Five Crucial Bankruptcy Regulations in Canada
Financial crisis can hit anyone, at any time. In such circumstances, bankruptcy can be a viable solution. However, the process is governed by a set of specific laws to protect both debtors and creditors. In Canada, these rules are encapsulated in the federal Bankruptcy and Insolvency Act (BIA). This article will walk you through the five key bankruptcy rules in Canada, which can greatly impact your decision to file for bankruptcy.
1. The Seven-Year Rule for Student Loans
According to the BIA, student loans are automatically discharged if the bankruptcy is filed seven years after the end of studies. This rule is in place to prevent abuse of bankruptcy laws and ensure that student loans are repaid unless the debtor is genuinely unable to do so.
2. RRSPs are Exempt from Seizure
Registered Retirement Savings Plans (RRSPs) are exempt from seizure during a bankruptcy proceeding, under certain conditions. This rule is designed to protect the retirement savings of bankrupt individuals and ensure they have financial security in their later years.
3. The Seizure of Certain Assets
Certain assets, like tax refunds, can be seized during a bankruptcy proceeding. The reason for this is to ensure that creditors receive some form of repayment for the debts owed. However, in a consumer proposal, you retain all your assets.
4. Contract Termination
A secured lender cannot terminate a contract merely due to the filing of bankruptcy. So, for example, if you have a car loan and file for bankruptcy, you can keep your car as long as you continue to make the payments.
5. Income Reporting and Surplus Income Payments
When you file for bankruptcy in Canada, you are required to disclose all your income. If you have surplus income of $200 or more above the threshold allowed by law, the bankruptcy period is automatically extended. This rule ensures that individuals who can afford to pay back some of their debts do so.
The Bankruptcy and Insolvency Act (BIA)
In Canada, the Bankruptcy and Insolvency Act (BIA) governs all insolvency proceedings. The Act contains the rules and guidelines to be followed by all stakeholders: the Licensed Insolvency Trustee, the debtor, and the creditors. The Act is intended to assist Canadian citizens encountering financial difficulties, protecting the rights of both debtors and creditors.
Purpose of the Bankruptcy & Insolvency Act
The BIA, often referred to as the “Bankruptcy Act”, is federal legislation established to assist Canadians who run into financial difficulties. It protects the rights of indebted individuals and their creditors and ensures that trustees and the court fulfill their responsibilities and duties.
Bankruptcy Options under the BIA
Under the BIA, individuals have three possible insolvency proceedings to address their debt.
1. Bankruptcy
Personal bankruptcy is a legal procedure where Canadians are discharged from the obligation to repay 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 may make additional surplus income payments, depending on their income.
2. Consumer Proposal
A consumer proposal is an offer made 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.
3. Division I Proposal
A Division I proposal is an insolvency option available to individuals when their debts exceed $250,000. It is more commonly thought of as a commercial proposal.
Business Bankruptcy Options
An incorporated business can file bankruptcy, make a Division I Proposal, or file a CCAA Plan of Arrangement under the Companies’ Creditors Arrangement Act. For unincorporated companies (such as sole proprietors and partnerships), it is not the business that files bankruptcy or any insolvency proceeding. Instead, the owners file insolvency as an individual.
The Main Stakeholders
The primary parties involved in an insolvency proceeding are the debtor, the creditors, and the Licensed Insolvency Trustee.
The Debtor
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 Bankrupt
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 disposed of in the past few years, and surrender all credit cards to the LIT.
The Creditors
Creditors are the people or entities the debtor owes money, goods, or services to. There are three types of creditors – secured, preferred, and unsecured.
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.
Bankruptcy Process Overview
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
The 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
The Stay of Proceedings won’t:
- 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.
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
The bankrupt is 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.
Consumer Proposal Overview
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.
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.
Order of Payment to the Creditors
Generally speaking, this is the order of priority of payments to creditors:
Certain classes of preferred creditors (for example certain debt obligations under support payments).
Secured Creditor
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.
Preferred Creditor
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.
Unsecured Creditor
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.
Finding a Licensed Insolvency Trustee
If you are experiencing financial difficulties and are unable to pay your debts, it is imperative to consult a Licensed Insolvency Trustee. They can guide you through the intricacies of the BIA and help you make informed decisions about your financial future.
