What is Bankruptcy

In a bankruptcy, the debtor (the person who owes money) surrenders their possessions (with exceptions), in exchange for their debts being eliminated.

The legal process of bankruptcy is approved through the Office of the Superintendent of Bankruptcy of Canada and managed through licensed insolvency trustees.

The title of “Bankruptcy Trustees” has been replaced with the name “Licensed Insolvency Trustees“

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 business file for bankruptcy, they 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 bankruptcy 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 bankruptcy, with a consumer proposal.

The person or company thats insolvent might enter bankruptcy, but not necessarily.

Bankruptcy trustees are now called Licensed Insolvency Trustees (LITs).

Insolvency trustees are persons licensed by the Office of the Superintendent of Bankruptcy to administer financial remedies such as bankruptcies and consumer proposals.

In bankruptcy, the bankrupt (person filing for bankruptcy) assigns a trustee to be the administrator of the bankruptcy proceedings.

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

In bankruptcy the trustee’s job is to:

• assist the bankrupt through the bankruptcy
• 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 to bankruptcy.

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

An application is under the Bankruptcy Act and Insolvency Act and the property is liquidated (sold).  Any money received is applied towards outstanding debts.

The bankrupt is required to:

• 200 dollars per month for the bankruptcy
• plus 50% of any surplus income that is assessed, and
• have two sessions for counselling on debt.

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

When you file for bankruptcy 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 change within the Execution Act from time to time with the Superintendent of Bankruptcy of Canada. The bankruptcy trustee will discuss any changes or updates.

For a detailed explanation about what you keep in bankruptcy follow this link >

Where a person or business files for bankruptcy they surrender (give up) all of their assets (things they own) to the bankruptcy trustee, except where the items are exempt, 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 bankruptcy is filed there is an immediate “stay of proceedings“, in which all proceedings against you will be stopped.  The people you owe 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.

★★★★★ Although filing for bankruptcy was the last thing we wanted to do, 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 for when declaring bankruptcy.

• previous year’s tax returns (if it was not filed),
• pre-bankruptcy return,
• in-bankruptcy return, and,
• a post-bankruptcy return

Upon filing for bankruptcy the trustee will assist with dealing with the CRA .

The pre-bankruptcy return is a tax return for the beginning of the tax year to the day before you filed for bankruptcy.  This would be from the 1st of January to the day before your filing date.

The in-bankruptcy tax return reports any income you received from the liquidation of your assets, which goes to any creditors.

The post-bankruptcy tax return is for your income reporting, from the date of bankruptcy to the end of the tax year, Dec. 31.

The bankruptcy returns are filed up to the date of bankruptcy. The bankrupt (you) files the returns from the date of bankruptcy to the end of the tax year.

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

Any funds received from filing back taxes used to pay creditors.

Tax refunds received from the pre-bankruptcy, in-bankruptcy or post bankruptcy are sent to the trustee directly.  Tax refunds in the years following your bankruptcy are sent to you and are yours to keep.

A record of your 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 of your bankruptcy, 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.