Bennett on Consumer Bankruptcy. Frank Bennett

creditors to pay something less, as a general rule, than the full amount that is owing to the creditors. There are many rules under the Act that apply to consumer proposals.

      Here is an example of a consumer proposal: The consumer debtor may offer (and the creditors may choose to accept) 40 cents on every dollar that is owed. If the consumer debtor owes $100,000 to all his or her ordinary creditors, the debtor may propose to pay $40,000 with the result that the debtor will be relieved or discharged from paying the balance of $60,000. If the creditors vote against the terms of the proposal or say “no,”then the consumer debtor is not automatically put into bankruptcy. If the creditors vote “yes”or in favour of the proposal, the consumer debtor will not be put into bankruptcy, but the debtor is bound by the terms of the agreement. In these cases, the creditors will accept the good intention and good faith of the consumer debtor to make a deal, thereby the consumer debtor avoids bankruptcy and going through the bankruptcy process from meetings to discharge.

      Over the last 20 years, the federal government has amended the Bankruptcy and Insolvency Act several times to permit a consumer debtor to take advantage of the provisions relating to consumer proposals. Division II of Part III of the Act specifically deals with consumer proposals. The consumer proposal is discussed later in this book, and particularly, in Chapter 10. It is the recommended solution if the consumer debtor has gainful employment. Creditors will receive something rather than nothing in a bankruptcy; the consumer debtor then is not bankrupt.

      3.1 Qualifying for bankruptcy

      The consumer debtor must meet certain conditions under the Bankruptcy and Insolvency Act in order to go bankrupt:

      • The consumer debtor must owe at least $1,000 to any of his or her creditors.

      • The consumer debtor must commit “an act of bankruptcy.”

      While there are many acts of bankruptcy, the usual one connected to consumers is that the consumer must be unable to meet the regular bill payments to creditors according to their terms. For example, if the debtor does not pay his or her bills within 30 days as promised, then the debtor is unable to pay those debts in the ordinary course; or the debtor must not have enough property which, if sold at a fair market sale, would be sufficient to pay all the creditors in full. For instance, if the debtor were to list all his or her personal possessions and then have a liquidator value them, the likelihood is that their total value would be very low compared to the size of the debt.

      If the consumer debtor meets these two conditions, the consumer debtor is considered insolvent. The consumer debtor then qualifies to go bankrupt voluntarily or he or she can be put into bankruptcy by any one of the creditors if the creditors are willing to go to court to do it.

      3.2 Alternatives to bankruptcy

      While the consumer debtor may qualify under the criteria above, he or she may wish to avoid bankruptcy if it is possible. Many debtors do not want to go bankrupt as they consider bankruptcy to be irresponsible and a failure financially.

      They may also consider their reputation in the community and the stigma attached to bankruptcy, although that factor seems to be diminishing over the last 30 years.

      Last, but not least, debtors want to protect their credit rating. Once in bankruptcy, it may take years to re-establish credit to what it was formerly.

      There are alternatives to bankruptcy and the consumer should carefully consider them before going bankrupt:

      • The consumer debtor may make a deal or enter into a proposal with his or her creditors.

      • The consumer debtor may be able to obtain a debt consolidation loan from one bank so that he or she can pay all the other creditors on a minimum monthly payment

      • The consumer debtor may obtain a consolidation order in Small Claims Court, or in some provinces an order directing payments to creditors.

      • The consumer debtor’s income may increase to cover the carrying charges and pay some principal.

      • The consumer debtor’s expenses may decrease.

      4. Exempt Property

      When the consumer debtor goes bankrupt, all of the property that is owned by the debtor and property that the debtor inherits or acquires after bankruptcy up to the time the debtor gets out of bankruptcy automatically belongs to the trustee in bankruptcy without any need or requirement to transfer or register ownership, except for real estate. The trustee in bankruptcy must sell the debtor’s eligible or non-exempt property and then distribute the sale proceeds amongst the creditors. Eligible property includes all kinds of property wherever it is whether inside or outside Canada. Property that is acquired by the bankrupt after bankruptcy up to the time of discharge is called “after-acquired” property. It usually includes wages, commissions, inheritances from family members, and winnings from lottery tickets.

      However, not all property goes to the trustee. In each province and territory, there are exemptions for bankrupts. These exemptions provide that the consumer debtor, now the bankrupt, can keep certain kinds of property. In other words, creditors cannot seize this type of property. While this is covered a little later in the book, in Chapter 6, the consumer debtor should note that he or she can keep most of the wages, vehicles, tools of the job, generally all clothing, furniture, pension funds, RRSP money with the exception of money deposited within the last year before bankruptcy, insurance proceeds, and proceeds arising out of a personal injury action.

      5. Protection Against Lawsuits

      Once the consumer debtor is in bankruptcy, a creditor who has a claim provable in the bankruptcy is stopped or prevented from starting any lawsuit or continuing any lawsuit against the bankrupt or the bankrupt’s property. The bankruptcy operates as a stay of legal proceedings by most creditors. These creditors have a right to look to what property the bankrupt had at the time of bankruptcy for payment. They are not entitled to take any legal proceedings against the bankrupt except with the permission of the court. This permission is rarely given except in the cases of fraud, misrepresentation, or with respect to the enforcement of a support order or in the case of a motor vehicle claim where there is insurance coverage. Bankruptcy does not stop or stay criminal investigations or contempt proceedings.

      Secured creditors can enforce their security against the bankrupt. They do not need the court’s permission to repossess the person’s property after bankruptcy. For example, a secured creditor could seize the bankrupt’s vehicle if payments are in arrears or a secured creditor could foreclose on the bankrupt’s home for arrears of mortgage payments or taxes.

      Therefore, the bankrupt can be assured that the sheriff or bailiff will not seize his or her assets or take garnishment proceedings without a special court order being made.

      5.1 Wage assignments

      Many consumer bankrupts give creditors a wage assignment as security for loans. A wage assignment is an agreement between the debtor and the employer which gives the employer the right to deduct amounts from the debtor’s wages to pay a creditor who has a judgment. When a consumer debtor goes into bankruptcy, the wage assignment does not continue. Instead, the bankrupt is now required to pay a portion of his or her surplus income to the trustee in bankruptcy for distribution to all the creditors.

      5.2 Licences

      Sometimes, a consumer debtor may hold a licence under legislation that regulates the industry. For example, a consumer debtor may require a real estate broker’s licence, a licence to sell securities, a licence to sell used vehicles, and other types of licences that are issued by provincial and federal governments. Each type of licence has to be reviewed under its applicable legislation to see what happens on bankruptcy. The consumer debtor should consult the governing body that issues and regulates the licence before making an assignment into bankruptcy. Some legislation allows an undischarged bankrupt to continue earning a living while