A commonly held belief about bankruptcy is: “If my debts are too high to manage, I can go bankrupt and nine months later they will be gone. I will start fresh.” For many this is true and one of the tenets of our bankruptcy system is indeed to give the “honest but unfortunate debtor” a fresh start. However, our bankruptcy system also strives to hold the bankrupt responsible for their debts, even if those debts will eventually be compromised. Failing to understand what their obligations will be and the elements of the bankruptcy process often leaves a bankrupt feeling confused, disappointed and even angry at the end of their bankruptcy experience. In an effort to eliminate unpleasant surprises and the resulting disillusionment, here is my list of “five things you should know before you go bankrupt”:
1. The duration of your bankruptcy varies depending on your income level.
Section 168.1 of the Bankruptcy and Insolvency Act (BIA) provides that a bankrupt who has never before been bankrupt in Canada before will be automatically discharged after nine months unless an opposition to the discharge has been filed (to be discussed later) or the bankrupt is required to make surplus income payments. If the Bankrupt is required to make surplus income payments, the bankruptcy period will be extended to 21 months.
2. You may have to pay a portion of your income every month for at least twenty one months.
Section 68 of the BIA sets out the requirement to pay surplus income as well as the guidelines for determining who has to pay and how much. Essentially it works like this: The Superintendent of Bankruptcies establishes, for each province, a basic allowance or minimum amount of income every individual or family requires to meet their basic needs. The amount increases as the size of the family increases. Everything above that minimum amount is surplus income, a portion of which must be paid each month to the trustee. For those of you interested in determining exactly what you would have to pay to your hypothetical Trustee follow this link: https://www.ic.gc.ca/eic/site/bsf-osb.nsf/eng/br03249.html to Directive 11R2-2016. Here you will find the 2016 standards with respect to available income along with a sample calculation that allows you to calculate what your surplus income obligation will be.
The surplus income obligation is one of the accountability mechanisms built into the bankruptcy system. A debtor who does not go bankrupt is responsible for paying their debts each month. Our bankruptcy laws do not allow a bankrupt to keep that portion of their income that would otherwise be used to pay down debts. In other words, one does not simply “walk away” from their debts if they can afford to pay something towards them.
3. Subject to a few exceptions, the Trustee will acquire your property when you go bankrupt.
The cost of surrendering one’s debts through bankruptcy is that the bankrupt must surrender their property in order to pay off a portion of those debts. Section 67 (1)(c) of BIA provides that the property of a bankrupt divisible among his creditors shall comprise: “all property wherever situated of the bankrupt at the date of the bankruptcy or that may be acquired or devolve on the bankrupt before their discharge. There are some exceptions, to this provision, in Ontario this includes:
- Necessary and ordinary clothing of the debtor and his or her family not exceeding a prescribed amount of $5,650;
- Business tools, instruments, and other chattels not exceeding a prescribed amount or $11,300;
- If the debtor is a farmer, livestock, fowl, bees, books, tools and implements and other chattels not exceeding a prescribed amount or $28,300;
- A motor vehicle up to a prescribed maximum value or $5,650; and
- Most pension plans and life insurance policies.
However, all other property including real property (which includes your principal residence), lawsuits and legal settlements, shares in corporation, any inheritance received during bankruptcy, and any art, jewellery or antiques of value will all become property of your bankrupt estate to be divided among your creditors.
4. Not all of your debts will be discharged (ie. go away) as a result of your bankruptcy.
Section 178 of the BIA is a list of debts that are not released as a result of bankruptcy. These debts include:
- Fines, penalties, restitution orders imposed by a court in respect of an offence;
- Damage awards in respect of bodily harm intentionally inflicted, sexual assault or wrongful death resulting therefrom;
- Child and spousal support;
- Debts arising out of fraud, embezzlement, misappropriation, or defalcation while acting in a fiduciary capacity;
- Any debt or liability that arises from obtaining property or services by false pretenses or fraudulent misrepresentation;
- Student loans where the date of bankruptcy occurs before the date upon which the bankrupt ceases to be a full or part-time student or within seven years after the date upon which the bankrupt ceases to be a full or part time student.
- If you are considering bankruptcy because of one or more of the above categories of debts, bankruptcy is not the solution for you.
5. Your Trustee and any of your creditors can oppose your discharge from bankruptcy
This is the fact that is often the most surprising to a bankrupt. The plan was to go bankrupt, serve their time in bankruptcy, get a discharge and start fresh. What very few bankrupts contemplate, or even seem to know, is the discharge from bankruptcy is not always automatic nor is it guaranteed. Section 173 is a list of “facts for which discharge may be refused, suspended or granted conditionally”. This section provides the grounds by which the Bankrupt’s trustee and/or any creditor can oppose a bankrupt’s discharge from bankruptcy. For the most part section 173 is a list of specific offences or failures to perform certain duties for which one a bankrupt should rightly be held accountable. A Trustee will often oppose a Bankrupt’s discharge to force him/her to perform duties they have neglected to do throughout their bankruptcy.
Another common goal in opposing a bankrupt’s discharge from bankruptcy is to obtain an order from the court requiring the bankrupt to pay an amount of money (over and above surplus income) in order to obtain their discharge. If a creditor cannot point to specific bankruptcy offence or failure to fulfill a certain duty on the part of bankrupt, section 173 (1)(a) is broad enough to act as an open door to any creditor motivated to oppose the Bankrupt’s discharge from bankruptcy. It provides that a Bankrupt’s discharge from bankruptcy can be opposed if; “the assets of the bankrupt are not of a value equal to fifty cents on the dollar on the amount of the bankrupt’s unsecured liabilities, unless the bankrupt satisfies the court that the fact that the assets are not of a value equal to the dollar on the amount of the bankrupt’s unsecured liabilities has arisen from circumstances for which the bankrupt cannot justly be held responsible”.
The motivations of the creditor to oppose a discharge can range from a genuine belief the bankrupt can afford to and therefore should pay more to his or her creditors to earn their discharge to a more cynical dislike or motivation to punish the Bankrupt. Whatever the reason, an opposition to a discharge often has the effect of embroiling the Bankrupt in litigation they may have gone bankrupt to avoid or imposes an additional cost or financial obligation that was never contemplated. The chance of an opposition therefore, should be explained and understood up front so that it can be a factor in the ultimate decision whether or not to go bankrupt.
The bankruptcy process can provide much needed relief to an honest but unfortunate debtor facing seemingly insurmountable debt. It is not, however, a fool-proof, walk away from your debts plan. Understanding the process, your obligations, and all of the hurdles and pitfalls that may come along can better prepare the bankrupt to navigate the process successfully.