When you file for bankruptcy in Canada, you are required to meet certain legal obligations. These can include surrendering non exempt assets to your Licensed Insolvency Trustee and, in some cases, making monthly payments if your income exceeds government surplus income thresholds.
One of the biggest misconceptions about bankruptcy is that all creditors are treated the same. In reality, they are not. The Bankruptcy and Insolvency Act sets out specific rules that determine who gets paid first and who gets paid last.
Understanding these rules can help reduce fear and confusion. It can also help you decide whether bankruptcy or a consumer proposal makes more sense for your situation. If you are new to the process, it can be helpful to first understand what happens when you file for bankruptcy in Canada.
How Creditors Are Paid in a Canadian Bankruptcy
In a Canadian bankruptcy, creditors are not paid equally. After secured creditors enforce their rights, Section 136 of the Bankruptcy and Insolvency Act determines how remaining funds are distributed. Priority payments may include bankruptcy administration costs, certain employee wages, child and spousal support arrears, municipal taxes, and limited landlord claims. Most unsecured creditors are paid only if funds remain. A Licensed Insolvency Trustee can explain how these rules apply to your situation and help you compare bankruptcy with a consumer proposal.
How the Bankruptcy and Insolvency Act determine priority
Bankruptcy in Canada is governed by the Bankruptcy and Insolvency Act, a federal law that applies across the country. It sets the legal framework for bankruptcies and consumer proposals and defines the rights and responsibilities of debtors, creditors, trustees, and the court.
Section 136 of the Act outlines the priority of claims in bankruptcy. While these priority rules are fixed by law, how they affect you depends on factors such as your income, assets, family size, and the type of debt you owe.
Secured creditors versus unsecured creditors
Before looking at who gets paid first, it is important to understand the difference between secured and unsecured creditors.
Secured creditors
A secured creditor is a lender that holds a legal interest in a specific asset as security for a debt. Common examples include mortgage lenders, auto loan lenders, leasing companies, and rent to own providers.
If payments stop, secured creditors generally have the right to seize and sell the asset tied to the loan. Because of this, secured creditors are typically paid from the value of their collateral, not from the general bankruptcy estate. Section 136 applies only after secured creditors’ rights have been addressed.
If you are weighing your options, this difference is one reason many people compare bankruptcy to other solutions, such as a consumer proposal. You can learn more about the pros and cons of filing a consumer proposal.
Unsecured creditors
Unsecured creditors do not have collateral backing their debt. They must rely on the bankruptcy estate for any repayment.
Unsecured creditors fall into three broad categories under the Bankruptcy and Insolvency Act.
Preferred creditors
These creditors are given priority under Section 136. Examples include certain employee wage claims, unpaid child or spousal support, specific municipal taxes, and limited landlord claims.
Ordinary unsecured creditors
This group includes most consumer debts such as credit cards, personal loans, lines of credit, and many debts owed to the Canada Revenue Agency.
Deferred creditors
Deferred claims are paid only after all other creditors have been satisfied. These may include certain loans from related parties such as family members or certain shareholder loans, unless the transaction is proven to be reasonable.
You can also read more about how unsecured debts are treated in the bankruptcy process in this guide on the surplus income and bankruptcy process.
Who gets paid first in a Canadian bankruptcy
Once secured creditors have exercised their rights, Section 136 of the Bankruptcy and Insolvency Act determines how the remaining funds in the bankruptcy estate are distributed.
1. Funeral and estate related expenses
If the bankrupt individual is deceased, reasonable funeral and estate administration expenses are paid first.
2. Bankruptcy administration costs
This includes trustee fees, legal costs, and other necessary expenses related to administering the bankruptcy.
3. Office of the Superintendent of Bankruptcy levy
A statutory levy is paid to the Office of the Superintendent of Bankruptcy, the federal agency that regulates Canada’s insolvency system and oversees Licensed Insolvency Trustees
4. Employee wage and expense claims
Certain unpaid wages, salaries, commissions, and disbursements owed to employees receive priority. These claims generally relate to services provided shortly before bankruptcy and are subject to statutory limits. Limited unpaid pension contributions may also be included.
5. Child and spousal support arrears
Periodic child or spousal support payments that became due in the twelve months before bankruptcy receive priority. Any unpaid lump sum support payments are also included. Ongoing support obligations continue after bankruptcy.
You can learn more about how support obligations are treated in insolvency in this overview of the surplus income and bankruptcy process.
6. Municipal taxes
Unpaid municipal taxes assessed within two years before bankruptcy may rank as a preferred claim, but only if they are not secured against the property. This priority is limited by the value of the bankrupt person’s interest in the property.
7. Commercial landlord claims
Commercial landlords may claim up to three months of rent owed immediately before bankruptcy. If permitted under the lease, limited accelerated rent after bankruptcy may also be claimed. These amounts are capped by the value of assets located on the leased premises.
8. Certain enforcement and legal costs
Limited costs incurred by the first creditor who initiated actions such as garnishment or execution against the bankrupt’s property may receive priority, subject to statutory limits.
9. Ordinary unsecured creditors
After all preferred claims are paid, any remaining funds are divided among ordinary unsecured creditors on a proportional basis. In many personal bankruptcies, there are little or no funds left at this stage.
10. Deferred claims
Pursuant to section 137(1), deferred claims are paid last, if any money remains. In most cases, these creditors receive nothing.
How creditor priority affects your decision
Understanding who gets paid first helps explain why bankruptcy is not always the right solution for everyone.
If you have few assets and limited income, bankruptcy may offer a fresh financial start. However, if you have assets you want to protect or income that would result in higher bankruptcy payments, a consumer proposal may provide a better outcome.
If you are comparing your options, this detailed breakdown of consumer proposals in Ontario can help clarify the differences.
Speak with a Licensed Insolvency Trustee before you decide
Bankruptcy and consumer proposals are legal tools designed to help Canadians regain control of their finances. Choosing the right option requires understanding how the law applies to you, not just knowing the rules.
A free consultation with a Licensed Insolvency Trustee can help you:
- Understand who would get paid in your situation
- Learn which assets are protected
- Compare bankruptcy and consumer proposal outcomes
- Get clear answers with no pressure or obligation
At David Sklar and Associates, our Licensed Insolvency Trustees explain your options in plain language so you can move forward with confidence.
Book a free confidential consultation today and take the first step toward financial relief.
Frequently asked questions
After secured creditors enforce their rights, Section 136 of the Bankruptcy and Insolvency Act determines who gets paid first. Priority may include bankruptcy administration costs, certain employee wages, child or spousal support arrears, municipal taxes, and limited landlord claims
In many personal bankruptcies, unsecured creditors receive little or no payment because there are few assets left after priority claims are paid. This is one reason consumer proposals are often considered as an alternative.
No. Child and spousal support obligations are not eliminated by bankruptcy. Support arrears receive priority, and ongoing payments must continue.
It depends on the type and value of your assets and the exemptions available under provincial law. In many cases, a consumer proposal allows you to keep all your assets.
For timelines and planning purposes, this guide on the timeline for filing a consumer proposal in Ontario can also be helpful.
