Who is Eligible For Bankruptcy?
When financial pressures start to mount, mortgage payments are missed, or collection agencies are calling, people start to seriously consider their options. For most Canadians, bankruptcy is a topic they know little about and one of the first questions asked is “who is eligible for bankruptcy?”
Bankruptcy filings in Canada are administered under the Bankruptcy and Insolvency Act. This act states that in order for you to qualify to file an assignment in bankruptcy, you must first be “insolvent”.
To be an insolvent person you must owe at least $1,000 and
- Be unable to pay your debts as they generally become due, and/or;
- Have ceased paying your current obligations in the ordinary course of business as they generally become due, and/or;
- Have more debts than realizable value of assets.
A couple of things to keep in mind:
- Although the debt threshold of $1,000 for insolvency is seemingly quite low, very few bankruptcies ever occur for debts of less than about $5,000. Usually other options or solutions can be found.
- Occasionally, individuals may have property that at least “on paper” appears to be worth more than all their debts owing but they are still insolvent and need to file for bankruptcy. Examples might include real estate jointly owned with an uncooperative co-owner or perhaps a claim to an insurance settlement that won’t be fully settled and available for several years. These kinds of circumstances can sometimes necessitate a bankruptcy filing even though the debts could perhaps still be paid if given enough time to realize on the asset.
- The vast majority of bankruptcy filings are “voluntary” as they are entered into at the sole discretion of the individual. However, it is sometimes possible for an unpaid creditor to “petition” a person into bankruptcy through a court application and subsequent order. This process can be costly and is very rare for individuals.
Other Insolvent “Persons”
While the vast majority of bankruptcies and insolvencies in Canada involve individuals, there are other legal entities that also qualify. The most common are business corporations that can be assigned into bankruptcy at the direction of their shareholders or directors or petitioned into bankruptcy by a creditor.
Some other less common bankruptcies are those of business partnerships and deceased estates that may be insolvent.
Residence in Canada
The other requirement for filing an assignment in Canada is you must reside in Canada, carry on business here or have property here.
While this would seem to include almost everyone in Canada, there can be issues for indebted Canadians who have either moved away or who may be working for extended periods outside of Canada. They are technically not permitted to file an assignment in bankruptcy until they return to Canada. This can often include military personnel stationed for lengthy periods overseas.
On the other hand, you don’t need to be a Canadian citizen in order to file for bankruptcy in Canada. As long as you reside in Canada, carry on business here or have property here, you are eligible.
Debts Owed Outside Canada
While a bankruptcy filed in Canada will lead to all Canadian debts being extinguished, debts owed in countries other than Canada will still exist in those other countries following a bankruptcy here. Those non-Canadian creditors can still pursue collection if you move back to those countries or to the extent that you acquire assets or earn income there in the future. While those creditors cannot continue to pursue you in Canada, those debts would need to be dealt with through a possible bankruptcy filing in those other countries.
Filing an assignment in bankruptcy is usually not the preferred option for most insolvent individuals. Depending on your circumstances, there may be other options available. One such option is filing a proposal under the Bankruptcy Insolvency Act in order to compromise the debts owed and avoid a bankruptcy.
Whether you are considering bankruptcy or a proposal you will require the services of a Licensed Insolvency Trustee.
Gareth Slocombe CPA-CA, CIRP, Licensed Insolvency Trustee