Insolvency means that you are in the state of being insolvent which means you have the inability to pay your debts as they become due and you must also owe at least $1,000 to your creditors.
When you go insolvent you are either going to declare bankruptcy or make a consumer proposal to your creditors; insolvency can refer to bankruptcy or a consumer proposal.
Your Insolvency Options
Canadian Insolvency involves going bankrupt or making a proposal so in order to go insolvent you need to declare bankruptcy or submit a consumer proposal to your creditors. Therefore, your Canadian insolvency options are limited to bankruptcy or a consumer proposal.
Bankruptcy: Bankruptcy is a legal option that is intended to provide relief of their debts to honest but unfortunate debtors who have become hopelessly trapped in debt. When you receive your automatic bankruptcy discharge, usually after 9 months of being bankrupt, you are released from all obligation to repay the debt that existed at the date of your bankruptcy filing.
Consumer Proposal: The other insolvency option is to file a consumer proposal, which is a popular alternative to filing for bankruptcy. The popularity of consumer proposals are rising as more people realize the benefits of making a proposal.
When you submit a consumer proposal to your creditors you are making an offer to your creditors to pay a percentage of the debt that you owe over a period of time lasting up to five (5) years, to extend the time you have to pay your debt (in full), or some combination of both.
In most consumer proposals you will repay 30% to 50% of the total amount of what you owe over a period of approximately 36 months, or 3 years. While your creditors will vote to accept or reject your proposal, most proposals are accepted because your creditors will end up better off than if you were to go bankrupt.
You have two options for making a consumer proposal: a consumer proposal, which is available to individuals who have debts of less than $250,000 (or $500,000 in a joint filing) that is not including mortgage debt on a principal residence. Businesses and individuals owing more than $250,000 are able to make a commercial proposal, or a Division I Proposal to their creditors as a way to solve their debt problems.
If you meet all the requirements as set out in the consumer proposal (usually these conditions only include making the required payments and attending two counselling sessions with your proposal administrator) you will be released from the obligation to repay your debts that were included in your proposal.
As an insolvent person or business you should seek the services of a Government Licensed Insolvency Trustee to explore your insolvency options.
What if I Have an Insolvent Company with High Debts?
If you have an insolvent company that owes over $5 million dollars in debt that needs to seek insolvency protection then your company can take advantage of the Companies’ Creditors Arrangement Act (CCAA).
The CCAA is federal law which gives corporations a chance to ask the insolvency court for short-term protection to give the corporation a chance to offer their creditors some form of payment to allow the corporation to restructure their financial affairs.
The insolvency court will supervise all CCAA proceedings. The purpose of the Companies’ Creditors Arrangement Act is to give insolvent corporations the chance to avoid bankruptcy and seizure of assets while also giving creditors a maximum return and saving the jobs of the company.
What Roles Are There in the Insolvency Process?
In the insolvency process there will be the debtor (the person or company owing money), the creditors (those who are owed money), the LIT (your licensed insolvency trustee), and the OSB (Office of the Superintendent of Bankruptcy).
The debtor will be responsible to disclose a list of their assets and debts to their LIT, assisting the Licensed Insolvency Trustee (LIT) in administering the insolvency, advising the trustee of any property they sold in the past several years, surrendering all credit cards, and during the insolvency process attending two financial counselling sessions.
Your creditors will also play a part in your insolvency as they will be responsible to vote at the meeting of your creditors whether to accept your insolvency, will appoint inspectors for your insolvency, could act as an insolvency and they have the power to inform your LIT of any regularities the bankrupt commits. Your creditors can also object to your bankruptcy discharge.
As a licensed officer of the court your bankruptcy trustee (now known as a Licensed Insolvency Trustee) is responsible to administer your insolvency, protecting the rights of you and your creditors, and helping guide you through the insolvency process.
Finally, the OSB (Office of the Superintendent of Bankruptcy) will supervise your bankruptcy or proposal (insolvency) and will be responsible for overseeing the administration of your case, maintaining the records of your proceedings under the BIA (or the CCAA), granting the license to your LIT, and investigating any complaints against you. The OSB also has the power to object to your bankruptcy discharge.