Bankruptcy

Bankruptcy is a legal process, governed by the Bankruptcy and Insolvency Act, that provides financial relief for debtors and a protection for creditors.

Bankruptcy

Bankruptcy is a legal process, governed by the Bankruptcy and Insolvency Act, that provides financial relief for debtors and a protection for creditors. When an individual or a corporation goes bankrupt, an accountant (called a trustee) is appointed to take control of the debtor's assets and distribute them among the unpaid creditors. Once this process is completed the debtor is released from any further obligation to pay those debts and is thus considered to be discharged from bankruptcy. The bankruptcy process can be initiated either by the debtor or by one or more creditors. The debtor whose debts become unmanageable may go bankrupt so that he can be released from his debts and get a fresh start. Bankruptcy does not release the debtor from obligations to pay support, maintenance or alimony; nor from debts arising out of fraud. In the case of fraud the creditor alleging fraud can make an application to the Court for an Order declaring that the bankrupt is not released from that particular debt.

A debtor commences the process by making an "assignment in bankruptcy," which is essentially an agreement to turn over all assets to a trustee for sale and distribution to creditors. Creditors can also "petition" a debtor into bankruptcy. There are several reasons why they would do this. Debtors are sometimes overly optimistic, spending all their remaining assets in an unrealistic hope of success. Sometimes they try to hide or sell property to keep a personal benefit and defeat creditors' claims. The appointment of a trustee in bankruptcy can prevent this because the trustee has powers to reverse such transactions. Creditors can petition the Bankruptcy Court (a division of the Supreme Court or Court of Queen's Bench in the common law provinces and of the Superior Court in Québec) and if they establish the individual or corporation's insolvent status then the court will grant a "receiving order," ie, a court order giving a trustee in bankruptcy control of the bankrupt's assets. Once the bankruptcy process commences, all other enforcement proceedings by unsecured creditors are automatically halted.

If the bankrupt is an individual, the trustee acquires control of all the assets except those that under the law of the province are exempt from seizure; if the bankrupt is a corporation, the trustee takes control of all its assets. Each province has slightly different exemptions, but most allow a debtor to keep a basic stock of clothing, furniture, tools and sometimes a car or truck and a basic equity in a home.

A wage earner who has declared bankruptcy or is petitioned into bankruptcy can continue to work and earn money, but the trustee or the court may require that some payments be made to the trustee for the creditors before the final discharge is granted. The amount will depend on the income of the debtor and her family responsibilities.

A corporation cannot resume business under its own control until or unless it pays all its debts. A bankruptcy deals only with unsecured debts; secured creditors with mortgages or liens remain free to enforce their security, and the trustee can only take what remains on behalf of the unsecured creditors.

On appropriate grounds the creditors can object to the bankrupt's discharge from bankruptcy; for example, when the bankruptcy is motivated by a debt to one creditor or when the bankrupt has previously gone through the bankruptcy process.

Consumer bankruptcies passed the rate of 3000 per month, for the country as a whole, in September 1982; in 1995 they averaged 5453 per month. There is now less stigma attached to bankruptcy in Canadian society. In addition, in difficult economic times, many more people were forced to bankruptcy as a last-resort solution to problems of indebtedness. The incidence of bankruptcies tends to follow widespread crop failures, plant closures, mine shutdowns and local or general market collapses. There is also a marked "domino" effect, especially in single-industry towns and in cities heavily dependent on one form of economic activity.

The Bankruptcy and Insolvency Act provides for consumers a rehabilitative scheme short of bankruptcy called the "orderly payment of debts" plan. Under the plan, individuals with nonbusiness debts have their debts frozen. They work out a budget with a counsellor and make one monthly payment that is distributed among the creditors, who receive all their principal but over a longer period and with interest reduced to a low rate. This plan (or an equivalent), offered through a provincial Consumer Affairs Department, is available in most provinces.

An increasingly used procedure under the Bankruptcy Act is a "proposal." A person or corporation in financial trouble can make a formal proposal to the creditors to pay them less money over a longer period of time in satisfaction of their debts. If the creditors agree, no bankruptcy occurs, leaving the individual in control of his assets. If they disagree or if a default is made in these lesser payments, bankruptcy occurs automatically. This allows some businesses to restructure their debts and continue to operate without going bankrupt. With revisions in the Bankruptcy and Insolvency Act in 1992, the "proposal" has become a more commonly used option; however, it is still the less popular of the 2 alternatives.


Further Reading

  • Lloyd W. Houlden and Geoffrey B. Morawetz, The 2002 Annotated Bankruptcy and Insolvency Act (2002); Roderick J. Wood, Bankruptcy and Insolvency Law, 2nd ed. (2015).