Bennett on Consumer Bankruptcy. Frank Bennett
body for trustees. Therefore, it is very difficult for a trustee to advise a debtor not to proceed with some form of insolvency protection when the individual is experiencing financial difficulties.
1. Defining Bankruptcy
Bankruptcy is a legal process which an individual debtor can take to protect himself or herself from creditors who are taking legal action to collect their accounts and debts.
Creditors may send letters and call the individual on a regular basis to pay the account, or more likely, creditors employ collection agencies who consistently call the individual. Ultimately, the creditor commences a lawsuit to collect, and if the individual does not have an adequate defence, the creditor obtains judgment. This judgment can be enforced easily through garnishment proceedings against the individual’s employer. This may finally force the debtor into bankruptcy.
Taking bankruptcy protection protects the individual debtor from further collection tactics. Bankruptcy involves a transfer of most of the debtor’s assets to a licensed trustee who sells them and distributes the monies amongst the debtor’s creditors. The debtor, however, can keep some exempt assets such as RRSPs. A debtor may be an individual person, a partnership, or a corporation. Bankruptcy wipes out, or releases most of the debts to creditors when the bankrupt obtains his or her discharge and allows the bankrupt to start all over again. The honest but unfortunate bankrupt person is generally entitled to a fresh start.
The bankruptcy process is governed by the Bankruptcy and Insolvency Act which is a federal statute. This statute was first enacted in Canada in 1919 and has been amended several times. The Act is the same throughout Canada and applies equally in Newfoundland and Labrador as it applies in British Columbia or in any of the territories.
The effect of taking bankruptcy proceedings is like waving a magic wand over the debtor’s creditors as it makes most legal proceedings to collect debts disappear. Taking bankruptcy protection relieves an individual debtor of his or her debts and provides instant relief and protection from creditors, collection agencies, and their lawyers who are suing the debtor. Taking bankruptcy protection stops collectors from collection agencies telephoning, faxing, emailing, and harassing the debtor. Taking bankruptcy protection stops employers from deducting monies from the debtor’s salary for the benefit of seizing creditors. For both the individual and the corporation, once bankruptcy happens, it feels as if a dark cloud over the debtor has lifted and disappeared.
After an individual goes into bankruptcy, creditors are generally prevented from taking legal actions against the debtor or against the debtor’s property. By operation of law, creditors are prevented from taking lawsuits, seizures, garnishments against the debtor’s wages, distress and similar related proceedings against the debtor without special permission of the court. The Bankruptcy and Insolvency Act provides an honest debtor with relief against overbearing creditors and affords the debtor with a second, and in some cases a third, chance to establish himself or herself.
Once a debtor takes bankruptcy protection, the process under the law also allows for the orderly and fair distribution of a bankrupt person’s non-exempt assets amongst all the debtor’s creditors according to a scheme of priority. Exempt assets are assets that the individual can keep if he or she files for bankruptcy. They would include, for example, tools of trade and household furnishings up to certain amounts, and registered retirement savings funds. Non-exempt assets for individuals are assets that are over and above certain thresholds. For example, the individual will be able to keep registered retirement savings funds except for monies invested within one year before bankruptcy. More about exemptions in section 6. and in Chapter 6.
The Bankruptcy and Insolvency Act sets out a priority scheme so that there is seldom any argument about the distribution of monies once the assets are sold. The provisions under the Act prevent creditors from scrambling to seize assets. It allows a debtor who is overburdened with debt, but has some assets, to transfer them to a trustee who will then sell and distribute the proceeds in a fair and equitable manner. This transfer of title to the assets happens automatically when the debtor takes protection. In practice, the consumer debtor rarely has any assets of value except for his or her salary. As a result, there is seldom any distribution of dividends to creditors. In short, bankruptcy allows the honest debtor to start all over again without the burden of debt.
2. Read This Book First!
Many people who go through the bankruptcy process do not need to consult a lawyer. Their affairs are neither technical nor complicated. These types of debtors are generally employees who lost their jobs through plant closures, business bankruptcies, receivership, or for other causes, and they are now unable to service the monthly debt to credit card holders such as VISA, MasterCard, and American Express, and to pay the mortgages on their homes.
However, if there are more serious financial problems which the debtor can identify from the list in section 3., and the debtor falls within one or more of them, then it is advisable to see a lawyer first. Once the debtor files for bankruptcy, the debtor is technically in bankruptcy and except in the rarest of cases, the debtor will not be able to reverse the process. If the debtor has any doubts about going into bankruptcy, again the debtor should see a lawyer first. The debtor should not sign any bankruptcy papers unless the debtor is satisfied of the consequences and is prepared to deal with them once in bankruptcy.
After seeing a lawyer, the debtor may have other remedies available to resolve the financial difficulties at which time the debtor may elect not to file for bankruptcy. This decision as to whether to file for bankruptcy is critical as once the debtor files for bankruptcy protection, the date becomes a focal point for many objectives under the Act. These are discussed throughout the book.
Lawyers are generally not able to list themselves in the telephone directory or advertise to the public by specialty or expertise unless they are certified as such experts by their provincial or territorial law society. Therefore, if the debtor has serious financial problems, it is necessary to go to a general practitioner in law or an accountant and if that professional cannot answer the questions, the debtor should request a referral to a bankruptcy and insolvency lawyer. Alternatively, the debtor may call the Law Society or the Canadian Bar Association and they may be able to suggest a number of lawyers who practise in this area. It is very important to deal with a lawyer who specializes in this area, as these types of lawyers have special knowledge and skill and they will save the debtor time and expense and usually give advice more quickly. However, if the debtor consults a general practitioner, he or she will have to review the law in the area and advise the debtor on questions. This may be time consuming and may be as or more expensive even though the general practitioner may come out with the same answers and give the same advice as the specialist.
In short, if there are no valuable assets, the debtor is likely a consumer debtor and will not require the services of a lawyer. However, if the debtor has substantial debt, has many valuable assets, or is a high wage earner or is self-employed, the debtor should see a lawyer first before filing for bankruptcy.
At this stage, the debtor should sit down and review this book and prepare questions to ask the lawyer if the debtor chooses to see one first, or questions to the trustee if the debtor goes directly to a trustee’s office. In either case, the debtor should clearly understand the process before making an assignment into bankruptcy.
3. Learning about Bankruptcy before It Happens
Almost every consumer debtor who is having financial difficulty and is not paying bills on time knows that he or she is in financial difficulty and is headed for bankruptcy unless there is a sudden influx of money. Debtors do not have to be mathematicians to know they can’t pay their bills. Once consumer debtors realize that they have more money going out of their bank account monthly than coming into their bank account, that they are no longer paying their bills in ordinary course, they may realize they are probably headed for bankruptcy. Usually, paying off one credit card with another is a typical signal of financial sickness. It’s just a matter of time until the credit card companies catch up on their collections and drive the individual to see a trustee in bankruptcy.