Navigating the Bankruptcy Process in Canada with a Bankruptcy Trustee
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By Matthew J. Munro, Bromwich+Smith Staff | 1600 words | Reading Time:8 minutes | Date: 2023/11/24
In Canada, facing financial hardships can be a daunting experience. Sometimes, despite your best efforts, bankruptcy may be the only practical solution. Bankruptcy can provide a fresh start, and it's necessary to understand the process thoroughly.
Bankruptcy in Canada: An Overview
Bankruptcy is a legal process that allows individuals and businesses to deal with overwhelming debt when there is no other solution. In Canada, bankruptcy is governed by federal law, primarily the Bankruptcy and Insolvency Act (BIA) The process typically involves the individual filing an assignment in bankruptcy, with a Licensed Insolvency Trustee ( previously called a Bankruptcy Trustee).
The Role of a Licensed Insolvency Trustee
A Licensed Insolvency Trustee (LIT), plays a fundamental role in the bankruptcy process. They are licensed by the Office of the Superintendent of Bankruptcy (OSB) and act as impartial mediators between the individual and their creditors. The primary responsibilities of a Licensed Insolvency Trustee include:
Assessment of Financial Situation: When an individual consults a Licensed Insolvency Trustee (Trustee), the Trustee will review their financial situation. This assessment helps determine the most appropriate debt resolution method, whether it's bankruptcy or a proposal (consumer proposal or Division 1 Proposal). Often the initial consultation and review will begin with a Debt Relief Specialist who works closely with the Trustee.
Filing for Bankruptcy: If bankruptcy is deemed the best course of action, the Trustee assists in filing the necessary paperwork and documents. This includes preparing the Statement of Affairs and Income and Expense Statement, both of which are required under the Bankruptcy and Insolvency Act.
Realization of Non-Exempt Assets: In a bankruptcy, some of the individual’s belongings may need to be sold to help pay down the debt, and this is known as “Realization of Non-Exempt Assets”. The Trustee is responsible for realizing non-exempt assets; in most situations these items are sold at fair market value (appraised value). Some assets are protected during bankruptcy, such as basic household goods and tools required for employment, and can be kept.
Dealing with Secured Creditors: Even if there are secured loans against them, some assets, such as vehicles, real property, or recreational vehicles, can be kept. This requires continuing the loan payments on these assets throughout the bankruptcy. If there is any non-exempt equity in these assets, there may also be an additional payment required to the Trustee.
Counselling and Education: Trustees provide financial counselling and education to help clients rebuild their financial wellness. There are two counselling sessions that will be provide by a Certified Insolvency Counsellor who works with the Trustee.
Monitoring the Bankruptcy Process: Trustees oversee the entire bankruptcy process, ensuring that both the individual and their creditors adhere to their legal obligations.
Discharge from Bankruptcy: After an individual has completed the required counselling session, paid the Trustee for the non-exempt assets, and reported their monthly income for the required amount of time, they may be eligible for discharge. Eligibility for discharge is based on completion of requirements.
Distribution of Funds: The final stage for the Trustee is the distribution of the proceeds to your creditors. This process is defined by the Bankruptcy & Insolvency Act.
The Bankruptcy Process Step by Step
Let's dive into the bankruptcy process in Canada step by step:
Consultation with a Licensed Insolvency Trustee: The process begins when an individual meets with a Trustee to evaluate their financial situation. During this consultation, the Trustee discusses various options, including bankruptcy, a consumer proposal, or other options.
Decision to File for Bankruptcy: If bankruptcy is the chosen direction, the individual will work with the Trustee to complete the required paperwork, including the Statement of Affairs and Income and Expense Statement.
Automatic Stay of Proceedings: Once the bankruptcy paperwork is filed, an automatic stay of proceedings goes into effect. This legal stay prevents creditors from pursuing or continuing legal actions against you. This means, for example, your creditors will need to stop calling and sending letters asking for payment. Some actions are more complex (e.g. garnished wages) and could take several weeks to stop.
Asset Liquidation (If Applicable): At this stage, the Trustee will take possession of your non-exempt assets and sell them at fair market value (appraised value).
Monthly Payments (If Applicable): If it is determined that there is surplus income the individual will be required to make monthly payments to the Trustee for a specified period. The calculation for surplus income is defined by the Bankruptcy & Insolvency Act.
Financial Counselling: Throughout the bankruptcy process, the Trustee or their office provides financial counselling to help ensure you are able to make informed financial decisions. These two sessions will include talking about budgets, how to plan for emergency savings and resources to avoid accumulating debt in the future.
Discharge from Bankruptcy: Once all requirements are met, there may be a discharge. This typically occurs nine months after the bankruptcy filing, but it can be longer for those with surplus income, or if this is a second or third bankruptcy.
Rebuilding Credit: After discharge, an individual can begin rebuilding their credit by taking steps to demonstrate responsible use of credit, like using secured credit cards. With the tools learned during the counselling sessions an individual will soon be on their way to rebuilding your credit.
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Key Considerations
It's important for anyone considering bankruptcy in Canada to consider these points:
Exempt Assets: Certain assets, such as basic household items, are exempt from seizure during bankruptcy. Be familiar with these exemptions to protect essential belongings.
Impact on Credit: Bankruptcy has a significant impact on a credit score. It can remain on the credit report for up to seven years, making it challenging to obtain favourable credit during that time. The result may be higher interest rates until the credit score is reestablished.
Alternative Solutions: Bankruptcy is not the only option. Discuss all alternatives like a consumer proposal with a Trustee before making a final decision.
Surplus Income: Anyone with surplus income may have to make monthly payments during bankruptcy. The surplus income threshold is defined by the Office of the Superintendent of Bankruptcy & Insolvency Act.
Completion of Duties: It's crucial to fulfill all duties, including attending mandatory financial counselling sessions and providing accurate information to the trustee.
Navigating the bankruptcy process in Canada is a complex journey, but it can provide much-needed relief from overwhelming debt. A Licensed Insolvency Trustee plays a central role in this process. By understanding the steps involved and seeking the guidance of a knowledgeable Trustee, individuals can work toward a fresh financial start. It's important to remember that bankruptcy is not a one-size-fits-all solution, and exploring alternatives and understanding the consequences are essential steps in the decision-making process.
Bromwich+Smith has a number of debt relief strategies to help you regain control of your finances and get your life back on track. Reach out today for a free, confidential, no obligation consultation. Bromwich+Smith’s Debt Relief Specialists are available by phone at 1.855.884.9243, Live Chat or you can request a call back at contact us page. We want to see you flourish!
FAQs:
1: What is the role of a Licensed Insolvency Trustee in the bankruptcy process in Canada?
The Licensed Insolvency Trustee plays a key role in assessing financial situations, assisting in filing for bankruptcy, realizing non-exempt assets, dealing with secured creditors, providing financial counseling, monitoring the process, and overseeing the distribution of funds to creditors.
2: What is the first step in the bankruptcy process in Canada?
The process starts with a consultation with a Licensed Insolvency Trustee, where your financial situation is evaluated, and options, including bankruptcy, a consumer proposal, or alternatives, are discussed.
3: How long does it typically take to be discharged from bankruptcy in Canada?
The discharge from bankruptcy typically occurs nine months after filing, though it can be longer for those with surplus income or those experiencing a second or third bankruptcy.
4: What are some key considerations for individuals considering bankruptcy in Canada?
Key considerations include understanding exempt assets, recognizing the impact on credit, exploring alternative solutions like consumer proposals, being aware of surplus income requirements, and fulfilling all duties throughout the bankruptcy process.
5: Can bankruptcy in Canada affect the ability to obtain favorable credit in the future?
Yes, bankruptcy has a significant impact on credit scores, remaining on the credit report for up to seven years. While not impossible, obtaining favorable credit during a bankruptcy may be challenging, and individuals may face higher interest rates until they rebuild their credit. It is important to note that you have the ability to rebuild your credit during and after your bankruptcy and will be able to secure credit with favourable terms again.
6: What happens during the automatic stay of proceedings in the Canadian bankruptcy process?
The automatic stay of proceedings, triggered after filing bankruptcy paperwork, prevents creditors from pursuing legal actions, including wage garnishment. It provides relief by stopping calls, letters, and legal actions from creditors.
7: How can individuals rebuild their credit after being discharged from bankruptcy in Canada?
After discharge, individuals can start rebuilding credit by using secured credit cards and demonstrating responsible credit use. The financial counseling received during the process helps in making informed decisions for a successful credit rebuilding journey.
8: What are exempt assets, and why are they important in the Canadian bankruptcy process?
Exempt assets, like basic household items, are protected from seizure during bankruptcy. Understanding these assets is crucial to safeguard essential belongings and navigate the process effectively.
9: How long does the bankruptcy process in Canada typically take from consultation to discharge?
The timeline varies, but from the initial consultation with a Licensed Insolvency Trustee to discharge, the process can take approximately nine months, with potential variations based on individual circumstances.
10: Can individuals explore alternatives to bankruptcy in Canada, and if so, what are they?
Yes, individuals can explore alternatives such as consumer proposals. Consulting with a Licensed Insolvency Trustee helps assess options and make informed decisions before choosing the most suitable path for their financial situation.
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Author: : Matthew J. Munro, CPA CGA CIRP LIT- Chief Insolvency Officer at Bromwich+Smith
Matt Munro Chief Insolvency Officer is most inspired when he is able to help someone solve a problem. Matt has been working in the insolvency industry for over 29 years and has yet to experience a boring day.