You most likely have heard the word bankruptcy but perhaps you are uncertain what it is. If you’re looking for some information before picking up the phone to book that consultation, look no further. In this blog we will cover some of the good, bad and the ugly points of filing personal bankruptcy.
Without Further Ado – The Good Aspect Of Bankruptcy
The Bankruptcy and Insolvency Act (BIA) has been referred, by some professionals in our community, as a “sword and shield”. What does this mean exactly? For the honest but overburdened debtor, the BIA can be used as a shield. We will come back to the “sword and shield” concept a bit later in this blog.
“So a shield you say”… One of the driving factors for someone filing for bankruptcy is to get relief from their creditors. The shield part of this expression relates to what is called a Stay of Proceedings or Stay. The Stay stops ongoing or pending garnishments; stops collection activity; and the general burden of having to make payments to ones creditors.
The other benefit to filing for bankruptcy is the idea that at the conclusion of the bankruptcy itself, the person filing for bankruptcy will be debt free. A clean slate if you will.
Something else to consider is the money that you would save by filing bankruptcy. Bankruptcy isn’t free and the LIT will discuss payment obligations, which are dependent on your specific situation. However, the monthly cost of filing bankruptcy would most likely cost less than what your monthly minimum payments to your creditors would be. Also, minimum payments to your creditors could carry on well past your best before date; whereas bankruptcy can be as short as nine months.
Now that we have established that your monthly cost of the bankruptcy would be less and for a shorter period of time than paying your creditors, what will you do with the extra money? You could use this money to stock the cupboards, improve your wardrobe or even start saving for retirement. One caveat on the saving aspect, during a bankruptcy any money you save could be considered an asset that belongs to the bankruptcy – so talk to your LIT first.
So, whether the need for filing for bankruptcy has come from some unfortunate event or from your own actions, bankruptcy can be an effective to get a fresh start.
Okay, So What Are The Bad Points Of Bankruptcy?
Yes there are “bad” aspects to filing for bankruptcy but the the good aspects certainly outweigh the bad aspects. When you file for bankruptcy, there will be a cost; you will have some duties to carry out; your credit score will drop; and your creditors will have rights, if they so choose.
The Cost Of Bankruptcy
Cost can be measured by the actual cost of the bankruptcy, your personal time or length of the bankruptcy and potential assets that you may lose.
Depending on your income, family size and the number of times that you have previously filed for bankruptcy, your bankruptcy could cost as little as $1,800 (usually paid as $200 monthly) and last only nine months. If your income is above a certain standard, your bankruptcy could be either twenty-one months or thirty-six months and the cost will be determined on the household income earned during the bankruptcy. If you have been bankrupt twice before, you will need to appear in bankruptcy court to find out the terms of your discharge.
The biggest concern for most folks is what will happen with their assets. Under provincial legislation, debtors can have the ease of mind knowing that certain assets have certain protection or exemptions. This list is not exclusive and lists some of the more common assets and their exemptions:
- Household Furniture and Effects – The aggregate value of these assets are exempt to the extent of $11,300;
- Clothing – All necessary clothing is exempt from seizure;
- Motor Vehicle – the value of the vehicle less any lien registered against the vehicle is exempt to the extent of $6,600;
- Whole Life Insurance Policies – the protection of these assets will be dependent on who the beneficiary is;
- RRSP – Registered Retirement Savings Plans are exempt in full less any contributions made in the year prior to filing bankruptcy;
- Tools of the Trade – Tools used to earn a living are exempt to the extent of $11,300
There are other assets to which exemptions may apply and your LIT can review those exemptions with you. With respect to assets that are not protected by provincial legislation, you will have to make a choice. You can either surrender those assets to your LIT for sale or you can pay the value of the asset into your bankruptcy. When calculating the realizable value (the amount that you would have to pay to keep the asset) of an asset, you deduct the amount of any registered lien.
The good news is that if your payments and the length of your bankruptcy are too much and too long, there is another option that your LIT can review with you. This option is a proposal. Learn more about consumer proposals.
Duties, You Say?
Yeah, bankruptcy is more than just making payments in order to clear out your debt. You will be responsible to complete certain duties. These duties focus on full disclosure, rehabilitation and maximizing the return for your creditors.
Prior to filing bankruptcy your LIT will ask for a complete inventory of your assets, your income, whether or not you made any preferential payments to your creditors and what asset have you disposed of. You will be asked to report on these items and when the time comes to sign documents, these disclosures will be sworn under oath.
Full disclosure doesn’t stop there though. During your bankruptcy any interested party has right to request a creditors meeting and/or an examination under oath. Both of these processes, while not always utilized, serve the purpose of making further inquiries into what has or has not been declared in terms of income and assets; as well as what your conduct was prior to your bankruptcy. Information gathered at these events will help determine whether an opposition to your discharge from bankruptcy is necessary. If you’re an honest Joe and haven’t dissipated your assets on the eve of bankruptcy, you would have nothing to worry about.
One of the goals of the BIA is to help a debtor become rehabilitated. This done by giving the debtor a fresh start and the tools necessary to avoid a future insolvency proceeding, especially in cases where the insolvency of a debtor was driven by poor money management.
During the course of the bankruptcy, a debtor will be required to attend two credit counselling sessions. These sessions are to be provided to you by your LIT, at no additional cost. These sessions are to occur after 10 days from the date of bankruptcy but before day 60 for the first session; the second session must be completed within 210 days from the date of bankruptcy. There must be at least 30 days in between both sessions.
The focus points of the credit counselling sessions revolve around money management, spending and shopping habits, warning signs of financial difficulties, credit rehabilitation and discussion pertaining to non-budgetary causes for insolvency.
If two counselling sessions were not enough, you can ask your LIT for a third session.
It is critical to come out of bankruptcy with the ability to manage your finances and understand the Canadian financial system so that you can avoid another insolvency proceeding.
Maximizing The Recovery Of Creditors
It is important to know that, even though you initiate contact a LIT and ask that LIT to provide you a service, a LIT is considered an Officer of the Court. The LIT must remain impartial between you and your creditors and has a duty to all stakeholders involved. This means that you may get some answers that you don’t like.
One of the duties that a LIT has is to maximize the recovery for creditors. This generally happens by realizing on certain assets (ones that are not exempt, as mentioned above) and collection on surplus income obligations.
Assets that are unencumbered and not exempt will vest in the Trustee. These assets will be valued and disposed of. The debtor does have the option to redeem the value of the asset. Redeeming the value of the asset means making a payment into the bankruptcy for the value of the asset. Essentially you are buying back something that you owned prior to the bankruptcy. For example, lets say that you own a boat worth $5,000 and there are no liens registered against it. You would have a choice to either surrender the boat to your LIT or pay $5,000 into the bankruptcy to keep it.
Surplus income is household income that is in excess of a certain standard, which is issued by the Superintendent of Bankruptcy. There is a Directive issued that gives LIT guidance on how to calculate surplus income and the obligations that the debtor will have to pay into the bankrupt estate. A LIT does have latitude to make adjustments based on circumstances. There is also a process called mediation that allows for a dispute on surplus obligations to be resolved. Mediation can be requested by the debtor or creditors and is mediated by an employee of the Office of the Superintendent of Bankruptcy.
Credit Score During And After Bankruptcy
Most people are aware that a bankruptcy is detrimental to your credit score. Hopefully this doesn’t catch you by surprise, but if it does that is okay. Click the link to find our how your Beacon Score is calculated. Your Beacon Score will range between 300 and 900. Bankruptcy can directly affect up to approximately 45% of that score.
The length of impact will be determined on a couple of factors. The first factor is the length of your bankruptcy and the second factor is how many times have you filed bankruptcy.
We already know that the shortest period (not including rare exceptions) of time that you will sit in bankruptcy is nine months. Bankruptcy can be longer, depending on income, prior insolvency proceedings and court discharge orders. During the period of time that you are in bankruptcy, your credit report will show a bankruptcy has been filed and all of your creditors will remain listed with a payment history rating of 9 (1 is the best, 9 is the worst).
Once you have been discharged from bankruptcy, your creditors and the payment history rating will be removed. There will be a notation listed on your report that notifies viewers of your report that a bankruptcy was filed. This notation will last for seven years for a first bankruptcy and fourteen years for second or more bankruptcies.
“Hang on! Creditors have rights?” Yes, your creditors do have rights throughout the administration of your bankruptcy. While they seldom exercise them, here is a list of their rights. Some of the more common things that your creditors can do are:
- Request a meeting of creditors. Usually to make the LIT aware of conduct issues or unreported income and assets;
- Request mediation. This is used where they disagree with the Surplus Income Obligations that you are required to make during the bankruptcy;
- Request an examination under oath. A government official from the Office of the Superintendent of Bankruptcy will ask you some standard questions under oath. Additional questions can be submitted by the creditors and your LIT; and
- Oppose your discharge. Generally, a first or second time bankruptcy will get an Automatic Discharge after a certain number of months, if they have completed all their duties. A creditor can oppose a discharge any time before the Automatic Discharge takes effect, provided there are grounds for the opposition. Your discharge then comes from the Court, which you will have to attend a hearing. The Court will listen to the reason why a creditor has opposed and what they are looking for. The court will make a decision and grant an order accordingly. It is somewhat unpredictable.
As long as you are okay with the credit hit, completing some duties, making payments and have been an honest debtor leading up to the bankruptcy, the above things really shouldn’t be all that concerning. The Good points definitely outweigh the Bad points.
And To The Ugly Aspects Of Bankruptcy
So what happens if you have been bankrupt multiple times, not prepared to complete your duties or have been a bit of a bandit leading up to the bankruptcy? Well ugly things of course. Let’s talk about the ugly side of things and hope that you don’t fall into this category.
If you have never been bankrupt before, you could be eligible for an automatic discharge after 9 months or 21 months, depending on income. If you have been bankrupt once before, the time frame is 24 or 36 months, depending on income. An automatic discharge is a discharge that occurs after a passage of time and can be issued by a LIT. An automatic discharge only occurs where no interested party has filed an opposition to your discharge.
If this is your third (or more) time filing bankruptcy, your discharge will be heard by the court. The court has the authority to grant a discharge subject to conditions; suspend the discharge for a period of time; grant and Absolute Order of discharge or refuse to grant a discharge altogether.
What Happens If You Don’t Complete Any Of Your Duties?
If you don’t complete your duties you won’t get discharged. Under these circumstances your LIT will seek its own discharge. If a LIT is discharged before you receive your discharge, the rights of the creditors are revived. This means that they can resume collection activity and garnishments. Basically you are back to square one, with a bunch of your time wasted and interest accumulated. Also, worth mentioning, you cannot file another bankruptcy until you have been discharge from the previous bankruptcy.
“What If I Haven’t Been An Honest Debtor?”
One of the core principals of the Bankruptcy and Insolvency Act (BIA) is to afford an honest but overburdened debtor a fresh start. Another core principal is that your creditors receive an even distribution of your assets and a portion of your income.
Earlier we talked about how the BIA was referred to as a “sword and shield”. The “sword” part of the reference speaks to rights, authority and obligations of all stakeholders to review the conduct of the bankrupt, any transactions made prior to bankruptcy and any preferential payments made. While the BIA will afford a debtor an opportunity to have their debts discharged, the BIA will also protect the rights of creditors an the integrity of the BIA regime.
Conduct, Transfer Of Assets and Preferential Payments
- Conduct – Section 198 of the BIA outlines different bankruptcy offences that can lead to a fine or jail time. Follow this link to read more. Obviously being fined or incarcerated is not an ideal situation.
- Transfer of Assets – To dispose of an asset and receive fair value is quite alright. However, selling your cottage to your cousin for a $1 and then declaring bankruptcy is quite the opposite of alright. Your LIT can apply to the court to have the transaction set aside or have the party privy to the transaction to pay the bankrupt estate the difference between the value of the asset and what was paid for on the transfer. One way or the other, your creditors are entitled to the value of the asset and your LIT will be required to make sure that happens.
- Preferential Payments – These are payments made to specific creditors and not to other creditors. For example, you owe your uncle Kevin $5,000 and your credit card $5,000. If you pay your uncle Kevin $5,000 and the credit car $100, a preferential payment has occurred. Remember that one of the core principals of the BIA is to ensure that your creditors share equally. In this scenario, your LIT will have the duty to recover the preferential payment from your uncle Kevin and share it pro-rata amongst all your creditors.
Just To Recap
If you’re an honest debtor but overburdened debtor, bankruptcy might be a good option to get a fresh start. If some of the “Ugly” considerations apply to you, a bankruptcy is still available but brace yourself for a process that will not only give you a fresh start but help your creditors get what they ought to receive.