Know Your Rights Around Declaring Bankruptcy

Bankruptcy is a legal process that provides an individual or a business the opportunity to reset their financial situation, albeit with serious consequences. It’s crucial to fully understand your rights around declaring bankruptcy to make an informed decision. This comprehensive guide will help you in doing so.

Voluntary Bankruptcy: The Basics

Bankruptcy typically commences voluntarily by the debtor. It’s also known as an assignment in bankruptcy. To qualify for this process, you must meet several conditions:

  1. You must be an insolvent person, meaning you live or possess property in Canada and owe at least $1,000.
  2. You are unable to meet your debt obligations as they fall due, or the total value of your property won’t cover all your debts.

The Role of Licensed Insolvency Trustee

To start the bankruptcy process, you need to work with a Licensed Insolvency Trustee (LIT), a professional licensed by the government to assist individuals grappling with debt issues. Remember, only an LIT can file an assignment in bankruptcy.

They will guide you through the process, starting with a detailed evaluation of your financial situation. They will then file the assignment in bankruptcy with the government, effectively making them the legal owner of your assets, which are held for the benefit of your creditors.

Involuntary Bankruptcy: What You Should Know

In certain circumstances, a creditor can apply to court for an order that a debtor be declared bankrupt. This generally happens when the debtor owes the creditor at least $1,000 and has committed an “act of bankruptcy” within the last six months.

Acts of bankruptcy can include leaving Canada to avoid paying creditors, making a fraudulent transfer of property, or failing to make debt payments as they come due. However, creditors usually resort to this option when they believe it’s unlikely they’ll be paid through other means.

Understanding Exempt Assets

When you declare bankruptcy, most of your assets will be sold to pay your creditors. However, some assets, known as exempt assets, are protected from this process. These include:

  • Funds held in a Registered Retirement Savings Plan (RRSP), Registered Retirement Income Fund (RRIF), or Deferred Profit Sharing Plan (DPSP) for more than one year.
  • Necessary clothing for you and your dependents.
  • Household furnishings and appliances, up to a certain value.
  • A vehicle, up to a certain value.
  • Tools and other personal property you use to earn income, up to a certain value.
  • Medical and dental aids required by you and your dependents.

The principal residence is also exempted if your equity in the residence is less than a certain amount.

What Happens After Filing for Bankruptcy?

After your LIT files the assignment in bankruptcy, they will send notice to your creditors. Some of your assets may be sold, with the proceeds put back into your estate. The LIT’s job is to distribute your estate to your creditors.

In addition to this, you’ll need to attend two financial counselling sessions before being discharged from bankruptcy. These sessions are usually provided by the LIT handling the bankruptcy. Refusal or neglect to attend these sessions can prevent your discharge.

Discharge from Bankruptcy: The Final Step

In most cases, you’ll be automatically discharged from bankruptcy after a certain period. This releases you from most of your debt obligations. However, some types of debt cannot be discharged.

Conclusion

Knowing your rights around declaring bankruptcy is essential to navigate this complex process. Whether you’re considering voluntary or forced bankruptcy, understanding the role of a Licensed Insolvency Trustee and what assets are exempted can make the process less stressful. Always seek legal advice before making a decision, and utilize available resources to help you manage your financial situation.

Remember, bankruptcy isn’t the end. It’s a chance to start fresh, free from the burden of unmanageable debt.

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