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Key Canadian Consumer Bankruptcy Reforms

posted by Stephanie Ben-Ishai
Today’s post is a summary of the key Canadian consumer bankruptcy reforms.  The most significant aspects of the consumer reforms touch on the following nine issues:

1.    Automatic Discharge
2.    Creditors’ Participation and Pay Out
3.    Bankrupts with High Income Tax Debt
4.    Bankrupts with Student Loans
5.    Treatment of RRSPs and RRIFs (tax sheltered retirement savings accounts)
6.    Tax Refunds
7.    Consumer Proposals
8.    Ipso Facto Clauses
9.    Trustee Fees

Below is more detail on each of these reforms.  I also have a short annotated book out on the reforms if you are interested in reading about them in more detail:

Stephanie Ben-Ishai, Bankruptcy Reforms 2008 (Toronto: Carswell, 2008): http://www.carswell.com/description.asp?DocID=5574

1.    Automatic Discharge

For most Canadian debtors, bankruptcy is a simple nine-month process that can be filed electronically by a bankruptcy trustee.  When a consumer assigns herself into bankruptcy, there is an automatic stay that stops collection efforts by her unsecured creditors, such as telephone calls and letters demanding repayment.  Following an assignment into bankruptcy, all of the bankrupt’s non-exempt property vests in the bankruptcy trustee to be sold for the benefit of her creditors.  If the bankrupt earns an income above the modified low-income cut off rate provided for in the Office of the Superintendent in Bankruptcy directives, she will be required to make surplus income payments to the trustee. 

In practice, many Canadian consumer bankrupts have little or no exempt property to be distributed among their unsecured creditors and earn incomes below the modified low-income cut-off line. Accordingly, the reforms to the automatic discharge will only impact a small number of debtors.  The reforms seek to increase the availability of the automatic discharge, while at the same time increasing for some debtors the period of time before eligibility for an automatic discharge.  Taken together, these reforms will result in fewer discharge hearings and will provide less discretion to trustees.

a.    Bankrupts with Surplus Income

Bankrupts with surplus income are required to wait for the expiration of a 21-month period before becoming eligible for an automatic discharge.  During this period they must continue to make surplus income payments to the bankruptcy trustee.

b.    Second Time Bankrupts

Second time bankrupts are entitled to an automatic discharge following the expiration of a 24 month period.  If a second time bankrupt has surplus income they must wait for the expiration of a 36 month period.  The second time bankrupt must make surplus income payments to the trustee during this period.

2.    Creditors’ Participation and Pay-Out


Only a small number of discharge applications actually result in a court hearing.  In these cases, opposition  most frequently comes from a trustee for non-payment of the trustee’s fees and expenses.  As a result, for many bankrupts, the bankruptcy process is merely a gateway to their unopposed discharge, which extinguishes most of their debts.  The reforms seek to increase creditor participation in the consumer bankruptcy process in two ways.

a.    Opposition to Discharge

A party opposing discharge may submit evidence orally under oath, by affidavit or otherwise.

b.    Pay-Out

A court may order payment to a particular party or parties of amounts payable by the bankrupt under a conditional discharge order.  Further, parties opposing a discharge may also be awarded legal costs incurred for their opposition.  This amount will come out of the estate.

3.    Bankrupts with High Income Tax Debt

a.    Mandatory Application for Discharge


For bankrupts with more than $200,000 (including principal, interest and penalties) in personal income tax debt (federal and/or provincial), representing 75 per cent or more of their total unsecured proven claims, an application for discharge is required.  For first and second time bankrupts, such an application may be made when the bankrupt would have been eligible for an automatic discharge.  For all other bankrupts, the hearing may not be heard until 36 months have expired.

b.    Discharge Hearing


The court may refuse the discharge, suspend the discharge, or provide a conditional discharge.  The burden is on the bankrupt to justify the relief requested and the court is directed to take into account:

i.    The bankrupt’s circumstances at the time the personal income tax debt was incurred;

ii.    The efforts made by the bankrupt to pay the personal income tax;

iii.    Whether the bankrupt paid other debts while failing to make reasonable efforts to pay the personal income tax debt; and

iv.    The bankrupt’s financial prospects for the future.

A discharge order may be modified after one year.

4.    Bankrupts with Student Loans


Since 1997, government funded student loans incurred within first a two-year period and, after 1998, a ten-year period from the bankruptcy date have formed an exception to discharge.  The reforms shorten this period and modify the process for discharging these loans somewhat.

a.    Exception to Discharge


Government student loans are non-dischargeable for seven years after the debtor ceases to be a student.

b.    Application to Discharge

Where a bankrupt has non-dischargeable student loans at the time of bankruptcy they are entitled to make an application for discharge of these student loans after seven years.  In addition, such a bankrupt may make an application for relief on hardship grounds after five years.

5.    Treatment of RRSPs and RRIFs

The protection of RRSPs and RRIFs (tax-sheltered retirement savings plans) provided by provincial law is restored such that they do not become property of the bankrupt divisible among his or her creditors.  Where RRSPs and RRIFs are not protected by provincial law, they will be afforded protection under the BIA.  An exception is provided for any contributions made in the 12 months preceding bankruptcy.  Such contributions are not excluded from property of the bankrupt divisible among his or her creditors.

6.    Tax Refunds


Bankruptcy trustees are typically paid in part out of the bankrupt’s tax refunds.  The reforms clarify the legality of this practice.

A bankrupt’s tax refund for prior years and for the entire year of bankruptcy become property of the estate.

7.    Consumer Proposals

This set of reforms deals with the practice that had developed where consumers were filing commercial proposals because their debt exceeded the $75,000 limit for consumer proposals.

A consumer proposal may now be filed by a person with up to $250,000 in debts, excluding the mortgages on their principal residence.

8.    Ipso Facto Clauses

Limits are now placed on creditors’ ability to terminate a contract or a supply of service to a bankrupt.  The main ipso facto clauses for consumers relate to basic services, such as telephone, gas, electricity and leases.

9.    Trustee Fees


Subject to any directives issued by the Office of the Superintendent in Bankruptcy, trustees are permitted to enter into binding contracts with debtors for payment of their fees for up to a year following the debtor’s discharge.  This provision applies even where the debtor has no surplus income.


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