Bankruptcy. Q: What Is Bankruptcy? Q: Is Insolvency Different From Bankruptcy? Q: What Is The Law On Bankruptcy?

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1 Bankruptcy Q: What Is Bankruptcy? A: Bankruptcy is a legal process that allows a person to obtain relief from his or her debts. It enables them to eliminate all or most of their debt by providing them with a clean slate to rebuild their credit. Q: Is Insolvency Different From Bankruptcy? A: Yes. A person is insolvent when they are experiencing difficulty meeting their debt obligations/bills as they become due. A person who is bankrupt has filed an assignment in bankruptcy. Q: What Is The Law On Bankruptcy? A. The Bankruptcy and Insolvency Act (BIA) is the federal law that sets out the procedures and rules for bankruptcy. The law is administered by the Federal Office of the Superintendent of Bankruptcy Canada Q: When Is A Person Eligible For Bankruptcy? A. A person is eligible for bankruptcy if they live, do business or own property in Canada and are insolvent.

2 To be insolvent, the person must owe more than $1,000 in unsecured debt; have debts greater than the sale value of their assets and be unable to pay their debts when due. Q: What Is A Secured Debt? A: A secured debt is a debt that is secured by collateral i.e. mortgage on a home or home equity line of credit. An unsecured debt is a debt with no security or collateral i.e. credit. Q: What Options, In Addition To Bankruptcy, May Be Available? A: Other options that may be available include consumer proposals, consolidation orders, or Division 1 proposals. A consolidation order is a legal proceeding in which all of the person s debts are combined and an amount is set that will be paid monthly to the court that will then ensure the amounts are distributed amongst the creditors. This is also known as an orderly payment of debt. It is only available in Nova Scotia, Alberta and Saskatchewan. A consumer proposal is available to an individual, whose total debt does not exceed $250,000, not including debts secured by the principal residence. The person will work with a Trustee in Bankruptcy to put together an offer to pay the creditors a percentage of what is owed over a specific period of time. Payments are made through the Trustee, and the Trustee uses that money to pay each of the creditors. With a consumer proposal, the person retains their assets and stays actions by unsecured creditors such as wage garnishments. Last Updated: August 2014 Page 2 of 18

3 In Nova Scotia, the Debtor Assistance Program can also work with the debtor to develop a consumer proposal and is not limited to working with a Trustee only. In a Division 1 proposal, the person works with a Trustee to make an offer to pay creditors a percentage of what is owed over a period of time. There is no limit on how much money is owed. The payments are made to the Trustee who will then use the money to pay each of the creditors. With a Division 1 proposal, the individual retains their assets and actions against them by unsecured creditors are stopped. Q: What Should A Person Do If They Are Considering Bankruptcy? A: The first step is for a person to contact a Trustee. Trustees are licensed by the Superintendent of Bankruptcy. If a person is having difficulty in finding a Trustee, they can search the Trustee Registry. The Trustee will discuss options with the person including an assignment in bankruptcy, consumer proposal, consolidation order or Division 1 proposal. Service Nova Scotia provides the Debtor Assistance Program which offers assistance to people with managing money, dealing with creditors and consumer proposals. The program does not deal with bankruptcy, because that requires a licensed Trustee in Bankruptcy. Last Updated: August 2014 Page 3 of 18

4 Q: What Does It Cost To Declare Bankruptcy? A: The Bankruptcy and Insolvency Act sets out the fees a Trustee is entitled to charge. The cost will depend upon whether the bankruptcy administration is ordinary or summary. Summary administrations are simpler and cheaper. Summary administrations generally cost between $1,500 to $1,800. Rule 128 applies to summary administrations which states fees are recovered as follows: 100% of the first $975; 35% between $975 and $2,000; 50% of the balance; Any counselling costs, assignment fee, court fees, HST and lump sum of $100 for other disbursements. Q: What Happens If A Person Cannot Afford To Pay A Trustee? A: If a person cannot afford a Trustee, they can contact the Office of the Superintendent in Bankruptcy about the Bankruptcy Assistance Program. To qualify for the program you must: Have contacted at least two bankruptcy Trustees participating in the Program without having been able to retain their services; Not be involved in commercial activities; Not be incarcerated; The person does not have surplus income. Last Updated: August 2014 Page 4 of 18

5 Q: What Is Summary Administration? A: Features of summary administrations: Available only to people; Realizable assets are limited to $15,000; No newspaper notice required; No first meeting of creditors unless requested; No inspectors unless creditors appoint them; One notice for all steps; Estates of related persons can be combined (i.e. spouse at a reduced amount); Trustee fees are according to a scale. This is the type of administration our clients would typically use. Q: What Is The Date Of Bankruptcy? A: This is the date the Trustee files the debtor s assignment in bankruptcy with the Superintendent in Bankruptcy. Q: What Happens When A Person Declares Bankruptcy? A: There are two things that will happen immediately: first all property, that is not exempted, vests in the Trustee; and, secondly, there is a stay of legal proceedings by your creditors including a stay of wage garnishment. Q: Does A Stay Of Proceedings Apply To Secured And Unsecured Creditors? Last Updated: August 2014 Page 5 of 18

6 A: An assignment or receivership order will act as a stay of proceeding for unsecured creditors. A Notice of Intention or filing of proposal will include secured creditors. A stay is broad and applies to judicial and extra-judicial proceedings. Q: What Property Is Exempt From Bankruptcy? A: All property vests in the Trustee; including after acquired property, however, Section 67 of the BIA sets out exceptions such as: Trust property; Certain GST credits; RRSP & RRIF monies (except monies contributed in the 12 months prior to the date of bankruptcy); Some causes of action (i.e. bodily and mental suffering); Property exempt from execution under provincial law (Judicature Act, Personal Property Security Act, Insurance Act). Property exempt under the Judicature Act, s.45: Necessaries; Chattels of $1,000 used in chief occupation; Motor vehicle with a value of $3,000 or less. Property exempt under the Personal Property Security Act (PPSA): Household goods under $5,000; Exemptions set out in s.59(3); Motor vehicle with a value under $6,500 for work purposes; Purchase Money Security interests (PMSI); Last Updated: August 2014 Page 6 of 18

7 Secured party may seize but becomes liable to debtor for amount of exemption. Property exempt under the Insurance Act: Must have irrevocable designation of beneficiary; Can be revoked with consent of the beneficiary; Will not form part of the bankrupt estate. Property exempt under the Pensions Benefit Act (PBA): Exemption for monies payable under a pension plan; Must be prescribed ; Does not extend to RRSPs (except for contributions in the year preceding bankruptcy and any further orders of the court). Q: If a Person Has a Spouse, Do They Include The Spouse s Assets In The Bankruptcy? A: A person s bankruptcy includes only their assets, unless they are jointly owned. If the person has a joint asset with their spouse, such as a house, their share of the house is included in the bankruptcy. Q: What Happens to The Bankrupt s Interest In The Family Home? A: The bankrupt s interest in the family home vests in the Trustee. The Trustee becomes a tenant in common with the nonbankrupt spouse. However, it is often possible to retain the family home if the person can pay to the Trustee the equity in the Last Updated: August 2014 Page 7 of 18

8 home. Upon discharge, the property does not automatically revest in the person. The Trustee must give a Trustee s Deed to transfer the interest in the family home back to the person. Costs that are taken into consideration in determining the equity the person must pay to the Trustee are the mortgage, the legal fees and real estate commission. The Trustee will review any separation agreement/minutes of settlement or court order during the course of administering the bankruptcy to determine what, if any, consideration was passed in the transfer of assets. The Trustee has little role to play in property that was transferred by way of an issued separation agreement or court order, prior to the date of bankruptcy. If a Trustee sought to vary the terms of a court order, they would need to apply for standing to do so. Q: If a Person Has a Spouse, Do They Include The Spouse s Debts In The Bankruptcy? A: A person s bankruptcy includes only their debts, unless they are jointly owed. If the person has a joint debt with their spouse, their spouse will still owe the debt even though the bankrupt will be released from the debt after the bankruptcy. Q: What Happens During a Bankruptcy? A: While a person is bankrupt they must report their monthly income and expenses to the Trustee. If the person s income is above the Federal Superintendent of Bankruptcy s Standards then the person will have to make monthly payments to the Trustee for the creditors. Some assets may be sold to pay debts owed to Last Updated: August 2014 Page 8 of 18

9 creditors, although the assets may be sold to the person declaring bankruptcy. There are exceptions on what assets can be sold like personal belongings, furnishings, RRSP s and vehicles up to a certain value. Support payments are deducted from net income when determining surplus income. In other words, the Trustee will give priority to the payment of child and spousal maintenance agreements or orders. Support payments are included in the receiving spouse s income for determining surplus income. Q. What Is The Order Of Repayment Of Creditors By The Trustee? A: The Trustee will pay preferred creditors before unsecured creditors. Preferred creditors are paid in accordance with their position in the class of preferred creditors as set out in the Act. Q: Can The Bank Continue With a Foreclosure After a Person Has Filed For Bankruptcy? A: Yes. Secured creditors are not stayed by the filing of bankruptcy and can continue with actions to enforce the debt. Therefore, the bank can continue with a foreclosure proceeding. Q. Can The Person s Vehicle Be Seized? A. Yes, if it was purchased through a conditional sales agreement. Last Updated: August 2014 Page 9 of 18

10 Q: What Debts Are Not Included In a Bankruptcy? A: Debts that are not included in a bankruptcy include student loans where the person has not been out of school for 7 years, spousal support, child support, debts arising from fraud and court-ordered fines. However, a person may apply for early discharge of a student loan (5 years after they stopped being full-time or part-time student) if it would cause the person undue hardship. A person may also apply to the Repayment Assistance Program to help manage the repayment of student loan debt. Q: Can A Person Secure A Family Law Obligation? A: Under section 15.2 of the Divorce Act, a court may make an interim or final order providing for security for support orders. In Re Mattes, [1998] N.S.J. No. 13, 4 C.B.R. (4 th ) 212 the court held that the order could be secured against the payor s property or secured against the proceeds of the sale of property. While section 15.2 deals with spousal support, not child support, under section 15.1(4) the court may impose terms and conditions on an interim order for child support as they deem just and fit. A court may make a similar order under section 36(1) of the Maintenance and Custody Act. The court can require the payor to give security; including a charge on property. Section 36(2) enables the court, upon application, where the payor has been required to give security pursuant to subsection (1) to direct the sale or other realization of the security upon such terms and conditions as the court considers appropriate. Last Updated: August 2014 Page 10 of 18

11 Q: Why secure the obligation? A: If a spouse makes an assignment in bankruptcy, the securing order will take precedence over judgments against that bankrupt, even where the judgments were registered before the granting of the order. Section 136(d.1) of the Act provides a preferred claim for alimony. Preferred claims for support or maintenance of a spouse, former spouse, former common law partner or child living apart from the bankrupt, but only if they have been provided for in a court order or separation agreement. It is limited to amounts accruing in the year prior to bankruptcy. Q: What Debts Are Discharged By Bankruptcy? A: An order of discharge will discharge most of the bankrupt s debts. Section 178 lists the debts that are not discharged by bankruptcy. Family debts not discharged are: Debts for alimony; Debts for support or maintenance of a spouse, former spouse, former common-law partner or child living apart from the bankrupt, but only if it is in a court order or separation agreement. Other debts not discharged: Misappropriation while acting in a fiduciary capacity; Obtaining property or services under false pretenses or fraudulent misrepresentation (i.e. credit card applications or use of credit cards). The creditor may object to the Last Updated: August 2014 Page 11 of 18

12 discharge or seek an order under Section 178 declaring the debt survives discharge; Fines, penalties, restitution or similar orders imposed in respect of an offence or a bail debt; Civil awards for intentional bodily harm or sexual assault or wrongful death. Q: What Would Be Considered In Determining If a Credit Application Or Use Of Credit Card Was Obtained Under False Pretenses Or Fraudulent Misrepresentation? A: The following would be considered: Were the statements true? Did the debtor disclose their true financial picture? Did the debtor inflate the value of their assets? Did they take a draw on the credit card on the eve of bankruptcy? Q: When Is A Bankrupt Discharged? A: The discharge can be automatic or it may be necessary to apply to the court. The application is usually made by the Trustee with the bankrupt being required to attend. For first time bankrupts, the Notice of Assignment serves as their Notice of Impending Discharge and they are automatically discharged after 9 months unless there is an objection or surplus income. The Trustee will issue the Certificate of Discharge. Last Updated: August 2014 Page 12 of 18

13 A second time bankrupt can be discharged after 24 months as long as there is no objection or surplus income. Q: What About Payments To Estates By The Bankrupt? A: Most bankrupts are required to contribute to estates and for longer periods of time. A bankrupt with surplus income must contribute half of their surplus to their estates. The Trustee will subtract any current spousal and/or child maintenance orders or agreements, if issued, from the bankrupt s income when determining surplus income. The date of discharge for first time bankrupts with surplus income is 21 months and for second time bankrupts it is 36 months. Q: What are the guidelines for contributions by the bankrupt? A: There are guidelines that set the standards for contributions to the estate. Full guidelines can be found in Directive No. 11R Example: Family of 4 (2 adults/2 children). Net income is $2,800/month. Childcare costs are $500/month. The net income for Guideline purposes is $2,300. The guideline amount for a family of 4 is $3,743. As a result, nothing is payable. The Trustee will ask for $1,800 over the period of the bankruptcy. Last Updated: August 2014 Page 13 of 18

14 Q: What Happens When A Bankrupt Is Discharged? A: At the end of a bankruptcy, the court may grant an absolute discharge, refuse to discharge, suspend the discharge, grant a conditional order or grant a conditional order and suspend the discharge. Q: What Might a Conditional Order Look Like? A: Examples of conditional orders: To pay money as a prerequisite to discharge; To consent to a judgment in favor of the estate; To do some other act or thing as a prerequisite to discharge. Q: How Might You Use a Conditional Order To Your Advantage In a Situation Where Your Client Is Owed Arrears For Maintenance? A: In the case of Re Ryan, [2000] N.S.J. 119, 188 N.S.R. (2d) 327, 99 A.C.W.S. (3d) 910, a condition was put in place that the bankrupt had to demonstrate to the Trustee that they paid any spousal and child support payments they had previously been ordered to pay. Q: Are There Limitations On An Absolute Discharge? A: Yes. A court cannot grant an absolute discharge where any of the facts set out in Section 173 are proven. In that situation, a Last Updated: August 2014 Page 14 of 18

15 court may only suspend, refuse or grant a conditional discharge. Example of when a court cannot grant an absolute discharge: Section 173(1) (k) where the bankrupt has committed fraud or fraudulent breach of trust. A guilty plea in a criminal matter will be proof of such; or if the bankrupt admits to the facts constituting a clear fraud. A bankruptcy court, without a finding by another court, will not usually make a finding of fraud. Q: Can The Court Order An Arrest Warrant In a Bankruptcy Proceeding? A: Section 168 provides the court with broad powers to issue an arrest warrant. A failure to obey a court order is sufficient. However, the power is seldom used. The court can order the seizure of books, paper and property on arrest or any property of the bankrupt. The search warrant can be ordered ex parte. The warrant may provide for the use of force, as long as a peace officer is present. Q: What Types Of Transactions May Be Challenged After Bankruptcy Has Been Filed? A: These are called impeachable transactions. An example would be the transfer of a home to a spouse. There are tough rules for individuals who are related by blood, marriage or adoption. Related persons are deemed to not be dealing with each other at arm s length. Last Updated: August 2014 Page 15 of 18

16 For entities, the relationship between the person controlling it or persons or corporations related to it or its controller. For entities it is a question of fact whether persons who are not related are dealing with each other at arm s length (Section 4(4)). Q: What Would Be a Fraudulent Conveyance and Transfer For Undervalue? A: The BIA refers to transfer at undervalue : A transfer at undervalue may be declared void, or the transferee or person privy to the transfer may be ordered to pay to the estate the difference between what was paid and the fair market value; Different considerations where the transfer at arm s length and where not at arm s length. The Statute of Elizabeth sets out three facts that need to be proven: Conveyance was made without valuable consideration. Grantor had the intention to delay or defeat creditors Conveyance had the effect of delaying or defeating creditors. The party applying under the Statute must first obtain a judgment against the debtor Q: What is a Privy? A: A privy is a person who does not deal with a party to a transfer at arm s length and, by reason of the transfer, receives a benefit or causes a benefit to be received by another person. Last Updated: August 2014 Page 16 of 18

17 Q: What is a Non-Arm s Length Transaction? A: This transaction may be impeached where the transaction occurred: 1 year before the initial bankruptcy; or 5 years before the bankruptcy event; and debtor was insolvent at the time of the transfer or rendered insolvent by the transfer; or debtor intended to defraud, delay or defeat creditors. Q: What is a Fraudulent Preference? A: It is a payment or transfer to a creditor made prior to the bankruptcy with the intent of preferring that creditor over other creditors. It goes against the notion of equal treatment for unsecured creditors. Q: What Will The Trustee Do? A: Very little. Unless there is money in the estate to pay, the Trustee is not required to any more than the very basic of functions. Therefore, many impeachable transactions are not challenged. Q: What Happens To After Acquired Property? A: The property vests in the Trustee (s.99). Innocent third parties are protected if the interest is acquired prior to the intervention of the Trustee. Last Updated: August 2014 Page 17 of 18

18 Disclaimer: This site contains general legal information for residents of Nova Scotia, Canada. It is not intended to be used as legal advice for a specific legal problem. Last Updated: August 2014 Page 18 of 18