Bankruptcy: The End or the Beginning?

Headed for bankruptcy? Find out what you need to know.

This article will be helpful to someone who is trying to deal honestly with overwhelming personal indebtedness and who has a genuine desire to make a fresh start financially.

Briefly noted are two of the changes to Canada’s Bankruptcy and Insolvency Act (BIA) applicable to individuals since July 7, 2008. The topics are:

• a slightly more lenient handling of government student loans and
• broader protection for registered retirement savings plans (RRSP). Both relate to a lifetime’s most laudable endeavours – getting an education and planning for retirement.

Briefly noted also are two of the changes to the BIA applicable to individuals as of September 18, 2009:

• the automatic discharge from bankruptcy for individuals has been changed, and
• an exception was created to deal with certain personal income tax debtors who become bankrupt.

These modifications are intended to prevent abuse of the bankruptcy law.

A fundamental purpose of the BIA and the personal bankruptcy process is the financial rehabilitation of the honest but unfortunate debtor.

Make a Proposal or Go Bankrupt

The BIA requires the debtor to be advised of the merits and consequences of the options available to resolve financial difficulties, including making a proposal to creditors, rather than voluntarily going into bankruptcy. This advising is the duty of a licensed trustee in bankruptcy.

The BIA enables a person (an insolvent debtor who is an individual) to make a formal proposal to his or her creditors to settle debts and avoid (the stigma of ) bankruptcy. Proposals under the BIA are either general or consumer. Since 1992, the streamlined process of a consumer proposal is available to a person where total debts do not exceed $250,000 (increased from $75,000 as of September 18, 2009) excluding mortgages against a principal residence. A successful proposal settles the debts on the terms set out in the proposal.

Bankruptcy involves a liquidation of the bankrupt’s available assets (if any) and distribution of the proceeds by the trustee of the bankrupt’s estate to the creditors. A discharge from bankruptcy releases the bankrupt from the unsecured debts existing when the bankruptcy began except for certain specified claims. A controversial exception since 1997 is that unpaid government student loans continue to exist after bankruptcy until paid or released by the bankruptcy court.

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