How to prepare for a bankruptcy filing?
Bankruptcy is a stressful process, but it is unfortunately common. Every year, between 30,000 and 60,000 Canadians file an assignment in bankruptcy to resolve their debts.
As it is a serious and complicated process, it is important to seek professional help early upon experiencing financial difficulties. Doing so will help you avoid inappropriate actions or behaviour that will have consequences during the process.
What Is Bankruptcy?
Bankruptcy is a legal process described in the Bankruptcy and Insolvency Act (“the BIA”). Bankruptcy is appropriate if an individual is unable to resolve their financial difficulties by other means.
With a few exceptions, bankruptcy immediately stops creditor collection calls and legal proceedings. Interest on unsecured debts also stops accruing and it is not necessary to make further payments to unsecured creditors.
Upon declaring bankruptcy, the Licensed Insolvency Trustee (“the LIT”) will take possession of the bankrupt’s assets (except those exempt from seizure by law), sell them and distribute the funds to the creditors.
Bankruptcy terminates most, if not all, of an individual’s unsecured debts, giving the individual a fresh start upon their discharge.
Things to Avoid Before and During a Bankruptcy Filing
Some may see bankruptcy as an easy way to avoid paying their debts. Although, the bankruptcy process is designed to ensure that creditors realize the funds they are entitled to from the Bankrupt’s assets and income. If the Bankrupt completes their required duties and they are an honest, but unfortunate debtor, they can be relieved of their unsecured debts.
Upon filing an assignment in bankruptcy, the Bankrupt is required to complete certain duties, which are outlined in section 158 of the BIA. These duties include disclosing and providing information to the LIT, including a declaration of assets, debts, income, and certain transactions and/or payments that occurred in the five years preceding bankruptcy.
If a Bankrupt does not complete their duties in the bankruptcy process or the Bankrupt commits a bankruptcy offence, it will affect their ability to get discharged. The following are examples of inappropriate behaviour, prior to the bankruptcy, that may affect the discharge of a Bankrupt:
Going Further Into Debt
Once you are aware that you are insolvent, or having financial difficulties, it is not appropriate to continue to borrow more funds. This includes maxing out your credit cards and/or applying for new loans. One should not borrow funds if there is no plan to repay the debt. The LIT will enquire about the use of credit leading up to bankruptcy. If it appears that funds were borrowed inappropriately, knowing that you were unable to repay the funds, and you may file an assignment in bankruptcy, it may affect your discharge from bankruptcy.
Making Preferential Payments
The purpose of the BIA is to ensure a fair distribution of funds to the unsecured creditors (credit cards, loans etc.). This means that if you owe a personal loan to family or friends, it should not be paid ahead of your credit card debt. This may be considered a preferential payment. Any payments to family or friends in the 5 years preceding the bankruptcy must be disclosed to the LIT. If the LIT determines a preferential payment has been made, it can pursue the recipient of the payment to recover the funds and it may affect the discharge of the Bankrupt.
Not Disclosing Assets or Income to the LIT
Some may try to hide that they have certain assets or income from the LIT. They hope that after the bankruptcy clears their debt, they can still enjoy the luxury of their assets and avoid paying the required amounts from their income. However, the creditors are entitled to these funds.
In the event, the LIT, a creditor or the Office of the Superintendent of Bankruptcy discovers undisclosed assets and/or income, the Bankrupt’s discharge will be opposed and reviewed by the Court. It may also result in criminal charges.
Selling or Transferring Assets
Selling, transferring or disposing of assets prior to bankruptcy must be disclosed to the Trustee. If assets are sold or transferred for an amount less than their fair market value, it may be considered a Transfer at Undervalue. These transactions may be attacked by the LIT and voided, resulting in the funds or asset being realized by the Trustee.
Such transactions may also affect the discharge of the Bankrupt.
Consequences for Committing an Offense Under the Bankruptcy and Insolvency Act
Listed above are some examples of offences under the BIA. Each situation will be reviewed on a case-by-case basis, most likely resulting in an opposition to the Bankrupt’s discharge and possibly criminal charges.
How to Best Prepare for a Bankruptcy Filing
It is important to seek professional assistance as soon as you are experiencing financial difficulties and be upfront and honest about your situation. You should make a true and complete accounting of all of your assets, debts, income and expenses and gather all the applicable documentation for the LIT to review.
The LIT needs to review the complete information, to provide details on the options available in resolving your debts. If Bankruptcy is the appropriate option, the LIT will guide you through the process.
If you are overwhelmed with debt and would like to consult with a professional, Baker Tilly Ottawa Ltd. is a Licensed Insolvency Trustee and Consumer Proposal Administrator. Its professionals have assisted thousands of individuals in successfully resolving their debt crises and overcoming financial turmoil since 2002. Its passion – its mission – is your health and well-being!