You may be familiar with the term “insolvency”, but do you know what it means? When individuals face unfortunate circumstances and can no longer repay their debts, two legislated debt solutions (or insolvency proceedings) can relieve them of their debt obligations: consumer proposal or bankruptcy.
In Canada, insolvency is a legal process governed by legislation called the Bankruptcy and Insolvency Act. For many people, the technical nature of the regulations and the process of a consumer proposal or bankruptcy can feel overwhelming, but the basics aren’t so difficult to understand.
If you’re interested in understanding the debt relief options available to you, or you’re considering seeking professional help with your debt, the information below can get you started.
The Bankruptcy and Insolvency Act exists to protect all the parties or stakeholders involved in a consumer proposal or bankruptcy — that includes the debtor, the lenders/creditors, and the Licensed Insolvency Trustee who coordinates and manages the process and filing. The Act lays out standards, rules and processes that all parties or stakeholders must follow.
To be insolvent, a debtor is deemed to be unable to pay their debts and bills. If you are deemed insolvent, your assets are reviewed to determine if they hold value and if (within a bankruptcy) they can be sold to repay some of your debts. If you file a consumer proposal or bankruptcy, the Act ensures you’re being properly and fairly treated and represented.
The Bankruptcy and Insolvency Act also protects businesses who need to make a Division 1 Proposal or file for bankruptcy. A Licensed Insolvency Trustee can explain the legal solutions available for businesses facing debt problems.
A Licensed Insolvency Trustee (LIT) is granted a license by the Office of the Superintendent of Bankruptcy. LITs are the only professionals legally authorized to administer a bankruptcy or proposal. An LIT fairly represents you (the debtor), and makes sure your rights are respected and intact, while also protecting the rights of the creditors. If you file a consumer proposal or bankruptcy, an LIT will support you through the entire process and help you to get your finances back on track in the months or years to follow.
There are three ways insolvency proceedings can go. Which option you choose will depend entirely on your financial situation and your debt load. In some situations, you may have to surrender assets to pay off your debts or agree to certain terms suitable to the creditors. An LIT first reviews your finances (debts, assets, income, etc.) and explains the options legally available to you.
To file a consumer proposal you must owe between $5,000 and $250,000 in unsecured debt (which excludes a mortgage or vehicle loan). Based on the review of your finances and debts, an LIT prepares an offer to your creditors that allows you to pay off a percentage of what you owe. The offer lays out a repayment plan where you make monthly payments for up to five years. You will not have to surrender any of your assets. Your creditors vote to accept or decline the offer. If your proposal is accepted, you are released from your debts at the end of the term.
If your unsecured debts exceed $250,000 (outside of a mortgage), this option may be available to you. A Division I proposal takes into consideration the high debt amount and offers options to suit the repayment of some of those debts.
The process of personal bankruptcy may release you from the obligation to repay certain debts (not all debts are exempt). As a part of the legal agreement, you would surrender some of your assets, which are sold to pay your creditors. Not all assets must be surrendered; personal exemptions vary by province and territory. During the bankruptcy process, you may also need to make monthly surplus income payments depending on your income.
Regardless of the process you choose, a stay of proceedings will be filed on your behalf. You will receive creditor protection, which means that creditors can’t take any further legal action against you. Essentially, a stay of proceedings tells creditors that you are working with an LIT to resolve your debt, and so legal actions against you should be stopped. That means a few practical things for you, as a debtor:
A stay of proceedings doesn’t cover everything. If you have a car loan from a secured creditor, that creditor can take the vehicle. If you make spousal or child support, you must continue to do so. If you have certain fines or penalties, those are not forgiven. An LIT will review your personal finances and determine what debts you carry and what can be included in your bankruptcy filing. If a creditor disagrees with something in a stay of proceedings, they can argue their position to a judge, who will ultimately make a judgement on the case.
During a bankruptcy process, an LIT will make an electronic filing of bankruptcy documents and any stay of proceedings to the government to get things underway. Your assets will be reviewed, and an LIT will determine if they’re included or exempt from action, such as being repossessed or sold to cover your debts. What is exempt varies depending on provincial law. You can find out more personal exemptions by province on our bankruptcy exemptions page.
If you file for bankruptcy, you must provide monthly income statements so an LIT can determine whether bankruptcy law requires you to make additional payments to your creditors. You are required to attend two financial counselling sessions with an LIT or a licensed credit counsellor. During these sessions you and the counsellor will review the causes of your financial problems and discuss credit and debt management techniques to help you rebuild your finances after you are discharged from bankruptcy. If you have completed your duties under the bankruptcy agreement, you will be discharged under a certificate of discharge.
If you don’t know how to get out from under your debt, you’re not alone. Almost a quarter of Canadians are facing unmanageable debt due to COVID-19. Seeking professional help to review your financial situation and discuss your options is the best action you can take towards improving your financial health.
Are your debts overwhelming your finances? To learn more about the Bankruptcy and Insolvency Act, and whether a bankruptcy or consumer proposal are right for you, reach out to a Licensed Insolvency Trustee today.
Call 1-855-BDO-Debt or fill out the form below. Your story is more than your debt and we’re here to help.
Fields marked with an asterisk (*) are required.
A BDO debt professional will contact you within one business day to schedule your free initial consultation.