What is Bankruptcy

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 are referred to as the “bankrupt”.

Cash-flow insolvency is when a person or company has enough assets to pay what is owed, but does not have the appropriate form of payment.

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 of 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 maybe able to avoid insolvency, with a consumer proposal.

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 of the bankrupt
• 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 counseling including suggesting alternatives like consumer proposals.

★★★★★ 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 process including updating my taxes.  A huge relief to have this all cleared up.  Staff at YanchDey were very professional, would recommend. John T. Whitby

Where the client wishes to file for bankruptcy the insolvency trustee will ask for a list of debts and obligations.

An application made by the trustee and the property is liquidated (sold).  Any money received is applied towards outstanding debts.

The bankrupt is required to:

• pay a fee of 200 dollars per month for 9 months
• plus 50% of any surplus income that is assessed, and
• have two sessions for counselling on debt.

Once filed, all legal actions against you and wage-garnishments are stopped.

At the end of 9 months the a discharge is issued and all debts and loans are are canceled.

You do not lose most of your personal possessions including:

• personal clothing
• furniture and appliances up to $13,000
• motor vehicles up to a value of $6,000
• tools of the trade, 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 bankruptcy trustee will discuss any changes or updates.

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 are canceled
• credit card debt is canceled
• garnishee of wages are stopped
• creditors must not contact you
• all debts are eliminated

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.

Once the filing there is an immediate “stay of proceedings“, in which all collection proceedings are stopped.  The people owed money to 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 co-lateral but only if you fail to make payments on those particular loans e.g. cars and mortgages.

★★★★★ It was the last thing we wanted to do, but YanchDey made this process 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, Debbie S. Ajax

Within five (5) days notice of the filed bankruptcy is send to each of your creditors.  It is the job of the trustee to speak and deal with the creditors so that you do not have to.

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

Filing for bankruptcy affects the way in which tax returns are filed.

There are four (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, and,
  • reporting any income you received from the liquidation of your assets,
  • which goes to any creditors
• a post-bankruptcy return
  • for your income reporting,
  • from the date of bankruptcy to the end of the tax year, Dec. 31.

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

Where there are have previous tax years that were not filed, 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 used to pay creditors.

Tax refunds received from the filing taxes are sent to the trustee directly.  Tax refunds in future years are sent to you and are yours to keep.

A record of the bankruptcy 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, a bankrupt 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.