The Financial Implications of Employing a Licensed Insolvency Trustee
A Licensed Insolvency Trustee (LIT) is a professional who specializes in assisting individuals and businesses in resolving their debt issues. In this article, we’ll delve into the Costs of Using a Licensed Insolvency Trustee, what services they provide, what they can’t do, their fees, and how to become one.
Understanding the Role of a Licensed Insolvency Trustee
A LIT is a professional, authorized and supervised by the Office of the Superintendent of Bankruptcy Canada (OSB). The designation “Licensed Insolvency Trustee” replaced the former term “trustee in bankruptcy” in 2016, to better represent the range of services they offer. OSB
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Services Offered by a LIT
LITs, like other debt consultants and credit counsellors, offer services such as debt solutions, as delineated under the Bankruptcy and Insolvency Act (BIA).
Unlike other professionals, an LIT is an Officer of the Court and is the only debt relief professional in Canada legally allowed to administer insolvency procedures regulated under the BIA. Specifically, LITs are licensed to file, manage and supervise consumer proposals and bankruptcies. When filing a proposal or bankruptcy, LITs will guide the debtor through the entire process and will prepare and file the necessary paperwork, as well as deal directly with the creditors.
Services an LIT is Not Authorized to Provide
Due to their statutory duties to both creditors and the administration of the consumer proposal process, an LIT cannot act as an advocate for debtors when making consumer proposals.
Fees and Expenses of an LIT
The fees for consumer proposals and bankruptcy services provided by LITs are a standard amount set by the Federal Government in the BIA. There are also government fees that must be paid to file these applications.
It should be noted that there is a potential financial conflict of interest for LITs in consumer proposals and bankruptcies. The more a debtor repays to the creditors under a consumer proposal or bankruptcy, the greater the financial compensation earned by the LIT.
1. Consumer proposal fees
According to the BIA, “the fees and expenses of the administrator of a consumer proposal” include:
- $750 payable when filing a copy of the consumer proposal,
- $750 payable when the consumer proposal is approved by the Court,
- 20% of the moneys distributed to creditors under the consumer proposal,
- The fee for filing a consumer proposal ($100),
- The costs of counselling at a rate of $85 per session if counselling is provided on an individual basis, and $25 per person per session if counselling is provided on a group basis,
- The fee payable to the registrar, and
- The applicable federal and provincial taxes for goods and services.
LIT fees for consumer proposals
The bulk of the LIT’s fees for filing and administering a consumer proposal come from their fee of 20% of the amount offered to the creditors. For instance, if a debtor makes a consumer proposal to pay creditors $30,000, and the creditors accept it, the LIT will take $6,000 as part of their fee, and will also pay the necessary filing fees, registrar’s fees, and taxes from the $30,000. So, the creditors will receive about 65%-75% of the proposal amount.
2. Personal bankruptcy fees
The cost of declaring bankruptcy depends on several factors, including monthly income, assets owned by the debtor, and a minimum amount payable.
Base cost of filing bankruptcy. At a minimum, the cost of bankruptcy is $1,800.
Surplus Income cost. When you file for personal bankruptcy, you are allowed to keep all of your income up to the threshold amount set by the government. If your earnings are above this limit (and depending on your family size) you are required to contribute half of that income, called surplus income, into your bankruptcy estate. The LIT will then distribute it to your creditors. Each year the OSB increases these limits based on inflation.
LIT fees for bankruptcies
LIT fees are regulated by the Federal Government and paid through the bankruptcy process. The LIT’s fees and expenses depend on whether the administration is considered summary or ordinary.
In a Summary administration (where assets are estimated at $15,000 and less) the LIT’s fees, after deducting necessary expenses and paying any secured creditors, are as follows:
- 100% on the first $975 or less of receipts,
- 35% on the portion of the receipts more than $975 but less than $2,000, and
- 50% on the portion of the receipts exceeding $2,000.
In addition to these amounts, an LIT in a summary administration may claim:
- The costs of counselling as set out in the legislation,
- Filing fees,
- Registrar’s fee under paragraph 1(a) of Part II of the schedule,
- Applicable federal and provincial taxes for goods and services, and
- A lump-sum of $100 in respect of administrative disbursements.
In an Ordinary administration (where assets are estimated at greater than $15,000) the LIT is entitled to fees representing 7% of the assets actually realized, as well as any remuneration decided by ordinary resolution at any meeting of creditors, or approved by the courts.
Requirements for Becoming an LIT
1. Licensing
To obtain the LIT designation, a person must be licensed by the OSB. To be granted a license, individuals must complete the Chartered Insolvency and Restructuring Professional Qualification Program (CIRP), which is administered by the Canadian Association of Insolvency and Restructuring Professionals (CAIRP).
To become an LIT, an individual must meet certain qualifications, including:
- Be of good character and reputation,
- Be solvent,
- Successfully complete the CIRP Qualification Program (CQP), National Insolvency Exam and the Insolvency Counsellor’s Qualification Course (ICQC),
- Pass an Oral Board of Examination, and
- Acquire a minimum of 2,400 hours of relevant insolvency experience throughout the duration of the Program.
Once they have met all the qualifications, candidates can apply for a trustee license online. Most LITs either work for themselves or are a member of a firm. For more information on applying for an LIT license, visit the OSB.
2. Other requirements needed to practice as an LIT
In addition to being licensed, there are other requirements that LITs must meet in order to legally work as a trustee. For example, to work as a sole practitioner, the LIT shall:
- Not practice an incompatible activity,
- Have sufficient financial resources to properly administer professional engagements,
- Have adequate facilities and personnel to administer professional engagements in the district(s) in which he or she is entitled to act, and
- Have adequate professional liability insurance and adequate employee dishonesty (also known as fidelity) insurance.
3. Code of Ethics for Trustees
LITs must also adhere to the Code of Ethics for Trustees found in the BIA. These standards involve:
- The information that LITs must provide to creditors,
- The treatment of funds entrusted to LITs,
- Conflicts of interest,
- The sale and purchase of the property of a business or individual who has filed for bankruptcy, and
- Standards for advertising by LITs and for maintaining the good reputation of the LITs’ community.
Making a complaint against an LIT
If you wish to make a complaint against your LIT, you can contact the OSB. The OSB is responsible for keeping a record of all complaints received regarding an insolvency matter, and will conduct a review of such complaints to determine if there has been any non-compliance with the BIA.
The types of complaints that the OSB will investigate include:
- Complaints against LITs for issues such as failure to provide required notices or mishandling of trust funds, and
- Complaints concerning the Code of Ethics for Trustees.
The OSB will also handle complaints about creditors and debtors, such as complaints:
- About debtors who have hidden assets or not disclosed all of their liabilities or income to the LIT,
- Against creditors for filing incorrect claims, or for inappropriate collection attempts while the file is subject to a stay of proceedings or after the debt has been discharged, and
- Alleging a bankruptcy-related offence.
The OSB will respond to a complaint within 30 days of the date it is received, unless it is a particularly complex complaint, in which case it may take longer.
If the OSB believes the complaint is valid and there has been non-compliance with the BIA, it will determine if, and what corrective measures or sanctions should be undertaken. The OSB will inform you of its decision and the complaint will be closed.
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