What If Your Financial Situation Improves During Bankruptcy?


Category: Consumer Proposal (8) comments

consumer proposal after bankruptcyHave you heard the expression, “it’s not over ‘til it’s over?” It applies to bankruptcy  in Canada as much as anything else.

If you have filed an assignment in bankruptcy and your situation changes for the better, you don’t have to remain bankrupt. You have the right to file a consumer proposal that, if accepted by your creditors, will cause your bankruptcy to be cancelled.

No one ever told you this? It is not surprising as it is not something that happens very frequently, but there are definite cases when it makes sense.

When To File A Consumer Proposal During Bankruptcy

Your Income Changes

Take for example a bankrupt that was out of work when they filed bankruptcy, but shortly thereafter landed a good (and by that I mean high paying) job. Their trustee likely told them their bankruptcy would cost about $1800 and run for 9 months, well the new job changes all of that. If the person earns more than the government threshold then they may be subject to surplus income payments (50% of every dollar they earn in excess of the standard) and their bankruptcy will automatically be extended by another 12 months. Depending on how the numbers work it, it might make more sense for the bankrupt to offer a consumer proposal to repay more money that their creditors might receive in the bankruptcy, just to get a lower monthly payment and to have the bankruptcy removed from their record.

You Receive A Windfall

Another typical example is a bankrupt that suddenly comes into some form of windfall (free money). Under bankruptcy rules the windfall is supposed to be seized by the trustee and paid out to the bankrupt’s creditors. If asked, the creditors may agree to accept a portion of this money in the form of a consumer proposal just to give the bankrupt a break. I have seen this done with inheritances and with life insurance proceeds. No one, not the bankrupt or the creditors was expecting the money, so a consumer proposal that provides for more money than the creditors were originally expecting is often accepted.

The point of all this is to demonstrate that “it’s not over ‘til it’s over”. If a bankrupt’s situation improves during their bankruptcy then it may makes sense to consider whether or not the bankruptcy should be completed, or whether it makes more sense to file a consumer proposal to deal with the debts and cancel the bankruptcy. Converting to a consumer proposal, if accepted, can cost you less money than continuing with your bankruptcy.

The last little tidbit – if your current trustee doesn’t want to discuss your options you have the right to use a different trustee to file your consumer proposal. I am not suggesting that you should shop around, but if your situation changes you should speak to someone that will review all of your options so that you may make an informed decision regarding what’s best for you.

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  1. Ron

    If my brother is bankrupt and not discharged then an inheritance goes to the trustee. If part of the inheritance is a jointly inherited house, can the trustee force the sale of the house or can he wait for improvements to be made to the property before it is sold?

    Reply
  2. Ted Michalos Post author

    The trustee can, but they’ll do whatever should result in the most money for your brother’s unsecured creditors. The problem you may encounter is there is very little chance the trustee will help pay for any required improvements – they will agree to have whomever pays for the improvements to be repaid before the proceeds from the sale are divided, but that means the other owners will have to pay up-front.

    A better option may be for the other owners to “buy” the trustee’s share of the house – that will set the amount the trustee is supposed to receive in stone and the other owners then will receive all of the benefit from the improvements.

    Reply
  3. carlotta

    if i have about 30-40% of the total debt that i could afford to give a family member considering bankruptcy, how can i give it to her in such a way that it will be the most effective, and will go towards paying off her debt/bankruptcy/bills, but won’t somehow skew it so that the creditors get more than they would otherwise be required to get? should i give it to her now? mid-bankruptcy?

    Reply
    1. J. Douglas Hoyes

      Carlotta: The answer depends on the dollars involved, but the short answer is probably that you should not give your family member any money either prior to or in the middle of a bankruptcy, as there would be a risk that the trustee would seize it as a windfall. A better option may be for your family member to file a consumer proposal, offering to pay 30-40% of the total debt. Once the consumer proposal is accepted, you can give your relative the money to pay off the proposal. A trustee can advise you on whether or not this is the best course of action.

      Reply
    1. J. Douglas Hoyes

      Hi Andre. You can’t cancel a bankruptcy, but you can file a consumer proposal while you are bankrupt. If the creditors accept your proposal your bankruptcy is annulled. Your licensed insolvency trustee can explain in more detail.

      Reply
  4. Alex

    Does anything need to be done if one half of a couple goes bankrupt, and then the other half of the couple receives something such as an inheritance or life insurance payout? Since they are not the one who went bankrupt, does the trustee need to be notified?

    Reply

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