Bankruptcy is a legal process governed by the Bankruptcy and Insolvency Act (BIA). An insolvent person who has no other way to meet their financial obligations may file for bankruptcy, unless they have not been discharged from a previous bankruptcy.
In a bankruptcy, an individual or company (“debtor”) that can no longer pay its debts assigns its non-exempt property to a Licensed Insolvency Trustee (LIT) who then sells it and distributes the money to creditors. Bankruptcy may be voluntary or forced by a creditor through the Courts.
Approximately 90 percent of bankruptcies in Canada are consumer bankruptcies in which the business-related debts account for less than 50 percent of the debtor’s total liabilities.
When a bankrupt’s realizable assets do not exceed $15,000, the bankruptcy proceeds by way of summary administration. The vast majority of consumer bankruptcies are administered under this process.
Bankruptcies processed as summary administrations are simpler; for example, they don’t require a meeting of creditors. If your debtor’s bankruptcy is to be handled as a summary administration, you will find a notation saying so near the top of the documents you receive.
Once a debtor is declared bankrupt, creditors are generally prohibited from commencing or continuing legal proceedings against the debtor without the permission of the court.
Secured creditors, however, may enforce their security interests unless the court orders otherwise in certain circumstances. For example, a bank holding security over a vehicle may repossess and sell the vehicle even after the debtor has declared bankruptcy.
Proof of Claim form
After a bankruptcy has been filed, the LIT will send you a notice of bankruptcy together with a list of creditors and the amounts of their claims.
The LIT will also provide a Proof of Claim form. You must fill out this form to share in the dividends and vote at the first meeting of creditors (if one is held). The form contains the name of the creditor and the bankrupt, the nature and amount of the claim, as well as other information. A list of instructions is usually included. Creditors must also attach a statement of account setting out the details of the claim, together with supporting documents or other evidence establishing the validity of the claim.
An unsecured creditor who wishes to vote at the first meeting of creditors must file the completed Proof of Claim with the LIT before the meeting takes place. Prior to the meeting, the LIT will review the Proof of Claim and determine whether the claim, in whole or in part, is accepted or disallowed. If a Proof of Claim is disallowed, the creditor has 30 days to appeal the decision to the court.
A secured creditor is generally not required to file a Proof of Claim unless requested to do so by the LIT, or unless the creditor wishes to vote at a meeting of creditors or receive a dividend in respect of the unsecured portion of the claim.
A creditor who wishes to vote at a meeting of creditors but cannot attend may appoint another person as proxy. To do so, the creditor must complete a proxy form and return it to the LIT together with the Proof of Claim, or provide it to the proxy for presentation to the chairperson of the meeting before the vote is taken.
What is a Discharge?
Under certain circumstances, the process for discharging the bankrupt begins with the LIT issuing a report on the bankrupt’s application for discharge. The report must analyze:
- the affairs of the bankrupt
- the causes of the bankruptcy
- the manner in which the bankrupt has performed his or her duties
- the bankrupt’s conduct before and during the bankruptcy
- whether the bankrupt has been convicted of any offence under the Bankruptcy and Insolvency Act
- any other fact that would justify the Court’s refusal of the discharge.
The main effect of a discharge is to release the bankrupt from most provable claims, subject to the exceptions set out in the Bankruptcy and Insolvency Act. Such debts include orders to compensate an assault victim, Court-ordered fines, claims by a former spouse or common-law partner for child support or alimony and student loans.
A discharged bankrupt can once again get credit, purchase property and sign contracts.
A bankrupt whose discharge is not opposed by the Office of the Superintendent of Bankruptcy (OSB), the LIT, or a creditor may be automatically discharged after 9, 21, 24, or 36 months, depending on whether it is a first or second bankruptcy and whether surplus income payments are required.
As a creditor, you have the right to oppose the discharge of a bankrupt. If you oppose the discharge on grounds other than those mentioned in the LIT’s report, you must notify the LIT and the bankrupt of your opposition and grounds. In that event, the bankrupt will not be discharged automatically and the grounds for the opposition will be heard by the Court.
A creditor who opposes the discharge of the bankrupt must prove the facts on which his or her opposition is based. In other words, it is not enough simply to allege the reasons for the opposition; the creditor must also give the Court evidence in support of these arguments.
If it is not the debtor’s first or second bankruptcy, or if a creditor, LIT or the OSB is opposing the discharge, the LIT must apply to the Court for a hearing about the bankrupt’s discharge. The Court may grant or refuse an absolute order of discharge, suspend the operation of the order for a specified time or grant a discharge under certain conditions (a conditional discharge).
If a bankrupt is not discharged, creditors may resume enforcement proceedings once the LIT has been discharged from administering the estate.
What facts must be proven to oppose a discharge?
If a creditor wishes to oppose a discharge, the creditor must prove to the Court at least one of the following facts:
- The bankrupt’s assets are worth less than 50 cents for every dollar of unsecured debt, unless the bankrupt can show the court that this happened because of circumstances beyond their control.
- The bankrupt failed to keep proper financial and business records that clearly showed their transactions and financial position during the three years before the bankruptcy up to the date of bankruptcy.
- The bankrupt continued operating or doing business after realizing they were insolvent and unable to pay their debts.
- The bankrupt could not satisfactorily explain the loss of assets or why there were not enough assets to pay their debts.
- The bankrupt caused or contributed to the bankruptcy through risky financial decisions, excessive spending, gambling, or neglect of their business affairs.
- The bankrupt caused creditors unnecessary expense by raising a frivolous or improper defence to a legal action.
- Within the three months before the bankruptcy, the bankrupt caused unnecessary expenses by starting a frivolous or improper lawsuit.
- Within the three months before the bankruptcy, the bankrupt gave unfair preference to certain creditors while unable to pay debts as they became due.
- Within the three months before the bankruptcy, the bankrupt took on additional debts to make their financial situation appear better than it actually was.
- The bankrupt has previously been bankrupt or made a proposal to creditors.
- The bankrupt committed fraud or breached a position of trust dishonestly.
- The bankrupt committed an offence under the Bankruptcy and Insolvency Act or another law related to their property or bankruptcy proceedings.
- The bankrupt failed to make required surplus income payments under section 68.
- The bankrupt chose bankruptcy instead of making a reasonable proposal to creditors that could have resolved the debts.
- The bankrupt failed to carry out duties required under the Act or failed to comply with a court order.
Are there any types of debts that survive beyond bankruptcy?
Yes. An order of discharge does not release the bankrupt from:
- court fines, penalties, restitution orders, bail debts, or similar court-imposed obligations;
- damages awarded for intentionally causing bodily harm, sexual assault, or wrongful death;
- spousal support, alimony, or child support payments;
- debts arising from support or maintenance agreements or court orders involving a spouse, former spouse, common-law partner, or child;
- debts resulting from fraud, embezzlement, misuse of funds, or breach of trust;
- debts obtained through false pretences or fraudulent misrepresentation;
- amounts owed to creditors whose claims were not disclosed to the trustee;
- most government student loans if the bankruptcy occurred while the person was still a student or within seven years after ceasing to be a student;
- apprentice loans if the bankruptcy occurred while the person was still an eligible apprentice or within seven years after ceasing to be an eligible apprentice; and
- interest owing on any of the debts listed above.
