One of the least known aspects of bankruptcy law in Canada is that when you file bankruptcy you may break any contract you have as part of the restructuring of your financial situation. The most common contracts that are terminated relate to cell phones and cable services, but it is not uncommon for people to return leased or financed cars and other big-ticket items that they can no longer afford (like time share agreements).
Personally, I have had a number of conversations with different companies regarding this application of the Bankruptcy & Insolvency Act. As a trustee, interested in the financial rehabilitation of the individuals in financial trouble that I meet with every day, the reasoning behind this policy makes obvious sense – if an individual is experiencing money problems then they need to be able to consider every financial obligation that they have when seeking a solution. If contracts cannot be broken then there may not be any way to sort out a person’s finances.
Let me give you an example. Bob was just laid-off from his job as a shop floor manager at an auto parts manufacturer. His salary was $75,000 per year so his take home pay was around $4,000 per month. He was given a 6 month severance package and at the end of that he will qualify for EI at $1,600 per month. Bob finds a new job, but at 2/3 what he used to earn. His take home is now only $3,000 per month (his taxes are lower so he gets to keep more of his income). With $1,000 less per month to live on he has to make some decisions. He decides to file a proposal to deal with his credit cards and lines of credit, but if he has to keep making his $650/month car lease payment then he can’t afford to pay his mortgage (or he could give up eating, but that’s a little silly). So, break his car lease or walk away from his house? Bob chooses to give up his car lease.
Obviously, using bankruptcy law to terminate a contract only makes sense if you were already considering bankruptcy or a consumer proposal, but if you are considering either of these procedures to sort out your money problems then you need to honestly look at every financial obligation that you have. Bankruptcy allows you to reset all of your contracts – if you are going to make changes in your life you should consider what you can do without and make the changes as part of a comprehensive plan to make sure you have a better financial future.
If you have questions about how a bankruptcy or consumer proposal will impact a contract, lease or financial commitment you made, contact a Bankruptcy Canada trustee in your area to talk about your options.