Which is Better Canadian or American Personal Bankruptcy?

From the perspective of the bankrupt the US citizen who goes into bankruptcy gets a better deal than the Canadian; mainly because the real estate exemptions in the US are generally very much higher.

The US and Canada share a similar culture, similar economy and similar laws.

In the US bankruptcy reform was enacted on October 17, 2005.

In Canada the last items of reform was passed into law in September, 2009.

Which is better Canadian or American Personal Bankruptcy?

The US Approach: In the US bankruptcies are handled by bankruptcy lawyers and not trustees, as in Canada. Consumers can file Chapter 7 (Canada = personal bankruptcy) or Chapter 13 (Canada = consumer proposal).

The states set bankruptcy exemptions, as the provinces do in Canada.

Some states allow their residents to choose between the state and federal exemptions.

Bankruptcy reform in the US brought in a means test to decide whether Chapter 7 or Chapter 13 must be filed.

The means test is two tiered.

The first test is whether a person’s income is below the median income for his state.

If it is he can file Chapter 7.

If it is not, a second test is required.

This one brings into the factor the person’s expenses.

Most of the people who go through this test are allowed to file Chapter 7.

The ones who do not are required to file Chapter 13 and make prescribed payments for 5 years.

By Canadian standards, the US means test is quite generous.

For example, under the laws in Canada payments to creditors kick in when a family of 3 has monthly take home pay of $3,300.00 (2014/15 Standards).

In New York the cut off for a family of 3 is a monthly gross salary of $6,006, (2016).

The cut-off is even higher in the US because if a person has income higher than the median he goes through another stage where his expenses are factored in.

A high percentage of these people are allowed to file Chapter 7, thereby not having to pay additional money to their creditors.

Which is better Canadian or American Personal Bankruptcy?

Which System is Better?

From the perspective of the bankrupt the US citizen who goes into bankruptcy gets a better deal than the Canadian; mainly because the real estate exemptions in the US are generally very much higher.

For more on this please refer to this Blog.

Other advantages for the American bankrupt are a quicker discharge in Chapter 7 of 4 months (Canada = 9 months or more) and a higher cut off before being required to file Chapter 13 (Canada = proposal).

From the perspective of which is better for society and the economy it is this writer’s opinion that the US system is superior to the Canadian.

My reason for this is that I subscribe to the conclusions of a research study by Wei Fan and Michelle White published in the Journal of Law & Economics, vol. 46:2, October 2003.

The study determined that lenient rules on bankruptcy leads to higher entrepreneurship and found that the easy bankruptcy laws in the USA is a prime reason for the advantage the USA has over Europe and other countries for entrepreneurship.

Comparison of Major Bankruptcy Aspects for Canadian and American Personal Bankruptcy:

(The Dollars quoted are: $US for US references and $CA for Canadian references.)

Cost:

• Canada: A minimum of $1,800.
• US: Approximately $1,800.

Note: In the US an individual can file bankruptcy without a bankruptcy lawyer. The paper work is detailed and complex and should only be attempted in the most straight forward bankruptcy.

Length of time to get a discharge:

• Canada: 9 months in a bankruptcy with no excess income.
• US: Usually 4 months.

Cut-off amount for paying additional money to creditors:
Family of 3:

• Ontario Resident – Monthly take home income greater than $3,300.
• New York Resident – Monthly gross income greater than $6,006.

Note: The cut-off is even higher in the US because if a person has income higher than above he goes through another stage where his expenses are factored in. A high percentage of these people are allowed to file Chapter 7, thereby not having to pay additional money to their creditors.

Allowable Exemptions (Assets that can be retained in a bankruptcy):

• Ontario: Home =$10,000, Vehicle = $6,600.
• New York: Home = $75,000 to $150,000, Vehicle = $2,400.

Counselling:

• Ontario: Two counselling sessions are required to be taken (usually with the trustee) during the term of the bankruptcy or consumer proposal.
• New York: A counselling session is required before bankruptcy is filed and again once before the discharge.

Debt That is Erased in a Bankruptcy

Canada: Certain kinds of debt are NOT erased by the bankrupt’s discharge. They are:

• Court fines;
• Alimony and other support payments;
• Debt arising from theft and / or fraud;
• Damages awarded by a court for certain serious crimes;
• Student loans less than 7 years (hardship applications may be accepted earlier)

US: The US has similar debt to Canada’s that cannot be erased in a bankruptcy. In addition Income Tax debt in most cases cannot be erased and student loan debt cannot be erased unless it would be an undue hardship to repay the student loans.

Second Time Bankrupts:
Canada

• If there is no excess income the discharge is in 24 months.
• If there is excess income the discharge is in 36 months or more if the court so orders.

US:

• A person can file Chapter 7 again if it has been more than 8 years since he or she was discharged from the previous Chapter 7 bankruptcy.
• A Chapter 13 can be filed if:
• The debtor received a discharge under Chapter 13 more than two years ago.

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