How does Canadian Insolvency Work
The Bankruptcy Insolvency Act (BIA) provides two remedies to settling debt through either bankruptcy or consumer proposal and each has pros and cons. Regardless of which one a consumer (or business chooses) the unsecured debts are dealt with and within 24 hours there is a stay of proceedings where creditors cannot sue, garnish or attempt to collect on the monies owing.
In Canada, only a Trustee in Bankruptcy can file bankruptcies and consumer proposals but consumers should be aware that a Trustee in Bankruptcy is an officer of the court and works for the benefits of the creditor. The reality of it is, the more you pay to your creditors the more the Trustee gets paid.
How do Bankruptcies Work
Bankruptcy is the cheapest way to deal with debt and is based on ‘value”- how much will the creditors see as a return on the dollar from the sale of your assets and surplus income.
The Act allows exemptions for income relative to family size, for a family of one presently the exemption is $2014.00; a family of two is $2508.00 so on and so forth up to a family of seven.
The first time a consumer goes bankrupt the process is a minimum of nine months provided that their income does not consistently exceed the exemption by $200.00 a month.
If their income is greater than the $200.00 per month the bankruptcy is extended for 12 more months to 21 months. While in bankruptcy a consumer is require to pay 50% of their surplus income for the duration of their bankruptcy that is typically 21 months.
In bankruptcy the time in which you are bankrupt is not flexible, it is either nine or twenty one months provided that no one opposes your discharge. Two credit counseling sessions are mandatory and while in bankruptcy you cannot obtain credit and cannot be a director of a company
Bankruptcy Pros:
– Cheapest way of dealing with debt
– Deals with all unsecured debt
– Protection from creditors
– No creditor harassment
Bankruptcy Cons:
– Payments fluctuate relative to income
– May lose assets
– Must do monthly income & expense reports to trustee
– Any windfall or inheritance goes to trustee
– GST cheques go to the trustee
– Any tax returns while bankrupt go to the trustee
– May have to attend creditors meeting
– Discharge could be opposed
– Could be held in bankruptcy and pay for indefinite period if opposed
– Stays on record at the credit bureaus for six years after discharge
– Much more difficult to rebuild credit
– If ever a second bankrupt is filed – automatic 24 months in bankruptcy, 36 if there is surplus
How do Consumer Proposals Work
Consumer Proposal has the same protections from creditors that a bankruptcy has but has to be a better return to the creditors than they would get in a bankruptcy. It has much more flexibility and is based on what is available to offer the creditors as a return and how much better is the return in comparison. In this process your assets are assessed for value and then that value is added to your bankruptcy calculation, you retain control of your assets.
The proposal is made to the creditors, they vote on whether to accept the proposal or come back with a counter offer (not all creditors have to vote in favor), once the settlement is reached and court approval has been granted –sixty days – the proposal is passed. It is then up to the debtor to make good on the agreement, should they get behind three months the proposal is then annulled and they are back in front of their creditors with their full debt plus all accrued interest and penalties, on the other hand the debtor can pay the proposal off as fast as they like with no penalties.
When the proposal is paid out and the counseling sessions have been completed the debtor gets a certificate of full performance, the debts are then retired. As in a bankruptcy two counseling sessions are mandatory.
Consumer Proposal pros:
– Fixed monthly payments structured to fit within your budget
– You pay no interest in a proposal
– Option to pay more monthly to shorten proposal period
– Can pay off at any time – no penalty
– Deals will all unsecured debts
– Protection from creditors
– No creditor harassment
– Retain assets
– No monthly reporting to trustee
– You maintain control of your finances
– Windfalls are yours
– You keep tax returns
– You keep your GSTs
– Purged from bureaus three years after proposal is paid out
– Easier to credit rebuild
– Is not a bankruptcy
Consumer Proposal cons:
– Pay more than in bankruptcy
– Would be annulled if three months in arrears
– May be in proposal longer than bankruptcy
So….What is your Best Option
Deciding what to do is the hardest part of moving your debt problems forward. The best way to start is at the beginning. You need to determine your debts, your assets, and get help! The rules of the debt industry can be complex and confusing at times – so getting help means you understand the repercussions of what you decide.
About Robert Osborne
We help clients in the Kootenays get out of debt and rebuild their finances using services such as debt consolidation, consumer proposals, financial education, and debt restructuring. It’s important that you know – bankruptcy is not your only option for getting out of debt.
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