The following information is a brief description of the bankruptcy process and is by no means complete. It is intended as an overview only. We hope that you find the information useful. Bankruptcy can be a nine month process which allows the debtor a chance to start over again. This is the most extreme method of dealing with debts, so all other options should be explored first.
Some of the other options include:
▪ Consolidation Loans
▪ Informal Agreements
▪ Orderly Payment of Debts (OPD)
▪ Credit Counselling (Debt Pooling)
▪ Consumer Proposals (Division I & II) Settlements
A person filing a bankruptcy must be insolvent at the time. In other words, you must owe more than $1000.00 and/or be unable to pay your bills as they come due. This means you have no likely way of paying back the money that you owe.
To begin this process you must make an assignment into bankruptcy. At this time you are assigning all of your assets over to a trustee for liquidation to the general benefit of your creditors.
In Alberta there are the following exemptions.
▪ Necessary clothing and personal effects to a liquidation value of $4000.00 (Each)
▪ Household furnishings and appliances to a liquidation value of $4000.00 (Each)
▪ Tools of trade or property used by the debtor to earn his or her principle
▪ source of income to a maximum value of $10,000.00 (Each)
▪ One car or truck to a maximum value of $5000.00 (Each)
▪ $40 000.00 equity in a principal residence. (Jointly)
▪ Liquidation Value – not the replacement value of the item, but what the item is realistically worth at this time.
▪ Equity – the value of the property minus the amount still owed against it.
▪ Also, if you are a couple who are each filing a bankruptcy, the listed exemptions apply to both of you with the exception of the home equity.
With the above in mind it becomes your responsibility to make an inventory of all assets and deliver all non-exempt items to the trustee.
At the time you file bankruptcy you must also provide the trustee with tax information for all tax years that have not been filed yet, and all applicable tax information until discharged. The year that you file a bankruptcy there will be two tax returns. The first, a pre-bankruptcy tax return, calculates your taxes from January 1 of the year you file bankruptcy to the day that you filed bankruptcy. If there is any money owing at this point it is absorbed by the bankruptcy and if there is a refund, it will go to the trustee for the benefit of your creditors. The second tax return, a post-bankruptcy return, will calculate your taxes from the day you file until the end of the year. If there is money owing at this point you must pay it, and if there is a refund, it will go to the trustee for the benefit of your creditors. It should be noted that if you do not receive a discharge, the trustee may continue to do your tax returns until you are discharged from bankruptcy.
You must also complete two counselling sessions during the nine months of bankruptcy. The first must be within 60 days of filing and the second within 180 days of filing. These counselling sessions are geared towards budgeting skills and financial planning and are designed to help you take better care of your finances.
A first meeting of the creditors might be required. In a first time bankruptcy this is unusual, but if it happens the purpose is simply to consider your statement of affairs. If this happens it will take place within two months of filing.
During the bankruptcy you are required to file monthly statements of Income and Expense. These are often referred to as budgets and are designed to help you keep track of your money. These budgets are to be brought to your second counselling session as well, so make sure you keep a copy of them for your own use.
In addition to trustee’s fees, which vary, there are also guidelines outlining how much income your family is allowed to make before excess income can be calculated. As an example, for single person the low income guideline is approximately $2000.00. This is what a household of one is allowed for net income for a month. Net income is calculated by taking your gross income and subtracting EI, CPP and Revenue Canada deductions. If your net income at this point is lower than $2000.00 then no excess income is payable. If it is more than $2000.00 then the following calculation will tell you how much to pay the trustee. Take the net income and subtract the Guideline (in this case $2000.00) and this will give you the total excess income. Now divide this figure by 2 and this amount is what you must pay the trustee in excess income. So if a single person earned $2200.00 in a month then we would subtract the Guideline of $2000.00 and would be left with $200.00. We would then divide this by 2 and would arrive at $100.00 being the amount owed in excess income to the trustee. You would then add this to your monthly payment for that month. The trustee, or a qualified BIA credit counsellor will inform you as to the guideline for your family. The guideline amount is based on Statistics Canada’s Low Income Cut-off amount and changes every year to account for cost of living and inflation.
At the time that you make an assignment into bankruptcy, there is a legal stay of proceedings put into effect. This prevents your creditors from actively pursuing the debts. You may still get the occasional phone call, at which time you simply tell the creditor that you have made an assignment into bankruptcy and give them the name of your trustee. At this point, they should stop calling you. Any correspondence you receive from your creditors (bills or statements) can simply be thrown away. Any bills that you forgot about, can be turned in any time during the bankruptcy. If there is something sent to you that you do not understand, simply call your trustee and he or she will tell you how to deal with the problem.
Eight months to the day that you file a bankruptcy, the trustee will file a report on your conduct under bankruptcy. At this point if you have complied with all the duties of a bankrupt and have not committed an offence under the act you could qualify for an automatic discharge. This applies to first time bankruptcies with no creditor objections. An automatic discharge simply means that at the end of the nine months you are released from bankruptcy and that your discharge does not go to court.
A second time bankrupt will have the report done on the 23rd month and may be asked to attend court, or sign a sworn affidavit explaining the circumstances leading to the second bankruptcy.
If anyone objects to your discharge, your application for discharge goes to court and it will be up to a judge to decide what happens from there.
The judge can choose from the following options.
▪ The judge can grant you an absolute discharge. This is similar to the automatic discharge in that you are released from bankruptcy at this point.
▪ The judge can give you a suspended discharge. This means that you don’t have to do anything but wait a specified period of time, and then you are released from the bankruptcy.
▪ The judge can give you a conditional discharge. A creditor may object to your discharge for this reason. Generally one of the conditions of discharge is that you pay more money back to your creditors. Once the conditions are met you will be released from bankruptcy.
▪ The judge can adjourn the file Sine Die. This means put off without day, or deal with it later. If you do not comply with the duties of a bankrupt the trustee can not force you to comply with the duties of a bankrupt it is up to you to ensure that you complete everything required in the time provided. If you do not complete these duties the trustee is required by law to object to your discharge. When this happens the trustee will then close the file, and the stay of proceedings is then lifted. Your creditors rights are reinstated and they are now able to pursue you again. As you can see it is very important to complete everything on time.
▪ The judge can also refuse to discharge you from bankruptcy. This is rare and is usually reserved for someone who has filed several bankruptcies in a very short period of time.
Once you have been discharged from bankruptcy the balance of the debts are legally forgiven with a few exceptions.
▪ Any debt imposed by court i.e. Speeding Tickets
▪ Alimony or Maintenance
▪ Fiduciary Act
▪ Fraud, Theft, Embezzlement, Misrepresentation, Misappropriations
▪ Canada or Provincial Student Loans (if you have been out of school for less than 10 years)
▪ Debts you forgot to include in your bankruptcy (note that intentionally leaving a creditor out of a bankruptcy is an act of fraud)
A bankruptcy will stay on your credit rating for a period of 6 years after the date of discharge for a first time bankruptcy and 14 years for second and subsequent bankruptcies. It should be noted however that this does not mean you cannot get credit, it simply means that you will have to take your time rebuilding your credit history and use credit cards more wisely in the future.
As stated above, this is a very brief outline and is not designed to answer all of your questions. You can find more information on bankruptcy in a booklet entitled “Dealing With Debt: A Consumer’s Guide”. This is available from Industry Canada or from most trustees and credit counsellors.