A Glossary of Common Terms Used in Bankruptcy
From insolvency to discharge, there are a lot of confusing words and important terminology you are bound to hear during a bankruptcy that are important to learn if you are about to file.
So, to help you better understand these terms, here is a guide to common bankruptcy terms used during the process.
What Is Bankruptcy?
Bankruptcy is a formal legal process for individual or business debtors who cannot meet their financial obligations that allows them to file for protection from their creditors under the Bankruptcy and Insolvency Act.
When filing for bankruptcy, debtors assign all of their assets—except for those exempt from seizure by law—to a Licensed Insolvency Trustee. The trustee will then sell these assets to help pay off outstanding debts.
And once a debtor is formally declared bankrupt, legal action from creditors stops along with wage garnishments from the bankrupt person’s salary.
Important Bankruptcy Terms Defined
Here are some of the most common terms you will hear when going through the bankruptcy process.
Licensed Insolvency Trustee (LIT)
A Licensed Insolvency Trustee (LIT) is a debt professional licensed by the Office of the Superintendent of Bankruptcy to administer bankruptcies and consumer proposals and help resolve other debt crises.
LITs are also Chartered Insolvency Restructuring Professionals (CIRP) and are highly ethical professionals that are government regulated and subject to rigorous training or professional ethics.
Bankruptcy and Insolvency Act (BIA)
The BIA is a federal law that governs and regulates bankruptcy and consumer proposals in Canada.
Superintendent of Bankruptcy
The Superintendent of Bankruptcy is a federally appointed official who oversees the administration of the Bankruptcy and Insolvency Actin Canada.
Insolvency is the inability for a debtor to pay off a debt when it becomes due, often resulting in bankruptcy or a consumer proposal.
Bankruptcy duties are moral or legal obligations imposed on a bankrupt person – such as making regular monthly surplus income payments to your LIT, so you can complete your bankruptcy process.
Other duties include:
- Surrendering your credit cards
- Disclosing to the Trustee details regarding your assets and assisting the Trustee in realizing on your non-exempt assets
- Attending the meeting of creditors, if one is held
- Disclosing certain transactions, payments, or gifts made prior to filing the assignment in bankruptcy so the Trustee can determine if there were transfers at undervalue or preference payments made to creditors
- Providing all necessary tax documents (e.g. T4s) to complete any outstanding tax returns
- Reporting monthly household income and living expenses to your LIT
- Attending credit counselling sessions
- Informing your LIT if you change your address
- Responding to and assisting with all requests from your LIT
- Telling any future lenders that you are bankrupt if you borrow more than $1,000
Creditors are people, institutions, or businesses who are owed money, goods, or services. A preferred creditor has a priority claim to any funds that are available from the bankrupt person’s assets.
Secured creditors hold security for the debt owed to them, while an unsecured creditor does not.
Anything a person owns that can be sold or used to pay a debt, such as cash and property. Property that is exempt varies by province. In Ontario, the exempt property includes household furniture, certain vehicles, and tools-of-trade.
Exempt property or assets cannot be seized, garnished, or executed legally by any execution creditor to enforce a debt, or by a Licensed Insolvency Trustee. Exemptions vary by province, but in Ontario, the following assets are exempt from seizure during a bankruptcy:
- Furniture and appliances to a maximum value of $13,500
- Your car, if the equity in it is less than $6,600
- Your home, if the equity in it does not exceed $10,000
- The tools of your trade or profession to a maximum value of $11,300
- Farming animals, equipment, and supplies to a maximum value of $29,100
- Registered pension plans
- RRSPs, with the exception of the contributions made in the 12 months preceding bankruptcy
- Most life insurance policies
The valuing of assets/property – also known as an appraisal. An assessment of a debtor’s assets is part of the first stage of the insolvency process.
The Office of the Superintendent of Bankruptcy sets a limit on what a person or family needs to live. Any income you earn over this limit is called a surplus income. So, if you are bankrupt, you will be required to pay half of your surplus income each month to your LIT. And your LIT will determine the amount of your payment based on your total income, your personal and family situation, and the standards set by the Superintendent of Bankruptcy.
A discharge from bankruptcy is the final step in the bankruptcy process. A discharge releases the bankrupt person from their legal obligation to pay back what is owed – with some exceptions – and as of the date they filed for bankruptcy.
With an absolute discharge, the bankrupt is released from their legal obligation to pay back their debt –with some exceptions – as of the date they filed for bankruptcy.
With an automatic discharge, the bankrupt person doesn’t have to go to court to finalize the proceedings. An automatic discharge can occur if the following conditions are met:
- It is your first or second bankruptcy
- You have not refused or neglected to receive counselling
- You have made payments with an extra surplus of income if and as required
- The creditor, Licensed Insolvency Trustee, and the Office of the Superintendent of Bankruptcy do not oppose the discharge
With a conditional discharge, certain court-imposed conditions must be met before your discharge becomes absolute—e.g. you must pay a specified amount to your LIT to distribute to creditors.
With a suspended discharge, there is a court-ordered delay, so the discharge will not take effect until a later date.
Unsecured debt is debt from creditors who do not hold security over any of your assets, like with a mortgage or car loan. Unsecured debts typically include credit cards, unsecured lines of credit, payday loans, and taxes owed to the Canada Revenue Agency.
Secured debt is debt from creditors who have protected themselves and hold security over some of your assets—such as a lien, mortgage, or pledge on or against your property. So if they are not paid, they can enforce their claims by recovering the assets on which they hold security.
A garnishment is a legal process involving a creditor getting a third party to turn over the debtor’s property, such as an employer garnishing wages from your paycheques, or a bank garnishing money from your bank account.
Credit bureaus collect information about a person’s financial behaviour, including credit accounts, payment histories, loan applications, bankruptcies, court judgements, and conditional sales contracts. That financial behaviour is represented by a score that ranges from poor to excellent, with good behaviour (such as paying bills on time) adding points to the score, and poor behaviour (i.e. missing payments or filing for bankruptcy) deducting points from the score.
Lenders, employers, and landlords will look at a person’s credit rating to see how much of a risk they are—i.e. of defaulting on their loan or not making rent payments on time.
A legal right or interest a creditor has in a debtor’s property, which usually lasts until the debt the lien secures is paid.
The act of taking possession of a debtor’s property by legal right or process.
As you can see, bankruptcy is a complex legal process that can be difficult to navigate without the proper help. For more information and help understanding the bankruptcy process in Canada, contact a Licensed Insolvency Trustee.
Baker Tilly Ottawa Ltd. is a Licensed Insolvency Trustee and Consumer Proposal Administrator. Its professionals have assisted thousands of individuals successfully resolve their debt crises and overcome financial turmoil since 2002. Its passion – its mission – is your health and well-being!