Top Bankruptcy Law Rules In The Bankruptcy And Insolvency Act

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Nobody wants to declare personal bankruptcy, but sometimes bankruptcy is the best solution for your debt problems. In Canada, personal bankruptcy is a legal process governed by federal law.

The law allows honest but unfortunate debtors to get out of debt while treating their creditors fairly. The legal process also features a “stay of proceedings” that prevents garnishments, legal actions, and stops your creditors from calling. At the end of the bankruptcy process, your debts are discharged and you no longer have to pay them back.

Here are the top bankruptcy law rules in the Bankruptcy and Insolvency Act (BIA) that could help you decide whether bankruptcy or consumer proposal are the right debt solutions for your situation:

  1. Secured lenders cannot terminate their contracts – Secured lenders cannot terminate their contracts simply because you’ve filed for bankruptcy. For example, if you file for bankruptcy while having a car loan, you get to keep your car if you continue to make the payments and they are up to date. There are also options where you get to keep your house.
  2. Your student loans might be discharged – Your student loans are automatically discharged if you’ve been out of school for more than seven years when you file for bankruptcy.
  3. Your RRSP or pension might be exempt – Filing for bankruptcy might not affect your RRSP. The BIA exempts most RRSPs from seizure, except for the contributions you made in the last 12 months.
  4. You get to keep all your assets in a consumer proposal – While you get to keep some of your assets when you file for personal bankruptcy, you get to keep all your assets when you file a consumer proposal.
  5. You have to reveal all your income – You have to reveal all your income when you file for bankruptcy. If your monthly income is $200 or more over the threshold set by the law, the length of the bankruptcy process is automatically extended by 21 months for a first bankruptcy and 36 months for a second one.
  6. Consumer proposals provide instant financial improvement – You’re on your way to a new financial start the moment your creditors accept your consumer proposal. The terms of the proposal are binding and you get to keep all the extra revenue you might make from getting a new job or by selling an asset.
  7. Your credit rating will recover faster after a consumer proposal – Reporting agencies treat consumer proposals differently from bankruptcies. Consumer proposals are classified as R7s and will stay on your credit bureau for 3 years after getting your certificate of completion. Bankruptcies are classified as R9s and will remain on your file for 6 years after getting your certificate of discharge.
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The Average Person’s Guide To The Bankruptcy And Insolvency Act In Canada

In Canada, bankruptcies are governed by the Bankruptcy and Insolvency Act. The Act mentions all the laws, rules, and guidelines the debtors, the creditors, and the Licensed Insolvency Trustee must follow during the bankruptcy process.

The Purpose Of The Bankruptcy And Insolvency Act

The Canadian federal government designed the BIA to assist and protect honest Canadian citizens who had the misfortune to run into debt problems. The Act protects the rights of the debtors while ensuring that the trustees live up to their duties and the creditors are treated fairly.

The BIA offers every Canadian who has debt problems two options: to come up with a financial proposal that would cover enough of the debt to satisfy their creditors, or to file for personal bankruptcy.

Who Is Involved In The Insolvency Proceeding?

The parties involved in an insolvency proceeding are the debtor (who is referred to as “the bankrupt” after filing for bankruptcy), the Licensed Insolvency Trustee (LIT), and the creditors.

The Debtor

The debtor is an entity (individual or company) that owes money to a creditor. At the start of the bankruptcy process, the debtor is referred to as “insolvent” because their liabilities exceed their assets and they are no longer able to pay their debts. The debtor can either file for bankruptcy or make a proposal to their creditors.

The Bankrupt

When an insolvent entity files for bankruptcy, they are referred to as “bankrupt”. A bankrupt entity must disclose all of their assets and debts to the Licensed Insolvency Trustee, inform the LIT of any assets or properties that were disposed of in recent years, and hand all their credit cards to the LIT.

The Licensed Insolvency Trustee

Licensed Insolvency Trustees are licensed by the Office of the Superintendent of Bankruptcy (OSB). They are the only federally regulated debt advisors operating in Canada. Their role is to create a satisfactory outcome for all the parties involved in the insolvency process.

The LIT investigates the debtor’s financial situation, administers the insolvency proceeding, ensures that the debtor’s rights are respected and all the rules and regulations are followed by the parties involved, and protects the rights of the creditors.

Once the insolvency proposal is filed and the bankruptcy protection starts, the LIT will work as a middleman between the debtor and the creditors.

The Creditors

Creditors are entities (individuals or businesses) that the debtor owes money, goods, or services to. There are two types of creditors – unsecured and secured. Unsecured creditors do not have direct claims on the debtor’s property, while secured creditors hold rights or claims against it.

Creditors must file a proof of claim to become involved in any dividend distribution from a bankruptcy. Any creditor also has the right to request a creditors’ meeting in order to review the affairs of the bankrupt. This process is rarely seen in personal bankruptcies, but it’s often encountered in business bankruptcies.

A creditor should also inform the Licensed Insolvency Trustee of any irregularities they might have witnessed before or during the bankruptcy filing. It’s an offence for debtors to fraudulently hide or dispose of propriety before the bankruptcy or during it, so creditors can inform the LIT if they are aware of foul play.

What Bankruptcy Options Are Available For Canadian Debtors?

Individual debtors can choose between 3 insolvency proceedings to deal with their debt:

1. Personal Bankruptcy

Personal bankruptcy is a legal procedure that allows Canadians who struggle with debt to be discharged from the obligation to repay the debts they had when they started the bankruptcy procedure.

When you file for personal bankruptcy, you assign all non-exempt assets you own to a Licensed Insolvency Trustee in exchange for the elimination of debts. But that doesn’t mean you lose everything. You are allowed to keep personal items such as clothing, work tools, household items, and a vehicle worth up to $6,600 (according to the current exemptions).

However, you might have to make some additional surplus income payments if your income is higher than the set threshold.

2. Consumer Proposal

A consumer proposal is a legally binding agreement your Licensed Insolvency Trustee negotiates with your creditors. Once filed, the consumer proposal offers you immediate protection from debt collectors and debt-related legal actions.

The consumer proposal can be a good alternative to personal bankruptcy because you keep control of your assets. Your Licensed Insolvency Trustee negotiates a payment plan between what you can afford and what your creditors expect to receive. The value of the settlement is determined by your income, what you own, and what you owe.

Consumer proposal payment plans are interest-free and can be spread out over a period of five years. This can result in substantial savings – sometimes savings of up to 70%.

3. Division I Proposal

Even though it’s often perceived as a commercial proposal, the Division I plan can be an insolvency option for individual debtors who own more than $250,000.

As with the consumer proposal, you will need to collaborate with your Licensed Insolvency Trustee to come up with a payment plan your creditors would accept. Each Division I proposal is different, based on what you owe, own, and your income.

Just like consumer proposal plans, Division I payment plans can be spread out over a maximum of five years.

Business Bankruptcy Options

Bankruptcy is the most common solution for small businesses that are unable to pay their debts. But some small business owners don’t realize that bankruptcy can be very costly and can sometimes create more problems than it solves.

The structure of your business and the creditors you have are two factors you should take into consideration before filing for bankruptcy.

Partnerships And Sole Proprietorships

If your business is registered as a sole proprietorship or a partnership, then it’s not your business that will go bankrupt, but yourself.

This happens because the structure of your business does not separate your business assets and liabilities from your personal ones.

Any assets you used to operate the business and the accounts receivable due to the business are considered personal assets and are used to limit the liabilities. You’ll deal with any creditors according to personal bankruptcy laws and regulations.

Incorporated Companies

If your business is registered as an incorporated company, it’s considered a separate legal entity and its assets are owned by the business. An incorporated company can go bankrupt if it cannot pay its debts or meet its financial obligations.

When an incorporated company files for bankruptcy, its assets are sold as part of the bankruptcy process and the raised amount is used to reduce its liabilities. Certain types of creditors may have preference over the company’s assets and they are usually the first ones to be paid.

For an incorporated company, the bankruptcy process usually costs more than $15,000. Most small businesses find it difficult to come up with the money, which is why small business owners prefer informally closing the company over bankruptcy. Informally closing the company can be just as effective as declaring bankruptcy if it’s done properly.

Things To Consider Before Filing For Business Bankruptcy

  • Does Your Business Have Assets? – If your enterprise has more assets than liabilities, you might be able to save or sell it. If the company’s liabilities are greater than its assets, it may be a good idea to close. You should handle your company’s assets with care, as certain creditors might have preferential claims over them.
  • Does Your Business Make Money? – If your enterprise is constantly losing money and you have to subsidize it with personal funds or personal credit, then it might be a good idea to stop the investment and walk away. However, if your company is profitable but is just facing some temporary setbacks, it may be a good idea to look into options such as debt restructuring that might save it.
  • Are You Personally Liable For The Company’s Debts? – Keep in mind that bankrupting the company deals with the company’s liability to pay the debts. But if you personally guarantee the debts or the debts are directors liability – such as some CRA debts – you might need to consider your options. Negotiating with your creditors can be a good option if your company’s cash flow can maintain new payments.

Bankrupting or closing down your business might force your creditors to go after you personally to recover the debts you guaranteed. Remolino And Associates can offer professional advice on all the options available to ensure you get the best results.

Performing your due diligence on how to close your business can sometimes be more important than the due diligence you showed before starting the business.

Bankruptcy Process Overview

A bankruptcy proceeding can only be made with the help of a Licenced Insolvency Trustee. Once the bankruptcy is filed, the debtor is protected from the creditors under the Bankruptcy And Insolvency Act until they complete all the requirements of the proceeding, which is known as a stay of proceedings.

Stay Of Proceedings

When the LIT files for bankruptcy on behalf of the debtor, creditors are no longer allowed to continue with most legal actions against the debtor. The debtor supplies the LIT with a list of all the legal actions – pending, started, or completed – against them. The LIT notifies the parties involved that a bankruptcy filing has been made and that the stay of proceedings is in place.

All garnishments except for child or spousal support will stop. All telephone calls and creditor threats will stop. Even lawsuits that have started and are underway will be ceased as soon as the stay of proceedings orders comes into place.

Even though it’s unusual, creditors can ask the court to lift the stay of proceedings. The creditors must argue before the court that the debt they’re owned is not covered by bankruptcy. However, the debtor has the right to attend the hearing and argue against the creditors’ request to lift the stay.

Assets Involved In A Bankruptcy

Most of the proprieties and assets you own, including investments, lands, and goods will be administered by the LIT in order to pay the creditors. The LIT will liquidate the assets and distribute the proceedings to your creditors according to the distribution priorities mentioned in the Bankruptcy And Insolvency Act.

Duties As A Bankrupt

Your creditors might hold meetings, which you, as a bankrupt will be required to attend. Inspectors will be assigned, and they will direct the LIT’s administration of your estate.

As a bankrupt, you will be required to prepare monthly income statements which your LIT will use to determine whether you must make additional payments or not.

You are also required to attend two financial counseling sessions with your LIT or a government-licensed credit counselor. These meetings should help you identify the causes of your financial difficulties and provide you with the tools to improve your money management skills.

Discharge from Bankruptcy

You will receive a Certificate of Discharge (or discharge order) after the bankruptcy procedure is completed (usually after nine months). Getting the discharge certificate means that all your debts, with certain exceptions, are wiped out. If you are not eligible for an automatic discharge, you can receive an Absolute Order of Discharge from the court once you complete all your duties.

Consumer Proposal Overview

Debtors who owe less than $250,000, excluding mortgages, can file consumer proposals. Consumer proposals are legally binding agreements between the debtors and their creditors. The proposal is an offer the debtor makes to pay all of their debt or a portion of it over a specified period of time.

Only a Licensed Insolvency Trustee can file a consumer proposal. Once it’s filed and accepted by the creditors, the consumer proposal has to be paid within five years.

As the proposal’s administrator, the LIT examines the debtor’s assets, their income, and their debts. After a thorough examination, the LIT helps the debtor structure a proposal their creditors would accept.

Once the LIT files the proposal with the Office of the Superintendent of Bankruptcy, the creditors are notified and the debtor can stop all payments on unsecured debts. Creditors can vote on and accept a proposal within 45 days.

Even though creditors are legally allowed to reject a proposal, this is a rare occurrence because a proposal is required to offer creditors more than what they would receive should the debtor file for bankruptcy. It’s also possible to renegotiate the proposal terms to the satisfaction of all parties involved.

Creditor Claims

Each creditor must provide proof of claim with the LIT in order to make a claim. The LIT evaluates the claim and has the right to allow or disallow it. If the creditor’s claim is not allowed, the creditor can appeal the LIT’s decision in court.

If the LIT or the court allows the creditor’s claim, the creditor will receive part of the funds mentioned in the proposal.

Contact A Licensed Insolvency Trustee

Are you ready to make a decision? Learn more about bankruptcies and consumer proposals from a Licensed Insolvency Trustee. Contact Remolino & Associates today and receive a free consultation. The first steps toward your financial freedom are only a click away.

Contact A Licensed Insolvency Trustee

Are you ready to make a decision? Learn more about bankruptcies and consumer proposals from a Licensed Insolvency Trustee. Contact Remolino & Associates today and receive a free consultation. The first steps toward your financial freedom are only a click away. 

Contact A Licensed Insolvency Trustee

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