How will the Canada COVID-19 Emergency Response Act affect my Bankruptcy?

The COVID-19 pandemic has shut down businesses, ravaged the global economy and caused significant job losses across the country. Thousands of Canadians are taking advantage of federal support measures and many are considering additional opportunities to further alleviate the mounting financial pressures.

Bankruptcy is one such option which can be highly effective for people dealing with unmanageable debt — especially during these uncertain times. However, we’ve increasingly been hearing concerns about how income subsidies will affect the cost and effectiveness of this opportunity.

More specifically, will programs like the Canada Emergency Response Benefit (CERB) or Canada Emergency Student Benefit (CESB) affect the total cost of a Bankruptcy? And would it be more cost effective to delay a Bankruptcy until these benefits expire?

To help you make sense of the current climate and make the best decision for your financial situation and goals, let’s review how Bankruptcy works along with when and why surplus income payments might be necessary. Then we can look at how COVID-19 income supports might impact what you pay in a Bankruptcy Process.

Bankruptcy Overview

Bankruptcy is a formal debt solution offered under the Bankruptcy and Insolvency Act (BIA). Along with a Consumer Proposal, it is one of the two federally legislated opportunities for honest but unfortunate debtors to recover from unmanageable financial distress and receive a fresh start.

Generally, a Bankruptcy process will involve surrendering a portion of your assets to a Licensed Insolvency Trustee (LIT). The LIT will liquidate (i.e. sell) these assets and distribute the proceeds to your creditors on a priority basis. You may also be required to contribute a portion of your income to your bankruptcy estate as well, all of which will also go to your creditors — more on this below.

Provided you are a first time bankrupt and meet all your statutory conditions as outlined by the LIT, you could receive your discharge and be completely debt free in as little as nine months from your initial filing.

Understanding Surplus Income Payments

When you enter the Bankruptcy process, you must disclose all sources of income (e.g. employment / self-employment, investments, rental properties, etc.) to the LIT. They will use this information to determine the total income you are entitled to earn throughout your bankruptcy. This figure is specifically outlined in the BIA and is intended to balance your need to maintain a reasonable standard of living with your creditors’ right to recover a portion of the money they are owed.

If your income is above the prescribed threshold, you must pay $0.50 of every dollar above that threshold to the LIT for every month of your Bankruptcy.

For example, if you are the sole member of your household, your monthly surplus income threshold is $2,243. If you earn $3,000 per month, you will pay $378.50 per month to the LIT — which they would then distribute to your creditors [($3,000 - $2,243) / 2 = $378.50].

How the CERB Affects Surplus Income Payments

The CERB provides temporary financial support to Canadians whose employment has been affected by the COVID-19 pandemic. To qualify for the program, applicants must have had a minimum of two consecutive weeks without employment / self-employment income within a four-week window and earned no more than $1,000 during that time.

It is possible that you could earn enough between your employment income and CERB benefits to surpass the surplus income threshold. However, CERB income will not count towards your surplus income calculations.

How the CESB Affects Surplus Income Payments

The CESB provides temporary income support to recent high school graduates, post secondary students and recent post-secondary graduates who cannot find work due to COVID-19 and do not qualify for either employment insurance (EI) or the CERB. Single applicants are eligible for $1,250 for each four-week period. Applicants with dependents or a disability may receive $2,000 for each four-week period.

It is possible — though unlikely — that you could earn enough between your employment income and CESB benefits to surpass the surplus income threshold. However, CESB income will not count towards your surplus income calculations.

Additional Federal Income Supports

The federal government previously announced two one-time top-up payments for families and moderate- to low-income households, including a supplementary GST/HST rebate payment in April and a supplementary Canada Childcare Benefit (CCB) payment in May.

As the situation continues to unfold it is unclear whether similar initiatives will be announced for Canadians who remain un- or under-employed. However, the existing practices, guidelines and direction from the federal government are clear:

• LITs do not typically include GST/HST in their respective month’s surplus income calculations for bankrupt individuals,
• The May top-up CCB payments will not count toward a bankrupt’s surplus income calculations, and
• LITs are not to include any payments received under the COVID-19 Emergency Response Act in surplus income calculations (this includes provincial subsidies which do not immediately fall under the act but support the same objectives).

Therefore, it’s extremely unlikely any future federal or provincial COVID-19 subsidies would be included in surplus income payment calculations moving forward.

A note about wage garnishments

Collections action is a common predecessor to a Bankruptcy or Consumer Proposal. With the increased financial pressures Canadian households are currently facing, it’s not surprising that many are worried this — and potentially court judgements and wage garnishments — might be in their future.

If this is something that you’re concerned about, here are a few things you should know:

• Benefits under the COVID-19 Emergency Response Act cannot be garnished for non-payment of secured or unsecured debts
• CERB and CCB payments cannot be garnished for child or spousal support payments
• CERB and CCB payments cannot be requested as security for a loan

However, these regulations only ensure that you will receive your full CERB or CCB payment via cheque or direct deposit. Once the money is in your bank account, it is cash and no longer subject to these restrictions. If you owe money to the same financial institution where you deposit your CERB or CCB payments, they may seize these funds to offset any outstanding balances.

Stop collections action for good

While your COVID-19 benefits are protected, other income may not be. Bankruptcies and Consumer Proposals put an immediate stay of proceedings on any collections action, court judgements and wage garnishments. This can eliminate a major source of stress and help you begin rebuilding your life and your finances immediately.  

Certainty in an Uncertain Time

You’re facing a lot of unknowns right now — from how to keep your family safe to when you might be going back to work and what it will take to return to normal. One thing you can be sure of is you will always have options to address your unmanageable debt; and you will not be punished for accessing government subsidies to navigate through this pandemic.

Reach out to MNP today and schedule a Free Confidential Consultation to find out how you can eliminate your debt for good. Whether you qualify for a Bankruptcy, a Consumer Proposal or would benefit from one of several other options, an LIT will help you choose the best solution for your unique situation. You don’t have to wait. And you don’t have to face your financial troubles alone. We ca help you begin your financial fresh start right now.