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BANKRUPTCY ACT CANADA: ARE YOU REALLY PREPARED FOR IT?

Introduction

No person wishes to go make a filing under the Bankruptcy and Insolvency Act (R.S.C., 1985, c. B-3) (Bankruptcy Act Canada), however occasionally it is inevitable. You might think that people who file are just those that are careless with their finances. However, with most of the people I see, it is usually an event outside of their control that pushes them over the edge.

In personal bankruptcy, things such as illness, divorce, job loss, unanticipated catastrophes, identity theft and fraud are many times the causes of insolvency. Of course, lack of proper budgeting, overspending and inappropriate uses of credit are also involved. In corporate insolvency, the #1 cause always seems to track back to management.

Insolvency filings happen every year. In 2018, a total amount of 128,846 insolvency filings were made with the Office of the Superintendent of Bankruptcy (OSB). This is 2.4% more from 2017. Consumer insolvency filings increased 2.5% (125,266 filings), while company filings dropped 0.8% to 3,580.

At the very same time, people choosing to avoid bankruptcy by filing a proposal continued increasing in 2018, bringing this number to a brand-new level. Proposals represented 52.6% of consumer filings in 2017. In 2018, they expanded by 6.6% to 56% of all personal filings.

Are you considering a Bankruptcy Act Canada filing, or at least speaking to a Licensed Insolvency Trustee (formerly called a trustee in bankruptcy) (Trustee)? In order to help you start your fact-finding, I want to tell you what will happen to your bank accounts, retirement accounts and your other important financial funds. Understanding what to anticipate can assist you to stay clear of some pricey blunders.

Bankruptcy or (consumer) proposal

Being insolvent is that you are not able to settle your financial debts. People with severe financial problems can make Bankruptcy Act Canada filing by filing either for bankruptcy, a consumer proposal or Division I proposal.

Proposals are official methods controlled by the Bankruptcy Act Canada for personal filings. Dealing with a Trustee you make a proposal to:

  • Pay your creditors a portion of what you owe them over a particular time period not going beyond 60 months
  • Extend the time you need to settle the debt
  • Or a mix of both

The Proposal is made via the Trustee, who uses the money in your proposal fund to pay the cost of administration and distribution to each of your creditors their pro-rata share. A consumer proposal needs to be finished within 5 years from the day of filing.

Proposal

People with severe financial problems can apply for bankruptcy. They can also try to avoid bankruptcy by using the Proposal provisions of the Bankruptcy Act Canada.

There are numerous advantages to avoiding bankruptcy. The main differences between proposals and bankruptcy are:

  • Unlike informal debt settlement, a Proposal produces a binding discussion forum where each of your unsecured creditors has to participate in for your debt restructuring.
  • You can keep your property, including your home, if you can afford to in your budget.
  • Lawsuits against you and enforcement proceedings, such as wage garnishments, cannot begin or continue.
  • In a successfully completed Proposal, you do not need to file for bankruptcy.

Keep in mind that financial institutions have “set-off” legal rights, implying that if you declare bankruptcy or file for bankruptcy when you’re behind in payments to them, they will take the funds in your accounts to try to cover all or some of what you owe them. This is notwithstanding that there is a stay of proceedings once a Bankruptcy Act Canada filing takes place and such an offset really should not take place.

So if you are thinking of filing either for bankruptcy or a proposal, I want you to be prepared for what might happen to your financial assets.

Your bank account

In a bankruptcy, the cash in your bank account is a property which must be paid over to the Trustee. Upon your filing, the Trustee will put all your banks on notice to provide the funds in any accounts maintained with them to the Trustee. As noted above, the bank may very well offset cash in your savings or chequing account against the money you may owe them, including credit card debt.

In a Proposal, you do not lose control of the money in your bank accounts. Rather, they are considered by the Trustee in formulating the type of Proposal you should offer your creditors. Remember, your Proposal must offer your creditors a better alternative than your bankruptcy would. However, even though there is a stay of proceedings invoked once you file your Proposal, it is not uncommon for a bank where you maintain an account and to whom you owe money, to take the money in your account and offset it against what you owe them.

So the moral of this story is that you are best to have bank accounts at financial institutions to whom you do not owe any money.

Registered Retirement Savings Plan (RRSP), Registered Retirement Income Fund (RRIF) or Deferred Profit Sharing Plan (DPSP)

In a bankruptcy, your RRSP, RRIF or DPSP are excluded from seizure. However, the Trustee is entitled under the Bankruptcy Act Canada to receive the equivalent to any amounts contributed to these accounts in the 12 months preceding your filing date. In a Proposal, this 12-month amount must be included by the Trustee in the calculation of what amount your Proposal should offer your creditors.

Canada Pension Plan (CPP) and Old Age Security income (OAS)

Canada Revenue Agency (CRA) is the only one permitted to garnish your CPP earnings if you have an unpaid personal income tax. By filing either for bankruptcy or a Proposal, the stay of proceedings will be invoked and CRA will have to stop the garnishment of your CPP and you will get the CPP payments you are qualified for.

However, the earnings obtained from CPP and OAS will certainly be taken into account by the Trustee in determining if you have any surplus income payment obligation in bankruptcy. In a Proposal, that amount also has to be considered in developing your Proposal.

Tax-Free Savings Account (TFSA), Registered Education Savings Plan (RESP) and other non-registered account investments

In a bankruptcy, just like any other non-exempt property, the amount held in your TFSA and any other non-registered investment account must be paid to the Trustee. In a Proposal, these amounts need to be taken into account in determining what type of Proposal to make. It may very well be that these accounts are collapsed in order to help fund a Proposal.

Similarly, RESPs are not excluded in personal bankruptcy. In a Proposal, the amount must be considered as an asset in calculating how much must be offered in your Proposal to stand a chance for success.

The reason that an RESP is not excluded from seizure in bankruptcy is relatively straightforward. Your child does not acquire ownership or other entitlement to the RESP funds as parents can take possession of the funds prior to the child becoming a post-secondary school student. For that reason, it is the parents who have ownership of the funds.

Consequently, the Trustee of an insolvent mother or father that has an RESP can collapse it. If the parent in bankruptcy wants the RESP to not collapse, adequate arrangements need to be made with the Trustee for the equal amount of funds in the RESP at the filing date be paid to the Trustee for the bankruptcy estate and the bankrupt’s creditors.

Annuity revenue in bankruptcy

Annuities are agreements where you pay a company (normally an insurance company) a specific amount, in order to get regular monthly payments for a specific period of time or for the remainder of your life.

If an annuity contract is properly set up with an insurance company, it will be exempt from seizure in bankruptcy. However, the income stream it produces will be considered by the Trustee in determining whether the bankrupt person has a surplus income obligation.

Your RRIF can also be considered as an annuity as it provides a legislated stream of payments. The RRIF is exempt from seizure in a bankruptcy, other than for any contributions in the 12 months immediately prior to filing. Like an annuity, the entitlement to payments will be considered by the Trustee in doing the surplus income calculation.

In a Proposal, you don’t give up ownership of an annuity contract or RRIF, but the income must be considered in preparing a suitable Proposal.

Bankruptcy Act Canada summary

Do you have financial problems? Do you not have enough money to pay your bills in full when due?

As a Trustee, we are the only professionals licensed, authorized and supervised by the federal government to offer insolvency advice and to implement solutions under the Bankruptcy Act Canada. A consumer proposal is a federal government licensed debt settlement plan to eliminate your debt. We will help you to select what is best for you to free you from your debt issues.

Call the Ira Smith Team today so we can eliminate the anxiousness, tension, discomfort and pain from your life that your cash problems have caused. With the unique roadmap, we develop just for you, we will promptly return you right into a healthy and balanced problem-free life.

Call the Ira Smith Team today. We have generations and decades of experience helping people and companies looking for debt restructuring and a debt settlement plan to AVOID bankruptcy.

You can have a no-cost consultation so we can work with you to fix your money troubles. Call the Ira Smith Team today. This will certainly allow you to go back to a new healthy and balanced life, Starting Over Starting Now.

bankruptcy act canada

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Brandon Blog Post

BANKRUPTCY AND INSOLVENCY ACT CANADA: BANKRUPTCY LAW FAQ

Introduction

I am often asked general questions about the Bankruptcy and Insolvency Act Canada. Sometimes it is about the application of a certain section or topic. Other times, it is a simple question such as where can I find a copy that I can look at?

The purpose of this Brandon’s Blog is to list the most often asked questions. Not all of them may be of interest to you. However, for those that have questions about the Bankruptcy and Insolvency Act, hopefully at least one of these questions (and the answer) will be of interest to you.

So here we go.

Is there a book that explains the various topics and sections of the Act?

Yes, there is. The book is an annotated version of the statute. It has the complete Act and its rules and regulations. In addition, the annotations provide explanations on the application of each section as well as a listing of decided cases to support the explanations.

Can I look up the Act and decided cases somewhere online for free?

Yes. The Canadian Legal Information Institute (CanLII) operates a website. It has the legislation online calling it the Bankruptcy and Insolvency Act Canada CanLII. CanLII can also be used to search bankruptcy legal decisions in both English and French.

Where can I find a listing of the many forms that a licensed insolvency trustee uses?

The best place to find all the mandated forms is on the website operated by the Government of Canada, Office of the Superintendent of Bankruptcy. It lists all the forms. They are also downloadable as pdf forms.

People ask me if they can perform a Bankruptcy and Insolvency Act Canada search. What they really mean is can they perform a search to find out if a specific person or company did a personal or corporate filing under the Canadian bankruptcy system. The answer to this question is yes.

The Office of the Superintendent of Bankruptcy operates a database for people to search the bankruptcy and insolvency records in Canada. The database can be accessed for free by a licensed insolvency trustee. Any member of the public can do the same search for the cost of $8 per search. Eventually, the Government of Canada is going to move to a free system, but it is not in place yet.

What are the Bankruptcy and Insolvency Act Canada regulations?

The Bankruptcy and Insolvency Act Canada regulations, otherwise known as the bankruptcy rules, form part of the Act itself. The pure legislation contained in the various sections of the Act is just that; the legislation. However, there are practical considerations which also need clarification. Such clarification is found in the Rules contained in the Bankruptcy and Insolvency Act (Canada). For example, the rules describe steps to abide by a specific section of the Act, or who is responsible for establishing Court fees.

Is their equal treatment for all unsecured creditors?

This is always an interesting question. The answer is also confusing to many lay people. The answer is both no and yes. I will explain. There are two types of unsecured creditors; preferred unsecured and ordinary unsecured. Many people forget this.

All ordinary unsecured creditors ARE treated equally. Their claims rank equally. The licensed insolvency trustee (formerly called bankruptcy trustee) paying a dividend to the ordinary unsecured creditors, they will all receive theirs in proportion share. The calculation is based on their respective ordinary unsecured claims.

The preferred unsecured creditors ARE NOT treated equally. The Bankruptcy and Insolvency Act Canada section 136 sets out the scheme of distribution for the rank of the claims. Payment to preferred creditors ALWAYS happens BEFORE payment to ORDINARY creditors.

The preferred creditors

However, preferred unsecured creditors are not equal. The Act states that there is a ranking of claims within the preferred group. The list and order of priority of the major types of preferred creditors are as follows:

  • for a deceased bankrupt, the reasonable funeral and testamentary expenses incurred;
  • the costs of the bankruptcy administration:
  • the levy payable by the licensed insolvency trustee under section 147 of the Act;
  • any wages, salaries, commissions, compensation or disbursements owing to employees for the six month period prior to the bankruptcy;
  • municipal taxes assessed or levied against the bankrupt, within the two years before the bankruptcy, that is not secured against the real property;
  • the commercial landlord for arrears of rent for three months immediately before the bankruptcy and accelerated rent for not more than three months following the bankruptcy (if entitled to accelerated rent under the lease);
  • one bill of costs of a lawyer for the creditor who first attached by way of garnishment or filed with the Sheriff an attachment, execution or another process against the property of the bankrupt;
  • indebtedness of the bankrupt under any Act about workers’ compensation, unemployment insurance or under any provision of the Income Tax Act creating an obligation to pay to Her Majesty amounts that have been deducted or withheld;
  • claims resulting from injuries to employees of the bankrupt for which there will be a receipt of money from persons guaranteeing the bankrupt against damages resulting from those injuries; and
  • any other claims of the Crown

The Trustee must pay the claims of the preferred creditors in full, less the statutory levy mentioned above. If there are insufficient funds to pay some or all the preferred creditors, then their claims become ordinary unsecured claims.

In personal bankruptcy, are there any claims not discharged upon the person receiving their absolute discharge from bankruptcy?

Yes. The Bankruptcy and Insolvency Act Canada section 178 lists the claims not discharged in a person’s bankruptcy. Such debts are:

  • a fine, penalty, restitution order or other order similar in nature imposed by a court in respect of an offence, or any debt arising out of a recognizance or bail;
  • any award of damages by a court in civil proceedings in respect of bodily harm intentionally inflicted, sexual assault, or wrongful death as a result of such an act;
  • a debt or liability for alimony or support under a court order or valid written agreement;
  • the debt or liability arising out of fraud, embezzlement, misappropriation or defalcation while acting in a fiduciary capacity;
  • debts or liabilities resulting from obtaining property or services by false pretenses or fraudulent misrepresentation;
  • the entitlement to a dividend a creditor would have received on any provable claim not disclosed to the trustee unless the creditor had notice or knowledge of the bankruptcy and failed to take reasonable action to prove a claim;
  • any debt or obligation of a loan made under the Canada Student Loans Act, the Canada Student Financial Assistance Act or any enactment of a province that provides for loans or guarantees of loans to students where the date the person ceased being a full or part-time student was within seven years before the date of bankruptcy;

All claims against a bankrupt person are discharged when the person obtains their absolute bankruptcy discharge except those indicated above.

Student loans

There is an additional provision in the Bankruptcy and Insolvency Act Canada student loans section. It states that any time after 5 years after the bankrupt person has ceased to be a full or part-time student, they can apply to the Court for relief. The Court can cut the student loan debt if proved that the bankrupt person:

  • has acted in good faith in trying to repay the student loan debt, and
  • the bankrupt person has and will continue to experience financial difficulty and will be unable to pay the debt

What is the history of the Bankruptcy and Insolvency Act in Canada?

The Bankruptcy and Insolvency Act in Canada has a very interesting history. The Bankruptcy and Insolvency Act of Canada has its origins in the Bankruptcy Act of 1919. The Act changed in 1949. In terms of the history of our country, this means the Act is a relatively young piece of legislation. The reason for the enactment is that every modern society has to realize that some of its citizens and businesses will run into financial trouble. A modern and efficient economy has to have the means to help those people and businesses out of their trouble. Everyone deserves a fresh start. To redeploy a company’s assets there must be a formal system to allow this to happen.

The Act changed again in 1992, 1997 as well as 2008-2009. The 1992 reforms concentrated on maximizing value for creditors with reorganization and rehabilitation, boosting the fair distribution to employees and providers of goods and services to the bankrupt company.

The 1997 reforms urged consumer debtor responsibility and boosted the reorganization stipulations as well as the administration of the Act. It introduced new sections dealing with the insolvency of securities firms and dealing with global insolvencies.

The 2009 reforms, had 4 primary aims:

  • to urge the restructuring of viable, but financially hampered companies;
  • to better secure workers’ insurance claims for wages and holiday pay;
  • making the bankruptcy system fairer and lower abuse; and
  • to improve the administration of the Canadian bankruptcy system.

Is the Act federal or provincial legislation?

Federal legislation. The name of the Act gives the answer. Its name is the Bankruptcy and Insolvency Act Canada. Although there are laws in each Province that will come into play during the administration of a bankruptcy or reorganization, the Act is Federal.

Summary

So I hope you have a better understanding of the most asked questions about the Government of Canada Bankruptcy and Insolvency Act. The Act deals with bankruptcy insolvency issues for both bankruptcy law personal and corporate.

If you have any questions about how the Canadian bankruptcy system works or feel that someone you know could benefit from a free first consultation with a professional licensed insolvency trustee, feel free to contact me.

The Ira Smith Team have decades of experience in both personal and corporate insolvency matters. We can handle complex corporate and other business financial restructurings as well as personal financial problems. In both corporate and personal insolvency matters, we first look at how we can reorganize and restructure the person or business to do a rescue.

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