What is Bankruptcy?

Bankruptcy is where an honest but unfortunate debtor can go through a process whereby their debts are extinguished which allows them to make a fresh start. In Canada the Federal Government governs the bankruptcy process through national legislation called the Bankruptcy and Insolvency Act. The Act gives Industry Canada the legal authority to license Bankruptcy Trustees in various jurisdictions throughout Canada.

What is a Bankruptcy Trustee?

Can anyone declare Bankruptcy?

Anyone who is insolvent and resides in Canada, or owns property in Canada, can declare bankruptcy in Canada.

Can I come in to talk to someone to review my finances even if I don’t know that either a Bankruptcy or Proposal is right for me?

We would be more than happy to look at your financial situation to discuss what options you have. Quite often we see people who are in a financial crunch who just need to talk out their options with someone who is not emotionally attached to their situation. We hope to provide each person with a full range of options that may not necessarily involve bankruptcy or file a Proposal.

When will I be finished with my bankruptcy?

The time when you are finished with the bankruptcy or “discharged from bankruptcy” depends upon your personal situation and your behaviour during the bankruptcy process. First and foremost your must do all the Duties assigned to you under the Bankruptcy and Insolvency Act. If you have performed all of your duties as explained by the Trustee, your eligibility for discharge depends upon how much income you earn during the bankruptcy process as well as whether or not you have been bankrupt before.

You can be discharged after;

9 months – if you HAVE NOT been bankruptcy before and you have NO Surplus Income
21 months – if you HAVE NOT been bankrupt before and you DO HAVE Surplus Income
24 months – if you HAVE been bankrupt before but DO NOT have Surplus Income
36 months – if you HAVE been bankrupt before and DO HAVE Surplus Income

There are additional rules about being discharged if you owe the Canadian Revenue Agency more than $200,000. For debtors in this category it is best to check with your Trustee as the case law, or jurist prudence, is regularly changing in this area.

Will Bankruptcy ruin my credit score?

Your credit score is reflective of your debt repayment history with your creditors. If you are not able to pay back all or portions of your debts, then your credit score will suffer. Declaring bankruptcy in itself will not necessary “ruin” your score but certainly once you declare bankruptcy your score will reflect this fact. Your score will also reflect the fact if you are late paying your debts or simply default on your payments. Once you have completed bankruptcy for a Proposal then you can make a clean financial start and start to rebuild your credit.

Will this affect my spouse?

The debts that you have incurred do not become the responsibility of your spouse unless your spouse has guaranteed your debts in some way (signed a personal guarantee, joint credit cards or line of credit etc.) This applies to anyone who has guaranteed your debts. Your spouses credit rating will not be affected and their debt is not included in your bankruptcy process

Do I have to report my monthly Income to my Trustee? Does my spouse have to report?

For each month that you remain in bankruptcy you will have to disclose your family income to the trustee and provide a proof of that income by either submitting pay slips or copies of bank statements etc. The Superintendent’s Guidelines anticipate that the entire family unit will be disclosing their income. If your spouse refuses to disclose his or her income, then the guideline amount is reduced by 50%.

In practice the Trustee will help you review your average family income and set a projected monthly commitment you will have to pay to the Trustee on a monthly basis for each month that you remain in bankruptcy. As the bankruptcy progresses, you will fill out and submit a Monthly Statement of Income and Expenses which will disclose your actual income and expenses incurred. If your income varies significantly from what was projected at the beginning, then your payments are adjusted accordingly.

How do I get the bankrutpcy process started?

You may ask yourself, “How do I get the bankruptcy Process Started?”
 

• Attend a meeting of your creditors, if such a meeting is requested
• Each month during the bankruptcy, send the trustee proof of your income.
• Make monthly payments to the trustee, if you have Surplus Income
• Attend two credit counseling sessions, to learn budgeting and money management skills.

If I change my mind, can I stop the process?

Once you have declared bankruptcy you must follow the process through to the end or you will remain un-discharged. Being un-discharged means that any interest you subsequently acquire in assets (house, cars, inheritances etc.) would belong to the Trustee. As well, if the Trustee is discharged, then your creditors can begin collection action against you again i.e. garnish your wages.

If you have filed a Proposal you can decide to stop your payments at any time if it is no longer something you can manage. If you stop your payments for more than 3 months worth of payments, then your Proposal is automatically over which means that your creditors can begin to collect against you again. There is some limited ability to start your Proposal over again, but it is not guaranteed that your creditors will agree to the process. As well, if you have filed a Proposal and defaulted on your payments, you cannot attempt to file a different or new Proposal for 6 months.

Will I lose all of my assets if I go bankrupt? What can I keep? What is meant by Exempt Assets?

Every province in Canada allows you to keep (claim them as “exempt”) some level of personal assets if you declare bankruptcy. The nature of the assets that you can keep depends on the applicable provincial legislation where you file for bankruptcy. If you declare bankruptcy, file a proposal or even if you are sued, in British Columbia the BC Court Order Enforcement Act allows you to keep from your creditors
 

• $5000 equity in a vehicle (equity being the value of the assets above the debt attached to that asset)
• $10,000 in Tools of the Trade (anything you use to earn an income)
• $4,000 in Home Furnishings and Appliances
• $12,000 in equity in a personal residence ($9,000 outside of the GVRD area)

In addition to the above amounts there is other legislation that allows you to keep your RRSP’s except for any contributions you have made in the previous 12 months.

To become a Bankruptcy Trustee generally the first step is to obtain a 4-year university Degree and then complete an in-depth 3-year course of study and examination. Once a candidate has qualified and passes all of the written tests, an Oral Board of Examination is set where the Office of the Superintendent of Bankruptcy, a lawyer who is familiar with insolvency law and a working Trustee review the potential Trustee for their level of competency. Only if all of these tests are passed will the Office of the Superintendent of Bankruptcy issue a license to practice to the Trustee.

A Bankruptcy Trustee is a highly respect insolvency professional. The Trustee designation signifies years of in-depth study, work experience, competence and commitment to the highest of professional ethics and objectivity. In Canada approximately 95% of Bankruptcy Trustee’s are members of the CAIRP (Canadian Association of Insolvency and Restructuring Professionals). Chartered Insolvency and Restructuring Professionals (CIRP) must maintain highest standards of conduct. The Rules of Professional Conduct, which set these high standards, are, first and foremost, to protect the public. Secondly, they are to ensure that all parties are treated with respect, courtesy and integrity.

Can I declare bankruptcy in Canada if I am living abroad?

You must be “resident” in Canada to declare bankruptcy unless you have either
 

• Carried on a business in Canada or/and;
• Have assets in Canada

Practically speaking unless you have severed all ties with Canada and have primarily Canadian debt, you can declare bankruptcy in Canada. Practically speaking the most practical way to do this is upon any travel back to Canada and contact a Trustee while you are in the country.
 

Can I keep my vehicle lease going while I am bankrupt or file a Proposal?

As long as you keep your payments up to date the Bankruptcy and Insolvency Act prohibits any creditor from cancelling a contract (lease) only because you are bankrupt. So yes, as will all “on-going” commitments (rent, mortgage, cell phone contract, car lease, etc) if you continue to make your payments under the terms of the original contract, then you can keep your asset.

Can I keep some debts out of my bankruptcy or Proposal?

All debts anywhere in the world must be part or your Bankruptcy or Proposal disclosure Statement. You cannot pick and choose which creditors your Trustee will notify. However, if you have a car loan and want to keep the car, as long as you continue to make your car payment under the terms of your secured agreement with the creditor, then you can keep you vehicle. Secured creditors, like a creditor who has loaned you money to purchase an asset such as a car and has registered the debt against that asset under the PPSA, they do not have their rights under their security affected by you filing for bankruptcy. So, if you keep making your payment, then you can keep your assets. If you fail to make your payments, then the secured creditor can come and take the asset (car) back if it is allowed under their security agreement.

Is the fact that I have been previously bankrupt remain forever?

The Office of the Superintendant of Bankruptcy, a part of the Canadian Federal Government administered by Industry Canada keeps permanent records of all individuals who have either filed for bankruptcy or filed a Proposal.

If I declare bankruptcy, will my name be made public?

If the trustee reviews your personal situation and there is going to be $15,000 or more available to your creditors, then the Trustee will generally be required to publish notice of your bankruptcy in the local newspaper. However, the Canadian Federal Government is responsible for keeping track of anyone that declares bankruptcy and this information is a matter of public record and the fact that you have previously declared bankruptcy will remain on your financial record with the Government.

Can I keep my leased car if I go Bankrupt in British Columbia?

Yes, it may be possible to keep your leased car when you file Bankruptcy in BC, however, some conditions may apply so it is important to review the details of your lease agreement. Generally, the rule after bankruptcy for a leased vehicle is that as long as your continue to make your payments, that is if they fit within your family budget, then then you can keep the vehicle.

Before you assign into bankruptcy your trustee in bankruptcy will look at the value of your leased car and your remaining lease payments. Generally the value of the car is less than the remaining lease payments, thus if you currently sold the car, what you would get would not be sufficient to pay off the lease in full. Don’t forget to look at the “balloon payment” or “buy-out option” at the end as this is usually where significant additional costs can be hiding. As well, if you have driven further than allowed under the terms of the lease, or have damage to the vehicle, then these may also be costs that you should factor into your decision when deciding if you want to keep the car or surrender it over to the secured creditors when you declare bankruptcy.

If you decide that you cannot afford the payments, you can give up the leased car and any debt associated with breaking the lease can be a debt discharged in the bankruptcy.

Once I declare bankruptcy, how long does it take before my creditors stop calling?

Yes, they have been notified and having straggling calls is quite normal. All bankruptcy documents are mailed to each creditor within 5 days of your assignment. However, we send the formal documents to the banks bankruptcy-processing centre so it can take time before the various collection agencies/departments are informed of your bankruptcy. Somewhere, in the banks processing departments, someone will flip a switch and you will no longer be called or receive paperwork. Until that time you may get both.

Do you pick up the phone? You don’t have to answer your phone, but if you want the calls to stop as quickly as possible, your best bet is to answer the phone, ask who is calling and ask for the proper spelling of their name and inform them that you are bankrupt, the name and address of your bankruptcy trustee and your personal estate number.

If they are particularly nasty, let them know that you are recording the call and that you are formerly requesting that they stop calling you. Generally this works.

Does Surplus Income add to the cost of bankruptcy?

On top of the trustee fee and your loss of assets, a bankruptcy may cost you some of your income, depending on how much you earn and the size of your household. The principle is that, if you earn more than your household needs to survive, you must pay the Surplus Income to your trustee for the creditors. The Office of the Superintendent of Bankruptcy determines the income that you can keep through their Income Standards based on the number of people in your household. The more you earn, the more expensive filing for bankruptcy will become.

Summary of the Canadian Bankruptcy System

The Canadian Bankruptcy process is legal process designed to allow the honest but unfortunate debtor the opportunity to get out from under insurmountable debt and make a fresh financial start. It is a process where a debtor assigns or surrenders everything you own, except assets that are considered Exempt Assets, in exchange for the elimination of your debts..

To go into Canadian bankruptcy in Canada, a person must live or do business in Canada, and must be insolvent. To be insolvent means:

To owe at least $1,000. and/or;

Not to be able to meet your debts when they come due.

Bankruptcy trustees are federally licensed. Their fees are regulated under the Bankruptcy and Insolvency Act and monitored through the Supreme Court of British Columbia.

Because bankruptcy is a legal process, there is a Stay of Proceedings that prevents on-going legal actions such as a garnishment of your wages or any new legal actions from your creditors commencing.

You may be entitled to an automatic discharge from bankruptcy in 9 months, the minimum time set by the Court to be bankrupt, provided you have never been bankrupt before and you complete various Duties and responsibilities.

A secured debt such as a car loan or mortgage, although listed in your bankruptcy Statement of Affairs, is not a debt that is erased in your bankruptcy. Since you have given an asset as collateral, your creditor does not need the bankruptcy process to recover the amount owing to them.

Some unsecured debts have special rules and are also not discharged in a bankruptcy such as Student Loans and any alimony or child support obligations..

The length of your bankruptcy will be nine months, unless one of the following is true:
 

• You fail to perform all your Duties, such as regular payments of surplus income to the trustee.
• You have Surplus Income
• You have been bankrupt before

Judgement creditor liens on Real Property after Bankruptcy

I had question about a judgement creditor lien which was filed at land titles against my house. I had a meeting a couple months ago about filing for bankruptcy and then decided against it as we wanted to try to settle our debts ourselves. My wife and I are trying to sell our condo right now and but don’t want a creditor to put a lien on it and risk my wife losing some of her money. I just realized that I am only a guarantor on our mortgage and not an owner. I wanted to ask about a creditor lien on property.

As all of the personal debt is in my name, I would like to know if I file for bankruptcy would a creditor still be able to put a lien on our condo? Can my wife sell the condo and keep all of the proceeds for herself?

Answer: This is your answer regarding debts and claims and creditor lien on property .

If you have a property, that is if you name is listed on title at Land Titles, then the property in some portion at least, is yours. Thus if any of your creditors sues you and is successful in that they can prove that you owe them money, then they can take that “proof” in what the court decides, called a “judgement” and record that judgment at Land Titles against the property. Any property must have “clear title” or have the judgement removed before it could be sold, so if you were selling it outside of a bankruptcy, then you would have to pay off the judgement.

However, once you declare bankruptcy any “judgement creditor” or those that are registered against your house or property cannot stay on title and by virtue of the bankruptcy would have to remove themselves from the Land Title registry. So, if you were bankrupt, the judgment creditors, if any, would have to come off title. Further, if you were bankrupt, no creditor could begin or continue with any court action so they would not be able to register on title or sue you, during the bankruptcy process. For a creditor to register a Judgement on Title of a property, you would have to be the debtor (owe the money) and be an owner of the property.

As well, if you were to go bankrupt and living in the condo, you could keep up to $12,000 in equity from the Trustee and creditors, whereas, if you sold the condo and were not bankrupt, any equity you receive in cash would be something that your creditors could go after as it would be “cash” and no longer a condo. Thus some people who have debts and need to declare bankruptcy will declare bankruptcy prior to selling their principle residences as they know that in a bankruptcy, once the property is sold, they can keep the first $12,000 in net proceeds.

In your case, when you were talking to us it may be that we estimated that your equity in the condo was beyond the $12,000 which is why you were concerned about creditors going after this asset? I am not sure. However, now if it is clear that you are not the owner of the condo and thus would not be eligible to receive any sale proceeds, then yes bankruptcy would definitely be an option for you.

I suggest that we discuss your situation in person again to decide which option is the best for you.

How does my Bankruptcy Trustee fees get paid?

Bankruptcy Trustee fees come from the funds paid into the bankruptcy estate. Bankruptcy Trustee’s are self-employed and do not receive a subsidy from any form of Government. The fees that we charge as a Trustee are governed under the Bankruptcy and Insolvency Act and the Supreme Court of British Columbia.

A Trustee will need to collect a minimum amount in your bankruptcy estate, usually at least $1,700 for fees but this amount can be paid based on monthly installments. For a first time bankrupt, the initial deposit is $165 plus a commitment to pay $180 for the balance of the 9 months.

In addition, the fees can be taken from assets that are above the Exempt amount, Surplus Income or Income Tax refunds (while you remain in bankruptcy any tax refunds including GST/HST refund cheques will automatically be sent to us as Trustee)

Are all debts covered in the Bankruptcy or Proposal? Is Canada Revenue Agency Tax Debts included as well?

In Canada, all debts, anywhere in the world are debts are covered by a bankruptcy or Consumer Proposal (or a Division 1 Proposal). This is also true for tax debts that arise from personal tax debts from the CRA such as GST, un-remitted source deductions or payroll tax. Other tax debts that arise from operating a small business are also included.

As soon as your sign the formal documents with your Licensed Insolvency Trustee there is an immediate Stay of Proceeding, which means that no creditor can continue to collect from you, phone you, or garnish your wages etc – once you have done something formal with a Trustee under the Bankruptcy and Insolvency Act. It takes some time for the information to trickle down to your creditors to stop calling after your have formally assigned. To help speed up this process, answer any collection calls you receive after your assignment and direct them to the office of your trustee.

When you have complete all of your obligations under either a bankruptcy or a Proposal, you are discharged from the formal process. Once you are discharged your debts are extinguished or wiped away legally and you can make a fresh financial start debt free. However, there are some debts that are not discharged or wiped away and these include debts that arose from ;

Debts Not Released in Bankruptcy or Consumer Proposal
 

• Student Loans less that 7 years old (sometimes this is reduced to 5 Year in the case of Hardship Rules for Student loans)
• Alimony, Child Support payments
• Fraud, Misrepresentation, Theft
• Fines of the Court
• Awards of Damages for intentionally inflicting harm on another person

Will I lose my house if I declare bankruptcy or file a Proposal?

As with other contracts (car leases, cell phone contracts etc), you must keep your payments up to date to keep your house and avoid any foreclosure action by your bank or mortgage company.

However, if your mortgage comes up for renewal and you remain in Bankruptcy or under a Proposal, it has been our experience that your best bet is to renew your mortgage without causing a review of its terms or of your personal credit situation. Generally the banks/mortgage companies will simply send you a form to renew your mortgage without reviewing your current credit report if you have been in good standing and made your payments on time during the course of the mortgage term. As such, it is in your best interest generally to sign and renew where requested.

If you have to “re-qualify” for a new mortgage, it may be more difficult if you remain un-discharged from either a Bankruptcy or a Proposal.

What is “Surplus Income”? How is my Income or Wages treated during Bankruptcy?

Surplus income, or excess income is a term referred to income earned by a bankrupt debtor above a certain minimum amount. Each month that you remain in bankruptcy your income is compared to a guideline amount set by the Office of the Superintendent of Bankruptcy (“Superintendent’s Standards”). Any income that you earn above these Standard amounts is considered “Surplus Income” and 50% of any of this surplus amount is payable to the Trustee for benefit of your creditors.

Lets go through a quick example to illustrate:

If you live by yourself, the Superintendent Standard for 1 person is $1980 per month.

If your monthly Take-home pay is $2,980, then your Excess Income would be $1,000 or

$2,980 – $1,980 = $ 1,000. What you would have to pay to the Trustee is 50% of the Excess calculated or $500

$1,000 x 50% = $500

If you have surplus income, then this is the amount you would pay to the Trustee each month that you remain in bankruptcy.

This is a key calculation as if for the first 9 months that you are in bankruptcy, if you Excess Income is beyond more that $100 for each month, on average – so $900 total over the first 9 month – then the time you have to remain in bankruptcy is automatically extended to 21 months.

Reach out to a debt solutions manager today: