Bankruptcy

In exchange the court issues a “stay of proceedings“, the debts are forgiven, wage garnishments, and legal actions are stopped and creditors are forbidden from calling or harassing the debtor.

Wage Garnishments:  How bankruptcy stops wage garnishments
Bankruptcy Advantages:  The benefits & disadvantages of bankruptcies
Bankruptcy FAQs:  Questions answered about filing for bankruptcy

Bankruptcy law allows for debt relief and financial counseling of a person or business while treating creditors fairly.

Where you’re considering bankruptcy, you call or meet with an insolvency trustee. During that meeting you explain to the trustee your debts and any financial obligations.

The trustee will review your finances and explain what the best option is to reduce your debts.  A consumer proposal maybe a better option vs bankruptcy.

In a bankruptcy application, non-exempt and surrendered assets are liquidated (sold) by the trustee.  Any money received is applied towards outstanding debts, owed to creditors.

★★★★★ It was easier than I initially thought, I gave a list of all my creditors and credit card bills.  They took me through the whole bankruptcy process including updating my taxes.  A huge relief to have this all cleared up.  Michael Dumas. Whitby

When you file for bankruptcy, you keep most personal possessions including:

• personal clothing
• furniture and appliances up to $13,000
• motor vehicles up to a value of $6,000
• tools, e.g things used for working
• farming equipment up to $19,000
• pension plans, life insurance policies and some RRSPs

The exceptions and the rules can change within the Execution Act from time to time.

The bankrupt surrenders (gives up) non-exempt assets (things they own) to the trustee, for example:

• homes where there is equity
• vehicles valued over $6,000
• TFSA’s, RESP’s and any cash in accounts
• items that can be sold for a cash value

Where a person facing insolvency has assets, has an income and is working they may want to consider a consumer proposal where there is no requirement to surrender property.

When you file for bankruptcy:

• all loans debts are cancelled
• unpaid credit card debt is cancelled
• garnishee of wages are stopped
• creditors must not contact you

The Bankruptcy and Insolvency Act is set up to allow individuals with no reasonable prospect of getting out of debt to start over with conditions.

The balance of all debts and credit obligations are eliminated.

The insolvency trustee explains and guides the debtor through the process, including filing of all appropriate forms and paperwork.

The trustee’s job is to:

• assist the bankrupt
• liquidate any non-exempt assets
• distribute and repay creditors from any liquidation funds

The insolvency trustee is also responsible for negotiating settlement agreements, speaking with creditors and to provide credit counselling including suggesting alternatives like consumer proposals.

★★★★★ It was the last thing we wanted to do, but the trustee made the process of bankruptcy very smooth, they did all the paperwork and dealt with our creditors.  The garnishee was stopped and we can sleep at night, we now have a fresh start. Many thanks, David Newman, Ajax

Insolvency is the state of:

• being unable to pay the debts, by a person or company (debtor), at maturity

There are two forms of insolvency:

• cash-flow insolvency, and
• balance-sheet insolvency

Persons or businesses who file for bankruptcy are said to be insolvent.  Where the insolvent person or company are referred to as the “bankrupt”.

Once the filing is complete there is an immediate “stay of proceedings“, in which all collection proceedings are stopped.  The people owed money and unsecured creditors cannot:

• contact or harass you for payments or money,
• garnishee your wages,
• file any lawsuits against you,
• collect any money from you.

Secured creditors can still seize property that was put up as collateral but only if you fail to make payments on those particular loans e.g. cars and mortgages.

Cash-flow insolvency is when a person or company has enough assets to pay, but does not have the “cash on hand” to make payments.

For example, a person may own a large house or a valuable car, but not have enough liquid assets, or cash to pay a debt when it’s due.

Cash-flow insolvency can usually be resolved by negotiation. For example, the bill collector may wait until the car is sold and the debtor agrees to pay a penalty.

Many times a cash-flow insolvency can be addressed with alternatives like a consumer proposal.

Balance-sheet insolvency is when a person or company does not have enough assets or even the ability to pay all their debts.

This may have occurred because of a health reason, loss of a job or other financial reason.

Where a loss is accepted by all parties, negotiation may be able to avoid insolvency, with a consumer proposal.

Within 5 days notice of the filed bankruptcy is sent to each of your creditors.  It is the trustee’s job to speak and deal with the creditors so that you do not have to.

The creditors may if they wish, file a claim to try to recoup any losses from the assets that you surrendered.

Filing for bankruptcy affects the way in which tax returns are filed. There are 4 types of income tax returns that must be filed.

• previous year’s tax returns (if it was not filed),
• pre-bankruptcy return,
  • for the beginning of the tax year to the day before filing
  • from the 1st of January to the day before your filing date.
• in-bankruptcy return,
  • reporting any income you received from the liquidation of your assets, which comes into the estate and is disbursed to creditors as per the Bankruptcy and Insolvency Act.
• a post-bankruptcy return
  • for your income reporting,
  • from the date of bankruptcy to the end of the tax year, Dec. 31st.

The trustee will assist with dealing with the CRA . The returns are filed up to the date of bankruptcy.

Where there are previous tax years that were not filed, some of these will be completed for you.  Should there be a refund or tax credit for previous years, the funds become the property of the estate.

Any funds received from filing back taxes become property of the estate and are for the benefit of the creditors.

Tax refunds received from the year of bankruptcy and any prior year are sent to the trustee directly.

Tax refunds in future years are sent to you and are yours to keep.

The bankrupt is responsible to surrender all credit cards, non-exempt property and:

• attend any creditor meetings
• provide any tax information, e.g T4 slips
• each month report all income, living expenses and any material budgetary charges
• where you have surplus income, make payments where required
• attend credit counselling sessions
• where you borrow more than 500 dollars, advise the lender that you are a bankrupt
• you may not be a director of a company

Where this is the first time filing and you have no surplus income then you are eligible to be discharged in nine (9) months.

The discharge means that all your debts are canceled.

A record is placed on your credit report for a minimum of six (6) years after the date of the discharge.

Even though there is a record, you may still be able to receive credit.

As well you should take action to gradually rebuild your credit rating and put this part of your life behind you.