How Bankruptcy in Canada Works for Debtors and Creditors
In Canada, the Bankruptcy process is legislated under the Bankruptcy and Insolvency Act, allowing those who have no other way to pay off their debts to declare insolvency, to use their assets to pay for a proportion of what they owe and to start a metaphorically new financial slate.
It can be difficult to get your head around precisely what goes on when someone declares themselves as bankrupt but it is easier if you break it down based on how it works from the perspective of both key parties involved, the debtors and their creditors.
Who’s who in bankruptcy
Debtors, creditors and Licenced Insolvency Trustees – when reading about debt relief services it can be easy to get caught up on who is who, making it more difficult to understand what’s going on behind the scenes.
Simply put, a debtor is a person who owes a debt to someone else, a creditor is a person or institution to which the money is owed, and a Licenced Insolvency Trustee is a person who is licenced by the Superintendent of Bankruptcy to administer bankruptcies and to manage the assets of the debtor.
Bankruptcy from the perspective of the debtor
As a debtor, there are several debt relief options available to you before bankruptcy, including debt consolidation and a consumer proposal.
If, however, having spoken to a Licenced Insolvency Trustee it is clear that you are insolvent and do not have sufficient income to pay off your debts, then bankruptcy may be suggested as your last resort.
What happens when a debtor files for bankruptcy?
If you and your Licenced Insolvency Trustee have decided on bankruptcy, then the first thing you will do is to sign a number of bankruptcy forms (hence the term, filing for bankruptcy).
These forms will typically include an Assignment form, in which you sign to say that you are handing over your assets to your Licenced Insolvency Trustee, and a Statement of Affairs which will list out your total assets and liabilities.
As soon as these forms are electronically filed with the government, then you are legally declared as bankrupt.
As soon as you are declared bankrupt by the government, your Licensed Insolvency Trustee will send notice to your creditors and you will gain immediate protection from them.
Your creditors will no longer be able to harass you for money, send debt collectors to your door, or take out lawsuits against you.
The next step in the bankruptcy procedure is for your Licenced Insolvency Trustee to liquidate your assets and to distribute them, along with any payments agreed, to your creditors.
The assets seized and liquidated during the bankruptcy process may vary depending on your province and how much you owe and there are some exceptions like personal property.
A debtors bankruptcy duties
During the bankruptcy process, as a debtor, you have a number of duties that you must uphold.
Failure to complete or comply with these duties can result in a delay of your bankruptcy, fines or prosecution.
A full range of duties can be found in Section 158 of the Bankruptcy Act, but the most important ones to remember are:
- As a debtor, you must disclose all of your assets and deliver them, unless exempt, to your Licenced Insolvency Trustee.
- You must also hand over all of your credit cards to your trustee who will then cancel them.
- You must complete, return and provide any forms or documents asked of you by your trustee.
- You must report your household income and expenses on a month on month basis to your trustee (these will be used to work out if you need to pay any surplus income charges.)
- You will be required to make any payments requested including surplus income charges.
- You will have to attend two mandatory counselling sessions.
- And you must attend any meetings with your creditors if required.
What happens after bankruptcy for a debtor?
Once the bankruptcy process has been completed, all of your dischargeable debts are discharged, meaning that you are no longer obligated to make any payments to your creditors and any remaining debt is forgiven.
It’s important to realize that not all debts are dischargeable including family support debts, alimony payments, court fines, any debts incurred due to fraud and traffic fines.
Any secured debts that you have, such as a mortgage or a car loan, are not included within your bankruptcy, and you will need to keep up with your monthly repayments for these if you do not want your creditors to use their rights and to repossess them.
Once the bankruptcy proceedings are complete, you needn’t worry about paying your Licenced Insolvency Trustee as their payment will be deducted as a proportion of the money gained from your seized assets.
Bankruptcy from the perspective of the creditor
As a creditor who is owed money by a debtor, bankruptcy is often the least preferred option as it often means that they will not be paid the total sum of the amount owed to them.
As soon as a debtor declares bankruptcy, their creditors will usually be notified by the Licenced Insolvency Trustee and they will then need to file a proof of claim in order to receive any distribution of the dividends collected.
Once bankruptcy has been filed creditors are no longer able to harass or call debtors for payments, but, in rare circumstances, creditors may request a meeting to review the finances of a bankrupt individual, however, this is not common.
A creditor is also responsible for informing the Licenced Insolvency Trustee of any suspicious behaviour in relation to the debtor such as if they suspect them of hiding assets from the bankruptcy proceedings.
At the end of the bankruptcy process, once all non-exempt assets have been seized and liquidated, creditors will receive a portion of the dividends, though, this very rarely comes close to paying off the full debt owed.
Can a creditor stop you from filing for bankruptcy?
The short answer to this question is no, and, although they may object to a debtor’s decision to declare bankruptcy, they are not able to stop it.
What creditors can do, however, is to challenge a debtor’s discharge, meaning that their debt may not be wiped clean at the end of the bankruptcy proceedings.
A debtor’s discharge can be challenged for a number of reasons but the most common is because the creditor is not satisfied with their payment terms and believes that they can recuperate more of what they are owed from the debtor.
What happens when a discharge is challenged?
When a discharge is challenged the case is reviewed by a court, where the debtor and the creditor will both be present.
The debtor may choose to attend proceedings alone, or they may choose to bring with them a lawyer, the choice is up to them.
Having reviewed the case, the bankruptcy registrar will decide the terms of your discharge which could range from being free and clear with no conditions to requiring that you make extra payments or fulfil other duties.
Discharge challenges do happen, but they are very rare in Canada, and typically only occur in extreme circumstances, so don’t let them put you off getting the help you need to deal with your debts.
Is the bankruptcy process unfair to creditors?
At first glance, it may seem as though the bankruptcy process lies heavily in the favor of the debtor, leaving creditors unable to recuperate what is owed to them in full, however, it is important to remember that in order to declare bankruptcy a person must be deemed insolvent, meaning that they had no way to pay their debt.
As a creditor, this shortfall may be frustrating but it is important to look at it from the debtor’s perspective, for which bankruptcy has rid them of their assets, costing them everything that they own that is of value, whereas for most creditors, the money owed to them is a portion of their net worth.
This same analogy is not necessarily true for smaller lenders, however, such as tradesmen, who can be left in financial difficulties as a result of one of their customers filing for bankruptcy.
For small lenders, this is why it is extremely important to try and protect yourself if providing a customer with credit.
How to file for bankruptcy in Canada
If you are in debt and have no way to repay what you owe, then you may want to consider bankruptcy as a final debt relief option.
Regardless as to whether you think bankruptcy is right for you or not, the very first thing that you should do is to reach out to us here at Bankruptcy Canada, where we can put you in contact with a Licenced Insolvency Trustee who will be able to offer you a free consultation about your financial situation.
Your Licenced Insolvency Trustee will be able to provide you with information on the various debt relief services available to you, and if applicable, will then be able to guide you through the bankruptcy process.
To be put in touch with a Licenced Insolvency Trustee today, give us a call on (877) 879-4770 or fill out one of our online evaluation forms.
Bankruptcy may seem scary, but we are here to help you to regain financial freedom, you just need to take the first step.