When Should You File Bankruptcy in Canada? 7 Signs You Need Relief

File bankruptcy when unsecured debts exceed 12 months of your gross income, creditors garnish wages or freeze accounts, you face collection lawsuits, minimum payments exceed 30% of net income, or you owe $5,000+ with zero realistic ability to repay within 3 to 5 years. The Bankruptcy and Insolvency Act requires minimum $1,000 debt, but practical minimum is $5,000 due to bankruptcy costs of $1,800 to $2,500.

Timing bankruptcy filing correctly maximizes financial recovery and legal protections while minimizing costs and credit damage. Understanding when bankruptcy makes sense versus when alternatives like consumer proposals or debt consolidation work better prevents costly mistakes.

Sign 1—Debts exceed 12 months of gross income

Total unsecured debt equaling or exceeding your annual gross income signals unmanageable debt requiring formal intervention. This debt-to-income ratio indicates you cannot realistically repay debt within a reasonable timeframe without severe financial hardship.

Calculate the ratio by dividing total unsecured debt by annual gross income. If you earn $50,000 annually and owe $60,000 in credit cards, lines of credit, and personal loans, your ratio is 1.2:1. Ratios exceeding 1.0:1 typically require bankruptcy or consumer proposals because repayment would take 5 to 10 years even with aggressive payments.

Monthly payment requirements at these debt levels become unsustainable. A $60,000 debt load at 15% average interest requires approximately $1,300 minimum monthly payments. On $50,000 gross income ($3,200 net monthly), $1,300 payments represent 41% of net income—far exceeding the 30% affordability threshold after housing and necessities.

Interest accumulation prevents principal reduction at high debt-to-income ratios. If you can only afford minimum payments, most of each payment covers interest rather than principal. A $60,000 balance at 15% interest accrues $750 monthly in interest. Paying $1,000 monthly reduces principal by only $250—requiring 240 months (20 years) to pay off while paying $180,000 total.

Bankruptcy discharges the entire $60,000 in 9 to 21 months at a cost of $1,800 to $12,000 depending on surplus income. Even including bankruptcy costs, you save $168,000 and 18 years compared to attempting full repayment. This massive difference makes bankruptcy the rational financial choice for debt-to-income ratios over 1:1.

Consumer proposals negotiate settlements of 20% to 40% of debt at these ratios. The same $60,000 debt might settle for $18,000 to $24,000 paid over 5 years ($300 to $400 monthly). Proposals save $36,000 to $42,000 compared to full repayment while protecting assets and creating less severe credit impact than bankruptcy.

Lower debt-to-income ratios may still be unmanageable depending on living expenses. If you earn $80,000 but owe $60,000 (0.75:1 ratio), the debt might be manageable at $1,000 to $1,200 monthly if you have low housing costs. However, with $2,000 rent, $500 vehicle costs, and $600 other necessities, your remaining $800 to $1,000 monthly cannot cover $1,300 debt payments.

Secured debt is excluded from this calculation. Mortgages and car loans are not included in debt-to-income ratios for bankruptcy purposes because these are secured by collateral. A $300,000 mortgage on $80,000 income does not indicate bankruptcy need—only unsecured debt matters for this assessment.

Sign 2—Creditors garnish wages or freeze bank accounts

Active wage garnishment or bank account freezes indicate creditors have obtained judgments and are enforcing collection through legal process. These aggressive collection actions justify immediate bankruptcy or consumer proposal filing to protect income and assets.

Wage garnishment removes 20% to 30% of gross wages in most provinces before you receive your paycheck. Ontario allows up to 20% garnishment, British Columbia and Alberta allow up to 30%. If you earn $4,000 gross monthly, garnishment removes $800 to $1,200 before you see funds. This makes covering rent, food, and utilities impossible for most people.

Filing bankruptcy stops garnishment within one to two pay periods through the automatic stay of proceedings. Your Licensed Insolvency Trustee notifies your employer and the garnishing creditor immediately upon filing. The stay is immediate and legally binding—employers must stop deducting garnishment as soon as they receive notice. Depending on payroll processing schedules, one or two more garnished paychecks may occur before garnishment fully stops.

Bank account freezes prevent access to your funds immediately. If you have $2,000 in your checking account and a creditor obtains a garnishment order against the account, the bank freezes the full amount. You cannot access frozen funds to pay rent, buy groceries, or cover any expenses. Freezes can last weeks or months while legal processes complete.

Bankruptcy releases bank account freezes within 48 to 72 hours of filing. Your trustee notifies the creditor and bank, and the freeze must be lifted. Money in the account at the time of bankruptcy filing may be claimed by the trustee as an asset—consult your trustee about protecting account balances by withdrawing or spending funds before filing if freezes are imminent.

CRA has enhanced collection powers compared to other creditors. CRA can garnish wages and freeze accounts without obtaining court judgments—administrative garnishment powers bypass the court system entirely. CRA also issues Requirements to Pay to third parties like employers and banks, directing them to remit funds to CRA instead of you. Bankruptcy immediately stops all CRA collection including these enhanced powers.

Multiple garnishments can occur simultaneously. If three creditors each obtain separate garnishment orders, they may each garnish up to the provincial maximum. Some provinces cap total garnishment at 30% regardless of number of creditors, but enforcement varies. Multiple garnishments remove most or all of your paycheck, making employment essentially worthless financially.

Garnishment continues indefinitely until debts are paid. Once a garnishment order exists, employers deduct the percentage from every paycheck for months or years until the full judgment plus interest and legal costs are paid. On a $20,000 judgment at 20% garnishment of $4,000 monthly gross wages, garnishment removes $800 monthly. Paying $20,000 at $800 monthly takes 25 months—over 2 years.

Bank account freezes are often first notice of legal judgments. Many people discover creditors sued and obtained judgments only when bank accounts freeze. If you ignore collection letters and lawsuit notices, creditors obtain default judgments without your participation. Account freezes force awareness and action—file bankruptcy or proposals immediately to unfreeze accounts.

Consumer proposals stop garnishment and freezes identically to bankruptcy. Proposals use the same automatic stay of proceedings under the BIA. If wage garnishment is your primary concern, proposals offer the same immediate protection as bankruptcy while potentially costing less and protecting more assets.

Sign 3—Collection lawsuits filed or judgments obtained

Creditor lawsuits signal debt has escalated beyond negotiation to legal enforcement. Lawsuits filed or judgments obtained justify immediate bankruptcy or consumer proposal consideration to freeze legal proceedings and prevent enforcement.

Collection lawsuit process begins with a Statement of Claim delivered to you. The claim states the creditor’s allegations including debt amount, interest, and legal costs. You have 20 days in most provinces to file a Statement of Defence. Failing to respond results in default judgment—the creditor wins automatically without trial.

Default judgments are common when debtors ignore lawsuits. Many people facing overwhelming debt ignore lawsuit papers, believing they cannot afford lawyers or that nothing can be done. Default judgments allow creditors to proceed directly to enforcement including garnishment and asset seizure without proving their case in court.

Filing bankruptcy freezes all active lawsuits immediately through the stay of proceedings. Lawsuits at any stage—Statement of Claim just served, Discovery in progress, trial scheduled—are automatically stayed. Court hearings after your bankruptcy filing date are cancelled. Creditors cannot continue lawsuits against undischarged bankrupts.

Judgments obtained before bankruptcy cannot be enforced during bankruptcy. If a creditor obtained a $25,000 judgment last month and you file bankruptcy today, the creditor cannot garnish wages or seize assets. The stay prevents all enforcement. After discharge, judgments for dischargeable debts are permanently eliminated—the judgment still exists on court records but is unenforceable.

Post-judgment enforcement is more aggressive than pre-judgment collection. After obtaining judgments, creditors can garnish wages without further court applications, seize bank accounts through garnishment orders, place liens on property, and in some provinces seize personal property or conduct debtor examinations. Judgments grant enhanced collection powers making life increasingly difficult.

Legal costs added to judgments increase debt significantly. Creditors add their legal fees—typically $2,000 to $5,000—to judgment amounts. A $15,000 debt becomes a $20,000 judgment including interest and legal costs. These additional amounts are discharged in bankruptcy along with the original debt.

Judgments create liens on real property in many provinces. Judgment creditors register writs of execution or other judgment liens against property you own. These liens attach to real estate and must be paid if you sell property. Bankruptcy eliminates judgment liens on dischargeable debts—after discharge, you can apply to remove liens from property titles.

Multiple lawsuits from multiple creditors compound stress and complexity. If three creditors simultaneously sue you, you face three separate legal proceedings with different timelines, lawyers, and court dates. Bankruptcy or consumer proposals consolidate all lawsuits into one proceeding with one trustee handling all creditors.

Consumer proposals offer the same lawsuit protection as bankruptcy. Proposals freeze lawsuits and prevent enforcement throughout the proposal term—potentially 3 to 5 years. After successful proposal completion, lawsuits are permanently resolved through the settlement. Proposals work well when you want to avoid bankruptcy but need immediate lawsuit protection.

Strategic timing matters—file before judgments are obtained when possible. Once creditors obtain judgments, they have enhanced enforcement powers. Filing bankruptcy or proposals before judgments are granted prevents creditors from ever obtaining those enhanced powers. However, do not delay filing bankruptcy while lawsuit trials approach—file when lawsuits are served or shortly thereafter.

Sign 4—Minimum debt payments exceed 30% of net income

Total minimum monthly debt payments exceeding 30% of net income after housing and necessities indicates unsustainable debt. This threshold is widely recognized in personal finance as the point where debt service prevents covering basic living expenses.

Calculate your debt service ratio: Total Minimum Monthly Payments divided by Net Monthly Income. If credit cards and loans require $1,500 monthly and net income is $4,000, your ratio is 37.5%—well above the 30% sustainability threshold. This means insufficient income remains for housing, food, transportation, and other necessities.

Housing costs should consume 25% to 35% of net income maximum. If debt service is already 30% to 40%, combined with 30% to 35% housing costs, you have 60% to 75% of income committed before any discretionary spending. This leaves 25% to 40% for food, utilities, transportation, insurance, child care, and all other expenses—impossible for most households.

Minimum payments on high balances barely reduce principal. A $50,000 credit card balance at 19.99% interest requires $1,250 monthly minimum payment (2.5% minimum). Of that $1,250, approximately $830 goes to interest and only $420 reduces principal. Paying minimums takes 35 to 40 years to clear the balance while paying $350,000 total.

Debt service ratios over 40% indicate financial crisis requiring immediate intervention. At 40% or higher, bankruptcy or consumer proposals are typically the only realistic solutions. Credit counseling and consolidation require affordable payments—if you cannot free up 10% to 15% of income for debt repayment, these alternatives fail.

Missing payments to afford other necessities spirals into worse problems. When debt service exceeds affordable levels, you miss payments to buy food or pay rent. Missed payments trigger late fees, interest rate increases to penalty rates of 29.99%, and collection calls. Debt balances grow despite attempts to pay, creating psychological and financial distress.

Bankruptcy eliminates the unsustainable debt in 9 to 21 months, freeing income for living expenses. If bankruptcy costs $300 monthly (including surplus income), you recover $1,200 monthly from the $1,500 previously paid to creditors. This $1,200 monthly savings immediately improves quality of life and covers necessities.

Consumer proposals reduce debt by 60% to 80% with affordable fixed payments. The same $50,000 debt might settle for $15,000 to $20,000 paid over 5 years at $250 to $335 monthly. This reduces debt service from $1,250 to $250 to $335—freeing $915 to $1,000 monthly while still resolving debt.

Self-employed individuals face more volatile debt service ratios. If monthly income fluctuates between $3,000 and $7,000, debt payments that are affordable in good months become impossible in slow months. Consistent debt service exceeding 30% in average months indicates bankruptcy or proposals should be considered.

Sign 5—Debt consolidation failed or is unaffordable

Failed debt consolidation loans or inability to qualify for consolidation indicates debt levels exceed borrowing capacity. This signals bankruptcy or consumer proposals are likely the only remaining options.

Debt consolidation loan denials mean lenders assess you as too risky. Banks, credit unions, and finance companies deny consolidation loans when debt-to-income ratios exceed 40% to 45% or credit scores fall below 650. If you cannot qualify for consolidation, your debt situation is too severe for conventional lending—formal insolvency options become necessary.

Home equity lines of credit (HELOCs) and refinancing may be unavailable. If you own a home, HELOCs can consolidate debt at lower interest rates. However, if you are behind on mortgage payments, have recent late payments on credit reports, or have debt-to-income ratios over 42%, lenders deny HELOCs. Without home equity access, consolidation becomes impossible.

Previous consolidation loans that failed indicate systemic financial problems. If you consolidated debt 2 to 3 years ago but accumulated new debt equaling or exceeding the consolidation amount, you have underlying income or spending problems consolidation cannot solve. Bankruptcy or proposals become necessary because you cannot stop accumulating debt.

Interest rates on subprime consolidation loans may exceed existing debt. Second-tier lenders and finance companies offer consolidation loans at 15% to 29% interest—often higher than existing credit card rates. Consolidation at these rates provides no benefit and may worsen your situation by adding origination fees and extending repayment timelines.

Secured consolidation loans risk losing collateral you cannot afford to lose. Some lenders offer secured consolidation loans using vehicles as collateral. If you default on these loans, you lose transportation necessary for employment. Using home equity for consolidation risks foreclosure if you cannot maintain payments. Bankruptcy or proposals avoid pledging essential assets as collateral.

Calculate whether consolidation actually improves your situation. If consolidation reduces monthly payments from $1,500 to $1,200 but extends repayment from 8 years to 15 years, you pay $216,000 total versus $144,000. Apparent payment reduction costs $72,000 more overtime. Compare consolidation total costs to bankruptcy costs of $2,000 to $12,000—bankruptcy saves over $200,000 and resolves in under 2 years.

Consumer proposals function like consolidation but eliminate 60% to 80% of debt. If banks deny consolidation loans, proposals negotiate directly with creditors to reduce total debt. Proposals offer what consolidation cannot—actual debt reduction rather than just lower interest rates. The $50,000 debt that no bank will consolidate can be settled for $15,000 to $20,000 through proposals.

Private lenders and alternative lenders charge predatory rates. Some companies target desperate debtors with consolidation loans at 35% to 47% interest plus origination fees of 5% to 10%. These loans trap borrowers in worse situations than before consolidation. Bankruptcy or proposals are always better than predatory consolidation loans.

Credit counseling debt management plans fail when payments remain unaffordable. Non-profit credit counseling agencies negotiate reduced interest rates and consolidate payments, but full principal must be repaid. If you cannot afford $800 to $1,000 monthly for 4 to 5 years, debt management plans fail. Proposals reduce both principal and payments to affordable levels.

Sign 6—Total unsecured debt exceeds $5,000 with zero repayment ability

Owing $5,000 or more in unsecured debt with no realistic ability to repay within 3 years justifies bankruptcy consideration. Below $5,000, bankruptcy costs may exceed debt amounts, making alternatives more practical.

The legal minimum debt for bankruptcy is $1,000 under the Bankruptcy and Insolvency Act. However, bankruptcy costs $1,800 to $2,500 minimum for low-income filers with no assets. Filing bankruptcy for $2,000 debt costs more than the debt itself—financially irrational unless creditors are actively garnishing wages or suing.

Practical minimum debt threshold is $5,000 to justify bankruptcy costs. At $5,000 debt and $2,000 bankruptcy cost, you save $3,000. At $10,000 debt, you save $7,000 to $8,000. Cost-benefit analysis favors bankruptcy when debt exceeds twice the bankruptcy cost. Below this threshold, negotiate settlements or use credit counseling.

Zero repayment ability means income barely covers necessities. If rent, utilities, food, transportation, insurance, and minimum child support leave $50 to $100 monthly discretionary income, you have zero realistic debt repayment capacity. Even $5,000 debt at $100 monthly takes 50 months (over 4 years) without interest—unmanageable.

Evaluate opportunity cost of attempting debt repayment versus bankruptcy. If you spend 5 years paying $10,000 debt at $200 monthly with no savings, emergency fund, or discretionary spending, you sacrifice significant quality of life. Bankruptcy resolves the same debt in 9 to 21 months at $200 to $300 monthly, freeing years of income for savings and financial recovery.

Collection-proof status exists for people with no income or assets. If you receive disability benefits or social assistance with no assets, you may be “judgment-proof”—creditors cannot collect even if they sue. In this situation, bankruptcy may be unnecessary. However, CRA can offset benefits and some creditors continue harassing collection attempts making bankruptcy worthwhile for peace of mind.

Future income potential affects the analysis. If you are temporarily unemployed but expect $60,000 annual income within 6 months, waiting to file bankruptcy until after securing employment may reduce surplus income calculations. Conversely, if income prospects are permanently limited, file bankruptcy now to stop collection harassment.

Student loans under 7 years old survive bankruptcy. If your only debt is $8,000 in student loans from 4 years ago, bankruptcy provides no benefit because the debt is not discharged. Wait until student loans exceed 7 years from end of studies before filing bankruptcy. If you have mixed debt—$8,000 student loans plus $12,000 credit cards—bankruptcy discharges the credit cards immediately and student loans after 7 years total.

Medical conditions limiting earning capacity justify bankruptcy at lower debt levels. If disability or chronic illness prevents working full-time and you owe $7,000 with $1,200 monthly income covering necessities, bankruptcy makes sense despite low debt amount. Your repayment capacity is permanently limited, justifying formal debt relief.

Consumer proposals work for debts as low as $5,000 if assets need protection. If you have $20,000 home equity and owe $8,000, bankruptcy requires paying $9,217 non-exempt equity (Ontario). A proposal might settle the $8,000 for $3,000 over 3 years while protecting all equity—total cost $3,000 versus $9,217.

Sign 7—Considering debt solutions but haven’t consulted Licensed Insolvency Trustee

Operating under false assumptions about bankruptcy or proposals prevents you from making informed decisions. Many people delay debt relief for years due to misconceptions about costs, eligibility, or consequences.

Common myths about bankruptcy prevent people from seeking help. Myths include: “I will lose everything I own” (false—provincial exemptions protect necessities), “I can never buy a house again” (false—mortgages available 2 to 3 years post-discharge), “Everyone will know I filed bankruptcy” (false—only creditors are notified), and “My employer will fire me” (false—employment protection exists).

Free LIT consultations provide expert analysis without obligation. Licensed Insolvency Trustees must provide free initial consultations explaining all options including bankruptcy, consumer proposals, and alternatives. Consultations are confidential and do not obligate you to file. Many people discover proposals work better than bankruptcy after consulting trustees. Find a Licensed Insolvency Trustee in Toronto or your nearest major city to schedule a consultation.

Debt settlement companies charge high fees for services LITs provide. For-profit debt settlement companies charge 15% to 30% of enrolled debt as fees—$15,000 to $30,000 on $100,000 debt. These companies negotiate settlements with creditors but cannot stop garnishment or lawsuits. Licensed Insolvency Trustees provide similar services through consumer proposals at regulated costs with immediate legal protections.

Credit counseling agencies help with mild debt problems but cannot administer bankruptcies or proposals. Non-profit credit counselors offer debt management plans consolidating payments and reducing interest, but creditors must agree and full principal must be paid. Counselors cannot stop garnishments or file legal proceedings. When debt is severe, credit counseling fails and LIT services become necessary.

Comparing multiple LIT consultations ensures comprehensive advice. Different trustees may emphasize bankruptcy versus proposals differently based on their practice focus. Consulting 2 to 3 trustees provides multiple perspectives and helps you evaluate which option truly fits your situation best. Do not rely on a single consultation for major financial decisions.

Timing matters—sooner is better than later for most people. Each month of delay costs hundreds of dollars in interest, collection fees, and potential garnishment. If debt is clearly unmanageable, delaying consultation for months or years worsens your situation. Schedule consultations within days or weeks of recognizing debt cannot be repaid conventionally.

Online bankruptcy calculators provide preliminary estimates. Use consumer proposal calculators to estimate costs before consultations. Calculators help you understand approximate costs and compare bankruptcy versus proposal expenses based on your income, debts, and assets. Calculators do not replace professional advice but prepare you for informed consultations.

Bankruptcy is not failure—it is legal protection. Canadian bankruptcy law exists specifically to help people overwhelmed by debt restart financially. Using bankruptcy when appropriate is rational financial management, not personal failure. Delaying due to shame or embarrassment costs thousands of dollars and years of financial stress.

When consumer proposals are better than bankruptcy

Consumer proposals are often better than bankruptcy when you have assets exceeding provincial exemptions, stable income between $40,000 and $100,000 annually, debts under $250,000, or want to avoid R9 credit rating. Proposals offer fixed payments protecting all assets while reducing debt by 60% to 80%.

Home equity exceeding provincial exemptions favors proposals strongly. If you have $30,000 equity in Ontario where the exemption is $10,783, bankruptcy costs $19,217 in equity buyout payments. A consumer proposal protects the full $30,000 while settling perhaps $60,000 debt for $20,000 over 5 years. Total proposal cost might be $23,000 versus bankruptcy cost of $21,217 to $31,217 depending on surplus income.

Vehicle equity works similarly. If you own a vehicle worth $15,000 outright, bankruptcy in Ontario requires paying $7,883 non-exempt equity. Consumer proposals protect the vehicle fully. Combined with home equity, proposals can save $20,000 to $40,000 in asset protection versus bankruptcy.

Stable income with moderate surplus favors proposals. If you earn $60,000 annually ($5,000 monthly net) as a single person, bankruptcy surplus income is ($5,000 minus $2,666) times 50% equals $1,167 monthly for 21 months, totaling $24,507 plus $2,000 fees equals $26,507. A proposal might settle $80,000 debt at 30% ($24,000) over 5 years—similar total cost but protecting all assets with less credit damage.

Proposals create R7 credit rating instead of R9. R7 is less severe—indicates debt settlement rather than bankruptcy. R7 remains on credit reports for 3 years after completion versus R9 remaining 6 to 7 years from bankruptcy discharge. Total credit impact is 6 to 8 years for proposals versus 6.5 to 7.75 years for bankruptcy.

Fixed proposal payments never increase regardless of income changes. If you expect raises, promotions, or bonuses during the next 5 years, proposals lock in fixed payments while bankruptcy surplus income increases with earnings. This predictability benefits professionals and skilled workers expecting career advancement.

Proposals allow negotiation to exclude certain creditors. If you owe family members money and want to continue repaying them, proposals can sometimes exclude family loans from the settlement. Bankruptcy treats all unsecured creditors equally—you cannot prioritize family debt repayment.

Social and professional considerations may favor proposals. Some professions view bankruptcy more negatively than consumer proposals. Lawyers, accountants, and financial professionals required to disclose bankruptcies to licensing bodies may face fewer complications with proposals. Proposals are settlements, not “bankruptcy,” which carries less stigma.

Proposals fail if you cannot maintain payments. Approximately 30% of proposals default due to missed payments. If you miss 3 consecutive payments or fail to pay the equivalent of 3 months payments at any time, the proposal is annulled and you return to pre-proposal status with all debts restored. Bankruptcy provides more flexibility with payment modifications.

High debt relative to assets may favor bankruptcy. If you owe $150,000 with minimal assets and low income, proposals requiring 30% payment ($45,000) over 5 years may be unaffordable. Bankruptcy costs $5,000 to $15,000 total and discharges 100% of debt—dramatically better outcome.

When to avoid bankruptcy—alternatives work better

Bankruptcy should be avoided when debt is manageable through conventional means, when assets far exceed debts and you can liquidate to pay creditors, when primary debt is non-dischargeable (student loans under 7 years), or when income is temporarily reduced but will recover soon.

Manageable debt loads under 50% of gross annual income with stable employment often resolve through budgeting and debt consolidation. If you earn $60,000 and owe $25,000 with no garnishment or lawsuits, aggressive budgeting and potential consolidation loan can clear debt in 3 to 4 years without bankruptcy.

Substantial assets that can be liquidated to pay debts make bankruptcy unnecessary. If you owe $40,000 but have $60,000 in non-registered investments and RRSPs over 12 months old, liquidate investments to pay creditors. Bankruptcy would cost $5,000 to $10,000 and damage credit for 7 years—paying debts from assets avoids these consequences.

Student loans under 7 years old cannot be discharged. If 80% of your debt is student loans from 5 years ago, bankruptcy discharges only 20% of total debt. Wait until student loans exceed 7 years to file bankruptcy when the full amount becomes dischargeable. In the meantime, explore Income-Driven Repayment or Repayment Assistance Plans.

Temporary income reduction with strong recovery prospects suggests waiting. If you are on parental leave for 12 months with $2,000 monthly income but return to $70,000 salary afterward, wait to assess debt manageability on full income. Bankruptcy filed during low-income periods may be premature if higher income makes debt repayable. With economic uncertainty in 2026, carefully assess whether income reduction is truly temporary or part of a broader trend.

Single large debts may be negotiable. If you owe one creditor $15,000 and other debts are minimal, negotiate a settlement directly. Many creditors accept 40% to 60% lump sum settlements to avoid bankruptcy where they receive 0% to 15%. A $6,000 to $9,000 settlement saves $6,000 to $9,000 versus bankruptcy costs while avoiding R9 rating.

Recent income tax debt may resolve through CRA payment arrangements. If you owe $12,000 to CRA and have stable income, negotiate a payment plan of $500 monthly over 24 months. CRA accepts most payment arrangements if you stay current on current-year taxes. Interest continues accruing at 10%, but total cost is $14,400 versus bankruptcy costs plus credit damage.

Pending inheritances or asset sales may provide funds to pay debts. If a parent’s estate will distribute $40,000 to you in 6 months and you owe $35,000, wait for the inheritance and pay creditors. Bankruptcy filed before receiving the inheritance results in the trustee claiming the inheritance—timing matters significantly.

Seasonal income variations for self-employed may misrepresent true financial condition. If you earn $80,000 annually but income concentrates in 6 months, consulting during low-income months may suggest bankruptcy when unnecessary. Provide full-year income projections to trustees for accurate assessment.

Timing considerations—when NOT to file bankruptcy

Avoid filing immediately before expected large income increases that would trigger surplus income. If you expect a $20,000 salary increase in 3 months, filing before the increase calculates surplus on lower income. Filing after the increase triggers higher surplus payments for 21 months. However, if debt is unmanageable now, do not delay months just to minimize surplus.

File after receiving expected tax refunds when possible. Tax refunds for bankruptcy year and prior years belong to the trustee. If you expect a $4,000 refund in March for 2025 and file in February 2026, the trustee claims it. Waiting until April after receiving the refund lets you keep the money. However, do not delay bankruptcy for 6+ months if garnishment or lawsuits are imminent.

File early in the calendar year to minimize tax refund loss. Filing on January 5, 2026 means only 1.4% of 2026 (5 days out of 365) belongs to the trustee. Your 2026 refund filed in early 2027 is 98.6% yours. Filing December 27, 2026 means 98.6% of the year belongs to the trustee.

Avoid filing immediately after receiving bonuses or severance. Large lump sums received in the month before filing are assets the trustee may claim. If you receive $15,000 severance, wait one month and spend the money on necessities before filing. Spending on essential expenses (rent, arrears, vehicle repairs) is acceptable—hiding cash or giving it to family is fraudulent.

Consider property sale timing. If you are selling property with equity and plan to file bankruptcy, complete the sale and deal with proceeds before filing. Money from property sales becomes cash the trustee claims. If sale generates $50,000 after mortgage payoff, spend down on exempt assets or protected investments before filing.

Coordinate with mortgage renewals if possible. If your mortgage renews in 3 months, wait until after renewal before filing if debt is manageable temporarily. Mortgages are difficult to renew as an undischarged bankrupt—lenders often decline renewal or demand higher rates. Renewing before bankruptcy locks in rates for the next 5 years.

File before major life events like marriage if possible. Marrying combines household finances and affects surplus income calculations. If you plan to marry someone with significant income in 6 months, file bankruptcy beforehand based on your solo income. After marriage, spouse’s income raises thresholds but may still increase surplus for high-earning spouses.

Bottom Line

File bankruptcy when unsecured debts exceed 12 months of your gross income, creditors garnish wages or freeze accounts, minimum debt payments exceed 30 percent of net monthly income after housing costs, you face active collection lawsuits or judgments, or you owe $5,000 or more with zero realistic ability to repay within 3 to 5 years through conventional means. The legal minimum is $1,000 debt under the BIA, but practical minimum is $5,000 due to bankruptcy costs of $1,800 to $2,500 for low-income filers with no assets. Consumer proposals are often better than bankruptcy when you have home equity exceeding $15,000 above provincial exemptions, vehicle equity exceeding $10,000, stable income between $40,000 and $100,000 annually, or want to avoid R9 credit rating—proposals eliminate 60 to 80 percent of debt with fixed payments that never increase, protect 100 percent of all assets, and create less severe R7 credit rating removed from reports 3 years after completion versus R9 remaining 6 to 7 years from bankruptcy discharge. Timing matters significantly—file after receiving expected tax refunds if possible, early in the calendar year to minimize refund loss, and before wage garnishment or lawsuits escalate to judgment enforcement. Consult Licensed Insolvency Trustees for free analysis comparing bankruptcy, consumer proposals, and alternatives specific to your debts, income, and assets—most people discover consumer proposal costs are comparable to or less than bankruptcy costs when asset protection and surplus income calculations are included.

Disclaimer: This article provides general information about when to file bankruptcy in Canada. Every financial situation is unique. Consult with a Licensed Insolvency Trustee for personalized advice based on your specific circumstances.

Last updated: February 2, 2026