If you’re filing for bankruptcy or entering into a consumer proposal, there are rules in the Bankruptcy and Insolvency Act that you, your creditors and administrators must follow.
Here’s everything that we’ll cover in this article:
What is the Bankruptcy and Insolvency Act?
In Canada, bankruptcy and insolvency laws are regulated through a government statute called the Bankruptcy and Insolvency Act, commonly referred to as the BIA or The Act.
This federal legislation contains rules that govern bankruptcies, consumer proposals, commercial proposals, and receiverships.
These rules apply to you, your creditors, the court and the Licensed Insolvency Trustee (LIT or trustee) that administers your bankruptcy or insolvency proceeding.
The Act also governs the government’s Office of the Superintendent of Bankruptcy (OSB), the entity responsible for granting licenses to Licensed Insolvency Trustees.
What is the purpose of the Bankruptcy and Insolvency Act?
The purpose of the Bankruptcy and Insolvency Act is to ensure someone in debt is treated fairly, so they have the opportunity to eliminate their debts and start again. The Act also guarantees creditor protection.
You’ll find that there are three options in the Bankruptcy and Insolvency Act for people in financial difficulties: bankruptcy, a consumer proposal or a Division I proposal.
Bankruptcy is a debt relief solution best suited to those who have little hope of paying off their debts as they become due.
A consumer proposal is a legally binding agreement between you and your creditors, where you can offer to repay what you can afford rather than the total amount due. Your creditors forgive the remaining amount.
Division I proposal
A Division I proposal is similar to a consumer proposal, with one difference. It is a debt relief solution available to businesses and individuals with over $250,000 in debts (with no maximum limit).
How does the Bankruptcy and Insolvency Act work?
The Bankruptcy and Insolvency Act ensures everyone involved in bankruptcy or insolvency proceedings understands their roles by outlining them in federal legislation.
OSB: The Office of the Superintendent of Bankruptcy (OSB) must ensure standards are being adhered to and comply with the legislation’s provisions through its responsibilities and powers.
Licensed Insolvency Trustee: A trustee has many duties to complete when administering bankruptcy and insolvency proceedings. Their role is to stand up for your rights, treat creditors fairly and comply with the standards set by the OSB.
You: When filing for bankruptcy or undertaking a consumer proposal (or a Division I proposal), you have responsibilities while in the arrangement, and you must assist the trustee when requested.
Courts: Lastly, the court will refer to the Bankruptcy and Insolvency Act when judging bankruptcy or an insolvency solution.
Bankruptcy and Insolvency Act rules
There are many rules outlined in the Bankruptcy Act, so let’s look at some of the basics.
Rules for the Office of the Superintendent of Bankruptcy
The Office of the Superintendent of Bankruptcy (OSB) must supervise the administration of all estates managed by Licensed Insolvency Trustees. They have the power through The Act to do so.
The OSB is responsible for:
- Maintaining standards; all trustees must adhere to standards of practice, rules and the Code of Ethics for Trustees.
- Issuing directives to trustees to provide an official interpretation of the bankruptcy process.
- Ensuring that a trustee has extensive knowledge and experience of insolvency before obtaining a license.
They have specific powers to intervene in any court proceeding.
If a complaint is made against a trustee, they must record and investigate it and undertake disciplinary proceedings if the complaint is valid.
The Act states how trustees must be licensed, how fees are paid, and under what conditions a license can be suspended or cancelled by the Superintendent.
The OSB must also keep a public record of bankruptcies, insolvencies, licences and appointments for a prescribed period.
Rules for Licensed Insolvency Trustees
A Licensed Insolvency Trustee acts as a receiver for your estate.
Under the Bankruptcy and Insolvency Act, only a trustee can administer insolvency proceedings that allow you to be discharged from your debt.
Upon filing for bankruptcy or a consumer proposal with a trustee, a Stay of Proceedings stops harassment from your creditors. Collection calls, legal action and wage garnishments will stop.
A Licensed Insolvency Trustee must administer proposals and bankruptcies fairly, protect you and your creditors’ rights, and investigate your financial affairs thoroughly.
Each trustee must adhere to the standards of practice outlined in The Act, with the OSB overlooking their activities and investigating complaints.
They must also comply with legislation, regulations, directives and undertake regular reviews, audits and inspections.
The Act allows trustees to take control of assets, sell them and distribute the proceeds amongst creditors. However, some assets are exempt through The Act and provincial legislation.
When it comes to the liquidation and distribution of assets from an estate, trustees must ensure that creditors are given fair consideration in order of priority. The money received by a trustee is deposited into a separate trust account.
Some powers exercisable by the trustee require the inspectors’ permission (someone who represents the creditor). The trustee will also liaise with the OSB and the court on occasion when needed.
Once appointed, a trustee must perform all legally required duties and then apply for a discharge. If required, the court may also remove a trustee and appoint another.
Rules for you
The Bankruptcy and Insolvency Act outlines what will happen if you proceed with bankruptcy or an insolvency proceeding such as a consumer proposal. It also explains your rights and responsibilities during this time.
During a bankruptcy or insolvency proceeding, you must assist the Licensed Insolvency Trustee in administering the bankruptcy or proposal.
This involves supplying the requested information to your trustee and disclosing all your assets, including those recently disposed of. If you file for bankruptcy, you’ll be required to surrender all credit cards to your trustee.
If you file for bankruptcy, you’ll provide proof of income and expenses to your trustee every month and pay surplus income if your income is high.
You’ll also need to supply income tax information if the trustee needs to file a pre-bankruptcy or post-bankruptcy tax return.
During a bankruptcy or consumer proposal, you must attend two financial counselling sessions, where you will learn how to manage your finances better. If a meeting of creditors is called, you must attend.
The Act explains what will happen to your assets and property in a consumer proposal or bankruptcy and how your Licensed Insolvency Trustee manages your estate.
Finally, you need to be aware of some potential offences. Your trustee will explain these.
You must be honest and truthful throughout the bankruptcy or consumer proposal process. Failure to do so could lead to a fine or imprisonment.
Once you have completed the tasks required, you are released from your debts.
Rules for creditors and inspectors
Creditors are the people who are owed money, so if your assets’ value is over $15,000 (unless the creditors decide otherwise), they are required to appoint an inspector who will represent them impartially when assisting the Licensed Insolvency Trustee during a consumer proposal or bankruptcy.
The trustee must obtain permission from the inspector before carrying out some responsibilities, such as selling assets. Inspectors approve the final statement of receipts and disbursements and the trustee’s fees.
An inspector can apply for the removal of a trustee if they feel the trustee isn’t complying with the Bankruptcy and Insolvency Act or the directives from the OSB.
In bankruptcy, creditors must file a proof of claim with the Licensed Insolvency Trustee, who will decide whether the claim is acceptable. If so, they will share in any proceeds recovered.
Creditors are entitled to appeal the decision in court if their claim is not accepted.
When distributing assets from a bankruptcy estate, creditors must be ordered by priority, beginning with secured creditors, then preferred creditors and unsecured creditors.
A secured creditor is a creditor that you have provided an asset as collateral to obtain credit. Examples include a mortgage or a car loan.
Typically, a secured creditor is not impacted by bankruptcy or a consumer proposal as long as your payments are up to date. However, if you default on the payments, a secured creditor can seize the asset to recover the amount owed.
If there is still money due, the creditor can file a proof of claim as an unsecured creditor.
Preferred creditors are prioritized before everyone else. An example would be an employee who is owed wages.
An unsecured creditor lends money without obtaining assets as collateral.
Source: Hoyes: Bankruptcy Law Rules
Creditors’ meetings allow creditors to vote on whether to accept your consumer proposal or bankruptcy.
Lastly, they must inform the trustee of any irregularities from the person involved in the bankruptcy or insolvency proceeding (referred to as the debtor).
Rules for the court
The Bankruptcy and Insolvency Act provides an overview of the structure of the court’s jurisdiction in bankruptcy and other proceedings, alongside information about the court’s powers, enabling them to exercise proceedings under the Act.
How does the Bankruptcy and Insolvency Act affect my assets?
Assets in bankruptcy
When declaring bankruptcy, you must surrender some assets to your Licensed Insolvency Trustee. The Bankruptcy & Insolvency Act defines the following exceptions:
- The property you hold in trust for other persons.
- GST credit payments relating to your essential family needs.
- Exemptions in your province or territory.
Typically RRSPs are exempt from bankruptcy (except contributions in the last 12 months).
Under the Bankruptcy and Insolvency Act, a Licensed Insolvency Trustee must turn any surrendered assets into cash for distribution to your creditors.
You must negotiate a payment agreement with your Licensed Insolvency Trustee to repurchase a non-exempt asset if you wish to keep it.
Assets in a consumer proposal
Unlike bankruptcy, you can keep all your assets in a consumer proposal.
What are exempt assets in bankruptcy?
In addition to the Bankruptcy and Insolvency Act, provincial legislation protects certain assets when filing for bankruptcy.
Examples include equity in your home or car, clothing, health aids, food, heating, household furnishings and appliances.
If an asset is exempt, it means your trustee cannot seize it if you file for bankruptcy, and you will keep it if you file.
A Licensed Insolvency Trustee can tell you which assets you can keep if you file.
Business bankruptcy in Canada
In Canada, if a business is having financial difficulties, it can refer to legislation called the Companies’ Creditors Arrangement Act (CCAA), which outlines how a company or corporation can restructure to avoid bankruptcy and continue to function.
What are the rules on debt collection?
Each province and territory has specific laws on debt collection.
See also: Resolve debts in collections
The Act ensures everyone involved understands their role and outlines the rights of all parties: you, your creditors, the court, the Office of the Superintendent of Bankruptcy (OSB) and the Licensed Insolvency Trustee that administers the proceeding.
The Bankruptcy and Insolvency Act exists to treat Canadians in debt fairly, so you can be released from your obligations and have the opportunity to resolve your financial issues.
Hopefully, by reading this article, you have learned something about the Bankruptcy and Insolvency Act and understand your rights and responsibilities if you decide to file for bankruptcy or a consumer proposal.
Seek advice from a Licensed Insolvency Trustee, who will provide a free, confidential, no-obligation consultation to discuss your situation.
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