How to go bankrupt

Between 1990 and 2006 business bankruptcies declined by 42 per cent – but consumer, or personal, bankruptcies increased by 85 per cent, according to Industry Canada statistics. And with Canadian household debt loads continuing to rise, it’s likely that individuals will continue to have to file for personal bankruptcy. Here’s an overview of the process and some things to consider.

When someone is unable to meet his or her payments on debts (known as debt obligations), that person is considered to be insolvent. The insolvency process is a legal proceeding that is dealt with under the provisions of the Bankruptcy and Insolvency Act.

You are considered to be insolvent when:
• you do not currently have an un-discharged bankruptcy
• you owe at least a $1000.00; and you are unable to meet your regular payments as they become due, or you would not be able to pay all of your debts if all of your assets were sold

At that point there are really two options:

• Bankruptcy: under the guidance of a trustee, most of the assets of that individual will be liquidated to sold the debt
• Proposal: where the individual makes an offer to debtors to settle the debt. (Companies have a third option, receivership, but this is rare for individuals.) To make a proposal the individual’s unsecured debts must total under $75,000.

A licensed professional can advise you on whether a proposal or a bankruptcy best fits your situation. Once you have determined that a bankruptcy is appropriate you will need to find a licensed trustee.

Trustees are chosen by the person filing for bankruptcy and paid by the bankrupt and the assets from the estate. These fees will depend on the individual’s debt situation, but are set under the Bankruptcy and Insolvency Act. However, it’s important to understand that a trustee’s first responsibility is to represent the creditors. The trustee’s duties are to:
• Review your situation and inform you as to the alternatives available;
• Administer the proposal – that is, to sell any assets you have that are not exempt and to distribute the cash to creditors
• Administer the estate and file the paperwork from the beginning to the end according to the Bankruptcy and Insolvency Act.

A trustee is also an officer of the court, and is generally an accountant. Once chosen, a trustee cannot be discharged (or ‘fired’) without approval from the Court.

If your case is particularly complex or you have concerns, you may want to consult an insolvency lawyer as well. The Office of the Superintendent of Bankruptcy Canada regulates licensed trustees, and provides an online database of trustees.

Once you have a trustee, you have certain obligations that you must fulfill.

Your obligations
Once you enter into the process of bankruptcy you must disclose all your financial information to the trustee: income, expenses, debts, and assets, along with information about any property you have sold in the last year. You will have to turn your credit cards over to the trustee. You must stay in touch with the trustee during the process and advise them of any address or telephone number changes.

You may have to attend an examination before the Official Receiver. This examination takes place under oath and is designed to discover the cause or causes of your bankruptcy, look at any property recently sold, and the status of current assets. Your conduct is also examined.

You may also have to attend a meeting of your creditors, if one is requested. This is to confirm the appointment of the trustee, give creditors information about the bankruptcy, and to appoint inspectors to oversee the process.

And you will have to attend at least two counselling sessions that discuss issues around personal finance and bankruptcy.

Which debts are covered by bankruptcy? What do I keep?
Debts that are not secured, such as credit card debt, and in many cases debts to the Canada Revenue Agency (taxes) are dealt with through bankruptcy. Debts to family must be included in the bankruptcy process – you cannot continue to repay family members the full amount of a loan while settling with other creditors for less.

Secured loans, such as mortgages and car loans are not covered by bankruptcy. However your trustee may be able to help you in surrendering those assets and receiving a receipt.

Other debt not covered by bankruptcy includes:
• student loans, if it is less than 10 years since your schooling finished
• fine or penalty imposed by the Court
• alimony
• liability for dividend to an undisclosed creditor
• debt obtained by fraud
• liability for support or maintenance of spouse or child under an agreement or Court Order

Which assets remain yours (or are exempt from the bankruptcy) depends on your province.

Once you file for bankruptcy most wage assignments and garnishments will stop. The trustee will review your income and expenses and compare these to guidelines set out by the Superintendent of Bankruptcy. If you are considered to have extra income it may be assigned to your creditors.

Assets that you acquire during the bankruptcy period – for example, if you were to inherit property – become a part of the bankruptcy.

Discharge of bankruptcy
For first-time personal bankruptcies the bankruptcy is automatically discharged after nine months. There are however, several kinds of discharge:

Absolute discharge: You are no longer responsible for unsecured debts incurred prior to bankruptcy except for those which were not included (such as child support payments).

Conditional discharge: You may have to make payments to your creditors through the trustee for a specified period. You will not receive an absolute discharge until that period is over (and all payments have been made).

Discharge refused: The Court may refuse a discharge in unusual circumstances, such as:

• your assets are less than 50 per cent of the amount owed
• you continued to obtain credit while unable to pay your existing creditors
• you contributed to bankruptcy by extravagant living or gambling
• you failed to perform any duty imposed by the Bankruptcy and Insolvency Act

Once your bankruptcy is discharged it will take six years for it to be removed from your credit report.