The Bankruptcy and Insolvency Act
Canada’s Insolvency Laws
Insolvency happens to honest people all over the world. All it takes is some misfortune or unforeseen interruption to cash-flow, and you may find yourself in a position where you cannot pay your debts on time (or at all). In these cases, the federal government wants to protect both debtors and creditors as much as possible. The Bankruptcy and Insolvency Act is the legislation that provides that protection. This piece of legislation ensures that all insolvency matters are administered fairly, and is essential when you decide how to resolve your debt. In particular, there are a few factors that could have an impact on how you proceed.
Did you know:
- Your RRSPs are safe from bankruptcy.
- Student loans can be discharged after seven years from the time you completed your studies.
- A consumer proposal allows you to keep your assets.
- You may have to surrender your non-exempt assets in case of bankruptcy.
- Your contracts with secured lenders will not be affected by bankruptcy – this means that as long as you make your payments on your home mortgage and/or vehicle loan, you will keep that property.
- You are legally required to disclose all of your income when you file bankruptcy.
- Surplus income considerations are based on a calculation set by the Office of the Superintendent of Bankruptcy.
- To qualify for a consumer proposal you must have no greater than $250,000 in unsecured debts.
Here’s what you need to know about the Bankruptcy & Insolvency Act (BIA):
The Bankruptcy & Insolvency Act was put in place by the federal government to ensure that debtors and creditors are treated fairly. During insolvency proceedings, all parties, including Licensed Insolvency Trustees (LITs), must follow the rules and regulations of the BIA. In Canada, if you are faced with more debt than you can afford, there are 3 different options for resolving your debt:
1. Consumer Proposal
A consumer proposal is an excellent option for anyone with less than $250,000 in unsecured debts. A proposal can only be administered by a Licensed Insolvency Trustee who will handle any negotiations with creditors on your behalf. Working together with LIT, you will come up with an offer you can afford. Many proposals offer up to 70% debt forgiveness, free of interest. You get to retain all your assets, and your debts are consolidated into a single monthly payment. Once your proposal is filed, you receive immediate protection from your creditors – this means no more wage garnishment or collection calls. You can choose a term of anywhere from a few months to 5 years. Your creditors will have 30 days from the time your proposal is filed to either accept or reject it. It is rare for a consumer proposal to be rejected.
2. Division 1 Proposal
This is similar to a consumer proposal but is designed for people with more than $250,00 in unsecured debts.
3. Bankruptcy
If you do not qualify for a consumer proposal or simply wish to eliminate your debts as quickly as possible, bankruptcy is the next option for formal debt settlement. In this case, you are discharged from your unsecured debt obligations in exchange for the surrender of any non-exempt assets and surplus income payments.
Law of Orderly Payment of Debts (OPD)
In certain provinces, a specific order of repayment is required as follows:
1. Secured creditors
A creditor can request collateral as ‘security’ in the event that you are unable to make your payments. Most home mortgages and car loans are secured. As long as you are maintaining your payments, a Bankruptcy Order will not impact your secured debts.
That being said, in the case of non-payment, a secured creditor can file a claim as an unsecured creditor.
2. Preferred Creditors
A preferred creditor could be the recipient of support payments or an employee who is owed wages – these creditors are one of the first to receive payment.
3. Unsecured Creditors
Credit cards, phone bills, utility bills, and other smaller types of credit are typical examples of unsecured debt. These creditors do not typically request collateral backing.
What if your business is facing financial difficulty?
Incorporated businesses have a few options when faced with financial troubles: file for a Division | Proposal, CCAA Plan of Arrangement, or bankruptcy.
Unincorporated businesses, such as small businesses and sole proprietorships, must be filed as a personal bankruptcy.
In most cases, there are three general scenarios for business bankruptcy:
- The business owner(s) filed for bankruptcy of their own accord.
- They were not successful in resolving their debts through a proposal.
- A Bankruptcy Order has been filed against the business.
Business Bankruptcy – BIA vs. CCAA
There is a federally legislated alternative the Bankruptcy & Insolvency Act (BIA), known as the Companies Creditors Arrangement Act (CCAA). The CCAA is designed to help businesses restructure themselves in order to resolve their financial difficulties. During the restructuring, the company will retain all property and remain open for business. The CCAA handles restructuring and monitors development, keeping creditors and the courts updated on the progress.
Corporations have the ability to choose between the BIA or CCAA – larger companies usually select the CCAA. In the event of a successful restructuring, creditors will receive a better payout from a CCAA than they would have in the case of bankruptcy. To qualify for restructuring, a company must have at least $5 million in debt and be unable to meet payments.
Do you really need a Licensed Insolvency Trustee (Bankruptcy Trustee)?
If you need debt help, you need a LIT. In Canada, consumer proposals and bankruptcy can only be administered by a licensed trustee. A LIT will be able to evaluate your financial situation and tell you what your best options are. Licensed trustees have a legal obligation to ensure that you know and understand all your options. They have the knowledge and expertise to save you both time and money. With that information, you decide your next steps. A licensed insolvency trustee is an officer of the court and will ensure that your debt is resolved in a fair manner, following the rules of the Bankruptcy & Insolvency Act.
Benefits to a ‘Stay of Proceedings’:
The Bankruptcy & Insolvency Act ensures that when a person files for bankruptcy or a consumer proposal, they receive immediate protection from creditors until the bankruptcy’s completion. This is also known as a ‘stay of proceedings’ and ensures that you don’t have to worry about being hounded by collections calls having your paycheck garnished.
In order to file a consumer proposal or bankruptcy, you must fully disclose any legal action against you – past or present. All creditors will be notified that a ‘stay’ is in effect, meaning creditors can no longer:
- Garnish your wages
- Hound you with collection calls (CRA included)
- Take legal action against you
A ‘Stay’ of Proceedings is NOT able to:
- Do away with an existing lien
- Restore property already repossessed
- Put a stop to court-ordered support for a spouse and/or child(ren)
- Stop collections for government fines or fraud
- Stop secured creditors from seizing an asset (i.e. A creditor can repossess your car if you are not making your agreed-upon loan payments)
In sporadic cases, a creditor may request that a ‘stay of proceedings’ be lifted. However, they must be prepared to argue the motion in a court of law. The creditor(s) would ask for a financial review of the debtor. The debtor also has the ability to be present for the hearing and put forth an argument, if they choose.
Filing for Bankruptcy
We do everything we can to help you find the right debt solution for you. For some, the best option for their financial future and getting the chance to start over is bankruptcy. To get started, they must sit down with a licensed trustee to review their finances and debt situation. The LIT will electronically file the necessary documentation to the Office of the Superintendent of Bankruptcy (OSB). Once submitted, the trustee has 5 days to notify all parties to get the claim process rolling.
Expectations of Bankruptcy
When you declare bankruptcy any non-exempt property, along with the rights and goods, are handed over to the trustee. Your LIT will then use the proceeds to settle your debts.
Once filed, you must follow the rules of the Bankruptcy & Insolvency Act which include:
- Monthly income statements – ensures that your trustee is aware of any sudden changes to your income.
- In rare cases, a meeting of creditors is called – if this does happen, you are legally required to attend.
- You must attend two sessions of financial counselling administered by a licensed professional – this will help to set you up for financial success in the future.
Completion of Bankruptcy
A standard bankruptcy term is only 9 months. A Certificate of Discharge is given to show that you have been cleared of your debts. If for any reason you do not meet the criteria for discharge, you will receive an ‘Absolute Order of Discharge’ once you have fulfilled your duties.
Free Professional Advice!
Goth & Company is an Alberta company committed to assisting people who are struggling with debt. Not sure where to turn? Call us; you can meet with a licensed professional (for free) who understands the stress you are under and will help you determine the best option for you. If you are struggling with debt we can help! Call us today! 780.435.5110