Bankruptcy in Canada is governed by the Bankruptcy & Insolvency Act (BIA or the Act). Individuals who are having personal debt problems have the option under bankruptcy law to file personal bankruptcy or a consumer proposal in order to eliminate their debt. Bankruptcy is seen as the solution of last resort while a consumer proposal is a way to repay a portion of your debts over a longer period of time.
If personal bankruptcy is the best financial solution to deal with your debts, as part of the bankruptcy process, your bankruptcy trustee will review your situation to determine which type of bankruptcy they will need to file with the Office of the Superintendent of Bankruptcy.
In general there are two types of personal bankruptcy in the BIA that may apply:
- A Summary Administration; and
- An Ordinary Administration Bankruptcy
Summary Administration Bankruptcy
A summary administration is a consumer bankruptcy that applies when your realizable assets (the value of your assets when they are sold) will not exceed $15,000. This includes the equity in your home, any investments or any other assets subject to seizure by your bankruptcy trustee. The federal government increases this limit periodically in order to keep up with the inflationary value of assets because in excess their concept is if you have a simple bankruptcy, there should be a simple administration process.
The majority of Canadian consumer bankruptcies are summary administrations. Businesses cannot file a summary administration bankruptcy.
The advantage of a summary administration from the bankrupt’s point of view is that there is no requirement to advertise the bankruptcy in a newspaper and no requirement to call a First Meeting of Creditors.
Trustee fees and disbursements are fixed by bankruptcy legislation in a summary administration and are not charged based on time or asset value.
Ordinary Administration Bankruptcy
An ordinary administration bankruptcy can be filed by either an individual or a corporation. If an individual has assets that are projected to realize more than $15,000 at the time they file then they will be required to file an ordinary administration bankruptcy. In these circumstances the bankruptcy must be advertised in the local newspaper and it is mandatory to call a creditors’ meeting.
If you expect your assets to total more than $15,000, your trustee will probably talk to you about filing a consumer proposal as an alternative. In this way, you can keep your assets (paying the value to your creditors over the period of your proposal) and avoid the requirements of an ordinary bankruptcy.
In an ordinary bankruptcy, which almost always is a business bankruptcy, trustee fees are paid from the sale of assets and are determined based on time spent on the administration of the file. This is because generally there is more work involved in the administration of an ordinary bankruptcy.
In both types of bankruptcy, a summary and ordinary administration, you may be eligible for an automatic discharge 9 months after filing. However because an ordinary bankruptcy can take longer to administer, your trustee may not be discharged for a longer period.
Small Business Bankruptcy
If you operate a small business, either because you are self-employed, act as a sole proprietorship or in a partnership, you can deal with your debts by filing personal bankruptcy.
Corporate bankruptcies are usually conducted by trustees who specialize in large business bankruptcies. However, if you are a director of a corporation, and become insolvent due to director’s liabilities, you can file for personal bankruptcy to eliminate your director’s obligations.
It is important to understand that no matter which type of personal bankruptcy you file, all will provide you with the same key benefits:
- An immediate stay, or protection from your creditors
- Discharge for your unsecured debts
A consumer proposal in Canada is an option permitted under the Bankruptcy & Insolvency Act to allow consumers to eliminate their debt by repaying a portion of their unsecured debts over a period of up to 5 years. It is an option only open to individuals (corporations cannot file a consumer proposal). To qualify you must owe less than $250,000 (not including the mortgage on your principal residence) and must be insolvent.
A consumer proposal is filed through a Bankruptcy Trustee. In this case they are acting as a Consumer Proposal Administrator under the Act.
If your debts are more than $250,000 you can still file a proposal to your creditors. This is now completed as a Division I proposal. As with the difference between a summary and ordinary bankruptcy, the end result is the same (your debts are eliminated) it is just the process that is different due to the added size or complexity of the file.
A licensed bankruptcy trustee will review your assets and your debts with you at your initial consultation and will explain what type of bankruptcy, or proposal you would be required to file and if you have other options, like a consumer proposal.
Find a personal bankruptcy trustee in your area for more information and help with your personal debts.