Choosing personal bankruptcy as a way of overcoming an unmanageable debt load is a hard decision to make. It is important for anyone considering personal bankruptcy to know the rules that would affect you the most.
Below is a complete layman’s guide to the Bankruptcy & Insolvency Act, however here are the top rules that could have the greatest impact on your decision.
- Student loans are automatically discharged after seven years;
- RRSPs are exempt from seizure in a bankruptcy (under certain conditions)
- Certain assets, like tax refunds, are seized in a bankruptcy. You keep all assets in a consumer proposal.
- A secured lender cannot terminate a contract simply due to the filing of bankruptcy. For example, if file for bankruptcy and have a car loan, as long as your payments are up to date and you continue to make the payments you get keep your car. Similarly there are options that can help you keep your house.
- If you file bankruptcy in Canada, you are required to reveal all your income. If you have surplus monthly income of $200 or more above the threshold allowed by law, the length of the bankruptcy period is automatically extended – for 21 months for a first time bankruptcy, and 36 months for second bankruptcy. Read our article on surplus income for more details.
- The consumer proposal debt limit to be eligible to file is $250,000 for an individual and $500,000 for a joint proposal.
Read more: Bankruptcy vs Consumer Proposal
Layman’s Guide to the Bankruptcy and Insolvency Act in Canada
In Canada, all insolvency proceedings are governed by the Bankruptcy and Insolvency Act (BIA or The Act). The Act contains the bankruptcy laws, rules and guidelines to be followed by all stakeholders: the Licensed Insolvency Trustee, the debtor, and the creditors.
What is the purpose of the Bankruptcy & Insolvency Act?
The BIA (often more simply known as the “Bankruptcy Act”) is legislation established by the federal government to assist honest Canadian citizens who are unfortunate enough to run into financial difficulties. It protects the rights of indebted individuals and their creditors and ensures that trustees and the court live up to their responsibilities and duties.
Bankruptcy law gives a person who is struggling financially two options: come up with a financial proposal, or file for bankruptcy.
What bankruptcy options are available under the BIA?
For individuals there are 3 possible insolvency proceedings they can choose to deal with their debt.
Personal bankruptcy is a legal procedure available to Canadians to be discharged from the obligation to repay the eligible debts that were in place when the bankruptcy was filed. In exchange for the elimination of their debts, the bankrupt surrenders certain assets and, depending on their income, may make additional surplus income payments.
2. Consumer Proposal
A consumer proposal is an offer to creditors to pay a percentage of what is owed. Creditors vote on the proposal; they can choose to accept or reject it. In a proposal the debtor does not surrender any assets. Instead, they make the agreed upon proposal payments over a period of up to five years. Once all the terms of the consumer proposal are met, the debtor is legally released from the debts included in the proposal.
3. Division I Proposal
A Division I proposal is more commonly thought of as a commercial proposal although it is an insolvency option available to individuals when their debts exceed $250,000.
Business Bankruptcy Options
An incorporated business can file bankruptcy, make a Division I Proposal or file something called a CCAA Plan of Arrangement under the Companies’ Creditors Arrangement Act.
In the case of unincorporated companies (small businesses that operate as sole proprietors and partnerships) it is not the business that files bankruptcy or any insolvency proceeding. Instead, in the case of a small business bankruptcy, the owners file insolvency as an individual.
The Main Stakeholders
The primary parties involved in an insolvency proceeding (whether it is a proposal or a bankruptcy) are the debtor, the creditors, and the licensed insolvency trustee.
A debtor is someone who owes money to a creditor. In a bankruptcy, the debtor is known as insolvent since their liabilities exceed their assets and they don’t have the ability to pay their debts. The debtor files an assignment in bankruptcy or makes a proposal to their creditors.
When an insolvent individual files for bankruptcy, they are known as a bankrupt. A bankrupt person must make a full disclosure of all of their assets and debts to the LIT, inform the LIT of any property that was disposed of in the past few years; and give up all credit cards to the LIT.
Creditors are the people that the debtor owes money, goods, or services to. There are 3 types of creditors – secured, preferred, and unsecured. Creditors who are parties to a proposal may participate in meetings of creditors and vote at these meetings, appoint and serve as inspectors, and inform the LIT of any irregularities on the part of the debtor.
The Licensed Insolvency Trustee (LIT)
Licensed Insolvency Trustees are officers of the court licensed by the Office of the Superintendent of Bankruptcy (OSB). The LIT administers the proposal or the bankruptcy, investigates the financial affairs of the debtor, ensures that the debtor’s rights are not abused, and protects the rights of the creditors.
Overview of the Bankruptcy Process
Both a bankruptcy and consumer proposal can only be made through a Licensed Insolvency Trustee or LIT. Once filed, the debtor receives protection under the BIA until they complete all requirements of the proceeding. This bankruptcy protection is known as a stay of proceedings.
Stay of Proceedings
A Stay of Proceedings is a legal benefit of bankruptcy that provides debtors with creditor protection in Canada. Upon filing a bankruptcy or proposal, creditors can no longer continue with most legal actions against the debtor. Their proceedings are “stayed.”
How a Stay of Proceedings Works
The debtor will supply the trustee with a list of all legal actions against them (whether pending, started, or completed) and the parties involved are given notice that a filing for a proposal or a bankruptcy has been made and that the stay is in place.
What a Stay of Proceedings Will Immediately Stop
- Wage garnishments (except for support payments).
- Collection activity, including activity by the CRA.
- Threats of legal action against the debtor for money owed to the creditors.
- Court actions that have already been filed by the creditors.
- Enforcement of court orders with respect to judgments already issued against the debtor.
What a Stay of Proceedings Won’t Do
- Stop court orders for child or spousal support. The only way to stop these kinds of payments is for the payer to request the issuing court to make changes to the order.
- Halt actions concerning certain types of debt such as fines and penalties, debts arising out of misrepresentation, fraud, or restitution orders.
- Prevent a secured creditor from repossessing property that the secured creditor has a lien against. For example, if the debtor has fallen behind on car payments the company that provided the car loan (the secured creditor) can take the vehicle.
- Remove a lien that is already registered, such as a lien against a house registered by the CRA for nonpayment of taxes.
- Recover property that has already been taken.
Motion to Lift the Stay of Proceedings
Creditors can ask the court to lift a Stay of Proceedings. However, to do so, a creditor must bring a motion before the court and argue that the action needs to proceed to determine how much the creditor is actually owed or that the type of debt is not covered by a consumer proposal or a bankruptcy. The debtor has the right to attend the hearing on the matter and argue against the request to lift the stay. It should be noted that it is quite unusual for a creditor to bring a motion to lift a stay.
How a Bankruptcy Works
To file bankruptcy, the debtor supplies the Licensed Insolvency Trustee with a list of debts and assets. Bankruptcy proceedings begin with an electronic filing of bankruptcy documents with the Canadian government through the Office of the Superintendent of Bankruptcy Canada. Within five days of the bankruptcy commencing, the LIT will send a copy of the bankruptcy paperwork to the creditors so that they can file claims.
Property Involved in a Bankruptcy
With certain exceptions, known as bankruptcy exemptions, all of the property and rights to property owned by the insolvent on the effective date of the bankruptcy vests in the trustee for the creditors. Property can include investments, goods, and land situated anywhere (not just in Canada). The trustee proceeds to liquidate the property and distribute the proceeds to the creditors in accordance with the distribution priorities prescribed under the BIA.
Duties of Bankrupt
Meetings of creditors may be held and inspectors appointed. If a meeting is called, the bankrupt is required to attend. The job of an inspector is to examine and give direction to the LIT’s administration of the estate of the bankrupt.
The bankrupt is required to prepare monthly income statements which will be used to determine if they must make additional payments.
The bankrupt is also required to attend two financial counselling sessions conducted by a Licensed Insolvency Trustee (LIT) or government licensed credit counsellor. The purpose of these meetings is to help the individual identify the causes of their financial problems and provide information and tools to improve their money management skills.
Certificate of Discharge or Discharge Order
Once the bankruptcy procedure is completed (usually after nine months) the bankrupt will, in most cases, receive a Certificate of Discharge, which means all of the bankrupt’s debts, with certain exceptions, are wiped out. If a bankrupt is not eligible for automatic discharge, the bankrupt can receive an Absolute Order of Discharge issued by the court once all duties are completed.
Overview of a Consumer Proposal
A consumer proposal is available to debtors who owe less than $250,000, excluding mortgages. It constitutes a legally binding agreement between the debtor and the creditors. The proposal is an offer by the debtor to repay a portion of the debt owed over a specified time, or to extend the amount of time to pay off the whole debt, or a combination of both. A consumer proposal can only be initiated and filed by a proposal administrator who is an LIT. Once filed and accepted by the creditors, a consumer proposal must be completed within five years.
How a Consumer Proposal Works
The proposal administrator examines the insolvent’s debts, income and assets and helps the individual structure the proposal. After the filing of the proposal with the OSB, the creditors will be notified, and the debtor is legally allowed to stop all payments on unsecured debts. The creditors have forty-five days in which to vote on and accept the proposal. Although the creditors can vote to reject the proposal, this is a very rare occurrence as the main requirement of a proposal is that the creditors should receive more funds than if the debtor went bankrupt and it is possible to renegotiate proposal terms to the satisfaction of both the debtor and creditor.
The Claims of the Creditors
In order to make a claim, each creditor must file a proof of claim with the trustee. The claim is then evaluated by the trustee who has the right to either allow or disallow the claim. If the claim is not allowed, the affected creditor has the option to appeal the trustee’s decision to the court. If the creditor has an allowable claim, the creditor will share in the recovery of funds from any realization of the property of the bankrupt.
Order of Payment to the Creditors
Generally speaking, this is the order of priority of payments to creditors:
- Secured creditors.
- Certain classes of preferred creditors (for example certain debt obligations under support payments).
- Unsecured creditors.
A orderly payment of debts is only available in certain provinces in Canada. Ontario does not provide for this program.
A secured creditor is one who has taken collateral in exchange for a loan. Examples are loans provided for the purchase of a house or a car. Secured creditors are generally unaffected by a Bankruptcy Order as they are entitled to take possession of the secured asset to be reimbursed. If there is not enough money to pay the total of what is owed, the secured creditor is allowed file a proof of claim as an unsecured creditor.
Secured loans, like a mortgage or car loan, remain in place with no impact to the debtor as long as they are current on all payments.
A creditor who has a first claim to any available funds, such as an employee who is owed wages, or in certain cases, some debts under support obligations.
An unsecured creditor is one who has provided credit but who does not have any security for the amount owed to them.
The BIA and Corporations
In Canada, a business will officially become bankrupt under one of following scenarios:
- The company has attempted to reorganize itself under the proposal provisions of the BIA but the reorganization has failed.
- The corporation voluntarily takes the legal steps to become bankrupt.
- One or several of the corporation’s creditors obtains a Bankruptcy Order against the corporation.
The Companies Creditors Arrangement Act (CCAA)
The Companies Creditors Arrangement Act (CCAA) is one other piece of federal legislation that enables financially troubled businesses to restructure themselves. In a CCAA restructuring, the debtor company remains in possession of its property and continues to conduct its business. A CCAA monitor oversees the restructuring and reports to the court and the creditors on the company’s activities during the reorganization.
Large Corporations Can Choose Either the BIA or the CCAA
A successful CCAA restructuring enables the creditors to receive higher amounts than they would have received if the company’s assets had been liquidated. To be eligible for a CCAA restructuring, a corporation, either alone or with its affiliates, must owe in excess of $5 million and each affiliate must be insolvent. The relevant section of the BIA has no specified financial threshold for restructuring, so insolvent corporations that owe creditors more than $5 million may choose to reorganize under the CCAA or the BIA. Typically, the CCAA is used by large corporations.
Find a Licensed Insolvency Trustee
Hoyes, Michalos & Associates Inc. is an Ontario Licensed Insolvency Trustee with many years of experience. We appreciate that learning about all the aspects of the BIA can seem a bit overwhelming, but we are here to help you. if you are experiencing financial difficulties and are unable to pay your debts, contact us for a consultation on the debt relief options available to you.