The Bankruptcy and Insolvency Act (BIA) is a federal law designed to relieve the honest but unfortunate Canadian debtor from debt that they cannot repay. As a society, Canadians recognize that people get into debt for a wide variety of reasons, many, if not most, beyond their control. The BIA is the tool that our government uses to help those people get back on their feet and resume their role as productive citizens.
The BIA sets the rules in Canada for Consumer Proposals, Division 1 Proposals (Business Proposals), Bankruptcies, and Receiverships. This is the legislation that sets the rights and responsibilities of everyone involved in the process: debtors, creditors, and Licensed Insolvency Trustees.
Like most federal legislation, the BIA is a complicated set of laws that can be difficult to understand. However, knowing your rights and responsibilities as they are defined by the law is important if you plan on filing a Consumer Proposal or an Assignment in Bankruptcy.
Like most Canadians, you may be unfamiliar with the legal definition of many of the words related to bankruptcy. Insolvency, debtor, and super-priority creditor are not words that come up in everyday conversations and can be difficult to understand. These are some of the most important words and terms you should know:
- Licensed Insolvency Trustee (LIT) Under the BIA, only Licensed Insolvency Trustees are allowed to administer Consumer Proposals, Division 1 Proposals, Bankrutpcies, or Receiverships. Licensed Insolvency Trustees undergo a long and intensive education in order to achieve this designation.
- Debtor — A person owing money to another person, company or agency
- Creditor — The person, company or agency to whom the money is owed.
- Super-priority creditor — A creditor that has priority over all other creditors, so that any funds paid out from a Bankruptcy would go first to satisfy the debt to that creditor. An example of this is a debt to CRA for source deductions, where the funds owed are trust funds.
- Insolvency—Being unable to repay what was borrowed in a timely way
- Bankrupt—The legal status of a person who can no longer pay their debts and has filed an Assignment in Bankruptcy with a LIT
- Consumer Proposal—A legal settlement between a debtor and creditors that allows the debtor to settle their debts for less than they owe, and administered by a LIT.
- Discharge—The release of the bankrupt from bankruptcy, discharging them from their debt, and removing all restrictions imposed by the BIA.
- Statement of Affairs—A legally sworn document provided by the bankrupt describing their financial situation
- Stay of Proceedings — a statutory restriction, issued by a LIT, preventing creditors from taking any collection practices, including wage garnishments, against a debtor who has filed a Consumer or Division 1 Proposal or an Assignment in Bankruptcy
- After Acquired Asset — An asset of some value that has been acquired by an individual while still bankrupt — common examples would be an inheritance or lottery winnings.
Rights and Responsibilities of the Debtor
The BIA sets out the rights and responsibilities of all the parties affected by the Act. Here are some that affect most debtors:
- The right to have all of their options explained by a LIT
- The right to make their own decision as to what is the best solution for their situation
Once that decision is made, if the debtor is filing either a Consumer Proposal or an Assignment in Bankruptcy, the following duties are required:
- To make a full disclosure of their situation, and to sign a sworn Statement of Affairs outlining that situation
- Attendance at two Financial Counselling sessions
- Keep the LIT informed of their address and contact information
Additionally, in a Consumer Proposal, the debtor is required to:
- Make agreed upon monthly payments for the time period set out in their Proposal
In a Bankruptcy, the debtor is required to:
- Submit to their LIT, monthly income and expense statements, with supporting documentation for income and non-discretionary expenses
- Make monthly payments to the LIT, for the benefit of your creditors, based on your ability to pay, as determined by the federal guidelines developed by the Superintendent of Bankruptcy
- Provide the documents needed to allow the LIT to file your past and current income tax returns
- Deliver to the LIT, for cancellation, all credit cards issued to or in the control of the debtor.
- Inform the LIT of any material change in their financial situation — change in income, change in family size, etc.
- Refrain from obtaining credit in excess of $1000, without informing the creditor that they are currently in bankruptcy.
The BIA also sets out certain debts that CANNOT be discharged through either a Consumer (or Division 1) Proposal or an Assignment in Bankruptcy. They are:
- Child support and alimony
- Fines or penalties of a court (this would include traffic tickets)
- Any award of damages by a court in respect to intentional bodily harm, assault or wrongful death
- Any debt or liability arising from fraud, embezzlement, misappropriation, or defalcation
- Any debt arising from fraudulent misrepresentation or false pretences.
- Student loans acquired less than 7 years prior to the insolvency
Rights and Responsibilities of the Creditor
Creditors, too, have rights and responsibilities set out in the BIA
- The right to complete and factual information about the affairs of a debtor
- The right to vote for or against a Consumer Proposal
- The right to oppose the discharge of a Bankrupt
- The right to a fair distribution of funds from either a Proposal or a Bankruptcy
- The right to representation through Inspectors, to give direction and assistance to the LIT in the administration of a bankruptcy estate.
- The responsibility to file an accurate Proof of Claim, giving a full account of the debt owed
- The responsibility to obey the Stay of Proceedings and cease all collection practices against the debtor.
Rights and Responsibilities of the Licensed Insolvency Trustee
- The right to refuse to take on a client
- The responsibility to explain to the debtor all of the options available to them, and all of the duties that will be required of them
- The responsibility to be honest, frank and even-handed with all the parties in the insolvency situation.
- The responsibility to verify the information provided by the debtor
- The responsibility to communicate with the creditors, giving complete and transparent information
- As an Officer of the Court, the responsibility to bring all necessary matters before the court with complete information
- The responsibility to uphold the integrity and spirit of the BIA
Help for Debtors in Trouble
The BIA offers hope to Canadians saddled with unmanageable debt. As a consumer, if you can’t afford to pay back your creditors, this law provides you with two legal options to deal with a debt crisis—bankruptcy and a consumer proposal.
If you have a secure, steady income or enough resources to pay back a part of your debt, a consumer proposal may be the answer for you. If accepted by your creditors, your proposal allows you to pay back all or part of what you owe, in payments you can afford, over an agreed upon period of time, no longer than 5 years.. As long as you complete the payments, your creditors must stop their collection efforts and abandon lawsuits and garnishments.
Bankruptcy is a little different. It is ideal for the debtor who does not have secure, long-term income, or who needs to be debt-free quickly. Technically what you are doing when filing an Assignment in Bankruptcy, is surrendering your assets as payment. In return, your creditors are agreeing to forgive your debts. However, in most provinces, there are generous exemptions for debtors. That is, assets that you do NOT sign over as part of the Bankruptcy process. For example in Manitoba, you are not signing over your personal effects or household furnishings, registered pensions or RRSP’s. There are also exemptions for tools of your trade, including a motor vehicle, and for some equity in your home. Farmers have even more exemptions, with the recognition that the objective of the BIA is rehabilitation. Farmers without land, livestock, and machinery cannot operate, so the Manitoba exemptions are designed to allow the debtor to continue farming.
If you do have any assets that are not exempt in your province, the proceeds from the sale of those assets are used to pay your creditors. Once your bankruptcy is discharged, you have a clean, debt-free slate and can begin rebuilding your credit and finances. In the case of a first-time bankruptcy, with no ability to pay according to the Guidelines, this will be 9 months from the date of bankruptcy.
The BIA and Your Fresh Start
The opportunity for a fresh start and freedom from the harassment of bill collectors are rights and protections that come through the BIA. The BIA protects you as long as you honor the agreements you have made when filing your Consumer Proposal or Assignment in Bankruptcy.
The Bankruptcy and Insolvency Act was made into law so that good Canadians with bad debt can recover from their debt problems. If you would like to explore this further, give LCTaylor, Licensed Insolvency Trustees, a call for a free, no-obligation consultation. They will help you review your situation and all of your options. Overwhelming debt takes a huge toll on one’s health and family. The sooner you get good, frank advice, the sooner you can move on to your fresh start.