Consumer bankruptcy in Canada

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Consumer bankruptcy in Canada is governed by the Bankruptcy and Insolvency Act ("BIA"). [1] The legislation is complemented by regulations, as well as directives from the Office of the Superintendent of Bankruptcy that provide guidelines to trustees in bankruptcy on various aspects of the BIA.

Contents

Consumer basic concepts

For the purposes of the BIA, it is important to be able to distinguish between legal definition of "insolvent person" and one of "bankrupt". Generally, an insolvent person is one who cannot pay his or her debts and may subsequently become bankrupt, either by assigning himself into bankruptcy, being petitioned into bankruptcy by the creditors, or being deemed to assign himself into bankruptcy by defaulting on a Division I proposal.

The person who is unable to pay his obligation is considered to be an insolvent person under the BIA. Under s. 2 of the BIA, an "insolvent person" is a person who is not bankrupt and who resides, carries on business, or has property in Canada, whose liabilities to creditors provable as claims under this Act amount to $1,000, and

(a) who is for any reason unable to meet his obligations as they generally become due,
(b) the aggregate of whose property is not, at a fair valuation, sufficient, or, if disposed of at a fairly conducted sale under legal process, would not be sufficient to enable payment of all his obligations, due and accruing due.


Insolvent consumers, according to the BIA, have three main options

  1. Declare bankruptcy;
  2. Submit a consumer proposal to creditors, Division II proposal;
  3. Submit a Division I proposal to creditors;

The four main players involved in consumer insolvency are Licensed Insolvency Trustee, Debtor/insolvent person, Creditors, Office of the Superintendent of Bankruptcy.

Under s. 2 of the BIA, an "insolvent person" can become "bankrupt" for the purposes of the BIA in three ways:

Bankruptcy process

The bankruptcy process may be divided into three stages:

Initiation of the bankruptcy process

[5]

Between bankruptcy and discharge

The bankrupt must: [14] [15]

A bankrupt must also remit to the trustee the amount of his income that is determined to be surplus to his needs, for the benefit of the estate. [16]

Determination of property in the bankruptcy estate

Contributions made to Registered Retirement Savings Plans (RRSPs), Registered Retirement Income Funds (RRIFs), and Deferred Profit Sharing Plans (DPSPs) in the twelve months prior to the date of bankruptcy will be recovered for the benefit of the bankruptcy estate [17] in provinces other than British Columbia, Alberta, Ontario, New Brunswick, and Nova Scotia (where they are exempt from seizure under applicable provincial legislation). The court can extend the one-year recovery period where it is considered appropriate.

Some assets are protected through bankruptcy exemptions that vary depending on which province or territory the person lives in. Common exempt assets include household furnishings, clothing, food, heating, work tools and a vehicle up to a certain value. [18]

Period applicable until discharge

The bankrupt may apply to court at any time for discharge from bankruptcy (provided he has fulfilled his duties), and the court may grant it, either fully or conditionally. [19] [20]

In the case of first-time or second-time bankrupts, discharge occurs automatically (provided they have attended counselling sessions arranged by the trustee) [21] as follows:

Automatically discharged (except where an opposition has been filed before it takes effect) [22]
Type of bankrupt9 months21 months24 months36 months
1st timeYes, unless surplus income has been remitted to the estateYes--
2nd time--Yes, unless surplus income has been remitted to the estateYes

The above does not apply to a bankrupt that has personal income tax debt of $200,000 or more, which represents 75% or more of total unsecured claims. In this case, a hearing for an application for discharge may not be held before the end of the applicable period below:

Hearing to be held no earlier [23]
Type of bankrupt9 months21 months24 months36 months
1st timeYes, unless surplus income has been remitted to the estateYes--
2nd time--Yes, unless surplus income has been remitted to the estateYes
Subsequently,---Yes

The following debts are not released on discharge:

In the case of student loans, the seven-year period noted above, on application to the court, may be reduced to five years, if the court is satisfied:

Purpose and objectives of the bankruptcy process

The purpose of the bankruptcy process is to introduce a legislative mechanism that would provide a fair and peaceful resolution of financial conflict between debtors and creditors, creditors competing among themselves for recovery of their loans and balance public interest in protecting financial security of creditors on one hand and public interest in allowing an insolvent individual to make a fresh start. Generally, the objectives of the bankruptcy process can be summarized as follows:

Consequences of bankruptcy

Positive consequencesNegative consequences
  • Bankrupt is discharged from all or a significant part of the existing debts and is able to make a "fresh start"
  • Creditors are not allowed to start new legal actions or to continue existing ones against the debtor or the third parties in possession of bankrupt's property
  • Collection agencies are not allowed to enforce the debts, meaning the collection calls will stop
  • Bankrupt is entitled to keep certain property exempted from distribution among the creditors
  • Although the bankrupt gives up a part of his surplus income during the bankruptcy period, it is significantly less than the total payments required to his/her creditors prior to the bankruptcy
  • Bankrupt gives up the legal title and control of non-exempt property
  • Bankruptcy will be shown on bankrupt's credit rating for as long as seven years after discharge for a first bankruptcy and up to fourteen years on the second bankruptcy
  • Future employment opportunities in certain industries can be impacted along with the ability to be bonded. The bankrupt may also lose some professional and civil privileges, i.e. capacity to hold money in trust, capacity to be elected to certain civil positions
  • Bankruptcy still carries negative stigma, i.e. negatively influence bankrupt's credibility in the credit granting community
  • Bankrupt loses part of any surplus income and all property received before his discharge, and is transferred to trustee for distribution among creditors
  • Debtor is deprived of a part of the income and the property and as a consequence may have to lower his and his family standards of living
  • Debtor's contractors may suspend and cancel the services where there is a contractual ipso facto clause allowing contractors to cancel the contract on bankruptcy
  • Bankrupt has limited contractual capacity, debtor's contracts are subject to a review by a trustee in bankruptcy
  • Debts that are not dischargeable debts still have to be repaid even after a discharge order is made (i.e. fraud, child support)
  • Bankrupt has duties to perform before the discharge, and, if the discharge is conditional, some duties to perform afterwards depending on the findings of the Court
  • The record of the bankrupt's insolvency is retained indefinitely in a searchable online database [27]

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References

  1. "Bankruptcy and Insolvency Act (R.S.C., 1985, c. B-3)" . Retrieved September 5, 2011.
  2. "BIA, S. 49(1)" . Retrieved March 25, 2017.
  3. "BIA, S. 43(1)" . Retrieved March 25, 2017.
  4. "BIA, S. 57" . Retrieved March 25, 2017.
  5. "Initiation of Bankruptcy Process, Bankruptcy Lawyers' Guide".
  6. "Alternatives to Bankruptcy. Consumer Proposal, Bankruptcy Lawyers Guide,http://www.lawyersbankruptcy.ca/consumer_proposal.html" . Retrieved August 24, 2014.
  7. "BIA, S. 66.12(1)". Archived from the original on September 30, 2011. Retrieved September 16, 2011.
  8. "BIA, S. 50(1)" . Retrieved September 16, 2011.
  9. "BIA, S. 50.4(1)" . Retrieved September 16, 2011.
  10. "BIA, S. 42(1)(i)" . Retrieved September 16, 2011.
  11. "BIA, S. 49(1)" . Retrieved September 16, 2011.
  12. "BIA, S. 43(1)" . Retrieved September 16, 2011.
  13. "BIA, S. 69(1)". Archived from the original on October 12, 2011. Retrieved September 16, 2011.
  14. "Bankruptcy: Duties of the Bankrupt". Bankruptcy Lawyers.
  15. "BIA, S. 158". Archived from the original on October 10, 2011. Retrieved September 16, 2011.
  16. "BIA, S. 68". Archived from the original on December 4, 2011. Retrieved September 16, 2011.
  17. "BIA, S. 67(1)(b.3)" . Retrieved September 16, 2011.
  18. "Bankruptcy Exemptions by Province or Territory in Canada". Findependence Day. Retrieved February 22, 2022.
  19. "Bankruptcy Discharge: Absolute, Conditional Discharges". Bankruptcy Lawyers.
  20. "BIA, S. 172". Archived from the original on 2012-02-21. Retrieved 2011-09-15.
  21. "BIA, S. 157.1". Archived from the original on 2011-10-10. Retrieved 2011-09-15.
  22. "BIA, S. 168.1". Archived from the original on 2011-10-12. Retrieved 2011-09-15.
  23. "BIA, S. 172.1". Archived from the original on 2012-02-21. Retrieved 2011-09-15.
  24. "Defense of Fraudulent Conveyances". Bankruptcy Lawyers.
  25. "BIA, S. 178(1)".
  26. "BIA, S. 178(1.1)".
  27. "Bankruptcy and Insolvency Records Search". Government of Canada. Retrieved December 6, 2018.