Bankruptcy in Canada

Bankruptcy in Canada is a legal process designed to provide individuals and businesses with relief from overwhelming debt. It is governed by the Bankruptcy and Insolvency Act (BIA), which outlines the rights and obligations of debtors and creditors during the bankruptcy process. Let’s delve into the key aspects of bankruptcy in Canada:

1. Bankruptcy Filing:
– Individuals or businesses who are unable to meet their financial obligations can voluntarily file for bankruptcy.
– Bankruptcy can also be initiated by creditors through a court process known as involuntary bankruptcy, but it is less common.

2. Licensed Insolvency Trustee (LIT):
– When filing for bankruptcy, debtors must work with a Licensed Insolvency Trustee (LIT). LITs are licensed professionals authorized by the Office of the Superintendent of Bankruptcy (OSB) to administer bankruptcies and proposals.
– The LIT’s role is to assess the debtor’s financial situation, explain the available options, and guide them through the bankruptcy process.

3. Bankruptcy Estate:
– Upon filing for bankruptcy, an estate is created. The estate includes all of the debtor’s assets, except for certain exempted items such as basic household furnishings, clothing, and tools of trade.
– The LIT takes control of the estate and manages it on behalf of the creditors.

4. Automatic Stay of Proceedings:
– When bankruptcy is filed, an automatic stay of proceedings comes into effect. This stay prohibits most creditors from pursuing collection actions against the debtor.
– The stay provides immediate relief to the debtor and allows for a fair and orderly distribution of assets among creditors.

5. Surplus Income:
– Bankrupt individuals with surplus income are required to contribute a portion of their income to the bankruptcy estate. The surplus income threshold is set by the OSB and varies depending on family size and income level.
– The surplus income payments ensure that those with higher incomes make additional contributions towards their debts.

6. Discharge from Bankruptcy:
– The ultimate goal of bankruptcy is to obtain a discharge, which releases the debtor from most of their pre-bankruptcy debts.
– The discharge typically occurs after a certain period, depending on the debtor’s financial history and whether it is their first bankruptcy or subsequent filing.
– However, some debts, such as child support, alimony, student loans (if less than seven years old), and court-ordered fines, are not discharged.

7. Bankruptcy Limitations:
– Bankruptcy is not a solution for every financial problem. Some debts, such as secured loans or mortgages, may require the debtor to surrender the assets securing the loan.
– Bankruptcy also has implications on creditworthiness, as it remains on the debtor’s credit report for several years, making it challenging to obtain credit in the future.
– Additionally, bankruptcy does not absolve directors or officers of a corporation from personal liability for certain debts, such as unpaid payroll deductions or taxes.

8. Alternatives to Bankruptcy:
– Individuals or businesses facing financial difficulties may consider alternatives to bankruptcy, such as making a consumer proposal. A consumer proposal is a negotiated agreement between the debtor and their creditors to settle the debts under modified terms.
– Debt consolidation, debt management programs, and informal negotiations with creditors are other potential alternatives that can help avoid bankruptcy.

It is crucial for individuals or businesses considering bankruptcy to seek professional advice from a Licensed Insolvency Trustee to understand their specific situation, explore available options, and make an informed decision.