When a defendant files for bankruptcy, the Bankruptcy and Insolvency Act automatically stays most existing or new lawsuits against them as an unsecured creditor. Instead of continuing your Small Claims Court action, you generally file a proof of claim with the bankruptcy trustee and wait to see what, if anything, the estate can pay — recovery for unsecured creditors is often partial, and sometimes nothing.
- A defendant’s bankruptcy triggers an automatic stay under the Bankruptcy and Insolvency Act that generally stops you from starting or continuing a lawsuit against them.
- The stay applies to unsecured creditors — someone with registered security over specific property is treated differently.
- Instead of a lawsuit, you generally file a proof of claim with the bankruptcy trustee, which lets you share in whatever the estate can pay.
- A creditor can apply to lift the stay in limited circumstances, but the bar is generally high for an ordinary unsecured claim.
- Continuing to pursue the lawsuit in violation of the stay can result in your action being struck, so confirm the bankruptcy status before taking further steps.
- Recovery through a bankruptcy proof of claim is often partial, sometimes a few cents on the dollar, and occasionally nothing at all.
The Automatic Stay
When a defendant becomes bankrupt, the Bankruptcy and Insolvency Act imposes an automatic stay of proceedings, which generally stops unsecured creditors — like a plaintiff in an ordinary Small Claims Court debt claim — from starting or continuing a lawsuit against them. The same kind of stay also applies when a debtor files a notice of intention to make a proposal, before a full bankruptcy is declared.
The stay is generally aimed at unsecured creditors. A creditor who holds registered security over specific property — a mortgage or a properly registered lien, for example — is typically treated differently and may be able to deal with that security in the ordinary course, subject to the specific rules that apply to them.
What It Means for Your Lawsuit
If you continue your Small Claims Court action in violation of the automatic stay, the action can be struck down by the court. Once you learn the defendant has filed for bankruptcy or a proposal, pause active steps in your lawsuit and confirm the bankruptcy status and the trustee’s contact information before doing anything further.
Filing a Proof of Claim Instead
Rather than continuing the lawsuit, you generally file a proof of claim with the licensed insolvency trustee administering the bankruptcy. This document sets out what you are owed and the basis for the debt, and registers you as a creditor entitled to share in whatever the estate eventually distributes.
A plaintiff has an $11,000 Small Claims Court claim for unpaid work when the defendant files for bankruptcy mid-litigation. Rather than continuing to trial, the plaintiff files a proof of claim with the trustee for the $11,000 owed, supported by invoices and the signed contract, and waits for the trustee’s process to run its course.
Can You Keep Suing Anyway?
In limited circumstances, a creditor can apply to the court to lift the stay and continue a proceeding. This is generally reserved for situations with specific, compelling circumstances, and the bar for an ordinary unsecured creditor pursuing a standard debt claim is high. This is not a step to take without legal advice specific to your situation.
What Recovery Realistically Looks Like
Bankruptcy exists because the debtor cannot pay all of their creditors in full. Unsecured creditors are generally paid after secured creditors and certain priority claims, out of whatever is left. Depending on the estate’s assets, that can mean a partial recovery — sometimes a modest percentage of what was owed — or, in many cases, nothing at all. Setting realistic expectations early helps you decide how much further time and effort the claim is worth.
If You Already Have a Judgment
If you obtained a judgment before the bankruptcy, ongoing enforcement steps like garnishment must generally stop once the stay takes effect. The judgment itself becomes the basis for your proof of claim in the bankruptcy, rather than a tool you continue enforcing directly against the debtor.
Facing a defendant’s bankruptcy mid-lawsuit in Toronto or elsewhere in Ontario? Our lawyers offer a free 30-minute consultation to help you file a proof of claim and assess your options. Call us at 416-274-2222 or contact us online.
Frequently Asked Questions
Generally, yes. The Bankruptcy and Insolvency Act imposes an automatic stay on proceedings by unsecured creditors once the defendant files for bankruptcy, meaning you generally cannot start or continue a lawsuit against them while the stay is in effect.
File a proof of claim with the bankruptcy trustee handling the defendant’s estate. This formally registers your debt so you can share in any distribution the estate eventually makes to creditors.
You can apply to lift the stay, but courts generally set a high bar for an ordinary unsecured creditor, and the circumstances where this succeeds are limited. Get legal advice before attempting this.
It depends entirely on what assets are available in the estate after secured creditors and priority claims are paid. Many unsecured creditors recover only a portion of what they are owed, and some recover nothing.
A pre-existing judgment is still generally treated as an unsecured claim in the bankruptcy, meaning enforcement steps like garnishment must generally stop, and you instead file a proof of claim for the judgment amount.
Most ordinary debts are discharged through bankruptcy. Certain categories, such as debts arising from fraud, are treated differently and may survive — this depends heavily on the specific facts.
A notice of intention to make a proposal also triggers a stay of proceedings against the debtor while the proposal process plays out, similar in effect to a bankruptcy filing.