Bankruptcy and Insolvency Law

There are typically three parties involved in a bankruptcy proceeding, the bankrupt, the licensed insolvency trustee, and the creditors

• The Debtor: is an insolvent person who is unable to pay their debts when they are due. There are several options available to an insolvent person. A debtor becomes the bankrupt when they officially declare bankruptcy.
• The Licensed Insolvency Trustee: is a federally regulated professional who provides financial advice and assist in the bankruptcy process. They are officers of the court who oversee bankruptcy proceedings on behalf of the bankrupt. They are a neutral third party meant to assist debtors and protect creditors rights. While you must pay for their services, they often offer a free consult, and their prices are federally regulated. If the bankrupt can not afford a Licensed Insolvency Trustee (LIT) you may apply to have one appointed for you free of charge.
• Creditors: are the parties owed money by the bankrupt. There are three main types of creditors: secured, unsecured and preferred. Creditors participate in meetings and proposals with the LIT and inform the LIT of any irregularities on the part of the debtor.

Bankruptcies are supervised and administered by the Office of the Superintendent of Bankruptcy (OSB) which is a federal agency. The OSB oversees the licensing and monitoring of LIT’s, maintains records of proceedings and enforces standards for the administration of estates.

If you have unmanageable debt the first thing you should do is contact a Licensed Insolvency Trustee (LIT). They often provide a free initial consult. They will evaluate your situation and help you consider your options. Bankruptcy is one of several options. Credit counsellors are also a good first step – as you may be able to find a non-profit that will not charge for their services. Credit counsellors however can not actually complete the bankruptcy process and will likely refer you to a LIT.

If you chose bankruptcy you will work with an LIT to file forms to officially declare bankruptcy. Once you file for bankruptcy your LIT will deal directly with your creditors on your behalf. Your assets will be sold, and the proceeds will go to paying off your creditors. Your creditors will be notified, you will stop making direct payments to unsecured creditors, any wage garnishments will stop, and any lawsuits by your creditors against you will stop as well. You will have to attend financial counselling sessions. If you make over a certain amount of money each month you may also have to make surplus payments.

Eventually you will be discharged from bankruptcy. A discharge releases you from the legal obligation to repay the debts you had the day you filed for bankruptcy. The timing of your discharge will depend on several factors including your income and the number of bankruptcies you have declared. Debts relating to spousal support and child support will not be discharged. You still must pay those debts. Student loans will be discharged as long as you declared bankruptcy 7 years after you graduated.

If you go bankrupt in Ontario what you are allowed to keep is legislated by the Ontario Execution Act. These items include:

• All necessary clothing;
• One motor vehicle worth up to $7,117 (car, truck, etc.);
• $14,180 worth of household furnishings and appliances;
• $14,405 worth of tools of the trade (equipment that you use to earn a living);
• Certain types of life insurance.
• All RRSP, RRIF and SPSP (Deferred Profit Sharing Plan) savings except contributions made in the 12 months before your bankruptcy.

Typically, if you own a house, it will be one of the assets liquidated in bankruptcy. It is possible if you have less than 10% equity in your home you may be able to keep it, but a LIT will help determine if that is the most prudent financial strategy.

Once a debtor declares bankruptcy creditors can no longer start or continue proceedings against the debtor without the Court’s permission. If you are a secured creditor (ie. someone who has a lien on a debtor’s property or assets) you are still able to take possession of the item for which you have a lien despite the declaration of bankruptcy unless the Court orders otherwise.

Once the debtor has filed for bankruptcy the LIT will send you a notice of bankruptcy as well as a Proof of Claim form. You must complete the form to share in the dividends and vote in the first meeting of creditors. If you are an unsecured creditor, before the first meeting of the creditors is held the LIT will look at your claim and decide if it should be allowed, dismissed, or allowed in part. If you claim is dismissed, you can appeal this decision to the Court within 30 days.

The LIT will provide notice of the meeting of the Creditors within 5 days of the bankruptcy being filed. At the creditors meeting you will appoint inspectors, review the LIT’s reports, review other creditors statement of claims and vote on any resolutions.

To help creditors recover some of what is owed, the LIT will seize and sell off all non exempted assets from the bankrupt. Once the property is sold the LIT will prepare a final statement of receipts and disbursements. They will also prepare a dividend sheet which will tell each creditor how much they are entitled to. Priority will go to secured creditors, then preferred creditors (who are set out in section 136 of the Bankruptcy and Insolvency Act) then ordinary creditors. Ordinary creditors will have the remaining funds divided amongst them in proportion to the amount they owe. You will then be paid the amount you are entitled before the bankruptcy file is closed.

A creditor plays an important role in fraud detection as often then know about assets or other information that the bankrupt may have failed to declare. If a creditor opposes a discharge from bankruptcy or suspects the bankrupt has engaged in inappropriate transactions, like continuing to make trades and spend money they know they can not pay off, or providing preferential treatment to one creditor over the interests of others, the creditor should report these issues to the LIT.  In addition to informing the LIT, the creditor should also inform Ontario’s Superintendent of Bankruptcy. Once the misconduct has been reported the Court will typically review the claims and make a decision.