Unresolved Access Issues

Yesterday’s post on means-measuring versus means-testing offered a positive perspective on the Canadian bankruptcy reforms.  The focus was on debtors who are currently able to access the bankruptcy system and how this will change with the enactment of the reforms.  Unlike the American system, the Canadian surplus payment requirements do not impose additional front-end administrative and financial burdens that in themselves will prevent the poorest of potential bankrupts from accessing the bankruptcy system. However, a number of obstacles hinder access to the bankruptcy process for the poorest debtors.  In particular, such debtors will have difficulty paying the approximately $1800 in costs associated with the administration of a bankruptcy.  The reforms go some way to address this concern by providing a mechanism for the bankrupt to reach an agreement with the trustee to continue paying for bankruptcy services after the bankruptcy period. 

Professor Saul Schwartz of Carleton University and I have been working on issues around debt, low-income households and insolvency remedies for some time now.  Jason Kilborn blogged about our 2007 article at: http://www.creditslips.org/creditslips/2007/04/bankruptcy_for_.html.  In that article, we pointed out that, for two reasons, the conventional wisdom is that the poor are not likely to have needed the insolvency system. First, creditors are reluctant to extend credit to the poor because the risks of non-payment are high. Not having been able to borrow, the poor are not over-indebted and are therefore not in need of bankruptcy protection. Second, some poor debtors - lone parents on social assistance for example - are judgment-proof meaning that judgments for money recoveries obtained by their creditors are of no effect because these debtors do not have sufficient non-exempt property or income to satisfy the judgment.

Means-Measuring versus Means-Testing

As readers of the Credit Slips blog are well aware, a central feature of BAPCPA was means-testing.  Means-testing requires all debtors to calculate their estimated ability to pay (according to complex formulae) and to file these calculations with their Chapter 7 petitions.  A failure to do so results in automatic dismissal of their petition.  In contrast, the Canadian approach is to focus on means-measurement.  That is, for liquidation bankruptcies, the bankruptcy trustee on the basis of regulations set by the Office of the Superintendent in Bankruptcy (OSB) sets the amount debtors are required to pay (if any) during the bankruptcy period.  For debtors who are required to pay under the current means-measurement tests, the reforms will increase the period of repayment.  The reforms do not seek to introduce means-testing into the Canadian system.

Functionally, the key difference between means-testing and means-measurement is that means-testing, as put into place in the United States, creates a hurdle at the front end for all debtors filing for liquidation bankruptcies.  The means-testing calculation results in a more complex and time-consuming bankruptcy process, which in turn drives up the fees of filing for bankruptcy, even for those bankrupts who clearly meet the test.  The result is that an increasing number of debtors are not able to afford bankruptcy.  At the ideological level, means-testing operates on a presumption of abuse.

I have asserted that Canada’s resistance to adopting the American means-testing model is a laudable feature of the reforms.  I argue that the Canadian means-measurement approach, while not without its own flaws, is more effective than the American model at putting into practise the objectives articulated by proponents of means-testing in the United States.  See “The Canadian Consumer Bankruptcy Discharge” in Stephanie Ben-Ishai and Tony Duggan, eds. Canadian Bankruptcy and Insolvency Law: Bill C-55, Statute C.47 and Beyond (Toronto: LexisNexis Canada Inc., 2007).

The Deviant Canadian Debtor

The reforms we’ve discussed so far signal that a paradigm shift with respect to consumer bankruptcy in Canada is well under way.  A key component of consumer bankruptcy in Canada has, since 1919, been the non-waivable or mandatory consumer bankruptcy discharge.  In a similar, but more mediated fashion than our American neighbors, bankruptcy’s discharge of past debts that cannot be contracted out of has in recent times been regarded as part of economic rehabilitation, which is equated with a “fresh start.” However, the 1997 amendments attempted to effect a move from rehabilitation of the debtor to asking debtors to rehabilitate their debts by making payments out of surplus income.  The 1997 amendments required trustees to assess whether bankrupts could have made a viable consumer proposal and whether they cooperated with the trustee by meeting any surplus income requirements.

Despite the underlying assumption that many bankrupts have an ability to make repayments to creditors, in practice these amendments had a limited impact on the majority of bankrupts who could not make a proposal because they did not have surplus income.  Over a decade later, the current reforms will take the 1997 amendments further, as these reforms impact bankrupts with surplus income and also expand the group included in the paradigm shift to include certain debtors who do not have surplus income but owe tax debt or student loan debt to the government.  While the 1997 BIA amendments had limited practical impact, they signaled a return to the “deviant debtor” construct, which positions bankruptcy law as a response to deviant behavior.  The current reforms hold the potential to further entrench this construct in Canada’s consumer bankruptcy system.  The following are three examples.

Key Canadian Consumer Bankruptcy Reforms

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

Introduction to the Canadian Bankruptcy Reforms

Thank you for the introduction Bob.  I am delighted to have the opportunity to Guest Blog this week about the Canadian bankruptcy reforms. 

On Friday September 18, 2009, the remaining amendments contained in Chapter 36 of the Statutes of Canada, 2007, and Chapter 47 of the Statutes of Canada, 2005 (c.36 and c.47) came into force:  http://www.gazette.gc.ca/rp-pr/p2/2009/2009-08-19/html/si-tr68-eng.html.  The coming into force of these amendments to the Bankruptcy and Insolvency Act (BIA) and the Companies' Creditors Arrangement Act (CCAA) brings to a close a long, frustrating, and confusing reform process.  While there are a number of promising components in the reforms, there is still much that could have been done.  Hopefully we (academics) won’t lose steam in pushing for future reforms and the regulators won’t feel that their work is done.  In today’s post, I’ll restrict my comments to background on the reforms and the process.  In the next post, I’ll briefly highlight the key consumer bankruptcy reforms.  For the last three posts I’ll offer a critical analysis of the consumer bankruptcy reforms.  Outside of the references to the commercial reforms in this post I will not focus on them this week, as time does not permit me to do a thorough job on both consumer and commercial reforms.  That being said there are significant commercial reforms that will have an impact on consumers, in particular the labour reforms.