The way a bankruptcy filing works in Canada is that the debtor assigns non-exempt assets for the benefit of his creditors, in exchange for which he will be discharged from most debts. This is the simplest explanation, but as there is more to this relationship, we detail below how a bankruptcy filing impacts both parties.
What is bankruptcy?
Bankruptcy is a legal process in Canada, legislated under the Bankruptcy and Insolvency Act (BIA), allowing an honest but unfortunate debtor to eliminate most of their debts. If you are insolvent and have no other way to meet your financial obligations, you may file for bankruptcy. A bankruptcy can only be filed with a Licensed Insolvency Trustee, who makes sure that laws around bankruptcy are applied equally and fairly to both the debtor and creditors.
What is a debtor?
A debtor is the person filing for bankruptcy. You may file individually or as a couple.
The debtor’s role in a bankruptcy filing
When you declare bankruptcy in Canada, you, as the debtor, will work with a Licensed Insolvency Trustee to complete all the administrative steps necessary to complete your bankruptcy and to eliminate debt.
Read More: Step-by-step Guide to the Bankruptcy Process
To file for bankruptcy, you will have to sign various government forms, including a form called the “Assignment” and another called the “Statement of Affairs”. In the bankruptcy assignment, you state that you are handing over your property to the Licensed Insolvency Trustee for the benefit of your creditors. The statement of affairs will list all of your assets and liabilities.
You will also be required to answer several questions about your situation including details on family, work, and disposition of assets. Once these documents have been e-filed with the government, you are legally bankrupt. You then have to perform the bankruptcy duties, as outlined in the BIA. These include making your payments, disclosing your monthly budget, and attending two credit counselling sessions. You will also be required to surrender all credit cards to your trustee.
Learn More: Duties of the debtor while bankrupt
What happens when I file for bankruptcy?
When you file for bankruptcy, you get immediate legal protection from your creditors, meaning wage garnishments stop and you no longer have to deal with collection agencies or further threats of lawsuits. It also puts an end to harassing phone calls.
Keep in mind that bankruptcy does not discharge all debts. If applicable, you would still have to pay any child support, alimony, fines, and student loans if you have been out of school for less than 7 years.
What is a creditor?
A creditor is the individual or business that is owed money by the debtor. There are two major classes of creditors: secured and unsecured. A secured creditor is one that holds a right or claim against the debtor’s property. An unsecured creditor does not have a direct claim on the debtor’s property.
Learn More: Types of Creditors
The creditor’s role in a bankruptcy filing
In a bankruptcy filing, the role of the creditor is to file a proof of claim, so they may participate in any dividend distribution from your bankruptcy. Creditors also participate in and vote at the meeting of creditors if one occurs, where they will be able to examine the affairs of the bankrupt and provide direction to the Licensed Insolvency Trustee. Note, however, that a meeting of creditors in a bankruptcy is quite rare. It will often only be held at the request of creditors who hold at least 25 per cent of the value of the proven claims, or by request of the Office of the Superintendent of Bankruptcy (OSB).
The creditor’s role also includes informing the trustee of any irregularities before or during the bankruptcy filing. It’s important to remember, though, that you will not be dealing directly with your creditors. One of the biggest benefits of filing for bankruptcy is the protection you receive from your Licensed Insolvency Trustee, who works with creditors to administrate the bankruptcy.
What is a Licensed Insolvency Trustee (LIT)
A Licensed Insolvency Trustee is a federally regulated professional who provides advice and services to individuals dealing with debt. They are also the only professionals able to administer a bankruptcy or a consumer proposal.
The Licensed Insolvency Trustee’s role in a bankruptcy filing
As a government regulated Licensed Insolvency Trustee, an LIT is an officer of the court. A trustee is responsible for the legal administration of a bankruptcy and ensures that both debtors and creditors follow all required rules and regulations during the bankruptcy process. The trustee’s role in a bankruptcy filing begins with gaining a good understanding of your financial situation, including learning about who you owe, how much you owe, your income, and the causes of stress in your life. Your trustee will carefully explain all your debt relief options and help you find the best solution for your needs.
If you decide that bankruptcy is the right debt solution for you to obtain a fresh financial start, your trustee will file your paperwork with the government and receive confirmation that they have officially been appointed to administer your bankruptcy estate.
As previously mentioned, once your paperwork is complete and the bankruptcy has started you will begin making your monthly payments.
When you file for bankruptcy, your trustee must ‘realize’ on your assets and distribute the proceeds (along with your required bankruptcy payments) to your creditors. One asset that must be realized on is tax refunds, however there are many exempt assets in a bankruptcy. Creditors often only recover a very small amount of money they are owed.
Debtors do not technically pay the trustee for their services. Trustee fees, which are regulated by the federal government, are deducted from the proceeds distributed to creditors. As a debtor, your bankruptcy payments are based on what assets you own and your income, and as such, the debtor’s cost to file bankruptcy is the same no matter which trustee they see.
Learn More: Who do Licensed Insolvency Trustees Work For?