What is Bankruptcy
How Bankruptcy Works
The bankrupt agrees to surrender non-exempt belongings to the trustee, in exchange for the elimination of their debts.
With conditions, bankrupts often choose to keep non-exempt assets such as:
- personal belongings
- RRSP’s and other assets
Bankruptcy law allows for debt relief and financial counseling of a person or business while treating creditors fairly.
Bankruptcy law allows for debt relief and financial counselling of a person or business while treating creditors fairly.
Filing for Bankruptcy
Where the client wishes to file for bankruptcy the insolvency trustee will ask for a list of debts and obligations.
An application is made by the trustee, and the surrendered assets are liquidated (sold). Any money received is applied towards outstanding debts.
The bankrupt is required to:
- pay a monthly administrative fee
- 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 discharge is issued and all debts and loans are canceled.
What You Keep
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, 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.
What You Lose in Bankruptcy
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.
What Debts are Cleared
When you file for bankruptcy:
- all loans are cancelled
- credit card debt is cancelled
- 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.
What Does the Trustee Do?
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
★★★★★ It was the last thing we wanted to do, but the trustee made the 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
Debt and Insolvency
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”.
- 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
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
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.
Dealing with Your Creditors
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.
★★★★★ After years of struggling with debts, I knew I had to get some help. I just walked into the office one day. They were very open and answered all my questions. It wasn’t always easy but they helped me and my husband and we’re now rebuilding our credit. I know it’s hard but give these people a call, they helped me and I know they will help you. Jo-anne D. Oshawa
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.
Your Duties as a Bankrupt
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.
After the Bankruptcy
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.
Send Us an Email
If you feel more comfortable sending us an email to discuss your issues, we understand that you’re looking for a reply asap.
We endeavour to respond to emails as soon as we receive them, and will do everything to help right away.
Where your concern is of an urgent need, call us at 905-721-7506.