies here, a rehabilitation-first pattern with no real American parallel.
Worked example
Sam owes $45,000 in credit cards and payday loans after a long stretch of unemployment. His new job pays modestly, below the surplus income threshold for his family size, and his only assets are furniture, work tools and an eight-year-old car, all within his province's exemptions. A proposal would mean years of payments his budget cannot absorb, so he files a first bankruptcy: he surrenders nothing in practice, completes his two counselling sessions, and is discharged in 9 months. Two years later, with a secured card paid in full every month, his credit is already rebuilding.
Reviewed by Alexandre Bernier, CFP®, CIM®, PFP®·Updated July 2026