The purpose of bankruptcy proceedings is to rehabilitate the honest debtor, providing a fresh start free of most debts, and to distribute the bankrupt's assets fairly amongst the creditors. Any resident of Canada may make an assignment in bankruptcy provided there are unsecured creditors totalling $1,000 and the debtor is insolvent in that liabilities exceed assets, or is unable to meet obligations generally as they come due.

Officials Who Administer Bankruptcies

Superintendant Of Bankruptcy

The Superintendant is the Federal Government official in Ottawa who licenses Trustees in Bankruptcy, supervises their activities, and administers the public aspects of the Bankruptcy and Insolvency Act  through his officers known as Official Receivers.

Official Receivers

Administration of the Bankruptcy and Insolvency Act (BIA), which is the federal statute governing bankruptcies, is conducted by Official Receivers at the regional level. Their duties involve:

- accepting Assignments in Bankruptcy and Statements of Affairs;
- making the technical appointment of the Trustee in Bankruptcy;
- conducting a statutory examination of the Bankrupt;
- chairing the first meeting of creditors, if any;
- supervising the Trustee by investigating complaints, and reviewing and approving of  accounts.

Trustees In Bankruptcy

Trustees are frequently, but not necessarily, accountants. Practising lawyers are not entitled to be licensed; however, some trustees have law degrees and have given up the practice of law for the front line role of a bankruptcy trustee. While all trustees must have a working knowledge of the insolvency laws, they must be careful not to give legal advice to a prospective bankrupt in situations where the ramifications call for independence.

The trustee's principal duty is to represent the creditors. This line tends to become blurred when debtors seek out a trustee with a view to obtaining assistance in resolving their financial difficulties. In the event of any unusual circumstances, a trustee would be wise to refer a debtor to an insolvency lawyer for a consultation prior to having the debtor make an assignment in bankruptcy.

Assignment In Bankruptcy

Apart from a creditor petitioning a debtor into bankruptcy involuntarily, nearly all personal bankruptcies occur by way of a voluntary assignment to a trustee in bankruptcy. The debtor will look for a trustee to provide a preliminary assessment. If as the result of that assessment it is decided to go bankrupt, the trustee will prepare an Assignment in Bankruptcy and a Statement of Affairs listing assets and creditors. The trustee will then file the documents with the Official Receiver who will make the formal appointment of the trustee and the debtor is bankrupt as of that date.

The effect of the Assignment is that all creditors' claims provable in bankruptcy are stayed. Therefore, creditors who had filed execution after judgment or who had garnished the debtor's income could not pursue their collection remedies. Conversely, all of the debtor's assets become the property of the bankrupt estate for the benefit of creditors, with certain exceptions.

Summary Administration

If the anticipated realizable assets do no exceed $5,000, the administration of the bankruptcy estate is handled in a summary fashion to reduce costs. For example:

- notice of bankruptcy need not be published in a local newspaper;
- documents do not have to be sent by registered mail;
- the trustee does not have to file a bond;
- the appontment of inspectors is not required;
- spouses can be dealt with jointly as one estate;
- court filing fees are reduced.

Exempt Property

All property of the bankrupt vests in the trustee with the exception of property which is exempt from execution under provincial laws. These laws vary from province to province so that in some provinces you may find that a matrimonial home is exempt to a certain degree while in others no such exemption is available. For example, in Ontario the following are typical exemptions:

- personal possession to the extent of $5,650;
- household furnishings to the extent of $11,300;
- tools of the trade to the extent of $11,300, or if a farmer, $28,300;
- life insurance policies or annuities where a family member is designated as a beneficiary;
- damages for personal injuries.

After Acquired Property

After bankruptcy any property that a bankrupt acquires until a discharge is obtained becomes property of the bankrupt estate for the benefit of creditors. If the bankrupt wins the lottery or becomes a beneficiary of an estate prior to discharge those assets will go to the trustee for creditors.

Depending on how much income the bankrupt is earning, a portion that exceeds a reasonable amount required for living may have to be paid to the trustee for creditors. The personal circumstances of the bankrupt will determine how much may be available for creditors. This is one circumstance in which a bankrupt may choose to seek legal advice, rather than rely on the trustee.

Cost

Trustees usually require $1,200 to cover their fees and disbursements. If the bankrupt is employed, part may be defrayed by any income tax rebate (provided that Revenue Canada is not a creditor). The trustee may accept regular payments prior to discharge.

Creditors' Meeting

A meeting of creditors is held approximately three weeks after the assignment. The bankrupt is required to attend and answer questions although they are not under oath. The purpose of the meeting is to report to the creditors any facts about the bankruptcy, affirm the appointment of the trustee, appoint inspectors if thought necessary, and provide the trustee with any special instructions. There may be up to five Inspectors appointed to represent creditors, whose duties are to assist the trustee, approve of any proceedings to be taken by the trustee, and approve of the final estate accounts. If there is no quorum of creditors at the meeting, the appointment of the trustee is deemed to be approved.

Disabilities And Duties

While undischarged, a bankrupt:

- must not be a director of a corporation;
- may not be a trustee or executor or have a trust account;
- must not engage in trade or business without disclosing status;
- must not obtain credit for more than $500 without disclosing status.

A bankrupt has certain duties while undischarged:

- turn over credit cards to trustee on making assignment;
- disclose and turn over all property to trustee;
- prepare a Statement of Affairs;
- submit to examination by Official Receiver, if so required;
- attend first meeting of creditors and answer questions;
- assist in realization of property;
- keep the trustee advised of any change of address.

Distribution To Creditors

After any creditors who may be entitled to receive the benefit of trusts are paid, secured creditors are entitled to look to their security for payment. Whatever may be left over will be distributed amongst the creditors in accordance with the following priorities:

- costs of the bankruptcy administration;
- the levy on dividends payable to the Superintendant of Bankruptcy;
- wages of employees for services in prior six months up to $2,000;
- certain municipal taxes within stringent limits;
- landlord's arrears for three months and accelerated rent for three months to the extent of the  value of realizable property on premises;
- expenses of first creditor enforcing an execution;
- lastly, all other unsecured creditors rateably.

Transactions Subject To Review

Transactions which have occurred prior to bankruptcy that have the effect of frustrating creditors' claims may be set aside and brought into the bankruptcy estate for the benefit of creditors in certain circumstances. It may be important to consider any such facts prior to deciding whether to make the step of going into bankruptcy. This is an example of a conflict of interest that a trustee may encounter in a preliminary assessment which should give rise to referring the debtor to an insolvency lawyer. The nuances of the law in this area generally require the attention of an expert opinion.

Fraudulent Conveyances

Any transaction involving a transfer of property with the intention of the debtor to defeat, hinder, delay, or defraud creditors is void. A purchaser for value is excepted unless they were aware of the fraudulent intent.

Assignments And Preferences

Payment to a creditor may be considered a preference and reversible. There is a presumption that the debtor intended to prefer the creditor if the transaction is attacked within 60 days or the debtor goes bankrupt within that time period.

Settlements

Any gratuitous transfer of property or gift is void if it took place within one year of bankruptcy. If the transaction took place within five years, at a time when the debtor could not have paid all debts without the use of the property so transferred, then it is also void.

Fraudulent Preferences

Any transfer of property to a creditor within three months of bankruptcy, at a time when the debtor was insolvent, with the intent of the debtor to prefer the creditor is void.

Reviewable Transactions

All non-arm's length transactions made within one year prior to bankruptcy are reviewable as to the adequacy of the consideration given for the transaction. The trustee is entitled to recover from the recipient the difference between the fair market value and what had been actually paid.

Discharge From Bankruptcy

Automatic Discharge

A first time bankrupt will obtain an automatic discharge nine months after filing an assignment. A creditor or the trustee, however, may oppose such a discharge and a hearing will be held in front of a judge in court. Again, it may be advisable for the bankrupt to retain an insolvency lawyer to appear in court.

Contested Discharge

On the hearing of an opposed discharge, the Court may dispose of the matter in one of four different ways.

Absolute: Provided that the Court has been persuaded that the liabilities have arisen from circumstances for which the bankrupt cannot justly be held responsible, it will grant an absolute discharge as of the date of the hearing.

Conditional: If the Court is of the view that the bankrupt can afford to make a contribution to the creditors having in mind the family responsibilities and any other circumstances, it may make the discharge conditional on the payment of a sum of money over a period of time, or consent to judgment on like terms. If the payment is made or the judgment is signed, then the bankrupt will receive an absolute discharge order.

Suspended: If the Court feels that the conduct of the bankrupt is subject to censure, but a conditional order is inappropriate, it may suspend the discharge of the bankrupt to a fixed date when it will become absolute.

Refused: If the conduct of the bankrupt has been particularly reprehensible, such as multiple bankruptcies, then the Court may simply refuse the discharge. The bankrupt will have to bring another application for discharge at a more propitious time if so advised.

Discharge Of Debts

The effect of receiving an absolute discharge from bankruptcy is that all debts provable in bankruptcy are discharged, with the following exceptions:

- court imposed fines or restitution orders;
- alimony or support payments;
- debts or liabilities arising out of fraud or false pretences;
- liability for any dividend to undisclosed creditors;
- student loans unpaid within ten years of leaving school.

Credit

The fact of the bankruptcy will remain on the records of credit reporting organizations for a period of seven years when it must be expunged. A second bankruptcy will never be removed. How credit grantors use the information will vary from one to another.

Alternatives To Bankruptcy

For many, bankruptcy may be particularly unattractive for any number of reasons. Depending on a debtor's circumstances, there may be alternatives that are workable.

Consolidation Order

If the debts are not so overwhelming but only require orderly payment, then depending on the provincial jurisdiction, a debtor may resort to either the Small Claims Court or the Orderly Payment of Debts provisions under Part X of the BIA. In Ontario and Quebec, the provinces have not adopted those provisions under the BIA and therefor alternatives must be relied upon. In either situation, the debts are not compromised but only payment extended.

Informal Proposal

A debtor can always submit a proposal to creditors to compromise or extend payments. Success will usually depend on how realistic the proposal is, how receptive the creditor is to the debtor, how many creditors are involved, and whether they are all being treated rateably. Credit Counselling organizations sometimes will provide this type of service.

Consumer Proposal

Provided that an insolvent debtor does not have aggregate debts exceeding $75,000, excluding mortgages on a principal residence, that person can file a proposal under Division II of the BIA, resulting in a stay of proceedings.

An Administrator, who is a licensed trustee in bankruptcy, will work with the debtor to formulate a plan to put to the creditors. If no objection is taken by the creditors, the proposal will be deemed approved without the necessity of a meeting. Similarly, if no objection is taken within 30 days of approval, it will be deemed approved by the Court.

If default is made for a prolonged period of time, the proposal will be annulled. However, the effect is not a deemed assignment in bankruptcy as it would be with a business proposal under Division I. Simply, the stay will be lifted and the debtor will not be able to file another Consumer Proposal.