Dealing with Debts

Many Canadians face a financial crisis now and then. For example, in Ontario, the total insolvencies in the third quarter of 2011 were 12,246 including 6,347 bankruptcies and 5,899 proposals. Most debt problems are easy to solve. Others need professional assistance. The best way to deal with your financial problems is to admit to them and take control before they get out of hand. We would like to correct one general misconception. Bankruptcy is just one possible outcome of a process that begins when a person or company is facing a financial crisis. If a person or company is unable to meet its debt obligations, it is said to be insolvent.

So, debts are mounting – what could be possible solutions? Depending on your situation you can:

• Contact your creditors and explain why you cannot make your payments and suggest making lower payments over a longer period of time. You may be surprised by how many creditors are willing to accept such arrangements.
• Search for credit counselling services that are usually available for free.
• Ask a bank or financial institution about combining or “consolidating” your debts into one loan. In such a case, the bank or financial institution will pay off all your debts and, in return, you make single monthly payments to the bank or financial institution.
• Under the Bankruptcy and Insolvency Act, make a consumer proposal to your creditors to reduce the amount of your debts, extend the time you have to pay off the debt, or provide some combination of both.

If none of the above methods solves your debt problem, you may choose to declare bankruptcy. Bankruptcy should be a last option. Bankruptcy is a legal process performed under the Bankruptcy and Insolvency Act. Because of your inability to pay your debts, you assign all of your assets, except those exempt by law, to a licensed trustee in bankruptcy. This process relieves you of most debts, and legal proceedings against you by creditors should stop.

GENERAL INFO

There are three main options to declare insolvency:

1. Bankruptcy – This is where assets of an individual or company are liquidated and the proceeds are given to people who are owed money. (Some assets are exempt from liquidation, depending on the province.)
2. Consumer Proposal – This is where an offer is made to people who are owed money in an effort to settle the debt.
3. Receivership – This usually happens to companies, not individuals. This is where a secured creditor (often a bank or other large creditor represented by a receiver) comes in and generally takes control of the assets of the company.

There are also three main players:

1. Debtor – The person or company that owes the money.
2. Creditor – The person or company that is owed the money.
3. Trustee – The people who are licensed to administer the proceedings.

While there are many variables, the general time frame for first time consumer bankruptcies is 9 months. For company bankruptcies or for those who have faced bankruptcy before, there is no general time frame.

Bankruptcy

Bankruptcy is a legal process carried out through a trustee in bankruptcy designed to relieve honest but unfortunate debtors of their debt burden. When individuals are in bankruptcy, creditors cannot initiate any collection actions against them. At the end of the process, a first-time individual bankrupt is usually discharged from debts after 9 months.

Consumer Proposal

It is important to note that a consumer proposal is a good alternative to bankruptcy. A consumer proposal can be submitted to creditors only if an individual’s total debt does not exceed $250,000, not including mortgage secured by their principal residence. A consumer proposal is a legal process that is carried out through a trustee in bankruptcy. The trustee puts together an offer to pay creditors a percentage of what is owed to them over a specific period of time, or extend the time the debtor has to pay off the debt, or a combination of both. Payments are made through the trustee, and the trustee uses that money to pay each of the creditors. The debt must be paid off within five years.

DEBTOR/BANKRUPT

A debtor is a business or person that is unable to meet debt obligations. A bankrupt is a business or person that has declared bankruptcy. At the end of the process, the bankrupt is released from his or her obligation to repay the debts. Both the debtor’s and bankrupt’s primary duties are to

• attend the first meeting of creditors (if a meeting is requested by the creditors);
• attend two counselling sessions (for bankruptcy and consumer proposals);
• advise the trustee in writing of any address changes; and
• generally assist the trustee in administering the estate or proposal.

In addition, the bankrupt must

• disclose all of his or her assets (property) and liabilities (debts) to the trustee;
• advise the trustee of any property disposed of in the past year;
• surrender all credit cards to the trustee; and
• attend an examination at the OSB, if required.

Once you are bankrupt,

• you will stop making payments directly to your unsecured creditors;
• garnishments against your salary will stop; and
• lawsuits against you by your creditors will be stayed (stopped).

Debts that are NOT Discharged by Bankruptcy

Under the Bankruptcy and Insolvency Act, some debts are not discharged by bankruptcy. These include:

• alimony payments and child support;
• student loans (if it is less than seven years since the debtor ceased to be a full- or part-time student);
• fines or penalties imposed by the Court; and
• debts arising from fraud.

The bankrupt has the right to earn a living. For this purpose, the bankrupt is allowed to engage in or continue a taxable business activity outside of the estate, after a bankruptcy.

CREDITORS

There are three main types of creditors:

• Unsecured creditor — A creditor who comes forward but hasn’t taken measures to guarantee that he or she will be repaid.
• Secured creditor — A person holding an instrument, such as a mortgage or a lien on or against the whole or part of the property of a debtor, as security for a debt due him or her from the debtor. This type of creditor is usually not affected by bankruptcy or proposals.
• Preferred Creditor — A creditor who has been given priority under the Bankruptcy and Insolvency Act over other creditors in the distribution of dividends. Preferred claims include unpaid wages, commissions or other remuneration of any employee of a debtor and, under certain conditions, any debt or obligation of support to a spouse, common-law partner or child living separate from a debtor.

Creditors can become fully involved in the process by participating in meetings of creditors or by being named an inspector. (Inspectors are appointed by creditors to represent them before the trustee during the administration of proposals and bankruptcies. They are expected to assist the trustee and are required to supervise certain aspects of the trustee’s administration.) Creditors are duty bound to inform the trustee if they have information about possible irregularities on the part of the debtor.

Creditors will be provided with, among others, the following two documents:

• Statement of Affairs — The bankrupt’s financial statement or balance sheet of assets and liabilities showing the estimated value of assets and the names and addresses of creditors and the amounts owed. This is usually presented at the beginning of the process.
• Statement of Receipts and Disbursements – A statement detailing the receipt and disbursement of funds, interest received, fees charged by the trustee, all dividends distributed to creditors and particulars of property that is not sold. This is usually presented at the end of the process.

To participate in insolvency proceedings and share in the distribution of dividends, if any, creditors with unsecured claims must file a Proof of Claim with the trustee.

Creditors can verify if a bankruptcy or proposal has been filed, and who the trustee is, by using the OSB Insolvency Name Search service. The central databank maintains a record of all bankruptcies and proposals filed in Canada since 1978 and all receiverships filed since December 1992. For an $8.00 fee, they will search the records for you to confirm the insolvency status of individuals or businesses.

TRUSTEE IN BANKRUPTCY

To file for personal bankruptcy you must use a trustee. If your debts are so large that you cannot handle them on your own, your first step should be to find a trustee who will determine if you are, in fact, insolvent. Trustees may be found in the telephone directory or by using Trustee Database of the OSB website. A trustee in bankruptcy is a person licensed by the Office of the Superintendent of Bankruptcy (OSB) to administer bankruptcy and proposal estates. Only licensed trustees can provide bankruptcy services.

Although trustees represent creditors, trustees are officers of the court who also advise debtors of their options with respect to debt problems. An officer of the Court, the trustee has an obligation to look after the rights of the creditors and to investigate the affairs of the debtor, as required. The trustee also ensures that the rights of the debtor are not abused. The trustee’s primary duties are to

• review the situation and advise debtors of their options with respect to debt problems;
• prepare official documentation that is both filed with the Superintendent of Bankruptcy and used to notify creditors;
• ensure the validity of creditors’ claims;
• ensure that debtors are provided with mandatory counselling and access to mediation services if there is a dispute regarding any income they are required to contribute;
• sell the debtor’s assets (except those that are exempt from seizure) and hold the proceeds in trust for distribution to the creditors;
• administer the bankrupt estate from beginning to end;
• assess the debtor’s conduct both before and during a bankruptcy, as well as the cause(s) of the bankruptcy; and make an application for a debtor’s discharge (in the case of individual debtors);
• make an application for a debtor’s discharge (in the case of individual debtors)

Rule 128(1) of the BIA governs the fee-setting behaviour of trustees and sets out the method in which maximum fees are to be calculated: the first $975, plus 35% of the next $1,025, plus 50% of everything above $2,000 to a maximum of $10,000. In practice, trustees try to realize at least $1,500 to $1,700 on each file. Of course, they are free to take less if they so choose.

There may be debtors in need of bankruptcy who cannot afford the fees that trustees ask. The OSB administers a program called the Bankruptcy Assistance Program (BAP). There is a list of available trustees. The program assigns listed trustees to administer the files of debtors who have approached at least two trustees to handle their bankruptcies but who have been turned away because of their inability to pay the normal fees. This service is available as long as:

• your debts are mostly personal rather than business-related;
• you can demonstrate that you have made at least two attempts to find a trustee; and
• you are not in prison

If you’re not satisfied with the service, contact the Chief Information Officer, Office of the Superintendent of Bankruptcy, Ottawa at (613) 941-1000. Your complaint will be handled within one business day.

OFFICE OF THE SUPERINTENDENT OF BANKRUPTCY

The Office of the Superintendent of Bankruptcy (OSB) supervises the administration of the Bankruptcy and Insolvency Act and the Companies’ Creditors Arrangement Act (CCAA). The responsibilities of the Office of the Superintendent of Bankruptcy are:

• supervising the administration of estates in bankruptcy, commercial reorganizations, consumer proposals and receiverships;
• maintaining a publicly accessible record of bankruptcy and insolvency proceedings;
• recording and investigating complaints from creditors, debtors, and members of the general public regarding possible wrong doing by someone involved in the insolvency process;
• licensing of private sector trustees to administer estates and the appointment of administrators of consumer proposals; and
• setting and enforcing professional standards for the administration of estates.

When an individual or a businesses cannot pay their debts, they may file for bankruptcy or make a proposal. These are legal proceedings carried out under the Bankruptcy and Insolvency Act and must be registered with the OSB, normally within 2 business days of receiving completed documents.

The address of Toronto Office of the Superintendent of Bankruptcy is:

Fees

The following charges apply to the insolvency registration services:

• summary administration bankruptcy – $75.00
• repeat bankruptcy in summary estate – $150.00
• ordinary administration bankruptcy – $150.00
• change from summary administration to ordinary administration – $75.00
• consumer proposal – $100.00
• commercial proposal – $150.00
• receivership – $70.00

Don’t forget that the trustee in bankruptcy will also charge fees.

CHANGES TO CANADA’S BANKRUPTCY AND INSOLVENCY LEGISLATION

Bankruptcy and Insolvency Act (BIA) is the federal law that regulates bankruptcy and insolvency in Canada. The Companies’ Creditors Arrangement Act (CCAA) is another law that regulates business bankruptcy and insolvency. The insolvency process is a legal proceeding that is administered by the Office of the Superintendent of Bankruptcy (OSB)

On September 18, 2009, changes to Canada’s bankruptcy and insolvency legislation came into force. These changes are designed to modernize the insolvency system, increase fairness and reduce abuse of the system, and encourage restructuring as an alternative to bankruptcy.

• Consumer Proposals: The maximum amount of debts allowable in consumer proposals increases from $75,000 to $250,000, excluding debts secured by the principal residence of the consumer. This amendment enables more consumers to use the streamlined process of consumer proposals, and should encourage and facilitate formal arrangements by consumers with their creditors, resulting in a greater percentage of debts being repaid.
• Discharge of First-Time Bankrupts: As in the past, first-time bankrupts with no surplus income remain eligible for an automatic discharge after nine months. Based on the amendments, first-time bankrupts who have surplus income are eligible for an automatic discharge after contributing part of their surplus to their estate for 21 months.
• Discharge of Second-Time Bankrupts: Second-time bankrupts without surplus income are eligible for an automatic discharge after 24 months. Second-time bankrupts with surplus income are eligible for an automatic discharge after contributing part of their surplus to their estate for 36 months.
• More on surplus income: Changes to the discharge of bankrupts are intended to ensure that a greater percentage of debts are repaid to creditors when the individual filing for bankruptcy has surplus income. The amount of surplus income is determined in a Directive issued by the Superintendent of Bankruptcy. The Directive is intended to assist bankruptcy trustees in determining equitably and consistently the portion of the bankrupt’s income that should be paid into the bankrupt’s estate. The Directive states that if the bankrupt has monthly surplus income equal to or greater than $200, he or she will be required to pay 50% of the monthly surplus income to the estate.
• More on discharge from bankruptcy: A discharge is the release of a debtor from the legal obligation to repay the debts he or she had as of the date the bankruptcy was filed. Certain types of debts are excluded from the discharge, including support payments and child-support, some student loans, a fine or penalty imposed by the Court or debt arising from fraud.
• Discharge for Bankrupts with High Income Tax Debts: Bankrupt individuals with more than $200,000 in personal income tax debt that makes up 75% or more of their total unsecured debt will not be eligible for an automatic discharge. Instead, they must apply to the Court for discharge. The Court may suspend or refuse the discharge or may impose conditions, such as partial payment of debts over a specific period of time.
• Mandatory Counselling: Consumers filing a consumer proposal will have to undergo mandatory counselling in order to complete successfully their proposal and receive a Certificate of Full Performance of Consumer Proposal. Consumers who have filed for bankruptcy and who have refused to attend mandatory counselling will not be eligible for an automatic discharge.
• Creditors: Creditors may take action to realize against the property of a bankrupt if the bankruptcy trustee has been discharged but the bankrupt has not.
• Interim Financing: The Court will now have the power to grant a security (over existing securities) in favour of a lender providing new interim financing to an insolvent business that files a proposal under the BIA or a plan under the CCAA. The amendments bring increased clarity about the powers of the Court in this regard.
• Unpaid Suppliers’ Rights: Unpaid suppliers have 15 days after the date of bankruptcy or the appointment of a receiver to submit a written demand for goods delivered to the purchaser or the purchaser’s agent within 30 days before the bankruptcy or appointment of the receiver.
• Wage Claims: Division I proposals under the BIA and plans under the CCAA must provide for payment of wage claims immediately after Court approval/sanction of the proposal/plan to employees (and former employees). The amounts paid must at least equal what they would be qualified to receive if the employer had become bankrupt.
• Pension Protection: Division I proposals and CCAA plans that do not provide for the payment of unpaid pension contributions are not to be approved by the Court unless the parties to the pension plan have entered into an agreement approved by the relevant pension regulator respecting payment of those amounts.
• Collective Agreements: Any collective agreement between an employer and a union shall remain in force unless the agreement is amended by agreement of the parties. There is no provision for the Court to disclaim, terminate or revise a collective agreement. If the collective agreement is amended by agreement of the parties, the union has a claim as an unsecured creditor for the value of concessions granted.

MAIN STEPS OF THE BANKRUPTCY PROCESS

1. Contact a trustee and attend a meeting with him or her to talk about your personal situation and your options
2. Work with the trustee to complete the required forms. The trustee will then file the bankruptcy with the Office of the Superintendent of Bankruptcy.
3. The trustee sells your assets and you make payments to the trustee.
4. The trustee notifies your creditors of the bankruptcy.
5. You attend a meeting of creditors, if one is called.
6. You attend an examination by an officer at the OSB, if required.
7. You attend two counselling sessions.
8. The trustee prepares a report to the OSB describing your actions during the bankruptcy.
9. You attend the discharge hearing, if required.
10. The bankruptcy is discharged.

Enquiries or Complaints

If you have questions about the bankruptcy process, or you think that the process was poorly managed, or believe you have suffered a prejudice, or you want to complaint, you can contact:

Last updated: June 2013