An individual may become insolvent for a variety of reasons. For many people, it may be a matter of over use of credit cards or other credit facilities. For the individual who owns or operates a business, if the business becomes insolvent, the individual may also find himself or herself to also be insolvent. Regardless of the reasons for insolvency, there are options available for individuals under the Bankruptcy and Insolvency Act (the “BIA”).
An insolvent individual has some of the same options as an insolvent corporation; he or she can file a notice of intention to make a proposal, immediately make a proposal or assign into bankruptcy. In addition, an individual who qualifies may make a consumer proposal. Like a corporation, the insolvent individual may also be forced into bankruptcy by a creditor initiating an application for a bankruptcy order in respect of the individual.
Making a proposal to creditors
Where an individual wishes to avoid bankruptcy and has the ability to pay some amount towards his or her debts, making a proposal may be the best option.
Persons owing up to $250,000 (excluding debt secured in respect of a principal residence) may make a Division II consumer proposal under the BIA. There are specific rules for consumer proposals that should be discussed with a Licensed Insolvency Trustee (“LIT”).
An individual also has the option to make a Division I proposal under the BIA. This type of proposal may be made where the individual has initiated the proposal process by filing a notice of intention to make a proposal or where the individual does not otherwise meet the requirements for a consumer proposal.
One key distinction between a Division II consumer proposal and a Division 1 proposal is that if creditors reject a Division I proposal, the debtor is automatically bankrupt, while creditor rejection of a Division II proposal does not automatically result in bankruptcy.
There are various reasons for making a proposal as opposed to assigning into bankruptcy. The debtor may:
- wish to remain in business and a bankruptcy will prevent this;
- need to be a director of a company, but will be disqualified from being a director if a bankrupt;
- have a professional accreditation that could be put in jeopardy if bankrupt;
- want to minimize the risk that a secured creditor will act on its security, such as a mortgage on the family home; or
- have other valid reasons to avoid bankruptcy.
Once a proposal process is initiated, there is an automatic stay of proceedings during which most creditors are not allowed to take or continue any legal action against the debtor in respect of any claims provable in bankruptcy without leave of the court. The exception is with secured creditors who may, in certain circumstances, be allowed to enforce their security.
There is a general expectation that creditors will be better off under the proposal than in the case of bankruptcy. The LIT will, in the report to creditors on the proposal, comment on the effect of the proposal on creditors in terms of their anticipated recovery as opposed to the anticipated recovery in a bankruptcy.
Accordingly, one of the key considerations for anyone making a proposal is to determine how to make the proposal more attractive to creditors than a bankruptcy. For example, if the debtor can offer a payment to creditors that would be funded by a third party which monies would not otherwise be available in a bankruptcy, that may be an attractive feature. A proposal that provides for the sale or use otherwise exempt assets to fund a proposal may also be attractive. Discussion of the options with a LIT or legal advisor can help to focus the individual on whether a proposal having a reasonable prospect of acceptance might be made.
In some situations, an insolvent individual may simply be unable to make a viable proposal and an assignment into bankruptcy may be the only reasonable option. Alternatively, creditors may defeat a proposal, or even initiate bankruptcy proceedings in respect of the individual. A proposal accepted by the creditors might be rejected by the court; or if the debtor fails to perform the obligations under the proposal, it could annulled by the court. In either case a bankruptcy will result.
Regardless of the circumstances resulting in the bankruptcy, the effect on the individual is the same. There are specific duties on a bankrupt under section 158 of the BIA. Such duties include, but are not limited to:
- delivering to the LIT all property (except exempt property), all credit cards, and all books and records;
- attending examinations as provided under the BIA;
- preparing and submitting to the LIT a statement affairs and other information regarding assets;
- advising the LIT about all property disposed of, including by gift or otherwise, in the prescribed period prior to bankruptcy and providing details regarding the disposition;
- attending the first meeting of his creditors as well as other meetings of creditors or inspectors when required; and,
- aiding the LIT in the realization of the property and the distribution of the proceeds among creditors by, for example, assisting in the review of proofs of claim by creditors.
The BIA imposes other obligations on the bankrupt. The individual will be required to provide monthly financial reports regarding household income and expenses and, if there is sufficient income, pay surplus income to the LIT.
Fortunately it is not all doom and gloom for a bankrupt. Unlike corporations who can only come out of bankruptcy by paying all creditors or making a proposal out of bankruptcy, there is light at the end of the tunnel for the individual. In all but the most exceptional of cases, discharge from bankruptcy will eventually be granted.
Moreover, not all the property of the bankrupt must be delivered to the LIT. Some property is exempt. The type and value of exempt assets can vary by jurisdiction. For example, in British Columbia, an individual bankrupt may retain the following assets which are exempt from seizure:
- assets held for more than one year in a registered retirement savings plan, registered retirement income fund or insurance-based annuity or insurance policy if a spouse, child, grandchild or parent is a beneficiary;
- necessary clothing of the debtor and dependents;
- furniture and appliances not exceeding a value of $4,000;
- one vehicle not exceeding $5,000 in value (or $2,000 if payments are being made under the Family Maintenance Enforcement Act);
- tools necessary for work not exceeding a value of $10,000; and
- equity in a primary residence up to $12,000 in the Capital Regional District or the Greater Vancouver Regional District or $9,000 elsewhere in the province.
Deciding on options
The insolvent individual needs to carefully consider whether the proposal route or the bankruptcy route or neither is the best course to follow in his or her situation. Experienced insolvency counsel may be able to assist the insolvent individual in weighing the options.