Summary

Bankruptcy is a federal law, set out in the Bankruptcy and Insolvency Act.  The Act is applicable to businesses and individuals.  The office of the Superintendent of Bankruptcy, a federal agency, is responsible for ensuring that bankruptcies are administered in a fair and orderly manner. 

 

Trustees in Bankruptcy administer bankruptcy estates.  An individual or company must use a Trustee in Bankruptcy in order to file bankruptcy.  Trustees in Bankruptcy are professional non-governmental individuals or firms and can be found in the Yellow Pages under “Bankruptcy” or on the Internet..

 

Some of the duties of the trustee in bankruptcy are to:

·        Prepare the bankruptcy documents that assign the person into bankruptcy

·        Review the file for any fraudulent preferences or reviewable transactions

·        Chair meetings of creditors

·        Sell any available assets

·        Perform counselling for the debtors

·        Recommend whether the bankrupt should be discharged.

 

Creditors become involved by attending creditors' meetings.  The trustee calls the first meeting of creditors for the following purposes:

·        To consider the affairs of the bankrupt

·        To affirm the appointment of the trustee or substitute another in place thereof

·        To appoint inspectors

·        To give such directions to the trustee as the creditors may see fit with reference to the administration of the estate.

 

Commercial Proposals

The trustee works with the owners of the company in drafting a proposal that presents a "win - win" situation for both the company and the creditors. Typically, the creditors are asked to give up rights to the monies they are owed in exchange for an offer by the company to pay so many cents on the dollar (say, 25 or 50 or 75 cents) over time.

Creditors vote on accepting or rejecting the proposal at a creditors' meeting held approximately 21 day after the proposal is filed.  In order to be accepted at least 66 2/3% in dollars and 50% plus one in number of eligible creditors who vote must vote to accept the proposal.  The Court must also approve the proposal. 

If the proposal is accepted by the creditors and approved by the Court then all unsecured creditors and all secured creditors are bound by the proposal; not just the creditors who voted in favour of the proposal.  If the proposal does not receive the required votes or if the Court does not approve the proposal, the company is bankrupt effective on the date of the creditors' meeting.

The debts are discharged once the proposal is successfully completed.

 

Personal Bankruptcy and Personal Proposals

 

Canada's bankruptcy laws are designed to permit an honest but unfortunate debtor to obtain a discharge from his or her debts while treating creditors equally and fairly.

 

Last year, 100,000 individuals in Canada filed for personal bankruptcy or filed a bankruptcy proposal.

 

 

Bankruptcy Exemptions (What you keep)

 

The provinces and territories set the exemptions for equity in assets that cannot be seized in a bankruptcy or personal proposal.  The bankruptcy exemptions vary widely.  For example, equity in a home in Alberta is exempt from seizure to the amount of $40,000.  In Ontario there is no exemption for a home.  Bankruptcy exemptions for each province and territory can be found at this link.

 

Debt that is erased in a bankruptcy

 

Debts are erased when the bankrupt is discharged, usually in nine months.  In the case of a personal proposal the debts are erased when the proposal in sucessfully completed.  The following debts are NOT erased:

·        Fines imposed by a Court

·        Money owing for things stolen

·        Things obtained by misrepresentation

·        Alimony or maintenance payments

·        Award of damages by a court for intentionally inflicting bodily harm or sexual assault

·        Student loans if bankruptcy is filed prior to or within seven years after the finish of studies.

 

What it costs

 

The payments a debtor makes in the nine months of bankruptcy are set by the government. Trustee fees come out of this amount. In the most common situations, the monthly payments are less than $200 a month for nine months.

 

 

Typical Key Events in a Straightforward Bankruptcy

Time Line	Key Event
Day 1	Initial consultation with the trustee office.
Day 3	Bankruptcy documents are signed and filed and the bankruptcy takes effect.
Day 10	The trustee mails the creditors notification of the bankruptcy.
Day 3 to Day 33	If the creditors, who have in the aggregate at least twenty‑five percent in value of the proven claims: S. 155 (d.1), or official receiver, wish a creditors meeting they must notify the trustee within 30 days after the date of bankruptcy.
Day 13 to Day 63	First counselling session is held.
Each Month	The bankrupt must submit budgets and required payments.
Day 33 to Day 213	Second counselling session is held.
Eighth Month	The trustee reports on the conduct of the bankrupt and recommends whether a discharge should be granted. (S. 170 Report)
Ninth Month	Bankrupt is discharged.  At this point the eligible debt is erased.
Tenth to 18th Month	Trustee completes administration of the estate including processing tax returns and selling any assets.
18th Month	Trustee applies for the trustee's discharge upon the file being completed.

 

 

Bankruptcy Reform (Consumer Bankruptcy and Proposals)

It was announced on December 14, 2007 that Bill C-12 - an Act to amend the Bankruptcy and Insolvency Act, the Companies' Creditors Arrangement Act, the Wage Earner Protection Program Act and Chapter 47 of the Statutes of Canada, 2005 has received Royal Assent.   

On July 7, 2008 the following bankruptcy law changes went into force:

• The Wage Earner Protection Program Act (“WEPPA”) and Regulations. The WEPP will compensate individuals for amounts earned, but not paid, during the six months preceding the bankruptcy or receivership of their employers under the BIA. The WEPP will help protect workers by providing a guaranteed payment of a maximum of $2,000 in respect of wages, salaries, commissions or compensation for services rendered, and up to $1,000 in respect of disbursements owing to travelling salespeople incurred should their employer declare bankruptcy. More information can be found at the government website.
• Reduction of the student loan discharge period from 10 to seven years. This amendment will apply where the debtor obtains his or her discharge on or after July 7, 2008 (PROVIDED that at the time they filed they had ceased to be student for the required seven years) or the debtor had or becomes bankrupt on or after July 7, 2008. 
  
  The amendment that will reduce to five years the period a bankrupt will have to wait to make a “hardship” application to have student loan debt or obligation discharged (BIA , s. 178(1.1) is also now in force.  This amendment applies to all debtors notwithstanding when the bankruptcy or the process that results in the bankruptcy is initiated.
• Provision of protection of all registered retirement savings plans (RRSP's, RRIF's and DPSP's (Deferred Profit Sharing Plans).
• Contributions made in the 12 months prior to the date of bankruptcy will be recovered (clawed back) for the benefit of the bankruptcy estate for RRSPs in provinces without RRSP exemption laws (BC, Alberta, Ontario, NB, and NS);
• There will be no upper cap on the amount of RRSPs that can be protected;
• There will be no need to set up the RRSPs in a locked in plan to make them eligible for exemption;
• The court will have no jurisdiction to extend the one year claw back period period in an appropriate case.

Our best estimate is that the balance of the changes affecting consumers will come into force in March of 2009 or later.  These changes are as follows:

Item	Current Laws	New Laws
When discharged	- 9 month automatic discharge for 1st. time bankrupts who fullfill all their duties.             2nd time bankrupts. This is largely at the discretion of the trustee and in most case is tied to the elapsed time from the previous bankruptcy and the causes of the two bankruptcies. A typical "penalty" for a 2nd time bankrupt, who was previously bankrupt 7 or more years ago, is to remain in bankruptcy a further 3-6 months over and above the 9 month period.	- 9 month automatic discharge for 1st. time bankrupts who fullfill all their duties and who do not have excess income. e.g. less than $2,700.00 a month take home pay for a family of 3. - 21 months (or more at the court's discretion) for 1st. time bankrupts who fullfill all their duties. and who have excess income. e.g. more than $2,700.00 a month take home pay for a family of 3. 24 months for 2nd time bankrupts who do not have excess income. e.g. less than $2,700.00 a month take home pay for a family of 3. 36 months for 2nd time bankrupts who have excess income. e.g. more than $2,700.00 a month take home pay for a family of 3.
High Income Tax Debt	Special collection privileges are not given to CRA. They are treated the same as all creditors.	Bankrupt individuals with more than $200,000 in personal income tax debts representing 75 percent or more of their total unsecured liabilities will not be eligible for an automatic discharge. These individuals will have to seek a Court order to be discharged of their debts.
Dollar Threshold for a Consumer Proposal	Consumer debts, excluding debts secured by the individual's principal residence, are not more that $75,000. For debt greater than this amount a Division I Proposal can be filed.	An individual's consumer and commercial debts, excluding debts secured by the individual's principal residence, are not more than $250,000. For debt greater than this amount a Division I Proposal can be filed.
Cancelling contracts if a person files bankruptcy. (Ipso Facto Clauses)	Cancellation of contracts is not allowed in the case of consumer proposals but is silent in the case of a bankruptcy. It is the writer's experience in the case of a bankruptcy that contracts such as telephone, gas, and electricity were never cancelled. In some cases vehicle leases were cancelled.	Cancellation of contracts is not allowed in the case of consumer proposals and bankruptcy. For consumers, the primary concern over ipso facto clauses relates to basic services, such as telephone, gas, electricity and leases.