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These are the main Proposed Changes to The BIA, affecting consumers, that are being considered:
Consumer Deposits | Responsible Lending | Licence Denial Regimes | Reaffirmation Agreements | Registered Savings Products | Federal Exemption Lists | Equalization Claims | Vesting of Family Property Claims | Discharge of Student Loans
A Review of Canada’s Insolvency Laws – was tabled in the House of Commons Tuesday, October 21, 2014.
This is the start of proposed changes to the Bankruptcy and Insolvency Act. The following are the major issues involving consumer bankruptcy and consumer proposals.
If a retailer goes into bankruptcy, consumers who pay deposits on a purchase rank as unsecured creditors thereby losing their deposits.
Consumer liens on the assets of the retailer may protect the consumers’ deposits.
CAIRP (Canadian Association of Insolvency and Restructuring Professionals) the governing body of trustees in bankruptcy has recommended that legislation outside of the BIA would be better protection for deposits, in both Insolvency and none insolvency situations.
Credit grantor behavior may also contribute to financial difficulty for some creditors.
For example, credit granting practices such as extending credit on onerous terms to individuals who were unable to meet their existing financial obligations can lead to higher rates of insolvency.
Possible responses could include empowering the trustee or court to disallow the claim of the creditor where credit was extended improvidently or on unconscionable terms. Additionally, the lender could be required to repay payments made on such loans leading up to a bankruptcy or proposal.
Additionally, the lender could be required to repay payments made on such loans leading up to a bankruptcy or proposal.
CAIRP (Canadian Association of Insolvency and Restructuring Professionals), has recommended that legislation outside of the BIA would ensure that responsible landing is applicable in all lending situations not just situations involving Insolvency.
License Denial Regimes
One of the major tenets of Canadian bankruptcy law is the principle that the honest but unfortunate debtor deserves a fresh financial start.
License denial puts the concept of a fresh financial start in jeopardy.
License denial regimes are most commonly used to deny automotive services by insurance companies, provincial insurance regimes, electronic toll highway operators and rental car companies.
The US bankruptcy code forbids license denials to collect released bankruptcy debts. In Canada this matter has been left to the courts.
CAIRP (Canadian Association of Insolvency and Restructuring Professionals), has recommended that license denials be forbidden in the Bankruptcy and Insolvency Act based solely on the grounds that the debtor has not paid a debt that is discharged.
A Reaffirmation Agreement is an agreement between a bankrupt and a creditor, where the bankrupt agrees to pay a debt that is eligible to be erased upon the bankrupt’s discharge.
The reaffirmation can be by conduct, when the bankrupt continues to make payments on the debt or by express written agreement. Reaffirmation by conduct is problematic because the bankrupt may not know that he’s doing so.
Reaffirmations offend the Fresh Start principle and effectively prefers one creditor over another.
CAIRP, the governing body of trustees in bankruptcy has made the following recommendations:
- The BIA be amended to provide that affirmation of unsecured debt, that is erased on the bankrupt’s discharge, be prohibited and unenforceable;
- The BIA be amended to provide that affirmation of secured debt by conduct be prohibited and unenforceable.
- The BIA be amended to provide that reaffirmation of secured debt be allowed by express agreement within nine months, beginning with the start of the insolvency proceedings and in the event that the debtor does not elect to reaffirm that the secured creditor be allowed to deal with its security.
Registered Savings Products:
Registered savings plans such as Registered Retirement Savings Plans (RRSPs) Registered Disability Savings Plans, (RDSPs) and Registered Education Savings Plans (RESPs) serve the public good by encouraging savings. In 2009 RRSPs were made exempt from seizure subject to a claw back of the contributions in the 12 months prior to the Insolvency event.
Alberta is the only province that has made RESPs and RDSPs exempt from seizure in a bankruptcy or a proposal. A recent BC Supreme Court ruling that held funds in a RDSP cannot be seized by a Licensed Insolvency Trustee (LIT) for the benefit of creditors in the event the beneficiary of the RDSP declares bankruptcy.
CAIRP has recommended that the BIA be amended to exempt from seizure property held in RDSPs and that any contributions in the 12 months prior to the date of the initial event be clawed back for the benefit of creditors.
The writer feels that RESP’s should be exempt from seizure also, and that any contributions in the 12 month period prior to the date of the initial Insolvency event be clawed back for the benefit of the creditors.
Federal Exemption Lists:
Each of the provinces and territories has its own list of exemptions. Assets on the exemption list cannot be seized by the trustee or creditors. They are retained by the debtor to help maintain dignity and to aid in their fresh financial start.
The assets listed on the exemption lists very widely. For example, in Alberta the exemption for a home is $40,000; in Ontario it is NIL. One suggestion is there should be a federal exemption list so that a minimum standard is available. The debtor would choose which exemption list he would use. This is the way the US handles exemptions with the states having to pass laws to give their citizens the choice of which exemptions to use. Most states provide this choice.
CAIRP does not recommend the introduction of a list of federal exempt property at this time as they believe the case in Canada to be substantially different than of other jurisdiction where insolvency legislation contains a federal list of exempt property.
The writer feels there should be a federal list of exempt property in order to promote consistency and fairness.
Marriage breakdown often triggers a bankruptcy.
Alimony and maintenance payments are not released in the bankruptcy.
However, equalization debt due to a spouse is erased upon the discharge of the bankrupt.
This has been met with criticism because of its apparent injustice with many calling for protection of equalization payments in bankruptcy by not having this debt discharged.
CAIRP recommends that equalization debt not be erased in a bankruptcy. It further recommends that the stay of proceedings, which prevents collection action, remain unchanged and continue to apply to maintenance matters including claims for equalization or division of property against exempt assets.
Vesting of Family Property Claims:
Upon bankruptcy, all property of the bankrupt, as at the date of the bankruptcy, or property he might acquire before his discharge, with the exception of property exempt by provincial or territorial exemptions vests in the trustee.
Property can include the right to sue a former spouse for equalization claims or for the division of the matrimonial property. Some stakeholders have recommended that the right to sue remain with the former spouse but that any proceeds obtained from the action be distributed amongst the creditors.
CAIRP recommends that the vesting of the bankrupt’s right to sue a former spouse for equalization or division of property remains with the trustee.
Discharge of Student Loans:
Federal and provincial governments have implemented student loan programs to assist students in paying for higher education and training. In most cases students benefit from higher learning and training. Students are also eligible for interest relief, debt forgiveness and other relief. Because of this, many stakeholders recognize that the release of student loans in a bankruptcy should be subject to special rules, including a waiting period. Currently student loans are not eligible for discharge in a bankruptcy unless the student has been out of school for seven or more years.
- That the student loan be eligible for discharge in bankruptcy if the student has been out of school for five or more years.
- That the waiting period for a hardship application be the date of the debtor’s automatic discharge or the date of the debtor’s actual discharge hearing.
CAIRP has made the following recommendations:
- 3rd time bankruptcies. An application for hearing be made no later than three years after the date of bankruptcy.
- Publication in the local paper. Publication of a notice of bankruptcy be only for corporate estates and that the publication of consumer bankruptcies be only when requested by the official receiver.
- Consumer proposals. The limit be raised from $250,000 to $325,000.
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