Bankruptcy

It is good to discuss the other options but the simple facts are that a lot of people having financial problems do not have enough income to pursue any of the other options. They simply cannot afford to pay their creditors the amounts required under any of the other options and they need some method to resolve the pressure and stress resulting from creditor demands. Ignoring this pressure and stress can affect many things including personal health, and marital or family situation.

It is important to note that only the person filing bankruptcy is protected. People who are joint borrowers or who co-signed a bankrupt’s debt are not released from their obligations and will be required to pay the debts in full unless they too look at some sort of protection from the creditor(s).

Debts that Survive Bankruptcy:

Filing an assignment into bankruptcy is a Right that everyone has under the Bankruptcy and Insolvency Act. Bankruptcy will help you with most unsecured debts, with the main exceptions outlined in Section 178 of the Bankruptcy and Insolvency Act .

Licenced Bankruptcy Trustees

The only person who can file a bankruptcy for you in Canada is a licensed bankruptcy Trustee. Non-Trustees may attempt to direct you to another option, even if it is not feasible for you simply because they cannot earn their fee if you file bankruptcy. Bankruptcy Trustees are licensed by Industry Canada and are responsible to the Superintendent and to the Courts for their actions and their advice.

Several groups have tried to advance a position that the Trustee works for the creditors and not for the person experiencing financial difficulty. They try to sell the idea that the Trustee will only recommend settlements that result in the highest payment to the creditors. This is simply not true. If it were Trustees would be encouraging everyone to file proposals because creditors always receive more funds in a proposal.

Without exception, in every centre across Canada, there are Trustees who will meet with people experiencing financial problems and explain all options available to them and not charge for the meeting. The Trustee will explain the effect of the various options based on your situation. The decision about which option is best for an individual is made by the individual.

Once a Trustee is appointed by the Courts to administer the action under the Bankruptcy and Insolvency Act, he is responsible to the creditors, to the government and to the Courts for carrying out the duties related to that role.

It is worthwhile to understand how your creditors’ claims against you are settled in a bankruptcy. The creditors have a right to share in the funds realized by the Trustee. The funds result from required payments and from the realization of assets that are not protected under Provincial Law. Any deficiency that may result after the Trustee has completed the administration of the bankruptcy will be written off by your creditors.

Protected assets

Every province defines protected assets that cannot be seized by creditors. The protection is available to your assets as long as you have not given the assets as security for your loans. Protected assets vary from province to province.

In addition to the above, Federal Legislation protects some life insurance managed retirement savings plans, some cash surrender value of life insurance policies and some pensions. The creditors’ rights to these insurance products should be discussed with your agent or your legal advisor prior to filing an assignment into bankruptcy.

Other Assets

If you have assets that are not protected, the Trustee will be forced to sell those assets and retain the funds in the Trustee’s trust account so that they can be distributed to your creditors.

The Trustee will file your personal income tax returns for the year of bankruptcy (and prior years if not filed) and any refunds will also be paid into trust for distribution to your creditors.

Cost to File a Bankruptcy

Filing bankruptcy is not free!

In the initial meeting with the Trustee, you will be advised of the payment that is required from your estimated income. The required payment from income is based on a schedule known as the “Superintendents’ Standards”. Protected income (the “Standards”) is established for each family based on national surveys conducted by the Federal government (All Trustees in Canada use the same standard).

You will have to provide the Trustee with monthly statements showing your income and your expenses.

If you have no assets and your income is below the Superintendents’ Standards, you will be required to make a contribution towards the costs of your bankruptcy.

Duties of a Bankrupt

The main duties required of a bankrupt are:

1. Be honest and communicate with the Trustee if you have questions.
2. File monthly statements of income and expense (most Trustees have forms for this purpose).
3. Attend two counselling sessions at the Trustee’s office.
4. Make the payments required by the Trustee.
5. Provide the Trustee with all information required for necessary income taxes.
6. Turn in all credit cards.
7. Co-operate with the Trustee and attend any other meetings that may be required.
8. Turn over any assets that are not protected by provincial laws.

The monthly income and expense statements are required for two reasons:

1.) The Trustee has to monitor your income to ensure you are paying the required amount into the creditors.

2.) The statements provide you with a history, on a cash basis, as to what it costs you and your family to live each month. This history is critical to future financial planning.

Since all credit cards are destroyed when you file bankruptcy, you will have to live on the income that your family is able to generate.

When the process is complete, you will know:

1. YOU can live without credit
2. YOU are able to save the amount of money that you have been paying to the Trustee to settle with your creditors, and
3. YOUR cash expenses are each month.

Your initial financial plan, after being released from your bankruptcy, could be to save the amount of money that you are paying to the Trustee during bankruptcy, and avoid credit. You can use the details of your filed statements to start a budget or financial plan. You could bank raises and extra paycheques(if you are paid on weekly or bi-weekly basis) to purchase Registered Retirement Savings Plans or to start a emergency fund for unexpected financial emergencies.

There are two counselling sessions that all bankrupts must attend with the Trustee. Most Trustees have individual sessions with only the bankrupt and the bankrupt’s spouse (as opposed to group sessions). Our firm does not do group counselling sessions because we believe that group settings do not allow people to discuss problems freely. The counselling sessions are supposed to help you, so why should you be asked to share the counsellor's time with anyone else.

Getting Out of Bankruptcy

In most cases getting out of bankruptcy is quite easy. With very few exceptions, first-time bankrupts are given an automatic discharge after nine months if they have completed the required duties and their creditors do not object to their automatic discharge.

If the duties are not completed, the bankrupt has been dishonest, or there is a creditor objection, the bankrupt will have to appear in bankruptcy Court to determine whether a discharge will be granted or on what terms the discharge can be granted. The Court will refuse a bankrupt’s discharge if the bankrupt has not been honest (such refusals are rare).

Any person who has previously filed bankruptcy is not eligible for an automatic discharge. Usually their discharge is suspended and the period of the suspension will vary according the circumstances of the current bankruptcy. During the period of suspension the bankrupt cannot get new credit or carry on a business without advising people that they are dealing with that they are an undischarged bankrupt. Any assets or windfalls that the bankrupt receives during the period that his discharge is suspended, are potential assets that must be paid to the creditors.

If a bankrupt does not honour the commitments they made when the filed the bankruptcy, most Trustees will not continue to support the bankrupt.

The Trustee can make an application for his discharge and leave the bankrupt in bankruptcy without the protection from the creditors.

The creditors will then be able to take action against the bankrupt and seize his assets and income. The bankrupt will have to pay all surplus income and turn over any non-protected assets that are received. It will cost extra to have the Trustee become involved in the file (this amount varies greatly amongst Trustees).

No one should file bankruptcy if they are not prepared to complete their duties and live up to the agreements that they made to their Trustee.

Advantages and Disadvantages of Filing Bankruptcy

Advantages:

• Cost is less than any other option.
• Proceedings on first time assignments are usually completed in nine months.
• Once assets are vested with Trustee, creditors do not need to have contact with the bankrupt.
• Monthly payments from income are based on national standards established by the Office of the Superintendent of Bankruptcy.
• Provisions can be made to decrease required monthly payments for exceptional expenses like child maintenance, etc .
• No requirement for a co-signor or for assets to be pledged to Trustee.
• It is not necessary to know the exact amount of money owed to creditors.
• In most cases, credit ratings are already bad and a bankruptcy will not increase the negative credit rating significantly.
• Bankruptcy will discharge the liability for most lawsuits therefore it may not be necessary to incur the costs to defend the legal action.
• Bankruptcy protects unsecured exempt assets from seizure.
• Bill collectors and their agents usually cease collection action after bankruptcy is filed.
• Tax assessments on income earned before bankruptcy are not effective after discharge from bankruptcy.
• Income above standards established by Superintendent of Bankruptcy can be used to reduce child maintenance and alimony arrears.

Disadvantages:

• Co-signers on loans will still be responsible for any loans.
• Some debts survive bankruptcy.
• Credit Cards must be destroyed.
• A perfect credit rating will be affected by a bankruptcy.
• Non-exempt assets must be turned over to the Trustee for benefit of creditors.
• While bankrupt, a person cannot get credit above $500 or carry on a business without disclosing that they are bankrupt.
• A bankrupt cannot be a director of corporation.