By: Jonathan Solomon
This year has been rough. In addition to the devastating implications to public health, the impacts on the economy have taken a heavy toll on people across Canada. As a result, many Canadians have or will need to consider seeking protections under bankruptcy law in light of their debt problems.
An insolvent person (i.e. corporation or individual) is either unable to meet their obligations as they become due (cash flow insolvent) or is unable to cover the value of their liabilities with the value of their assets (balance sheet insolvent).
In Canada, personal insolvency (insolvency of an individual also known as a debtor), is governed by the Bankruptcy and Insolvency Act (“BIA”). This statute outlines the options available to those facing financial hardship.
Upon experiencing financial difficulties, an individual reaches out to a Licensed Insolvency Trustee (licensed by the Office of the Superintendent of Bankruptcy) who reviews the insolvent person’s financial situation through credit counselling sessions. They then determine what the best course of action is for that individual based on their financial situation. They will analyze their credit report, credit rating, credit score, tax returns among other documentation to make their recommendation.
There are three options:
(1) Consumer Proposal (s.66.11 of the BIA),
(2) Voluntary Bankruptcy or,
(3) Involuntary Bankruptcy
Let’s start with the first.
A consumer proposal is an arrangement entered into between (a) an individual who is bankrupt or insolvent (meets the one of the tests above) and has an aggregate amount of debt more than $250,000 excluding their mortgage (i.e. credit card debt) and (b) the entities who provided those funds. It is binding on the parties involved and allows for some compromise between the two sides while avoiding bankruptcy. When it is filed, a stay of proceedings takes hold, which prevents further legal action from being enforced until the insolvency process unfolds.
The second, voluntary bankruptcy, occurs when an insolvent individual applies for relief to the court under an Application for Bankruptcy Order. If this is their first bankruptcy and the creditors (the entities that are owed money) do not oppose the Order, the individual is considered debt free via automatic discharge. Note there are certain obligation that the court will not release the debtor from including student loans (if over 7 years removed from full- or part-time studies), child support payments, and court-imposed garnishments. If this is the individual’s second bankruptcy or more, though, there is a separate mediation/hearing process that must take place before the individual can be granted their “fresh start”.
Alternatively, the third option is where the individual could be subject to an application for bankruptcy initiated by one of the creditors. To qualify, the entity needs to be owed more than $1,000 and an “act of bankruptcy” must have occurred within six months of the application. An act of bankruptcy is a set of events listed in s.42 of the BIA. If an individual commits one of these acts and owes the creditor $1000 or more, they may be subject to legal action. The result of this is either that the person is or is not deemed insolvent; freeing them of some or all of their repayment obligations for non-exempt assets. Exemptions include personal items, clothing, household furniture, and RRSPs (other than contributions made in the last twelve months).
This is a simplistic summary of the personal insolvency process in Canada.
With the effects of the pandemic still unclear, there are likely to be many more insolvent individuals who need to be informed about the bankruptcy process and serviced by professionals in the space. The Conflict Analytics Lab has been developing a tool to help ameliorate the task of deciding on an appropriate path for reconciliation that would help all the stakeholders involved, including the unfortunate debtor, the bankruptcy trustee, and the lenders.
One area of particular interest to the Lab is disputes relating to s.68 of the BIA, which primarily involve the date upon which surplus income payments (i.e. income made after becoming insolvent) are calculated. The earlier the date, the larger the pool of funds creditors can have access to; the later the date, the smaller the pool. This area is often contested by both parties and appears in all BIA proceedings (i.e. all three options). The prospective tool would analyze the data set to provide greater transparency to all parties involved and promote expediency in this complex legal process (likely starting in Ontario).
Although free consultations are a great resource for many who face financial hardship, tools in the space of personal bankruptcy are needed if Canadian insolvency law is to be consistent, reliable, and useful recourse for individual debtors and lenders (i.e. unsecured creditors and secured creditors). Money management has been increasingly difficult for many during the pandemic – assistance and clarity are ever more important. We are still in the early stages of development and are continuously looking at any and all opportunities to fulfill our mandate of promoting access to justice and transparency in the legal process.
To learn more about MyOpenCourt’s tools, please click here.