Debtor Bankruptcy and Consumer Proposals: Ontario Small Claims Enforcement

The Automatic Stay Stops Everything

Filing for bankruptcy triggers the stay under section 69 of the Bankruptcy and Insolvency Act (BIA); filing a consumer proposal triggers the stay under section 69.2. For an ordinary unsecured judgment claim, the stay generally prevents creditors from starting or continuing collection steps for that claim, including garnishment and execution, subject to statutory exceptions. It takes effect on filing; no separate court order is needed.

That means:

• Active wage garnishments must be halted
• Bank garnishments cannot be enforced
• Writs of seizure and sale are frozen
• You cannot schedule new examination hearings
• You cannot initiate any new enforcement steps

You'll receive official notice from the debtor's Licensed Insolvency Trustee (LIT). That notice is your trigger to pause everything.

What to Do When You Get the Notice

Immediately:

1. Contact the court clerk and direct them to hold any garnishment funds received after the filing date
2. If a wage garnishment is active, notify the employer that garnishment payments should stop
3. Do not serve any new enforcement documents

Then:

1. File a proof of claim with the Licensed Insolvency Trustee, setting out the judgment amount, post-judgment interest accrued, and enforcement costs to date
2. Attend the first meeting of creditors if one is called — this is where you learn about the debtor's assets and the proposed distribution

Your judgment debt becomes part of the insolvency process. What you recover depends on whether the debtor filed bankruptcy or a consumer proposal, and how much is available for distribution to unsecured creditors.

Bankruptcy vs. Consumer Proposal: The Difference for Creditors

Bankruptcy (Assignment in Bankruptcy): The debtor surrenders non-exempt assets to the trustee, who liquidates them and distributes the proceeds to creditors. A first-time bankrupt is generally eligible for automatic discharge after 9 months without surplus-income payments or 21 months when surplus-income payments are required, if the discharge is not opposed and required counselling is completed. A discharge releases most claims provable in bankruptcy, but exceptions under BIA section 178(1) may survive, including debts arising from false pretences or fraudulent misrepresentation. Check whether the judgment debt falls within an exception before treating it as released.

For Small Claims Court judgments, the practical reality is often grim. The debtor's non-exempt assets may be minimal after the trustee's fees and preferred creditors are paid. Unsecured creditors (which includes most Small Claims Court judgment creditors) typically receive cents on the dollar, if anything.

Consumer Proposal: The debtor proposes a payment plan through the trustee — typically offering creditors a percentage of what's owed, paid over up to 5 years. Creditors vote on whether to accept the proposal. If accepted or deemed accepted by creditors and approved or deemed approved by the court, it binds creditors in respect of all unsecured claims and secured claims for which proofs of claim are filed under the BIA. A debt listed in section 178(1) is released only if the proposal expressly provides for it and the affected creditor voted to accept the proposal.

The debtor keeps their assets and makes payments under the proposal. Your recovery depends on the proposal's terms and whether it is completed; there is no fixed percentage of the judgment.

What Happens to Your Land Writ

If you registered a writ of seizure and sale of land before the debtor filed, the stay prevents you from executing on it during the stay; the writ alone does not let you force a sale. Ask the Licensed Insolvency Trustee or a lawyer how the filing date and registered interests affect the writ's treatment and priority. Do not assume the writ gives you secured status in the insolvency.

Can You Oppose the Discharge?

In a bankruptcy, certain creditors can oppose the debtor's discharge. Under BIA section 173, the court may refuse, suspend, or impose conditions on discharge for listed grounds. Examples include failure to account satisfactorily for a loss or deficiency of assets, continuing to trade while insolvent, or contributing to bankruptcy through rash speculation, unjustifiable extravagance, gambling, or culpable neglect of business affairs.

Separately, a judgment debt arising from obtaining property or services by false pretences or fraudulent misrepresentation may survive discharge under BIA section 178(1)(e). If you believe the debtor hid assets or the judgment debt arose from fraud, consider legal advice about the available grounds and evidence.

When to Contact a Professional

Insolvency proceedings are complex and governed by federal law, not Ontario Small Claims Court rules. If the debtor files:

• Review the trustee's notice carefully for filing deadlines
• File your proof of claim before the deadline (missing it can exclude you from distributions)
• Consider consulting a Licensed Insolvency Trustee or lawyer if the judgment amount is significant

For most Small Claims Court judgments under $10,000, the cost of legal representation through insolvency proceedings exceeds the likely recovery. Filing the proof of claim yourself and attending the creditors' meeting is usually sufficient.

For the full enforcement process, including what to do when bankruptcy interrupts an active garnishment, see our Ontario judgment enforcement guide.

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