If money problems are piling up and your debts feel impossible to manage, you’re not alone. Many Islanders face overwhelming financial stress due to job loss, illness, or high-interest debt. Bankruptcy is a legal process that may offer the reset you need to take back control and work toward a debt-free future.
In this article, we explain what bankruptcy involves in Prince Edward Island, who qualifies, how the process works, what happens to your assets, and the alternatives you might want to consider before filing. With the right support, a fresh financial start is possible.
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What is bankruptcy?
Bankruptcy is a legal process designed to help individuals who are unable to repay what they owe. When you are overwhelmed with unsecured debt and filing for bankruptcy becomes the most viable option, it provides a structured way to eliminate or reduce your debts under the protection of federal law.
By filing for bankruptcy, you agree to follow specific steps and responsibilities in exchange for the chance at a financial reset. This process is governed by the Bankruptcy and Insolvency Act and ensures that both you and your creditors follow the appropriate legal framework. The following discharge period offers relief from ongoing collection efforts and allows you to focus on rebuilding your financial life.
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Who qualifies for bankruptcy?
You may qualify for bankruptcy in Prince Edward Island if you owe at least $1,000 and are unable to keep up with your unsecured debt payments, such as credit card bills, personal loans, or income tax debt. These types of debt are not tied to any physical asset.
However, if most of your debt involves secured loans, like mortgages or car loans, bankruptcy may not be your best option. In such cases, those debts are backed by assets the lender can claim if payments stop.
A Licensed Insolvency Trustee can assess your unique financial situation to determine if bankruptcy is the most suitable path, or whether an alternative such as a consumer proposal would provide better long-term relief.
What debts can bankruptcy help with?
If you’re struggling with financial problems and have tried other options without success, bankruptcy may offer meaningful relief by eliminating many types of unsecured debt. Understanding which debts can—and cannot—be discharged through bankruptcy is essential before filing.
Bankruptcy in Canada can help with most unsecured debts, which are debts not tied to an asset. These include:
- Credit card balances
- Personal loans
- Lines of credit
- Payday loans
- Outstanding utility bills
- Income tax debt
- Student loans (only if you’ve been out of school for seven years or more)
These debts are typically eliminated at the time of your bankruptcy discharge, giving you a chance to rebuild your finances without the burden of mounting interest and payments.
However, there are exceptions. Some debts cannot be discharged through bankruptcy, including:
- Child support payments
- Spousal support
- Court-ordered fines and penalties
- Debts due to fraud
It’s also important to note that secured debts, such as mortgages or car loans, are not covered by bankruptcy unless you choose to surrender the asset.
If you’re unsure which category your debts fall into, a Licensed Insolvency Trustee can help you understand what bankruptcy would and wouldn’t resolve in your case.
How does the bankruptcy process work in Prince Edward Island?
Filing for bankruptcy is a legal process that can help individuals overwhelmed by debt get the financial reset they need. If you’re struggling to meet your financial obligations, declaring bankruptcy in Prince Edward Island might be a solution worth considering. Here’s how the process works, step by step:
1. Get free debt advice
Before taking any action, it’s important to explore all your options. Many people start by booking a free initial consultation with a Licensed Insolvency Trustee. During this meeting, you’ll receive confidential advice tailored to your specific situation.
The trustee will explain the pros and cons of bankruptcy and help you determine whether it’s the best option—or if an alternative debt solution may be more appropriate.
2. Appoint a bankruptcy trustee
Only a licensed trustee (also known as a Licensed Insolvency Trustee or LIT) is legally authorized to administer a bankruptcy in Canada. Once you’ve decided to proceed, your trustee will help you complete the necessary paperwork to file. This includes providing details about your income, assets, debts, and monthly expenses.
The trustee will then submit your bankruptcy documents to the Office of the Superintendent of Bankruptcy to begin the process.
3. Complying with bankruptcy terms
Once your bankruptcy is filed, you’ll need to meet certain responsibilities. This includes submitting monthly income reports, attending two financial counselling sessions, and possibly making surplus income payments if your earnings exceed government thresholds.
You may also need to surrender certain non-exempt assets, which your trustee will explain.
4. Discharge from bankruptcy
Most first-time bankruptcies last nine months, but this can extend to 21 months if surplus income applies. At the end of your bankruptcy period—and as long as you’ve fulfilled all obligations—you’ll receive an official discharge from bankruptcy. This legally eliminates most unsecured debts, giving you a clean slate.
5. Rebuilding credit and working towards a debt-free life
After your discharge, you can begin rebuilding your credit. With support and guidance from your trustee, and by adopting better financial habits, it’s possible to recover your credit score in less than seven years.
Bankruptcy is not the end—it’s a new beginning, offering a fresh start and a chance to take control of your financial future.
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How long does bankruptcy last?
The length of bankruptcy depends on your financial situation, past filings, and whether you have surplus income. For a first-time bankrupt with no surplus income, the process typically lasts nine months. If you’re required to make additional contributions based on income, it may extend to 21 months.
For individuals filing for a second time, bankruptcy may remain in effect for 24 to 36 months. These timelines apply only if all legal duties are completed on time. If they aren’t, your discharge could be delayed, requiring a court hearing.
During this period, you must submit income statements, attend counselling, and cooperate with your Licensed Insolvency Trustee. Bankruptcy won’t last forever—but your participation is key to reaching a fresh financial start.
How do surplus income payments work?
When filing bankruptcy in Canada, your monthly income plays a key role in determining how much you’re required to pay throughout the process. If you earn more than what the government deems reasonable based on your family size, you may be required to make surplus income payments.
Surplus income payments are additional monthly payments made by a bankrupt individual who earns income above the threshold set by the federal government. These thresholds are updated annually and take into account your household size and necessary living expenses.
Your bankruptcy trustee—a Licensed Insolvency Trustee—will assess your income and expenses when you begin the bankruptcy process. If you are found to have surplus income, your monthly payments will be adjusted accordingly, and your bankruptcy period may be extended from 9 months to 21 months for a first-time bankruptcy.
It’s important to report your income to your trustee every month during the bankruptcy. Failing to do so may delay your discharge or lead to additional obligations. Surplus income payments are designed to ensure fairness in the bankruptcy system while still providing the relief needed for a fresh financial start.
What happens to my assets during bankruptcy?
When you file for bankruptcy, your assets are assessed by a Licensed Insolvency Trustee to determine what can be sold to repay your creditors. This may include your home, especially if you hold significant equity. However, you won’t lose everything.
Each province, including Prince Edward Island, has provincial exemptions that allow you to keep certain essential items needed for daily living and to earn an income. The following items are typically exempt from seizure during bankruptcy:
- Clothing for you and your family
- Furniture and appliances up to a specific dollar value
- One motor vehicle, depending on its value
- Enough family food
- Necessary farm equipment, tools, and animals if farming is your primary livelihood
These provincial exemptions exist to ensure that even while going through bankruptcy, you can maintain a basic standard of living, manage daily costs, and continue working.
If you own non-exempt assets—such as a second vehicle, valuable collectibles, or investments—these may be sold by your trustee to help pay down your debts. However, you may also have the option to “buy back” non-exempt assets by paying their equivalent value into your bankruptcy estate.
A Licensed Insolvency Trustee can explain exactly what you’ll keep and what may be impacted based on your specific situation.
Will declaring bankruptcy hurt my credit?
Yes, declaring bankruptcy does affect your credit. A first-time bankruptcy will appear as an R9 rating—the lowest possible score—on your credit report, and remain there for six years after your discharge.
This can make it more difficult to get approved for loans, credit cards, or favourable interest rates in the short term. However, your credit score isn’t permanent. Once you’re discharged, you can begin taking steps to rebuild your credit profile—such as paying bills on time, applying for a secured credit card, or making consistent contributions to savings.
Bankruptcy gives you a chance to eliminate debt so you can eventually restore your financial standing and move forward with confidence.
Alternative debt solutions
Bankruptcy isn’t the only path to resolving serious debt problems. Depending on your situation, there may be other debt relief options that offer relief while helping you avoid the consequences of filing for bankruptcy.
Consumer proposal
A consumer proposal is a legally binding agreement administered by a Licensed Insolvency Trustee. It allows you to make a single, manageable payment toward your unsecured debts, often paying back only a portion of what you owe. The trustee will negotiate with your creditors on your behalf, and once the proposal is accepted and completed, the remaining debt is eliminated. This option can help you avoid bankruptcy while keeping your assets.
Debt consolidation
If you have steady income and a decent credit score, a debt consolidation loan may be an option. This involves taking out one larger loan to pay off multiple unsecured debts. You then make one monthly payment at a lower interest rate, which can make your debt more manageable over time. However, you must be cautious: without budgeting and discipline, this approach may simply replace multiple debts with one larger one—without solving the root of the problem.
Credit counselling
Credit counselling provides expert advice, budgeting help, and support in managing your money. A credit counsellor will work with you to assess your situation, educate you about better financial habits, and even negotiate with your creditors to develop a debt repayment plan. It’s a great option if you’re serious about rebuilding your financial future, no matter the amount you owe.
Get the support you need with your finances
If you’re overwhelmed by debt problems, you’re not alone. The right help can make a lasting difference in your financial situation. At Farber, we’ve helped thousands of Canadians—across Prince Edward Island, and other provinces—find real solutions that work.
Whether you’re considering bankruptcy or exploring other debt solutions, our Licensed Insolvency Trustees are here to guide you through the process with respect and care. Visit your local office or contact us today to book an appointment for a free consultation.
Wherever you are in the country, we’re ready to help you deal with your debt and move forward with confidence.
