For most individuals and businesses, declaring bankruptcy is a once-in-a-lifetime event. Not surprisingly, many have little idea what to expect. Our post this week provides a brief, general overview of the process for those considering bankruptcy as a means of dealing with insolvency.
Evaluating the options
Bankruptcy is an option of last resort. Discussing a dire financial situation with an insolvency lawyer can be a wise first step, especially where there are contentious issues with creditors, complex business structures or where significant assets or amounts are involved. An integrated financial and legal analysis may ultimately reveal other viable alternatives, short of bankruptcy, for managing the insolvency. Even if bankruptcy is ultimately the only option, certain strategic decisions by the debtor or others prior to taking that final step may be appropriate.
Working with a licensed insolvency trustee
Where bankruptcy is determined to be the best available solution, a licensed insolvency trustee (LIT) is required to prepare the necessary documentation to initiate the bankruptcy. The LIT will then administer the bankruptcy estate for the benefit of the bankrupt's creditors.
The first step on the road to bankruptcy is for the LIT to prepare an Assignment for the General Benefit of Creditors which is signed by the debtor and then filed by the LIT with the Office of the Superintendent of Bankruptcy (Superintendent). Once the Superintendent issues a Certificate of Appointment confirming the appointment of the LIT as trustee of the bankrupt's estate, the debtor is bankrupt.
Unsecured creditors are stayed
The first benefit of the bankruptcy is that unsecured creditors (but not secured creditors) are stayed from initiating or continuing legal proceedings related to the property or financial obligations of the bankrupt. This can be a significant benefit to an individual who may have been hounded by creditors or burdened by legal actions by creditors.
Vesting of the bankrupt's assets in the LIT
On bankruptcy, but subject to the interests of secured creditors, all of the assets of a corporate bankrupt and all assets of an individual bankrupt that are not otherwise exempt from execution under provincial law or the Bankruptcy and Insolvency Act (BIA) will vest in the LIT. The LIT will value the assets. Those assets, if not in cash or cash equivalents or otherwise charged in favour of a secured creditor, will be sold or otherwise realized upon for ultimate distribution to creditors with proven claims in accordance with the order of priority set out in the BIA after the costs of the bankruptcy have been paid.
Notification and meeting of creditors
The LIT notifies all creditors, as disclosed by the bankrupt, of the bankruptcy. If the bankrupt is unaware of a claim, but later is notified that a claim is asserted, the bankrupt has an ongoing obligation to inform the LIT of such claims.
The LIT will provide creditors with, among other information, a copy of the bankrupt's Statement of Affairs setting out the bankrupt's assets and liabilities and a proof of claim form. Creditors will be invited to complete and file with the LIT a proof of claim in which the creditor will set out the basis for the claim against the bankrupt and the amount alleged to be owed. The LIT, with information or assistance from the bankrupt, will assess the proof of claim and determine whether it should be accepted in the amount presented, accepted at a reduced amount, or disallowed in total. The bankrupt can play an important role where someone claims to be a creditor, but either does not have a legitimate claim or has exaggerated the claim.
While a meeting of creditors is not always required, the creditors may request one. Creditors with accepted claims can play an active role in bankruptcy process by either directing the LIT in certain aspects of the administration of the estate, for example, with respect to instructing the LIT to pursue certain claims to recover assets of the bankrupt, or by appointing representatives to be inspectors of the estate who will provide oversight and direction to the LIT. If inspectors are appointed, their permission is required before the LIT can take certain steps in the administration of the estate, such as selling the property of the bankrupt, bringing or defending legal proceedings related to the property of the bankrupt or settling claims by or against the estate.
Examination of the bankrupt and others
Following the bankruptcy, the bankrupt (or in the case of a corporate bankrupt, a director or officer of the bankrupt) will be examined under oath by the official receiver. The purpose is to investigate the bankruptcy and circumstances surrounding it, and may involve close scrutiny of the debtor's conduct and disposition of property.
Other examinations of the bankrupt may also occur, such as one by the LIT if authorized by the creditors or inspectors or, with leave of the court, by other parties such as a creditor or the Superintendent. The court can also authorize the examination of persons other than the bankrupt who may have knowledge of the bankrupt's property or affairs.
Financial counselling and surplus payments by bankrupt individuals
At some point during the bankruptcy, an individual who is bankrupt is required to attend two financial counselling sessions. The aim is to provide instruction on financial management with a view to helping the bankrupt avoid another bankruptcy in future.
An individual who earns income in excess of what is required to maintain a reasonable living standard in accordance with the guidelines as set under the bankruptcy legislation will be required to make payment of a portion this surplus to the LIT during the course of the bankruptcy. These proceeds will be distributed in accordance with the order of priority set out in the BIA.
Discharge from bankruptcy
Few corporate bankrupts are discharged from bankruptcy as to achieve that goal all creditors must be paid in full. In some cases, it may be possible for a corporate bankrupt to make a proposal out of bankruptcy under which proposal creditors would agree to accept less than the full amount owed.
For an individual, discharge from bankruptcy is the ultimate goal. For bankrupts with no surplus income, discharge may be automatic after nine months in bankruptcy, assuming neither the LIT nor any creditors oppose the discharge. If there is objection, the bankrupt must satisfy the court that a discharge should be granted, either with or without conditions.
For a bankrupt with surplus income, an automatic discharge may occur after 21 months in bankruptcy, subject again to any objection by the LIT or one or more creditors.
Early intervention and sound legal counsel can provide the best chance of successfully navigating financial insolvency, managing debt and, ideally, avoiding bankruptcy.