Frequently Asked Questions on Bankruptcy

Provided by Murray K. Morrison, Barrister and Solicitor

Q. What is Bankruptcy?

A. Bankruptcy is a legal process whereby a person or corporation that cannot manage their debts as they come due makes an "Assignment" to a licensed professional known as a Trustee in Bankruptcy; the theory being that the Trustee will liquate those assets which are not exempt and distribute the proceeds of sale proportionally among the creditors (after allowing for his or her fees, of course). Also, it is possible that a creditor or creditors may Petition an individual or corporation into bankruptcy by filing documents in Court asserting that that individual or corporation is unable to meet their obligations as they become due.

Q.Do I have to give up all my assets?

A. No. For example, in each Province of Canada, and specifically in British Columbia, the Debtor may retain the following assets:

a) A motor vehicle or equity in same for a value of up to $5,000.00;

b) Household goods to a value of $4,000.00;

c) Equity in a residence up to a value of $12,000.00 if in the Greater Vancouver or Greater Victoria Area, and $9,000.00 if elsewhere in the Province.(Please note that this exemption is not limited to real property, but can encompass a house boat, a trailer or a motor home, or a boat) The test is whether or not you live in it;

d) RRSPs and RRIFs but for the last year of contributions.

Click here for a complete list of Provincial Exemptions

Q. Why would an individual wish to go bankrupt?

A. The goalpost here is the "Discharge". In the normal course of events, in Canada, a bankrupt is required to spend 9 months or 21 months depending on income as an undischarged bankrupt, and then, assuming no creditors (or the Trustee or the Superintendent of Bankruptcy) object, the bankrupt is discharged, which simply means that outstanding debts (save for certain exceptions listed later) are legally forgiven and that person can carry on with his or her life. Please note that corporations may never be discharged. Also, if "surplus income" is present.

Q. Do any debts survive?

A. Yes. Certain kinds of debts are not released by a discharge. They are:

1. Fines imposed by a Court;

2. Money owing for fraud or things stolen or obtained by misrepresentation;

3. Alimony or maintenance payments;

4. Court damages awarded for intentionally inflicting bodily harm, or sexual assault;

5. Student Loans. If bankruptcy is filed prior to or within 7 years after the student has left the school. Application may be made after 5 years to request the discharge of these debts. This is a very difficult application.

Q. Does bankruptcy affect my credit rating?

A. Yes, of course it does. Generally when people choose bankruptcy their credit rating has already been seriously impaired. For example in British Columbia, a notation of bankruptcy may remain in a person's credit bureau files for 6 years from the date of the last event - usually the discharge (unless the person has been bankrupt previously, in which case the listing is extended). However, it is quite possible through good planning to commence building a better credit rating long before the 6 years have passed.

Q. What happens during my bankruptcy?

A. You are required to report all your income while you are an undischarged bankrupt, although a family member may opt out of these provisions. If a family member does elect to opt out, the legislation requires that the family exemption be halved. As well, you must attend two counselling sessions related to the use of credit, which sessions are mandated by governmental authority and are provided by the Trustee.

Q. May I earn money during my bankruptcy?

A. Yes. However, the Superintendent of Bankruptcy applies standards each year and if the family income exceeds those standards, a portion (usually 50%) must be paid to the Trustee. For example a single person for the calendar year 2012 may earn the sum of $1,980.00 monthly, net (that is take home pay after all statutory deductions). The family income is proportionalized between the bankrupt and other family members. As a brief example, if the bankrupt took home $2000.00 monthly, he would be required to pay to the Trustee the sum of theoretically $20.00 monthly as "surplus income".

Q. What if I am being sued?

A. The bankruptcy causes a "Stay of Proceedings" which legally prohibits all creditors from taking further legal action against a bankrupt with the exception of Maintenance and Enforcement Actions and certain other proceedings. As well, most collection activities are terminated. Creditors cannot continue with garnishees or lawsuits. The creditors must deal with the Trustee. A creditor may apply to the bankruptcy Court for leave to proceed with an action in such types of cases as fraud and the like.

Q. Should I continue to pay any creditors?

A. No. Once a debtor becomes bankrupt they must not make any further payments to any unsecured creditors. Payments to secured creditors should only be continued after consultation with your Trustee. Please note that while we have listed exempt assets above, if these assets are pledged to a creditor (for example a car loan), that creditor may yet seize that asset. However, often creditors will permit a bankrupt to retain the pledged assets if the Trustee is determined and the security is valid, and the bankrupt continues to make payments on that asset.

Q. What if I am receiving or paying alimony or maintenance?

A. If you are paying alimony or maintenance, these payments must be kept up; however, they are generally added to your exempt income as they are non-discretionary expenses. A bankruptcy does not stop any actions for collections by a spouse for these types of claims. If however, you are receiving alimony or maintenance, you must include it in your income.

Q. Are there any alternatives to bankruptcy if my financial situation is precarious?

A. Yes. A Proposal may be made through a Trustee in Bankruptcy. There are two types as follows:

a. A Consumer Proposal is a situation is where your aggregate debts (excluding any debts secured by property) do not exceed $250,000.00 (as of September 18 2009). If this form of Proposal is not accepted by your Creditors, as it must be put to a vote, there is no impact on this and the debtor is back where he "started from";

b. A regular (or Division 1) Proposal has no limitation with respect to either assets or debts. But, if the Proposal is not approved by the Creditors, the Proposor automatically becomes bankrupt;

c. Proposals may also be made through a Credit Counsellor whereby the person's unsecured indebtedness is retired over a period of up to 5 years in regular monthly payments. Oftentimes creditors can be persuaded to remove or reduce interest due on indebtedness for this type of Proposal. As well, certain Credit Counselling Agencies also do what are known (among other things) as Debt Reduction Proposals, whereby the debtor offers a reduced amount to the creditors (generally in monthly payments, but occasionally on a lump sum basis) due to their difficult financial circumstances. Their circumstances must be conclusively proved to the creditors, to endeavor to obtain their acceptance. The advantage to Credit Counsellor Proposals is that they receive a preferential Credit Bureau Rating, and are informal in nature; the disadvantage, of course is that in Proposals under the Bankruptcy and Insolvency Act a "Stay of Proceedings" exists whereby creditors cannot pursue the debtor unless and until the Proposal is rejected.

Q. How do I become bankrupt?

A. There are two ways a debtor can become bankrupt:

a) Voluntary Bankruptcy - where the debtor attends upon a Trustee and signs the formal documentation necessary to start the bankruptcy process. These documents are filed with the Superintendent of Bankruptcy and the Court;

b) Involuntary Bankruptcy - a creditor asks that the Court to make an Order that the debtor is bankrupt and to appoint a trustee in bankruptcy. This Order is called a Receiving Order.

As the writer practices in Canada, the comments made here are based upon Canadian Law. However, many other Countries have similar provisions and methods.