Declaring Bankruptcy What You Need To Know

Declaring bankruptcy is not an easy decision to make. It’s important that each individual seeking out the best debt solution to their unique situation have a full understanding of exactly what the requirements and consequences of filing for bankruptcy are. The following list covers some very basic and important points that any debtor should know.

Assets “vest” with the Trustee

Basically the “vesting” provision means that everything a person owns becomes property of an estate that’s created when someone files for bankruptcy.

Provincial exemptions – The vesting rule doesn’t mean that someone immediately comes to your house and takes your belongings. There is legislation in each province that details what assets are protected from creditors. A Trustee in that province will be able to advise you on what belongings and / or assets may be considered exemptions. For example: Each province will have a set dollar value of the furniture and personal effects for each person that is protected. Among others items, some provinces will also protect a certain dollar value of equity that’s in a personal vehicle, home or tools required for employment.

Recovery methods – When someone has an asset that does not fall under the provincial exemption amount, the Trustee is required to recover those funds for the unsecured creditors. The debtor filing and the Trustee can negotiate how this is done.

An example of this would be:

• In Alberta, a debtor has a car valued at $9,000.
• The debtor does not owe any money to a lender for this car. It’s fully paid for.
• The Alberta exemption amount is $5,000.
• This leaves $4,000 in equity that is not protected by the exemption. That’s the piece that the unsecured creditors have a right to.

If the debtor does not wish to keep the car, the Trustee may send it to an auction or have it sold in some other fashion. The debtor will receive their $5,000 exemption amount and the Trustee will receive any monies greater than the $5,000 exemption.

If the debtor does wish to keep the car, the debtor may pay the extra equity of $4,000 into the estate in monthly payments.

Timing of the vesting provision – It’s important to understand that when someone files a bankruptcy, their assets become property of the estate for the entire time they are bankrupt. That means that if a debtor receives an inheritance, wins the lottery or has some other windfall, the Trustee will be bringing those funds into the estate for the unsecured creditors to share in.

Recovery of assets disposed of prior to bankruptcy – There are sections of the Bankruptcy and Insolvency Act that give the Trustee powers to review and reverse transactions that happened prior to someone filing a bankruptcy. One example is:

• Person A jointly owns a house worth $300,000 with their spouse, Person B.
• Person A & B owe $100,000 on a mortgage against the house.
• That would mean there is $200,000 in equity in the house, of which $100,000 belongs to each Person.
• One month prior to declaring bankruptcy, Person A signs over their interest in the house to Person B.

In a case like this, the Trustee would have the ability to make an application to Court to have that house transferred back to Person A in order for the equity to be made available to the unsecured creditors of Person A.

Payment requirements are based on income

The Superintendent of Bankruptcy sets a new standard each year protecting some income earned from the unsecured creditors. That standard changes depending on the number of people in the family. Fifty per cent of the income earned that is greater than the protected standard will be called the “surplus income” payment and will need to be paid to the Trustee.

Certain expenses, such as child support and medical expenses, will reduce this amount that needs to be paid to the Trustee.

Withdrawal of a bankruptcy filing

Once a bankruptcy filing has been made, it cannot simply be stopped or withdrawn if a debtor changes their mind. That means that if a debtor stops communicating with the Trustee and doesn’t complete the required duties, that debtor remains bankrupt indefinitely.

Potential for Trustee or creditor to oppose discharge (leave someone bankrupt)

In every bankruptcy, there is always the risk that the bankruptcy will not end when it should. Both the Trustee and creditors have the ability to oppose the discharge, which means there will likely be a court hearing to determine if the debtor gets their discharge from bankruptcy or not.

There are numerous reasons that the opposition could be made by either party.

The most common circumstances where the Trustee would oppose the discharge would be that duties had not been completed by the bankrupt as required by legislation or there is significant tax debt.

The most common reasons a creditor would oppose the discharge relate to significant tax debt, if the debtor has put creditors to unnecessary expense with legal actions or if there are convictions of fraud.

When a person meets with a Trustee, it’s important to disclose all information to the Trustee to ensure that the Trustee is able to explain all potential results of filing.

Who the Trustee works for

The Trustee does not work for the debtor, nor does the Trustee work for the creditors. The Trustee has a requirement to remain impartial, to ensure that the debtor’s rights are protected, ensure the creditors are treated fairly and in line with the requirements of the legislation, protect assets and ensure that creditors receive what is rightfully to be made available to them.

Not all debt is discharged (written off)

Though the idea of bankruptcy is that all debt should be discharged, the legislation makes certain exceptions. The requirement remains that all creditors must be notified of the filing and have the ability to share in dividends. Once the bankruptcy is over however, some debt may survive. Though the following list is not exhaustive, some examples include:

• Alimony
• Child Support
• Student Loans (depends on timing of when school was attended)
• Debt relating to fraud

When making a decision to file a bankruptcy, a debtor is required to disclose a lot of information to the Trustee. A Trustee will then have an ability to advise a debtor of any potential risks relating to any of the debt or any transactions they have completed or are thinking of completing.

Depending on each person’s situation, a bankruptcy may or may not be the best option. A Licensed Insolvency Trustee will provide a debtor with all available options, including Orderly Payment of Debt or a Proposal. Regardless of what option is chosen, it will be about creating a fresh financial start and feeling better about the future.