Generally speaking, bankruptcy doesn’t have a good reputation, especially when it’s surrounded by fear, judgment, and misinformation. We rarely talk openly about it, especially not with friend, because of the scary stories we’ve heard. But the truth is, many bankruptcy myths in Canada are based on outdated or exaggerated ideas. Maybe you’re considering bankruptcy as a way to fix your debt problems, but you’re unsure about what it involves or how it might affect your life. You might feel hesitant to move forward because of the horror stories you’ve heard, most of which simply aren’t true.
While it may sound intimidating and shameful, bankruptcy exists to provide lasting debt relief. It’s designed to free you from the cycle of debt and set you on a path toward financial stability. In this guide, we’re going to set the record straight by walking you through ten of the most common bankruptcy myths in Canada.
1. You’ll lose everything you own
One of the biggest fears about bankruptcy is being left with nothing. People believe creditors will take everything they own, leaving them destitute. But that’s not true. In Canada, bankruptcy law (both at the federal and provincial level) aims to give you a fresh start, not punish you. That’s why it allows you to keep certain assets after filing for bankruptcy, ensuring you can maintain a reasonable standard of living. These items are known as “exempt assets.”
For example, in Ontario, you can keep all your clothing, money held in most retirement savings accounts (like an RRSP), and household furniture up to a specific dollar limit. You can also retain one vehicle and your primary home, provided their value doesn’t exceed the provincial limit. If it does, you can keep them if you pay out the excess equity to your creditors. A Licensed Insolvency Trustee(LIT) can explain exactly which assets are safe from seizure based on your province’s rules.
2. Your credit will be ruined forever
It’s no secret that bankruptcy harms your credit score. But the damage isn’t permanent. A first-time bankruptcy stays on your credit report for six to seven years after your discharge date. So, while the impact may be detrimental in the short run, you won’t feel the effects forever.
With the right approach, you can quickly rebuild your credit after bankruptcy. You’ll see progress long before the bankruptcy record disappears from your report. Some credit-building strategies include making on-time payments, keeping your credit utilization low, and using a secured credit card.
Depending on your effort and consistency, you may qualify for loans at decent interest rates in just a few years. You could potentially get a mortgage from a traditional lender after bankruptcy in as little as two years after receiving your discharge.
3. Your spouse’s finances will suffer
Worried about damaging your spouse’s impeccable credit score after you file for bankruptcy? Or maybe you’re concerned about saddling them with your debt obligations?
The good news is that if your spouse didn’t co-sign or guarantee any of your debts, your bankruptcy won’t impact their credit or personal finances. You’re filing individually, so the bankruptcy process only pertains to you. Your spouse will never be required to give up their assets, pay bankruptcy fees, give up part of their paycheque to your creditors, etc.
The only time bankruptcy will affect your spouse is if they share joint debts with you. In that case, creditors can still pursue them for payment.
4. Filing bankruptcy means you can’t manage your money
Declaring bankruptcy doesn’t necessarily mean you’re financially irresponsible. Nor is it something to be ashamed of or embarrassed about. Yes, some people believe that bankruptcy results from reckless spending or poor money management. But nothing could be further from the truth.
Tragic and unexpected events occur in life that bring about financial stress. According to a 2021 report from the Office of the Superintendent of Bankruptcy (OSB), Canadians face financial difficulty primarily due to a drop in income, such as after a job loss. Other reasons include steep medical bills to treat an illness or injury and relationship breakdowns, which can destabilize a household’s finances.
Financial disaster can strike anyone: the working poor, the middle class, and the wealthy. No one is entirely immune from these setbacks, which can lead to a dependency on debt to stay afloat. Always remember: bankruptcy isn’t a reflection of your character—it’s a solution to help you start with a clean slate and move forward.
5. Bankruptcy eliminates all debts
While bankruptcy offers swift and meaningful debt relief, it’s not a cure-all for every dollar owed. Not all debts qualify for inclusion in bankruptcy. Under Canada’s insolvency laws, you can only include unsecured debts when filing, which include things like credit cards and payday loans. Secured debts, like a mortgage or car loan, are not eligible.
In addition, you’ll still be responsible for liabilities like child support, alimony, and court fines—these are never forgiven under bankruptcy. Government student loans are also excluded from bankruptcy unless it’s been seven years since you’ve left school.
6. Everyone will know that you’ve declared bankruptcy
Are you a high-profile corporate executive or celebrity? Do you own a vast estate that’s worth tens of millions? If not, you can rest easy knowing that your bankruptcy filing won’t be publicized or attract hordes of paparazzi. No one notices or cares when a regular person declares bankruptcy.
But aren’t bankruptcy records themselves kept public? Technically, yes. The OSB registers the file of anyone who claims bankruptcy in the country in their database. However, most people would never think of searching for your file as there are few compelling reasons to do so. Moreover, accessing the insolvency registry isn’t free—the interested person must pay a fee.
The bottom line is that your friends, family, and employer won’t learn of your bankruptcy unless you tell them. It’s a private legal process involving only your creditors, the court, and LIT.
7. Bankruptcy won’t get rid of tax debt
Many people are surprised to learn this is a myth, given the fierce power of government agencies to enforce tax obligations. But you can absolutely include tax debt in your bankruptcy. If you owe money to the Canada Revenue Agency (CRA), those debts are eligible for discharge. Some examples are income taxes and GST/HST, . Under Canadian bankruptcy, the CRA is treated like any other unsecured creditor.
There are some exceptions, mainly cases involving fraud and tax evasion. Also, property taxes don’t qualify for bankruptcy since they are tied to your home, much like a secured loan. If you fail to pay these taxes, the municipal government could force you to sell your property to collect what you owe.
8. Going bankruptcy will endanger your job
Bankruptcy is unlikely to result in you losing your job. In fact, it’s illegal in Canada for an employer to fire you because you’ve declared bankruptcy. Your employer will most likely never discover your bankruptcy filing, anyway. They’ll only be notified if there’s a legal reason for them to know (like a wage garnishment that stops after you file).
However, some occupations require individuals to disclose their insolvency. Usually, these roles involve professional associations or involve managing money or handling sensitive information. Some examples are mortgage brokers, lawyers, medical doctors, accountants, and insurance agents. If you belong to one of these or similar professions, bankruptcy may negatively impact your work for some time, as you could face restrictions or other obligations. Getting bonded or becoming a director at a corporation may also be more challenging.
9. Filing for bankruptcy is expensive
If you’re battling massive debts, the cost of bankruptcy is, naturally, a major worry. However, while costs are involved, bankruptcy often is less taxing on your wallet than other solutions. Debt consolidation loans, debt management programs (DMPs), and private debt settlement can demand more money in the long run. In some cases, your debt situation will worsen with these options.
Under bankruptcy, the federal government sets the fees and other required payments, not your LIT or creditors. The amount you pay is based on your income, assets, and family size. As a result, you can expect fair treatment and avoid getting scammed.
The cost is minimal if you earn a low income and own few assets. A first-time bankruptcy may cost you as little as $200 monthly for nine months ($1,800). Your Licensed Insolvency Trustee will inform you of the costs upfront so there are no surprises.
10. Bankruptcy is the only solution if you’re struggling with debt
Bankruptcy is only one of several options to deal with your debts. Never assume it’s the only escape route if you cannot repay your debts. Consider your income, assets, family obligations, goals, and the severity of your debt situation before deciding how to proceed.
Depending on your situation, you may be better off with a consumer proposal, Canada’s most popular alternative to bankruptcy. Applying for a debt consolidation loan or enrolling in a DMP could also work. That’s why it’s wise to speak with a Licensed Insolvency Trustee. They’re legally required to review all your options with you—not just bankruptcy—so you can choose the best one to eliminate your debts.
The bottom line on bankruptcy myths in Canada
Bankruptcy may seem intimidating and treacherous at first glance (or, for those with massive debts, a “get out of jail free card”). However, many myths and misconceptions come from misunderstanding how it works, including an exaggeration of the negative consequences.
Always remember: Bankruptcy exists to allow you to rebuild financially from the ground up, not ruin your future. There may be some short-term pain, but you can set the foundation for a better future by eliminating debts you can’t afford to pay.
If you’re looking for lasting debt relief, speak to a Licensed Insolvency Trustee at David Sklar & Associates. We can help you determine the best solution—whether that’s bankruptcy or something else. Don’t let harmful myths, misinformation, and fear-mongering hold you back. Book a free consultation today to start taking control of your money.
