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While creditors have every right to go after consumers who still owe them money, it can be incredibly stressful for the borrower when the funds aren’t available to repay such debt. In order to stop the pressure, some borrowers may consider bankruptcy, due to a rule called “stay of proceeding”.

What Is A Stay Of Proceedings In Canada?

This might sound like a fancy, sophisticated term, but the concept is rather simple to understand. A stay of proceedings in Canada essentially stops (“stays”) creditors from continuing to pursue you for the money you owe them.

When you file for bankruptcy or a consumer proposal, a stay of proceedings is automatically initiated. Once you inform your licensed insolvency trustee that you’re filing for bankruptcy or a consumer proposal, your trustee will report to the courts and all parties involved that you’ve filed accordingly. At that point, a stay will be put in place which will stop any threat of legal action.

How Does A Stay Of Proceedings Work? 

When you file for bankruptcy, a stay of proceedings will take effect. This feature of bankruptcy protects you against creditor actions, including collections and wage garnishment.

Once you notify your Licensed Insolvency Trustee (LIT) of legal action, the court and your creditors will be informed of your bankruptcy filing. The stay of proceedings will then take effect and will remain in place during your bankruptcy. The stay of proceedings will cease when your bankruptcy is discharged. However, since your debt will have been dealt with by then, you won’t need the “stay” protection any longer.

How Fast Does It Go Into Effect?

A stay of proceedings is an automatic feature of a bankruptcy filing, which means it will take effect immediately. There’s no need to request a stay of proceedings since you’ll get one the moment you file.

For this reason, filing for bankruptcy will immediately stop any actions from creditors. That means any wage garnishments and other actions will stop the moment you file for bankruptcy. However, it may take a few days before collection calls stop while the paperwork is underway.

What Does A Stay Of Proceedings Stop?

A stay of proceedings will stop the following actions:

  • Collection agency calls
  • Wage garnishments
  • Threats of litigation from creditors
  • Lawsuits already started
  • Court judgments
  • Documents filed with the court by creditors
  • Court order enforcements

Keep in mind, however, that a stay of proceedings doesn’t apply to the following:

  • Child support
  • Spousal support
  • Repayment of debts based on falsified information
  • Fines and penalties
  • Student loan debt (if you finished within the last 7 years)

Will A Stay Of Proceedings Stop Lawsuits In Progress?

Lawsuits that have already started and are underway will be ceased immediately once a stay of proceedings is in motion. Even if a creditor has successfully sued you, the enforcement of the court order will be stopped with the introduction of a stay of proceedings.

Your trustee has many duties and obligations throughout your bankruptcy. One of them is to deal with your creditors and any actions they may want to take against you accordingly. If any one of your creditors wants to take you to court and sue you for monies owed, the stay of proceedings will protect you throughout the duration of your bankruptcy.

Does A Stay Of Proceedings Stop Revenue Canada From Coming After You?

You may owe the federal government taxes, but a stay of proceedings applies to any income tax debt you may have as well. Once you file for bankruptcy or a consumer proposal, your trustee will notify the Canada Revenue Agency (CRA). At this point, they will be required to stop any collection efforts, just as your creditors would.

Before an automatic stay of proceedings is initiated, the CRA can start putting a freeze on your bank accounts or even take measures to have your wages garnished. But once that stay of proceedings is put into effect, all such activity must cease. That’s why it’s so important to initiate some sort of process to protect yourself from having any further assets taken from you.

When it comes to the CRA, a lien can eventually be placed on your home if a stay of proceedings is not initiated early enough. Once that lien has been placed, filing for bankruptcy or a consumer proposal afterward won’t do anything to eliminate it.

Are There Any Debts Exempt From The Stay Of Proceeding In Canada?

Certain exceptions exist when it comes to a stay of proceedings and the extent of protection that it offers:

  • Car Debt. Your car can still be repossessed if you have missed car payments and are defaulting on your auto loan. The lender who loaned out the funds for an auto loan may also choose to place a lien on the vehicle.
  • Spousal And Child Support. Any spousal support or child support payments can still be collected, regardless of any filing of bankruptcy or consumer proposal.
  • Debt From Fraud. Any debts accumulated from fraudulent activity or misrepresentation on your part won’t be covered by a stay of proceedings.
  • Student Loan Debt. If you’ve recently completed or left school, your student loan probably won’t be covered.

How Long Do The Stay Of Proceedings Last? 

Your stay of proceedings will cease once you are discharged from bankruptcy or your consumer proposal has been completed. However, there’s usually nothing to worry about in terms of creditors seeking legal action because your debt is included in the bankruptcy (with certain exceptions). Since your debt would be waived with your discharge, creditors typically have no basis to take you to court to recoup their owed funds.

Can Creditors Fight A Stay Of Proceedings?

Yes, creditors have the right to request that a stay of proceedings be lifted, but only if they go through the proper sequence of actions. The only way a creditor can seek legal action against you is if they apply to the court to lift the stay of proceedings and are successful in doing so.

Once a motion has been brought before the court, the creditor will be in the position to argue to have the stay of proceedings lifted in order to identify the precise amount that is owed. The creditor may also be required to argue that the type of debt owed is not covered by bankruptcy or a consumer proposal. You may then defend yourself in court and argue against this testimony in order to help ensure your stay remains.  

It should be noted that motions to lift a stay of proceedings by a creditor are rather uncommon.

Stay Of Proceedings FAQs

What debts does bankruptcy cover?

Bankruptcy covered all unsecured debt such as personal loans and payday loans. However, unsecured debt such as student loans are only covered under certain requirements. Secured loans are also not covered.

Can an automatic stay of proceedings stop my mortgage lender from seizing my home?

A stay of proceedings deals with unsecured debt, not secured debt. Since a mortgage is a type of secured debt, a stay will not stop your mortgage lender’s actions. If you’re unable to keep up with your mortgage payments, your lender can take steps to repossess your home.  That said, if you’re able to continue making mortgage payments, your lender may not be able to seize your home just because you declare bankruptcy. 

Is a stay of proceedings immediate?

A stay of proceedings is immediate, legally speaking. However, it could take a few days for collection calls to stop, since your creditors may not receive the paperwork right away.

What happens if my creditors still call me after filing for bankruptcy?

If a collection agency calls you after declaring bankruptcy, let them know that you’ve filed bankruptcy. Give them your trustee’s number so they can confirm the information you’ve provided. Or, you can speak with your trustee and ask them to reach out to your creditors on your behalf. 

Bottom Line

Once you file for bankruptcy or a consumer proposal, a stay of proceedings is automatically put in place and your creditors are notified of it right away. At this point, you’re protected against any threats of lawsuits from creditors, as long as the debts they seek fall under the law of bankruptcy in Canada. If you’re vulnerable to being legally threatened to repay your debts, speak with a licensed insolvency trustee who will help you choose the right path of protection for you.

Lisa Rennie avatar on Loans Canada
Lisa Rennie

Lisa has been working as a personal finance writer for more than a decade, creating unique content that helps to educate Canadian consumers in the realms of real estate, mortgages, investing and financial health. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. Lisa is very serious about smart money management and helping others do the same.

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