8 Chapter 7 – Bankruptcy

While lenders do their best to ensure that each credit application is of sound quality, there are times when a client, for one reason or another, does not fulfill their obligations to the lender and defaults on their loan. There is a process that exists for this type of client, and understanding this process will help a lender remain cognizant of the fact that there is always the potential for a deal to go wrong. In addition, the lender should be aware of what options are available for the client in this type of situation, and the lender should help the client develop a plan to address it.

There are signs that can indicate an individual is experiencing challenges with their financial situation (see the list below). If these challenges are caught early, the lender can provide credit counselling to the client and help them avoid bankruptcy.

Credit counselling is an option for a client who still has the ability to pay but is overwhelmed by high interest rates. If the lender is not equipped to provide credit counselling, they can recommend another financial advisor or other credit counselling organizations to the client.

An individual should only consider bankruptcy after they have tried every debt management option available to them. If these options do not work, then seeking out a licensed insolvency trustee (LIT) would be the next step. An LIT will advise the individual about the effects of filing for bankruptcy and explain all the possible options. A lender should have a good understanding of bankruptcy and be able to support their client when and if the time to file bankruptcy arrives.

To understand how bankruptcy works, it is important to learn about the different parties that are involved in the bankruptcy process. Two important terms that will be used throughout this section are debtor and bankrupt.

Office of the Superintendent of Bankruptcy Canada 

The Office of the Superintendent of Bankruptcy Canada (OSB) is responsible for overseeing all matters for which the Bankruptcy and Insolvency Act (BIA) applies as well as certain issues relating to the Companies’ Creditors Arrangement Act (CCAA). The OSB licenses and regulates the insolvency profession. It also oversees estates in bankruptcy, the reorganizations of commercial organizations, consumer proposals, and receiverships (Office of the Superintendent of Bankruptcy Canada, 2018).

Official Receiver

An official receiver is a federal government employee, specifically in the OSB. They are appointed by Governor in Council. This role has many responsibilities, including accepting all documents that are filed in proposals and bankruptcies. The official receiver also examines bankrupts under oath and will chair the meetings of the creditors (Office of the Superintendent of Bankruptcy Canada, 2015).

Registrar in Bankruptcy

The registrar in bankruptcy is a court official who has a judicial role in bankruptcy court on discharge hearings, bankruptcy and insolvency-related motions, and examinations of the debtors, creditors, and any other parties involved in insolvency matters (Rumanek & Company Ltd, 2022).

Licensed Insolvency Trustee (LIT)

An LIT is a federally regulated professional who provides advice and services to individuals and businesses in Canada who are experiencing debt problems (Office of the Superintendent of Bankruptcy Canada, 2016). The trustee notifies creditors of bankruptcy assignments and will collect, review, and approve submitted claims. Throughout the bankruptcy period, the trustee will collect payments, ensuring that the debtor fulfills their requirements. The trustee also distributes funds to the creditors. An LIT has a fiduciary duty and is obligated by the BIA to act honestly and in good faith; they are bound to the established code of ethics for LITs.

Inspector

An inspector is appointed by the creditors and represents the interests of the creditors during the administration of the bankrupt’s estate. An inspector also has a fiduciary duty and performs their duties impartially and in the interest of the creditors. An inspector will give direction to the LIT regarding any required actions that need to be taken in the handling of the bankrupt’s estate. The inspector also oversees the LIT’s administration to ensure that the LIT acts in accordance with their direction.

Creditors

There are three types of creditors: secured, unsecured, and preferred. Creditors are to participate in and vote at the meetings of the creditors. They have a duty to appoint an inspector and can also serve as an inspector. A creditor informs the LIT of any irregularities that are seen on the part of the debtor of the bankrupt.

Debtor 

The debtor owes money and has been assigned or petitioned into bankruptcy, or they filed a proposal.

To qualify for bankruptcy, an individual must meet the following criteria (Bankruptcy Canada, 2022):

• owes a debt of at least $1000 (minimum);
• the value of the debts exceeds the value of assets; and
• they are unable to pay debts as they come due.

Once the LIT has filed bankruptcy, creditors are barred from contacting the individual. For the debtor, this provides relief from the hassle of dealing with collection calls, legal actions, and garnishment of wages, along with making payments on most debts.

The LIT will prepare and file any outstanding tax returns up until the date of bankruptcy. Any outstanding balances and/or penalties will be included in the bankruptcy filing. An individual’s income tax refunds are considered assets to the bankrupt’s estate.