Deconstructing the Myth: Can A Debt Collector Force You Into Involuntary Bankruptcy?
A New Collection Approach: Threats of Involuntary Bankruptcy
Innovative collection strategies are now surfacing, striking fear into the hearts of debtors. Collection agents are now using the threat of involuntary bankruptcy as a scare tactic. But, is this a legitimate concern? Can a bill collector or creditor genuinely force you into bankruptcy? What does an involuntary petition entail? Should it be a source of anxiety for you?
Let’s unravel these questions and see what’s really going on.
The Trigger: An Intimidating Collection Letter
This discussion was sparked by a client who received a notice. It wasn’t from a collection lawyer, as he thought, but rather a paralegal. The threat of an involuntary bankruptcy petition for an unpaid debt was looming in the letter.
The collection letter read something like this:
“You have failed to satisfy the above-noted claim voluntarily, and your file has been assigned to our firm with the intention of filing an Application for Bankruptcy Order (“Application”), according to the Bankruptcy and Insolvency Act, R.S.C., 1985, c. B-3 (BIA).”
The letter went on to detail the possible consequences of a successful application, such as the liquidation of all real and personal property and assets for the benefit of all creditors. Understandably, the client was alarmed, fearful of being forced into bankruptcy.
Understanding Bankruptcy Petitions: Who Can File?
While it seems alarming, the Bankruptcy & Insolvency Act does provide a legal process for involuntarily assigning someone into bankruptcy. If a debtor has committed an act of bankruptcy, a creditor can approach the court to force the debtor into bankruptcy.
According to section 43 (1) of the Act, one or more creditors may file a bankruptcy order application against a debtor if:
- The debts owed to the applicant creditor amount to at least one thousand dollars.
- The debtor has committed an act of bankruptcy within the six months preceding the application filing.
An act of bankruptcy can include situations where you cease to meet your liabilities as they become due, declare that you are insolvent, or give notice that you have suspended or are about to suspend payment of your debts.
However, just because a creditor can technically petition you into involuntary bankruptcy does not mean they will.
Decoding Collection Tactic: Real Threat or Just a Bluff?
If you owe money, a collection agent will contact you, demanding payment. If you refuse, they can take legal measures to collect. They can even take you to court, sue you, and garnishee your wages. In rare instances, a creditor can even threaten to seize your car for unsecured debt.
Yet, threats of lawsuits often don’t work due to various reasons:
- If the debt is small, legal fees to take you to court will outweigh any potential collection amount.
- If the debt is past the Limitation Period, the court will not grant a judgment.
So, when the threat of a lawsuit fails, debt collectors may resort to threatening you with bankruptcy proceedings. However, this is merely a collection tactic.
The Reality of Involuntary Bankruptcy: More Applicable to Corporations
So, is it possible to force someone into bankruptcy, as the collection agent suggests? How often does this occur in a practical sense?
For corporations with millions of dollars in debt, it happens occasionally.
However, in my extensive experience in insolvency work, I’ve rarely seen a creditor petition a person into bankruptcy. It’s an extremely rare occurrence for a creditor or debt collector to push an individual into personal bankruptcy.
Why is this the case? Well, whenever the court is involved, lawyers are involved, and lawyers cost money.
The cost of legal fees to file a bankruptcy petition in bankruptcy court can start from $5,000. This is because the lawyer must notify all interested parties and prepare documents to convince the judge that an act of bankruptcy has occurred.
The chances that a collection agency will spend $5,000 in legal fees to collect a small debt are slim to none. It would be an unwise business decision.
Deciding Your Next Move: To Voluntarily Assign or Ignore?
So, what should you do if you receive one of these intimidating emails?
Firstly, confirm the authenticity of the debt. If you don’t owe the debt, don’t pay it. If you do owe the debt, determine its age. If the debt is past the limitation period, it is highly unlikely that the collector will commence legal action.
If the debt is within the limitation period or is negatively affecting your credit score, you have options. You can negotiate a plan directly with the collection agent, who may be willing to accept less than the full amount if paid in full.
If you have other debts, paying this one could alert other creditors that you have money and are paying debts, potentially leading to a barrage of collection calls.
If you can’t pay your bills, this may not be your only collection action. If you have significant debts, it would be beneficial to consult a Licensed Insolvency Trustee to review possible debt relief options.
A consumer proposal could help you plan to deal with all of your debts. If you don’t have enough income to support a consumer proposal, you might want to voluntarily assign yourself into bankruptcy as a last resort. A false threat is not something you need to fret about.
Being on the receiving end of an email like this can be stressful. However, by understanding the process and knowing your options, you can formulate a plan to manage all of your debts and embark on a journey towards a fresh start.
