Some of the proposed changes to bankruptcy law contained in Bill C-12 are favourable to bankrupts, so waiting to file may be advisable. Other changes will make personal bankruptcy in Ontario more difficult, so for some people going bankrupt now is to their advantage.
Before we comment on proposed bankruptcy law changes, please be advised that the legislation has not yet become law, and we do not know when it will come into force, or even that these rules will become law as originally presented. Please contact our Ontario bankruptcy offices to discuss how we can help with your specific situation.
Also, it may be wise to consider filing a consumer proposal as an alternative to bankruptcy. Under the new law, the limit on debts covered in a consumer proposal increases from $75,000 to $250,000 (excluding your mortgage), so if you have large debts, waiting to file a consumer proposal may be to your advantage.
Now our comments on the proposed bankruptcy law changes:
First, under current law, student loans in a bankruptcy are only automatically discharged if the debtor has been out of school for over ten years. Under the new law, a student loan debt is automatically discharged if you have been out of school for seven years, and you can apply to court to have the loan discharged after five years. Therefore, if you have a student loan that is between seven and ten years old, it may be prudent to wait until the new legislation becomes law. Further information can be found at the Canadian Student Loan Bankruptcy Blog.
Second, in certain circumstances, in an event of bankruptcy, RRSPs will now be exempt from seizure. To prevent abuse, contributions made in the 12 months prior to bankruptcy are not exempt, and the RRSP will only be exempt if the individual "locks in" the funds, subject to a maximum cap. Therefore, if you have RRSPs that are not locked in, you may be better off waiting to file bankruptcy until the new law takes effect.
Third, the proposed changes to bankruptcy law make it harder for a person who owes a substantial amount to the Canada Revenue Agency (CRA) to go bankrupt and discharge their debts in the normal first-time bankruptcy period of nine months.
Bankruptcy law changes contained in section 172.1 of the Act state that if you are an individual, and owe more than $200,000 in tax debt, and that debt is more than 75% of your total debt, you will not be eligible for an automatic discharge after nine months. You must attend a court hearing, and the bankrupt will have to convince the court that they should be discharged from their debts, based on their efforts to repay the debts, their financial situation when the debt was incurred, and their future financial prospects. If you can't deal with your significant debts to Revenue Canada, a bankruptcy sooner rather than later may be in your best interests.
Fourth, under current law, the bankrupt person automatically loses their tax refund for the prior year(s), and the period up to the date of bankruptcy in the year of bankruptcy. Under proposed changes to section 67(1)(c) of the Act, in the year that a person goes bankrupt, that person will lose their tax refunds in bankruptcy for the entire year. Thus if you go bankrupt on June 30, 2006, instead of just losing your tax refund for the period from January 1 to June 30, 2006, you will now lose your tax refund for all of 2006 (if the new law is passed).
Finally, under the new laws it may be easier to keep a financed or leased car; it is often possible to keep a car under the current rules, but the new rules may make this even easier. The rules are vague, so further interpretation will be required when the new laws are passed.
First, Section 168.1 of the Bankruptcy & Insolvency Act is amended to lengthen the period that many people will be bankrupt. Under current rules, a first time bankrupt is eligible to be discharged after nine months. Under the new rules:
What does this mean? If you have income over the government allowed threshold (which for a single person is $1,797 in take-home pay per month in 2007), it is likely that your bankruptcy will be extended for a further 12 months, and you will be required to continue to pay that surplus income into your bankruptcy estate for your creditors.
What's the solution? If your income is higher than the government thresholds, you should consider filing a consumer proposal, which for many people is the best solution.
As noted above, the legislation has just been presented to Parliament; over the next few weeks and months we will review the impact of this legislation and post our comments on this as more information becomes available.
The bankruptcy law changes proposed in Bill C-12 bring up new complicated rules, so we recommend that you contact our Ontario bankruptcy offices for advice on your specific situation.
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