The Bankruptcy Process
Financial difficulties can arise at any time. For most people, the decision to declare bankruptcy is a serious and often painful one, usually resulting from loss of income or too much consumer credit.
In many cases, individuals who are considering bankruptcy do not understand the bankruptcy process. At Janes & Noseworthy, we recognize the need to understand the process and the associated risks. The purpose of this page of our website is to explain in simple terms the duties, restrictions and responsibilities imposed on a person who declares bankruptcy.
The bankruptcy process is intended to give a person with financial problems a fresh start.
Bankruptcy is a legal process that provides immediate financial relief to individuals with financial problems by stopping legal actions by creditors. Bankruptcy usually results in getting rid of most, if not all, of a person's debts. The procedure itself is referred to as filing an assignment and the person making an assignment in bankruptcy is referred to as the bankrupt.
The bankruptcy process is intended to give a person with financial problems a fresh start. The bankruptcy provides for a fair split of the bankrupt's assets (if any) among his or her creditors.
The steps to declaring bankruptcy include filing the assignment in bankruptcy, a meeting of the creditors, counselling and discharge. If you are considering bankruptcy, the following provides a summary of these steps and addresses many of the questions you may have.
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; and
- if you sold all of your assets, the funds would not be enough to pay off all of your debts.
In general, bankruptcy is considered to be the best solution only if you cannot reorganize your debts to repay them (in full, or some lesser amount if a viable proposal is agreed upon by the creditors) over a reasonable period using available assets and income.
Contact a Trustee
Janes & Noseworthy handles more personal bankruptcies and consumer proposals than any other firm in Newfoundland and Labrador .
The first step in the bankruptcy process is to contact one of Janes & Noseworthy's four offices.
A Trustee is an individual who is licensed by the Government to administer bankruptcies. The bankrupt is NOT a client of the Trustee, rather the Trustee is an intermediary who has a 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 stays (stops) the actions of your creditors but does not release you from your debts. The release is achieved by getting a ‘discharge' from bankruptcy.
Meetings
If required by at least 25% of your creditors, the Trustee will notify the creditors and organize a creditors' meeting which the bankrupt has a duty (if required) to attend. In most cases it is not necessary to arrange a meeting with creditors. Similarly, a bankrupt has a duty (if required) to meet with a representative of the Office of the Superintendent of Bankruptcy called an Official Receiver, but this rarely is required in consumer bankruptcies.
Counselling
The Trustee will arrange for counselling during your bankruptcy. The counselling will help you with budgeting and to understand the causes of your bankruptcy, which may be non-budgetary, and look at possible solutions. You must take part in two counselling sessions, which in the case of remote areas is provided by telephone.
Other Duties
Other duties that a bankrupt must comply with are detailed here. Generally speaking, bankrupts who do not have excessive income and co-operate with the Trustee throughout the process are discharged (released from responsibility) from most or all of their debts nine months after filing for bankruptcy.
The vast majority of people who file for bankruptcy are discharged in nine months.
Either an automatic discharge will be granted or the Trustee will apply to the Court for a discharge hearing date – i.e if there is an opposition filed by an interested party who feels that the discharge should not happen "automatically".
Automatic discharges
You will be automatically discharged from bankruptcy nine months from the date of the assignment provided that:
- you do not have, on average, "surplus income" as calculated based on standards established annually by the Office of the Superintendent of Bankruptcy;
- you do not have personal income tax debts in excess of $200,000 and representing more than 75% of total unsecured liabilities;
- you have never been bankrupt before; and
- neither the Superintendent of Bankruptcy, the Trustee, nor any creditor opposes the discharge.
Changes to Canadian insolvency legislation effective September 18, 2009, mean that a second-time bankrupt is also eligible for an automatic discharge as soon as twenty-four months from the date of filing the second bankruptcy. In both cases, if a bankrupt’s income is, on average, above the "surplus income" standards, the timing of the automatic discharge is postponed by 12 additional months. Therefore, a first-time bankrupt with "surplus income" can obtain an automatic discharge in 21 months, while a second-time bankrupt with "surplus income" can obtain an automatic discharge in 36 months.
In simple terms, a single person with average monthly take home pay of less than $2,000 would not be required to make "surplus income" payments during their bankruptcy. For more information on how these standards work, you may wish to speak to one of Janes & Noseworthy’s debt professionals and/or consult the following link to the federal government’s “surplus income” standards - http://www.ic.gc.ca/eic/site/bsf-osb.nsf/eng/br02230.html.
If you do not qualify for an automatic discharge in nine months, the Trustee may need to prepare a Report for the Superintendent of Bankruptcy - which then forms part of the information considered by the Court in hearing an application for discharge as described below.
Application to the Court for discharge (for those not qualifying for automatic discharge)
Usually nine months after the filing of the bankruptcy, the Trustee will apply to the Bankruptcy Court for an appointment to hear the application for discharge.
The Registrar reviews the Trustee's Report and may issue one of the following orders:
Absolute: Is effective immediately when it is granted by the Bankruptcy Court and means that you are no longer responsible for the debts you had, except for those “Debts not released” described below.
Adjourned: Any objection to the granting of a discharge order will, in most cases, cause the hearing to be postponed to a later date.
Conditional: Conditions may be imposed by the Court that will have to be met before your discharge becomes absolute. For example, you may have to pay a certain sum of money to the Trustee for distribution to your creditors.
Suspended: Same as an Absolute Order but with a delay before coming into effect.
Refused: While the Court has the right to refuse a discharge, it rarely exercises this power.
Upon being discharged, the bankrupt is released from all debts EXCEPT for the following:
- fines or penalties imposed by a Court for an offense or for default on bond bail;
- student loans where you have not been out of school for more than seven years. The federal legislation was changed on July 7, 2008 to reduce this waiting period from ten years. In the meantime, it is now possible to obtain post-bankruptcy relief from student loans as soon as five years from the date of completion of school;
- alimony or support for child or spouse;
- debts from fraud, theft or fraudulent misrepresentations, i.e. borrowing money without full disclosure of existing debts; and
- non-disclosure of creditors to the Trustee (These creditors will be entitled to the share that would have been paid to them if they were aware of the bankruptcy and submitted a claim.)
If I declare bankruptcy, what happens to my assets?
You may normally keep household furniture, clothing and personal effects, as well as a vehicle and principal residence in many cases.
Your assets, whether in your possession or in the possession of a third party, will belong to the Trustee for the benefit of your creditors. Assets belonging to others, in your possession, will be turned over to them once they have proven their claims to the Trustee.
Based on Newfoundland law, you may normally keep household furniture, clothing and personal effects, as well as a vehicle and principal residence in many cases. If you have any assets that are not exempt from seizure by Newfoundland law, they will have to be turned over to the Trustee who will sell them and distribute the proceeds among the creditors.
If your assets were mortgaged to any creditors, such as a finance company or bank, these creditors can sell the assets unless other arrangements can be made. In the case of your principal residence, if the value of your home is not more than $10,000 above the amount of a mortgage(s) on the home, and arrangements are made with the mortgage holder(s), you would be able to keep the home.
At the date of bankruptcy, any cash on deposit at a bank to whom you owe money may be taken by that creditor as it has the right to offset the cash against the amount it is owed. After bankruptcy, it is advisable to do your banking at an institution not owed money at the date of bankruptcy in order to avoid funds being offset in error after the bankruptcy.
At the time of filing an assignment in bankruptcy, all legal actions such as garnishments, seizures or law suits are halted. If a creditor commences a court action against you during the period of bankruptcy, you should immediately inform the Trustee of the action and send any legal documents to the Trustee who will take steps to stop the action. Child support or spousal support claims are outside of the bankruptcy process and garnishment can still continue without a court order.
What happens to my credit rating?
In most cases a person's bad and negative credit rating can improve after bankruptcy.
Once your level of debt has become so great that bankruptcy is required, your credit rating is usually at its lowest. The ability to obtain and use credit after discharge will depend upon your ability to convince a potential lender of your future personal financial maturity. Therefore, in most cases a person's bad and negative credit rating can improve after bankruptcy. If you are unable to pay your existing creditors, certainly no creditor will advance further funds. After discharge of 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. 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 may be required to make payments to the Trustee from that excess until the date of absolute discharge. These “surplus income” payments are made according to standards issued by the Superintendent of Bankruptcy. In the event of a disagreement with the standards, the Court or other mediator may be asked to decide on the amount to be paid.
Should there be any change in your financial situation during the bankruptcy period, the amount of the payment can be changed.
If you receive unexpected assets or windfalls, such as lottery winnings or an inheritance, after the date of 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 pay your creditors and return any leftover 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.
How do I handle income tax returns?
The Trustee prepares a pre-bankruptcy 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. A post-bankruptcy tax return for the period from the date of the bankruptcy to December 31st may be completed by the Trustee. Any refund resulting from this tax return may belong to the Trustee. Any taxes payable regarding this post-bankruptcy return must be paid by you whether you are discharged or not.
Any GST or HST cheques based on the tax returns filed for the year of bankruptcy and for prior years will be kept by the Trustee.
What about special gifts, transfers of property, or special treatment?
Gifts or transfers of property by you to others during the twelve months or in some cases five years prior to your bankruptcy are subject to review by the Trustee and may be reassessed 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.
Duties imposed upon the bankrupt:
As an individual filing for bankruptcy, you must fulfill all of the following duties:
- reveal and turn over to the Trustee any assets in your possession or control that are not exempt from seizure;
- deliver for cancellation all credit cards issued to you and in your control;
- make available to the Trustee all books and records relative to your assets or affairs;
- report income and expenses to Trustee on a monthly basis during the period of bankruptcy, and make payments to the Trustee as required;
- meet with the Official Receiver, if requested, to be examined under oath as to the facts relating to the bankruptcy;
- provide a complete statement of assets and liabilities including creditors names, addresses, account numbers, invoices and amounts. Where additional bills or legal documents are received by you, they should be forwarded to the Trustee. If assets were accidentally omitted, the Trustee must be told promptly;
- inform the Trustee of the details of all assets disposed of during the twelve months prior to the bankruptcy and real estate disposed of or any other assets disposed of as gifts during the five years prior to the bankruptcy;
- if required and unless excused, attend the meeting of creditors and any other meetings when called upon by the Trustee;
- keep the Trustee advised of your place of residence and any changes in income until discharged;
- generally comply with all reasonable requests from the Trustee to assist in the bankruptcy administration.
Besides the offenses under the criminal code, which may also apply, you are liable for imprisonment up for up to three years if found guilty of any of the following offenses under the Bankruptcy and Insolvency Act:
- failing to perform the previously mentioned duties as a bankrupt;
- fraudulently disposing of assets before or after bankruptcy;
- failing to answer fully and truthfully all questions when examined under oath;
- making false statements regarding assets or liabilities;
- destroying or concealing books or documents relating to your property or affairs;
- obtaining property or credit by false representation during the period of twelve months prior to the bankruptcy and until the date of discharge;
- not disclosing to the person(s) with whom you are dealing, prior to obtaining credit in excess of $1,000, that you are an undischarged bankrupt.
A summary of the steps in the bankruptcy process
- Contact one of Janes & Noseworthy's four offices and file the assignment in bankruptcy;
- Appear before the Official Receiver to be questioned. This step is waived in most cases;
- If required, attend a meeting of creditors which is normally held at the Trustee's office;
- Attend counselling sessions as required, (by telephone in remote areas);
- Where required, make payments to the Trustee while awaiting discharge;
- Follow the other duties as noted above;
- Attend Court for the discharge hearing, if required.
