The Personal Bankruptcy Process
If a consumer or Division 1 proposal is not an option for you, then bankruptcy may be the solution to your debt burdens.
The personal bankruptcy process is governed by a federal statue called the Bankruptcy and Insolvency Act (“BIA”). Under the BIA, the major steps in the bankruptcy process are:
- Meet with a Licensed Insolvency Trustee to evaluate your financial situation
- File an assignment in bankruptcy with the Office of the Superintendent of Bankruptcy (“OSB”)
- Attend two financial counselling sessions
- Meet with the trustee to discuss your discharge
Each of these steps will be discussed below.
Step 1: Meet with a Licensed Insolvency Trustee to evaluate your financial situation
Just as you would see a doctor to assess your symptoms when you’re not feeling well, you would see a Licensed Insolvency Trustee when experiencing great financial distress. The trustee’s evaluation includes a review of your assets, debts, and household budget (i.e., income and living expenses). Upon completing the evaluation, the trustee will give you options in dealing with your debt, including the option of bankruptcy.
Step 2: File an Assignment in Bankruptcy
Once you’ve made a decision to file for personal bankruptcy, the trustee prepares a legal document called an Assignment in Bankruptcy. By signing the Assignment, you are indicating that you are voluntarily filing for personal bankruptcy.
At the time you sign the Assignment, the trustee will explain that you have duties as a bankrupt individual. These duties are to:
- Disclose all of your assets and liabilities to the trustee
- Advise the trustee of any property disposed of in the past year
- Surrender all credit cards to the trustee
- Attend an examination at the OSB, if required
- Attend the first meeting of creditors (if a meeting is requested by the creditors)
- Advise the trustee in writing of any address changes; and
- Generally assist the trustee in administering the estate
The Assignment is filed with the OSB, a branch of the federal government that monitors bankruptcy and insolvency filings. Once the OSB receives the Assignment, it issues to the trustee a Certificate of Appointment, appointing them as the trustee of your bankruptcy estate. There are three things that happen once the trustee is appointed:
1. Once the Certificate of Appointment is issued to the trustee, you are legally bankrupt. At that point, your trustee becomes the legal owner of your assets for the purpose of liquidation and distribution to your creditors.
In the majority of situations, you won’t lose all of your assets, as Ontario law allows a bankrupt person to retain:
- Household furnishings and appliances up to $13,150
- your principal residence is exempt from seizure IF the equity in your home does not exceed $10,000. If the equity does exceed $10,000 then your principal residence is subject to seizure and sale
- All necessary clothing
- Tools of the trade up to $11,300
- A vehicle valued up to $6,600
- Other special exemptions for farmers
- Certain life insurance policies and certain RRSPs
The trustee may sell other assets you have for the benefit of your creditors. However, in most cases arrangements can be made to allow you to keep assets that would normally be sold.
2. Wage assignments and garnishments are stopped, as well as most other legal proceedings against you.
3. You are required to keep track of your monthly income and expenses and may be required to pay a portion of your monthly income to the trustee. How much you have to pay is determined by the trustee based on guidelines set out annually by the OSB. These guidelines take into account the amount of your household income and the number of dependents.
Step 3: Attend two financial counselling sessions
During your bankruptcy you’ll be required to meet with the trustee to discuss any potential non-financial issues that led to your filing for personal bankruptcy. For example, gambling, substance abuse, and marital breakdown are common problems in society that inevitably lead to financial hardship. A Trustee may refer you to the appropriate professional to deal with a gambling addiction or substance abuse issues. In addition, the trustee will provide information to you on money management and ways in which you can rebuild your credit.
Step 4: Meet with the trustee to discuss your discharge
An important event in the bankruptcy process is obtaining your discharge from bankruptcy. Being discharged from bankruptcy essentially means that you are free of your debts (with certain exceptions – student loans, alimony/child support, fines for breaking the law, and judgments arising from fraud or physical/sexual assault are not discharged), and that you are no longer “bankrupt” for legal purposes.
Your creditors, the trustee, or the OSB have a right to oppose your discharge.
If no one objects to your discharge and you are a first-time bankrupt, a discharge is automatically granted 9 to 21 months after filing bankruptcy. How long you are bankrupt for will depend on whether your net monthly income exceeds a certain monthly living allowance established by the OSB. If you are granted an automatic discharge, there is no court hearing and the trustee sends you a copy of the discharge.
If your discharge is opposed, the trustee sends a discharge application to the Court. The Trustee will advise you if you are required to appear in Court for the discharge hearing. At the hearing, the Trustee’s report informs the Court of the circumstances surrounding your bankruptcy. The Court will then issue one of the following orders:
Absolute Discharge: You are no longer responsible for debts incurred prior to bankruptcy (save for the exceptions noted above).
Conditional Discharge: You may be required to pay a certain amount of money to your creditors through the trustee for a specified period (e.g., $100 per month for 24 months). Your discharge is subject to fulfilling the terms and conditions of the order. An absolute discharge will be granted when the specified conditions are fulfilled.
Suspended Discharge: This could be an absolute discharge but there is a delay before it comes into effect or is reviewed again by the Court.
Discharge Refused: The Court has the right to refuse a discharge in unusual circumstances.
If you’ve been bankrupt before, your discharge is automatically granted 24 months to 36 months after filing bankruptcy. Again, whether you are bankrupt for 24 or 36 months will depend on whether your net monthly income exceeds a certain monthly living allowance established by the OSB.
Preparing an extra tax return
You must supply the trustee with documents to complete two income tax returns during the year in which a bankruptcy occurs. A pre-bankruptcy income tax return must be filed for the period from January 1 to the date of bankruptcy. A post-bankruptcy income tax return must be filed for the period from the date of bankruptcy to December 31.
Income tax refunds from prior years are an asset of the bankrupt estate and must be sent to the trustee. The trustee may request that refunds from the post-bankruptcy return be paid to the estate. Income taxes owing prior to the bankruptcy are discharged. Any amount owing on the post-bankruptcy tax return must be paid by the bankrupt.
Bankruptcy can be a necessary process to escape your debts when they are overwhelming. However, it is not without its consequences. Bankruptcy will carry the most severe hit to your credit rating (R9). In some professions, your ability to practice will also be affected if you are bankrupt or recently post bankrupt. For example, holding funds in trust may not be permitted for certain professionals undergoing bankruptcy.
Bankruptcy is ultimately a rehabilitative process that relieves a debtor from the burden of crushing debt and allows them to become a productive member of society. From the creditors’ standpoint, the bankruptcy process provides transparency into the debtor’s financial affairs and ensures that they will be dealt with in an orderly process.