The application alleges that the debtor owes a sum of money, that the debt has not been paid, that there are other creditors who are also owed money, and that for the benefit of all creditors, the consumer debtor should be placed into bankruptcy. The consumer debtor has the right to defend the application, and after a short period of time, there is a trial to determine whether the consumer debtor should be placed into bankruptcy. If the application is successful, the court then makes what is called a “bankruptcy order”against the consumer debtor; in other words, the court issues an order that simply places the consumer debtor into bankruptcy.
This remedy is used by creditors who do not get paid and who take the legal steps to put the debtor into bankruptcy. The process is adversarial; that is, there is a legal dispute which is heard before a judge. After the hearing, the judge decides one way or another. This hearing or trial can be costly for both sides if the consumer debtor can and wants to defend on good grounds. Creditors do not generally force consumer debtors into bankruptcy as there are rarely substantial assets to administer and the expense of doing so would be borne by the application creditor. However, a consumer debtor will rarely defend the application for a bankruptcy unless the consumer debtor is concerned about some asset or assets that may have questionable exemptions.
Last, a consumer debtor may consider making a deal or settling with his or her creditors. Governed by the Bankruptcy and Insolvency Act, this process is called a “proposal.”A proposal is a contract or an agreement by a consumer debtor and the creditors to pay something less, as a general rule, than the full amount that is owing to the creditors. There are many rules under the Act that apply to consumer proposals.
Here is an example of a consumer proposal: The consumer debtor may offer (and the creditors may choose to accept) 40 cents on every dollar that is owed. If the consumer debtor owes $100,000 to all his or her ordinary creditors, the debtor may propose to pay $40,000 with the result that the debtor will be relieved or discharged from paying the balance of $60,000. If the creditors vote against the terms of the proposal or say “no,”then the consumer debtor is not automatically put into bankruptcy. If the creditors vote “yes”or in favour of the proposal, the consumer debtor will not be put into bankruptcy, but the debtor is bound by the terms of the agreement. In these cases, the creditors will accept the good intention and good faith of the consumer debtor to make a deal, thereby the consumer debtor avoids bankruptcy and going through the bankruptcy process from meetings to discharge.
Over the last 20 years, the federal government has amended the Bankruptcy and Insolvency Act several times to permit a consumer debtor to take advantage of the provisions relating to consumer proposals. Division II of Part III of the Act specifically deals with consumer proposals. The consumer proposal is discussed later in this book, and particularly, in Chapter 10. It is the recommended solution if the consumer debtor has gainful employment. Creditors will receive something rather than nothing in a bankruptcy; the consumer debtor then is not bankrupt.
3.1 Qualifying for bankruptcy
The consumer debtor must meet certain conditions under the Bankruptcy and Insolvency Act in order to go bankrupt:
• The consumer debtor must owe at least $1,000 to any of his or her creditors.
• The consumer debtor must commit “an act of bankruptcy.”
While there are many acts of bankruptcy, the usual one connected to consumers is that the consumer must be unable to meet the regular bill payments to creditors according to their terms. For example, if the debtor does not pay his or her bills within 30 days as promised, then the debtor is unable to pay those debts in the ordinary course; or the debtor must not have enough property which, if sold at a fair market sale, would be sufficient to pay all the creditors in full. For instance, if the debtor were to list all his or her personal possessions and then have a liquidator value them, the likelihood is that their total value would be very low compared to the size of the debt.
If the consumer debtor meets these two conditions, the consumer debtor is considered insolvent. The consumer debtor then qualifies to go bankrupt voluntarily or he or she can be put into bankruptcy by any one of the creditors if the creditors are willing to go to court to do it.
3.2 Alternatives to bankruptcy
While the consumer debtor may qualify under the criteria above, he or she may wish to avoid bankruptcy if it is possible. Many debtors do not want to go bankrupt as they consider bankruptcy to be irresponsible and a failure financially.
They may also consider their reputation in the community and the stigma attached to bankruptcy, although that factor seems to be diminishing over the last 30 years.
Last, but not least, debtors want to protect their credit rating. Once in bankruptcy, it may take years to re-establish credit to what it was formerly.
There are alternatives to bankruptcy and the consumer should carefully consider them before going bankrupt:
• The consumer debtor may make a deal or enter into a proposal with his or her creditors.
• The consumer debtor may be able to obtain a debt consolidation loan from one bank so that he or she can pay all the other creditors on a minimum monthly payment
• The consumer debtor may obtain a consolidation order in Small Claims Court, or in some provinces an order directing payments to creditors.
• The consumer debtor’s income may increase to cover the carrying charges and pay some principal.
• The consumer debtor’s expenses may decrease.
4. Exempt Property
When the consumer debtor goes bankrupt, all of the property that is owned by the debtor and property that the debtor inherits or acquires after bankruptcy up to the time the debtor gets out of bankruptcy automatically belongs to the trustee in bankruptcy without any need or requirement to transfer or register ownership, except for real estate. The trustee in bankruptcy must sell the debtor’s eligible or non-exempt property and then distribute the sale proceeds amongst the creditors. Eligible property includes all kinds of property wherever it is whether inside or outside Canada. Property that is acquired by the bankrupt after bankruptcy up to the time of discharge is called “after-acquired” property. It usually includes wages, commissions, inheritances from family members, and winnings from lottery tickets.
However, not all property goes to the trustee. In each province and territory, there are exemptions for bankrupts. These exemptions provide that the consumer debtor, now the bankrupt, can keep certain kinds of property. In other words, creditors cannot seize this type of property. While this is covered a little later in the book, in Chapter 6, the consumer debtor should note that he or she can keep most of the wages, vehicles, tools of the job, generally all clothing, furniture, pension funds, RRSP money with the exception of money deposited within the last year before bankruptcy, insurance proceeds, and proceeds arising out of a personal injury action.
5. Protection Against Lawsuits
Once the consumer debtor is in bankruptcy, a creditor who has a claim provable in the bankruptcy is stopped or prevented from starting any lawsuit or continuing any lawsuit against the bankrupt or the bankrupt’s property. The bankruptcy operates as a stay of legal proceedings by most creditors. These creditors have a right to look to what property the bankrupt had at the time of bankruptcy for payment. They are not entitled to take any legal proceedings against the bankrupt except with the permission
