What You Need to Know about the Bankruptcy and Insolvency Act

The Bankruptcy and Insolvency Act is Canadian legislation that governs the legal procedures for handling insolvency. It sets out the rules for declaring bankruptcy, restructuring debts, and ensuring equitable treatment of creditors while providing options for individuals and businesses to manage financial difficulties.

What is the Bankruptcy and Insolvency Act (BIA)?

The Bankruptcy and Insolvency Act (sometimes called the “BIA” for short) is a federal legislation that sets out the rules and procedures for individuals and businesses that are unable to pay their debts. Its main goal is to provide a fair way for debtors to deal with their financial difficulties while ensuring creditors  (the businesses or people who are owed money) are treated equitably.

Under the BIA, there are different ways to deal with insolvency. Insolvency is the legal term for a situation in which an individual or business is unable to meet their debt obligations when required. The different ways of dealing with debt laid out by this insolvency law include:

• Consumer Proposal
• Division I Proposal
• Bankruptcy

As well as giving insolvency options that are designed to help people or businesses in different situations, the act also establishes the role of Licensed Insolvency Trustees (LITs) – legal professionals authorized to manage bankruptcy and proposal processes.

The BIA is a complex piece of the law that’s designed to help individuals make a fresh start while also making sure the businesses that are owed money receive fair treatment.

If you’re considering a way of dealing with your debt problems that falls under the BIA, a LIT will help you understand exactly what’s involved – but getting an overview of the act will help you decide if you would like to learn more about the solutions it offers.

Who’s Typically Involved in Bankruptcy and Insolvency Act Proceedings?

Official information on the Government of Canada website explains who the stakeholders are in any proceedings relating to the Bankruptcy and Insolvency Act. “Stakeholders” is the term for the various individuals, companies, professionals, and officials who may be involved.

The following sections will explain who the stakeholders may be and what their duties are according to the Bankruptcy and Insolvency Act.

Office of the Superintendent of Bankruptcy (OSB)

This is the federal agency that oversees the administration of the Bankruptcy and Insolvency Act and the Companies Creditors Arrangement Act (a similar act to the BIA that deals with insolvency of large companies).

Its duties include:

• maintaining records of proceedings under the BIA
• recording and investigating complaints
• licensing LITs
• setting and enforcing professional standards for the administration of estates

The debtor/bankrupt

This is the insolvent person or company who owes money and is unable to pay their debts. The individual becomes known as a ‘bankrupt’ if they file for bankruptcy.

According to the BIA, an individual debtor must:

• attend two financial counselling sessions
• assist the Licensed Insolvency Trustee (LIT) in administering the bankruptcy or proposal

If a debtor becomes a bankrupt or files a proposal, they must:

• disclose all of their assets (property and things they own) and debts to the LIT
• let the LIT know about any property disposed of in the past few years
• individuals that go bankrupt are required to hand over all credit cards to the LIT

Creditors

These are the companies, people, or entities that are owed money. Depending on the kind of debt owed to the creditor, they are categorised as either a “secured creditor,” “unsecured creditor,” or “preferred creditor.”

According to the BIA, a creditor’s role can include:

• taking part in and voting at meetings of creditors
• appointing inspectors
• serving as an inspector
• informing the LIT of any irregularities on the part of the debtor or bankrupt

Licensed Insolvency Trustee (LIT)

This is the legal professional licensed by the OSB who organises and manages the proposal or bankruptcy and is an officer of the court.

The LIT’s responsibilities include:

• administering bankruptcies and proposals
• ensuring creditors are dealt with equitably
• investigating the financial affairs of the debtor/bankrupt
• making sure the rights of the debtor are not abused

Types of Insolvency Proceedings Included in the BIA

Proposals

Proposals under the Bankruptcy and Insolvency Act are alternatives to bankruptcy that give individuals or businesses a chance to negotiate a repayment plan with creditors.

There are two types of proposals:

• Consumer Proposals: A Consumer Proposal is for individuals with debts not exceeding $250,000 (excluding a mortgage on their primary residence), offering a way to pay back a portion of their debts over a maximum of five years.
• Division I Proposals: Division I Proposals are for companies or individuals whose debts are larger than $250,000 (outside of a mortgage).

Proposals are designed to allow debtors to avoid the severe consequences of bankruptcy while providing a structured method to address their financial obligations.

Bankruptcy

Bankruptcy is a legal process in which honest but unfortunate debtors declare their inability to pay off their secured and unsecured debts.

Under the Bankruptcy Act, declaring bankruptcy involves surrendering assets (the things you own) to a Licensed Insolvency Trustee who will then realize on these assets to raise money to repay creditors. In most cases when an individual files for bankruptcy, they are able to keep all of their assets.

The process provides relief from debt collection efforts. For individuals, a bankruptcy offers a fresh financial start. However, bankruptcy will usually significantly impact a person’s credit rating and financial standing. When a company goes bankrupt, the business is shut down.

Bankruptcy is usually considered a last resort when other debt management options, like proposals, are not viable.

The Role of the Licensed Insolvency Trustee in More Detail

Although we’ve given an overview of the Licensed Insolvency Trustee above, it’s useful to know a little more about what the LIT does during insolvency proceedings under the Bankruptcy and Insolvency Act  – especially because these will be the people you communicate with the most as a debtor or bankrupt.

LITs are the only professionals legally authorised to administer a bankruptcy or proposal. Before they do, they will talk to you about your unique financial situation and help you decide which is the best route for you – although the final decision will always be yours.

If filing a proposal or bankruptcy is right for you, the LIT firm will administer your insolvent estate. The filing of a  a proposal or bankruptcy under the Bankruptcy and Insolvency Act automatically puts in place  a “stay of proceedings” – which we will explain in more detail next.

A Stay of Proceedings 

If you decide that either bankruptcy or a proposal is right for you, under the Bankruptcy and Insolvency Act a “stay of proceedings” is automatically put in place.  This means that creditors can no longer contact you to collect their debts.  The “stay of proceedings” also prevents creditors from starting or continuing a legal action.  The LIT will notify your creditors that you’ve filed a proposal or bankruptcy.

The stay of proceedings means:

• Calls, letters and other contact from creditors and collection agencies will stop
• Any legal action being taken against you will be stopped
• Action being taken by the Canada Revenue Agency to collect taxes will be stopped
• Most wage garnishments will be stopped (except for certain payments – like child support for individuals)
• Interest that’s being charged on your outstanding balances will be frozen

What Won’t a Stay of Proceedings Stop?

Although a stay of proceedings puts some practical measures in place to help you and your LIT decide on the best next steps for you, it doesn’t cover all debts.

Certain secured debts – such as car loans – are still payable and the creditor can take the vehicle if they believe you may fail to make your payments. Equally, you must continue to make spousal or child support payments, and certain fines and penalties will not be forgiven.

Don’t worry though, when you talk to your LIT about your finances, they’ll help you understand what the stay of proceedings will put a pause to, what debts can be included in your chosen debt solution, and which debts you have to keep paying towards.

Your Responsibilities Under the Bankruptcy and Insolvency Act

Although we touched on the responsibilities of a debtor or bankrupt above, it’s useful to know a little more about what exactly is expected from you should you decide to move forward with bankruptcy or a proposal to your creditors.

Firstly, the BIA is clear that you cannot manage your own bankruptcy or proposal – this has to be done by a Licensed Insolvency Trustee. You will also be expected to assist the LIT throughout the process – providing complete and accurate information about your financial situation, including assets, liabilities, income, expenses, and recent transactions.

Secondly, individuals will be required to attend two financial counselling sessions. These are specialist sessions that are designed to help you manage your finances moving forward and will focus on things like budgeting, money management, and credit use.

If You Move Forward with Bankruptcy or a Consumer Proposal

If it’s decided that bankruptcy or a proposal is the best way forward you will expected to follow certain steps. If you are filing for bankruptcy you will then be considered a “bankrupt” according to the BIA. Whether a bankrupt or filing a proposal, there are additional conditions you must abide by:

If Filing for a Proposal or Bankruptcy: You Must Disclose All Assets and Debts to the LIT

Bankrupt individuals and individuals filing a proposal must provide a complete and detailed list of all their assets and debts to the LIT. This includes any property, vehicles, bank accounts, investments, and personal belongings of significant value. Full disclosure is crucial as it allows the LIT to accurately assess the your financial situation.

If Filing for a Proposal or Bankruptcy: You Must Report Any Disposed Property

Bankrupt individuals are required to inform the LIT about any property they have disposed of in the past few years. This includes any sales, transfers, or gifts of assets. The LIT needs this information to ensure that no assets have been improperly transferred. Such transactions may be reviewed and potentially reversed if it’s decided they have been done inappropriately.

If Filing for Bankruptcy: You Must Hand Over All Credit Cards

Upon declaring bankruptcy, you’ll be expected to surrender all their credit cards to your LIT. This step is taken to prevent any further debt and to protect the creditors’ interests. The LIT will cancel the credit cards to ensure that no new debts are incurred during the bankruptcy process, allowing you to focus on rebuilding your financial stability.

What an LIT Does for You

You’ll notice that throughout the Bankruptcy and Insolvency Act, the Licensed Trustee is noted as working on behalf of the creditors you owe. While this is strictly true – they’re trying to make sure creditors are fairly treated – this doesn’t mean they won’t work closely and compassionately with you. As such, even though these conditions look quite complex and involved – they will make sure you’re guided through the process and each step is explained to you along the way.

In Summary: The Bankruptcy and Insolvency Act

The Bankruptcy and Insolvency Act is federal legislation that governs bankruptcy and insolvency in Canada. The act explains a range of different debt solutions that can apply to individuals or businesses – with different options that depend on the amount of money that’s owed to creditors.

For individuals, the most common ways the BIA applies is in respect of Consumer Proposals and Bankruptcy proceedings. While the BIA ensures that creditors are fairly treated when someone cannot afford to pay back what is owed, the BIA also lays out a series of protections for you, the debtor, to make sure you’re fairly treated throughout your chosen process too.

In order to file a proposal or bankruptcy a debtor is required to work with a Licensed Insolvency Trustee. By doing so, this impartial trustee can make sure creditors are fairly treated and you are guided through the process – as well as receiving the support you need to work towards a better financial future.

Key Takeaways

• Legal Government Framework: The Bankruptcy and Insolvency Act (BIA) is a federal legislation that outlines the rules and procedures for handling insolvency in Canada, providing a fair process for both debtors and creditors.
• Covers Different Insolvency Solutions: The BIA offers various solutions for managing debt, including Consumer Proposals and Division I Proposals for repayment plans, as well as bankruptcy for more severe financial difficulties.
• Role of Licensed Insolvency Trustees (LITs): LITs are licensed professionals who manage the insolvency process, ensuring compliance with the BIA, ensuring creditors are treated equitably, and providing guidance and support to debtors.
• Stakeholders and Responsibilities: Key stakeholders in BIA proceedings include debtors, creditors, LITs, and the Office of the Superintendent of Bankruptcy (OSB), each with specific roles and responsibilities to ensure a fair and orderly process.
• Stay of Proceedings: When a proposal or bankruptcy is filed, a stay of proceedings is automatically put in place,  halting collection actions and legal proceedings, giving debtors protection while they work with their LIT to resolve their financial situation.