Personal Bankruptcy

Understanding the Personal Bankruptcy Process

Financial difficulties can arise at any time for many reasons. For most people, the decision to declare bankruptcy is a serious and often painful one, usually resulting from business failure, marital problems, illness or too much consumer credit.

In many cases, individuals who are considering bankruptcy do not understand the bankruptcy process. At Kunjar Sharma & Associates Inc., we recognize the need for debtors to understand the process and the associated risks. We also understand that there may be alternatives to bankruptcy that may be more appropriate. The purpose of this booklet is to explain in simple terms the duties, restrictions and responsibilities imposed on a person who declares bankruptcy.

What is Bankruptcy?

Bankruptcy is a legal process that provides immediate financial relief to individuals with financial problems by stopping legal actions by creditors. Bankruptcy usually releases an individual from most, if not all, of his or her debts. The procedure is referred to as “filing an assignment” and the person filing an assignment in bankruptcy is referred to as “the bankrupt”.

Going through the bankruptcy process or the steps to declaring bankruptcy include filing the assignment in bankruptcy but also a possible examination by an Official Receiver, a possible meeting(s) of the creditors, two counselling sessions and the discharge from the debt. If you are considering bankruptcy, the following pages provide a summary of these steps and answer many of the questions you may have. Bankruptcy law was made to give a person with financial problems a legal basis for a fresh start. The law was also intended to provide a basis for a fair distribution of the bankrupt’s assets among his or her creditors.

The following warning signs may indicate you need the assistance of a Licensed Insolvency Trustee:

  • Calls from collection agents
  • High credit card debt
  • Being turned down for loans
  • Low Credit Score
  • Making only minimum monthly payments
  • Garnishment of paycheque or bank account

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Who Can Go Bankrupt?

In order to declare bankruptcy, you must meet certain conditions, i.e.:

  • Owe at least $1,000;
  • Be unable to meet regular payments as they become due;
  • Your debts must be greater than the realizable value of your assets.

In general, bankruptcy is considered the best solution only if you cannot rearrange your debts to meet your payments or if your wages are being garnished with little or no other income to live on.

Trustee's Recommendations

The Trustee prepares a report for the Superintendent of Bankruptcy describing your actions during the time of the bankruptcy, outlining your current financial situation and recommending whether or not you should be discharged.

The Trustee is required to recommend a Conditional discharge if either of the following circumstances exist:

  • The bankrupt did not pay the surplus income as required; or
  • The bankrupt filed for bankruptcy when he or she could have made a viable repayment plan (called a Proposal). If the bankrupt or a creditor does not agree with the Trustee’s recommendations, mediation may be requested provided no other objections to the automatic discharge are filed.

Main Steps in the Bankruptcy Process can be Summarized as Follows:

  1. Contact the Trustee to discuss your personal financial situation and options available to you.
  2. Complete required forms for filing by the Trustee with the Office of the Superintendent of Bankruptcy.
  3. Notice is given to the creditors by the Licensed Insolvency Trustee filing.
  4. Attend at a meeting of creditors, if required.
  5. Attend an examination by the Official Receiver, if required.
  6. Complete duties such as turning over assets and making surplus income payments to the Trustee.
  7. Receive your Certificate of Discharge or attend Court for a discharge hearing, if required.
Major Steps in Bankruptcy

Contact a Trustee who will act as your Administrator

The first step in the bankruptcy process is to contact a Trustee at the office of Kunjar Sharma & Associates Inc. which is a corporation and has individuals who are licensed by the Government to administer bankruptcies. The bankrupt is not a client of the Trustee. The Trustee is an intermediary who has responsibility to both the bankrupt and the creditors.

The Trustee will inform you of the effects of bankruptcy and will prepare the necessary documents to file the assignment in bankruptcy with the Office of the Superintendent of Bankruptcy. The act of filing an assignment in bankruptcy does not release you from your debts, but it does “freeze” them. The release from the debts is achieved by getting a “discharge” from bankruptcy. During the bankruptcy term, you are required to make payments to your trustee for distribution to your creditors. The Trustee determines how much you will be required to pay.

Meeting

The Trustee will notify the creditors of your bankruptcy. A meeting with your creditors will be arranged if it is requested by a required number of creditors, within 30 days after the date of bankruptcy. The purpose of this meeting, which you must attend, is to allow creditors to obtain information about the bankruptcy. The Trustee or a representative chairs the meeting.

Counselling

The Trustee will arrange for two counselling sessions during your bankruptcy. The counselling will help you to discover and understand the cause(s) of your bankruptcy, which sometimes is non-budgetary. These sessions will also provide information to assist you in managing your financial affairs in the future. You must attend both of the counselling sessions in order to obtain your discharge from bankruptcy. Additional counselling may be available if you need more assistance.

Discharges

For a first-time bankrupt, generally an automatic discharge applies after 9 months or 21 months if surplus income payments are required. For those who have previously been bankrupt (once before), if no surplus income payments are required, a discharge takes place 24 months from the date of bankruptcy. If surplus income payments are required, a second-time bankrupt must wait 36 months.

  • For a first-time bankrupt, you will be automatically discharged from bankruptcy nine months from the date of the assignment, provided that neither the Superintendent of Bankruptcy, the Trustee, nor any creditor has opposed the discharge. You must also have completed the two counselling sessions as well as paid all surplus income payments. As part of the filing process, the Trustee prepares a report for the Superintendent of Bankruptcy describing your actions during the time of the bankruptcy, outlining your current financial situation and recommending whether or not you should be discharged. (See Trustee’s Recommendations above.)

If you do not qualify for an automatic discharge, the Trustee will apply to the Bankruptcy Court for an appointment to hear the application for discharge. The Trustee’s report forms part of the information considered by the Court at the discharge hearing. The Court may issue one of the following Orders:

  • Absolute: is effective immediately and means that you are no longer responsible for the debts you had at the date of filing your bankruptcy, except for those described below;
  • Suspended: same as an Absolute Order but there is a delay before the discharge comes in effect;
  • Conditional: certain conditions may be imposed by the Court that must be met before your discharge becomes absolute, i.e. you may have to pay a certain sum of money to the Trustee for distribution to your creditors;
  • Adjourned: any objection to the granting of a discharge order will usually cause the hearing to be postponed to a later date;
  • Refused: the Court has the right to refuse a discharge, however, it only exercises this power in exceptional cases.

As noted above, upon being discharged, the bankrupt is released from all debts EXCEPT for the following:

  • Fines, penalties or restitution orders imposed by a Court for an offence or for default on a debt arising from a recognizance or bail bond;
  • Alimony or support of child or spouse;
  • Debts from fraud or theft while acting in a fiduciary capacity;
  • Property obtained by fraudulent misrepresentations, i.e. borrowing money without full and/or honest disclosure of existing debts or other relevant facts;
  • Dividends payable to creditors whom the bankrupt failed to disclose to the Trustee, (these creditors will be entitled to the dividend that would have been paid to them if they had filed a claim in the bankruptcy);
  • Damages awarded by a court in respect of bodily harm intentionally inflicted, or sexual assault, or wrongful death resulting therefrom;
  • Student Loans if you ceased to be a full or part-time student less than seven years prior to your assignment in bankruptcy.

Duties Imposed Upon the Bankrupt

(Per Section 158 of the BIA) A bankrupt shall:

  • (a) make discovery of and deliver all his property that is under his possession or control to the trustee or to any person authorized by the trustee to take possession of it or any part thereof;
  • (a.1) in such circumstances as are specified in directives of the Superintendent, deliver to the trustee, for cancellation, all credit cards issued to and in the possession or control of the bankrupt;
  • (b) deliver to the trustee all books, records, documents, writings and papers including, without restricting the generality of the foregoing, title papers, insurance policies and tax records and returns and copies thereof in any way relating to his property or affairs;
  • (c) at such time and place as may be fixed by the official receiver, attend before the official receiver or before any other official receiver delegated by the official receiver for examination under oath with respect to his conduct, the causes of his bankruptcy and the disposition of his property;
  • (d) within five days following the bankruptcy, unless the time is extended by the official receiver, prepare and submit to the trustee in quadruplicate a statement of the bankrupt’s affairs in the prescribed form verified by affidavit and showing the particulars of the bankrupt’s assets and liabilities, the names and addresses of the bankrupt’s creditors, the securities held by them respectively, the dates when the securities were respectively given and such further or other information as may be required, but where the affairs of the bankrupt are so involved or complicated that the bankrupt alone cannot reasonably prepare a proper statement of affairs, the official receiver may, as an expense of the administration of the estate, authorize the employment of a qualified person to assist in the preparation of the statement;
  • (e) make or give all the assistance within his power to the trustee in making an inventory of his assets;
  • (f) make disclosure to the trustee of all property disposed of within the period beginning on the day that is one year before the date of the initial bankruptcy event or beginning on such other antecedent date as the court may direct, and ending on the date of the bankruptcy, both dates included, and how and to whom and for what consideration any part thereof was disposed of except such part as had been disposed of in the ordinary manner of trade or used for reasonable personal expenses;
  • (g) make disclosure to the trustee of all property disposed of by gift or settlement without adequate valuable consideration within the period beginning on the day that is five years before the date of the initial bankruptcy event and ending on the date of the bankruptcy, both dates included;
  • (h) attend the first meeting of his creditors unless prevented by sickness or other sufficient cause and submit thereat to examination;
  • (i) when required, attend other meetings of his creditors or of the inspectors, or attend on the trustee;
  • (j) submit to such other examinations under oath with respect to his property or affairs as required;
  • (k) aid to the utmost of his power in the realization of his property and the distribution of the proceeds among his creditors;
  • (l) execute any powers of attorney, transfers, deeds and instruments or acts that may be required;
  • (m) examine the correctness of all proofs of claims filed, if required by the trustee;
  • (n) in case any person has to his knowledge filed a false claim, disclose the fact immediately to the trustee;
  • (n.1) inform the trustee of any material change in the bankrupt’s financial situation;
  • (o) generally do all such acts and things in relation to his property and the distribution of the proceeds among his creditors as may be reasonably required by the trustee, or may be prescribed by the General Rules, or may be directed by the court by any special order made with reference to any particular case or made on the occasion of any special application by the trustee, or any creditor or person interested; and
  • (p) until his application for discharge has been disposed of and the administration of the estate completed, keep the trustee advised at all times of his place of residence or address.
Frequently Asked Questions (FAQ)

What Happens if There is an Objection to My Discharge?

If the Superintendent of Bankruptcy, the Trustee or any creditor has opposed the discharge, the Court will deal with the matter. However, the parties may also ask that the matter be mediated. If the parties do not reach an agreement on the conditions for the bankrupt’s discharge through mediation, the Trustee must apply to Court for a hearing.

What is Mediation?

Mediation is a way of resolving conflict between two or more people. The parties involved in the disagreement agree to work with an independent person called a “mediator” who helps them settle their dispute. The mediator will help the parties explain their point of view and discuss ways to settle the disagreement. The mediator does not decide what the settlement will be. The parties decide that together.

If I Declare Bankruptcy, What Happens to My Assets?

With some exceptions, your assets, whether in your possession or in the possession of a third party, will transfer to the Trustee for the benefit of the creditors. Assets belonging to others which are in your possession, will be turned over to them once they have proven their claims to the trustee.

While you may normally keep household furniture, clothing and personal effects, the assets exceeding specified provincial exemptions must be turned over to the Trustee. These assets will be sold and the proceeds will be distributed among the creditors. If your assets were mortgaged to any creditors, such as a finance company or a bank, these creditors can seize and sell the assets unless arrangements can be made by you to pay for them.

What Property Will Not be Taken?

Certain assets are considered exempt from seizure under laws of your Province of residence. Contact our office for details of exemptions in your Province.

Can I Still be Sued?

At the time of filing an assignment in bankruptcy, all legal actions such as garnishments, seizures or lawsuits are halted. Child support or alimony claims are dealt with outside of the bankruptcy and therefore these actions can still continue.

What Happens to My Credit Rating?

Once your level of debt has become so great that bankruptcy is required, your credit rating is usually at its lowest – R9 rating. The ability to obtain and to use credit after your discharge will depend on your ability to convince a potential lender of your new personal financial maturity. After the discharge of past debt obligations, your ability to re-establish yourself may be improved.

Will Other People Know About My Bankruptcy?

While an individual’s bankruptcy and discharge are matters of public record, notice of personal bankruptcy is not usually advertised in the newspaper and your employer is not normally notified unless there is a payroll garnishment in place that needs to be lifted. Bankruptcy records are permanently maintained in the court and with the Superintendent of Bankruptcy.

What Happens to Salary, Wages and Other Assets?

When you earn income in excess of what is necessary to maintain a reasonable standard of living, you will be expected to make payments to the Trustee from that excess until the date of the discharge. This amount is called surplus income. The amount of these payments are set taking into consideration the standards issued by the Superintendent of Bankruptcy, and the bankrupt’s personal and family situation. If the bankrupt does not agree with the amount of surplus income to be paid, the Trustee must request mediation. Further, if any of the creditors do not agree with the amount of surplus income to be paid, they may submit a written request to the Trustee asking for mediation. Failure to make the required payments may affect your discharge from bankruptcy.

Should there be any change in your financial situation during the bankruptcy you must notify the Trustee of the change. The amount of the payment may be changed as a result of the change in your financial situation.

What Happens if I Win the Lottery or Receive an Inheritance While I am A Bankrupt?

If you receive assets, such as lottery winnings or an inheritance, after the date of a bankruptcy but prior to discharge, they must be turned over to the Trustee as they are considered assets that should be shared among your creditors. The Trustee will use these funds to pay your creditors and any surplus is turned over to you. Certain sources of income such as pension plan benefits, welfare and disabled persons assistance, old age or family allowances are exempt from seizure in most Provinces.

How Do I Handle Income Tax Returns?

The Trustee prepares a pre-bankruptcy income tax return from January 1st to the date of bankruptcy and any refund for that period, as well as refunds of previous years not yet received, will be kept by the Trustee. The Trustee may also file in-bankruptcy returns to report income from liquidated assets such as RRSP’s or from businesses that the Trustee is winding-up. The Trustee will also file a post-bankruptcy income tax return for the period from the date of bankruptcy to December 31st. Any refund resulting from this tax return may belong to the Trustee. You must pay any taxes payable regarding this post-bankruptcy return whether or not you are discharged.

How Do HST Rebates Work?

Canada Revenue Agency is notified automatically when you file a bankruptcy in Canada. All HST cheques are (and tax refunds) are redirected to your Trustee. HST is refunded to you (Ontario) if a dividend is available to creditors without taking that payment into account. For greater clarity, if there is more than $1,800.00 in your estate from either assets or from your contribution (example $200 x 9 months), the HST is returned to you.

What About Special Gifts, Transfer of Property, or Special Treatment?

Gifts or transfers of property by you or others during twelve months, or in some cases five years, prior to your bankruptcy are subject to review by the Trustee and may be reversed by the Court. If a creditor or a person related to you received special treatment, such as being paid while others were not, the Trustee may demand repayment from them. The Trustee must be advised of any such payments or transfers made during the twelve months prior to bankruptcy.

How does Bankruptcy Affect Co-Signers of My Loans?

Bankruptcy will not cancel the liability of anyone who has guaranteed or co-signed a loan on your behalf.

What do I do if a Creditor Sues Me?

If a creditor commences a court action against you for a debt arising prior to the date of the bankruptcy, you should immediately inform the Trustee of the action and send all legal documents to the Trustee who will take steps to stop the action.