The Bankruptcy and Insolvency Act is the federal law in Canada that governs what happens when a person or business cannot pay their debts. It offers two main routes: a proposal that lets you repay a portion of what you owe while keeping your property, or bankruptcy, which liquidates your non-exempt assets in exchange for a discharge from most debts. The same rules apply in every province and territory, though provincial law decides which assets you can protect.
Who the Act Applies To
The Act covers any person or business that lives in, does business in, or owns property in Canada. To use it, you have to qualify as an “insolvent person.” That means owing at least $1,000 in provable debts and meeting one of three conditions: you cannot pay your obligations as they come due, you have stopped paying debts in the ordinary course of business, or the fair-value sale of everything you own would not cover what you owe.1Justice Laws Website. Bankruptcy and Insolvency Act RSC 1985 c B-3 – Section 2
Being behind on payments is not the same thing. The $1,000 floor and the three conditions draw the line between financial strain and formal insolvency. An insolvent person still has choices. A “bankrupt” is someone who has already made a voluntary assignment or had a bankruptcy order issued against them by a court.
The Two Main Paths
Everything under the Act flows from a basic choice: restructure your debts through a proposal, or hand over your non-exempt assets through bankruptcy. Proposals come in two forms. A consumer proposal is for individuals with debts up to $250,000 (excluding a mortgage on a principal residence). A Division I proposal handles larger debts and corporate filings. Bankruptcy itself can be voluntary (you assign yourself) or involuntary (a creditor forces it through the court).
No one navigates these routes alone. Every bankruptcy and every proposal must be administered by a Licensed Insolvency Trustee, a federally licensed professional who acts as an officer of the court and owes duties to both the debtor and the creditors.2Office of the Superintendent of Bankruptcy. How to Become a Licensed Insolvency Trustee The trustee drafts the paperwork, files it with the Official Receiver, holds the assets in a bankruptcy, collects payments in a proposal, and reports to creditors.
Consumer Proposals
A consumer proposal is the most common alternative to bankruptcy for individuals. You keep your assets and repay a portion of your unsecured debts through fixed monthly payments, which cannot run for more than five years.3Justice Laws Website. Bankruptcy and Insolvency Act RSC 1985 c B-3 – Division II Consumer Proposals The core test is that creditors must do better under the proposal than they would in a bankruptcy. Your trustee builds the numbers around that test.
Once the proposal is filed, creditors have 45 days to accept it or call a meeting to vote. If no vote is called and no formal objection is lodged, it is deemed accepted.4Office of the Superintendent of Bankruptcy. You Are Owed Money – Consumer Proposals An accepted proposal binds every unsecured creditor, including the ones who voted against it. Miss three payments and the proposal is typically annulled, which can leave you facing bankruptcy anyway.
Division I Proposals
When debts exceed the consumer proposal threshold, or when a corporation is the debtor, Division I applies. The restructuring logic is the same (offer creditors more than liquidation would), but the stakes are higher. If creditors reject a Division I proposal, the debtor is automatically deemed bankrupt. That consequence does not exist for consumer proposals, where rejection simply returns you to your pre-filing position.
How Someone Becomes Bankrupt
There are two ways in. A voluntary assignment is the direct route: you surrender your non-exempt property for the general benefit of creditors, backed by a sworn statement listing your assets, your creditors, and the amounts you owe.5Justice Laws Website. Bankruptcy and Insolvency Act RSC 1985 c B-3 The Official Receiver files the assignment and appoints a trustee, who then takes legal title to the assets.
Involuntary bankruptcy runs the other way. A creditor holding more than $1,000 in unsecured debt can apply to the court for a bankruptcy order, alleging that the debtor committed an “act of bankruptcy” within the previous six months. The most common allegation is that the debtor has generally stopped meeting obligations as they come due. The debtor can contest the application; the court decides.
The Stay of Proceedings
Filing a bankruptcy assignment or a proposal triggers a stay of proceedings. Lawsuits, wage garnishments, and collection calls on included debts have to stop.6Justice Laws Website. Bankruptcy and Insolvency Act RSC 1985 c B-3 – Section 69.3 This is often the most immediate relief a debtor experiences.
The stay has limits. Secured creditors can still realize on their security, so a mortgage lender can continue foreclosure, though a court can delay that right by up to six months in some cases. Actions involving financial collateral cannot be stayed at all. Family law proceedings, including the enforcement of child support and spousal support, also continue unaffected.
What You Keep
Bankruptcy does not take everything. The Act leaves most exemptions to provincial law, so the amount of home equity, vehicle value, household goods, and tools of trade you can protect depends on where you live.7Justice Laws Website. Bankruptcy and Insolvency Act RSC 1985 c B-3 – Section 67 A filer in Alberta and a filer in Quebec will not necessarily keep the same things.
One federal exemption applies everywhere: registered retirement savings in RRSPs, RRIFs, and RDSPs are protected from seizure. The exception is any contribution made within 12 months before the date of bankruptcy, which can be clawed back into the estate. That rule exists to stop last-minute sheltering of cash.
Surplus Income Payments
If your income during the bankruptcy exceeds a threshold set annually by the Superintendent of Bankruptcy, you have to contribute a share of the excess to your estate for creditors. For 2026, the monthly limit for a single person is $2,716. Two-person households are at $3,381, and a four-person household sits at $5,047.8Office of the Superintendent of Bankruptcy. Directive No. 11R2-2026 Surplus Income
If your surplus is under $200 per month, you owe nothing. At $200 or more, you pay 50 percent of the surplus into the estate.8Office of the Superintendent of Bankruptcy. Directive No. 11R2-2026 Surplus Income Surplus income also stretches out how long your bankruptcy lasts.
When the Bankruptcy Ends
Discharge is the legal event that releases you from most debts. The earliest you can be discharged depends on whether you have filed before and whether you had surplus income during the bankruptcy:
- 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.
- Third or subsequent bankruptcy: 36 months at the earliest.
These are earliest-eligibility dates, not guaranteed outcomes.9Justice Laws Website. Bankruptcy and Insolvency Act RSC 1985 c B-3 – Discharge Provisions A creditor, the trustee, or the Superintendent can oppose the discharge, which sends the matter to a court hearing. The judge can grant an absolute discharge, a conditional discharge requiring extra payments, a suspended discharge that takes effect later, or refuse to discharge at all.
Debts That Survive a Discharge
Some debts walk through a discharge untouched. Section 178 of the Act lists them:
- Court-imposed fines, penalties, and restitution orders.
- Spousal support and child support, whether set by court order or separation agreement.
- Debts arising from fraud, embezzlement, or misappropriation while in a fiduciary role.
- Debts obtained through false pretences.
- Damages for intentional bodily harm, sexual assault, or wrongful death stemming from those acts.
- Student loans, if you file within seven years of the date you stopped being a student.
- Debts you did not disclose to the trustee, unless the creditor knew about the bankruptcy and chose not to file a proof of claim.
Interest on all of these also survives.10Justice Laws Website. Bankruptcy and Insolvency Act RSC 1985 c B-3 – Section 178 The student loan rule catches many younger filers off guard: if you graduated less than seven years ago, bankruptcy will not clear your government student debt.
Mandatory Counselling
Everyone who files a bankruptcy or a consumer proposal has to complete two counselling sessions through the federally regulated Insolvency Counselling Program. The first session covers budgeting and happens early in the process. The second covers longer-term money management, spending habits, and credit.11Office of the Superintendent of Bankruptcy. Insolvency Counselling Program Introduction
Each session is $85, paid out of the estate rather than by the debtor personally. The fee is federally fixed, and counsellors cannot bill the insolvent person directly. Completing both sessions is a prerequisite for discharge in a bankruptcy and for finishing a consumer proposal.
Penalties for Dishonesty
The Act treats fraud and concealment seriously. Section 198 lists the main offences: fraudulent transfers of property, refusing to answer questions truthfully at an examination, making false entries or omissions in financial statements, destroying records, obtaining credit through false representations, and hiding property worth $50 or more. The penalties:
- On summary conviction: a fine of up to $5,000, imprisonment of up to one year, or both.
- On indictment: a fine of up to $10,000, imprisonment of up to three years, or both.
The same ranges apply to a bankrupt who, without reasonable cause, fails to comply with a court order for surplus income payments or ignores the duties imposed by the Act.12Justice Laws Website. Bankruptcy and Insolvency Act RSC 1985 c B-3 – Section 198 The system relies on full disclosure, and the penalties exist to enforce it.