Facing unmanageable debt is hugely stressful and the idea of filing for bankruptcy can be intimidating. You might feel like you’re at your creditors’ mercy and fear they’ll take everything you own. However, it’s important to remember that when it comes to Bankruptcy laws, Canada has a firm system to protect you and your creditors. The Bankruptcy and Insolvency Act of Canada (BIA) outlines the rights and responsibilities of insolvent borrowers and the creditors they owe. The laws provide a safety net in challenging times.
Insolvency Solutions
There are two primary debt solutions for insolvent borrowers: Consumer Proposals and Bankruptcy. You are insolvent when you don’t have enough income to pay your debts. Both Businesses and individuals can be insolvent.
A Consumer Proposal, also known as a Division 1 Proposal, allows you to repay some or all of your debt. It consolidates your payments into one monthly payment. Here are the key features of a Consumer Proposal:
- It can reduce your debt by up to 80%, while allowing you to repay some of what you owe.
- You have five years (60 months) to repay it.
- You must make all your monthly payments on time.
- You keep all your assets.
- It’s available for both individuals and businesses.
- It will hurt your credit score.
If there’s no way you can repay any of your debt, filing for Bankruptcy may be the right solution for you. When you file for Bankruptcy:
- You will be discharged from your debts.
- For first-time bankruptcies, the process generally takes nine months.
- You keep some assets, but not all.
- You maintain the right to earn a living.
- It will affect your credit score more than a Consumer Proposal.
How borrowers go Bankrupt
The BIA federally governs bankruptcy. Each province also has specific rules that must be followed, including asset exemptions. Only a Licensed Insolvency Trustee (LIT) can file for Bankruptcy on your behalf. LITs are debt professionals who have the necessary training and licensing. Their work is overseen by the Office of the Superintendent of Bankruptcy (OSB). The OSB ensures that the process is handled with expertise and integrity.
There are three ways to go Bankrupt:
- Voluntary Assignment: A voluntary assignment is when you approach a LIT to deal with your debts.
- Involuntary Assignment: Your creditors can petition the court to force you into Bankruptcy. They may do this when you violate the borrowing contract, such as by missing payments.
- Deemed Bankruptcy: A deemed bankruptcy occurs when you file a Consumer Proposal but do not fulfill its requirements. You are legally considered bankrupt without having filed. One reason for deemed bankruptcies is borrowers who are unable to make monthly payments on their Consumer Proposals.
Canadian insolvency laws
Bankruptcy is a government-approved debt relief solution. It legally binds the borrower and the creditors. The legislation can be complex, and working with a trustee in Bankruptcy is essential. Both debtors and creditors have rights and responsibilities.
Borrower’s rights and responsibilities
Debtors have the right to earn a living, even after filing for Bankruptcy. Provincial laws allow you to keep some necessary tools and equipment for your job. You can keep a vehicle and home if your equity is below the provincial maximum.
Additionally, you have the right to be free from any collection calls, legal action or wage garnishment from your creditors. Bankruptcy is a legally binding debt solution. Filing immediately stops contact by your creditors.
So, what do you need to do to comply with Bankruptcy laws? Your responsibilities include:
- Disclosing all of your income, assets and debts to your LIT.
- Surrendering any non-exempt assets to your LIT so they can be sold.
- Completing two financial counselling sessions.
- Reporting your income to your LIT every month.
- Paying extra towards your debt if your income exceeds a certain threshold.
You must follow the law to ensure a successful bankruptcy process. By doing so, you’ll experience relief from creditors’ demands. Your debts will be written off, and you can move forward with a clean slate.
The BIA ensures that honest but unfortunate debtors can legally eliminate their debts if they are insolvent. However, some individuals may attempt to act fraudulently for personal gain. Bankruptcy fraud is taken very seriously by the courts.
For instance – one common fraud that some borrowers commit is fraudulent conveyance (or fraudulent transfer). This occurs when a debtor transfers an asset to another person. They do this to avoid losing it during Bankruptcy. ie:, selling a vehicle to a relative for a low price and then buying it back later is considered fraudulent when in bankruptcy.
Creditors’ rights and responsibilities
Creditors have a right to know if you are filing for Bankruptcy. Your LIT will notify them of your intention. Once they know of your intention to file, they have the right to ask about your financial affairs. They can also call a meeting of creditors and have the right to file a claim for the money you owe. If a creditor’s debt is not included in the Bankruptcy, they have the right to continue collecting payment. Creditors can object to your discharge from Bankruptcy if they have reasons to do so.
Their main actions are:
- Stop all collection activity once you file for bankruptcy.
- File a claim for the money you owe.
- Write off your debt once the Bankruptcy is complete.
Where to Find Debt Help
Don’t be afraid to find help when dealing with unmanageable debt. It’s normal to fear losing your assets or privacy when it comes to bankruptcy, but bankruptcy laws in Canada try to protect the borrower’s dignity and ability to earn a living. With professional guidance and support, you can confidently navigate this challenging time.
At Allan Marshall and Associates, we have a team of LITs who are debt experts. We’ll guide you through the process, making sure your debt relief plan will benefit you and your future. Reach out to us today online or give us a call at 1-888-371-8900 for a free consultation. We’ll work with you to eliminate your debt so you can get back on track.
