03 Apr Canadian Bankruptcy (Part One)
Today, weâ€™ll explore something new here on Bankruptcy Law Network: bankruptcy in Canada. Anyone working in consumer bankruptcy these days knows our Bankruptcy Code is in a less-than-ideal condition. U.S. bankruptcy law was â€œreformedâ€ in 2005 with the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act (â€œBAPCPAâ€). Our neighbors to the north also have a new bankruptcy law, and I was curious about how bankruptcy law worked in Canada.
Iâ€™ve been lucky enough to have located a well-recognized authority on Canadian bankruptcy law, J. Douglas Hoyes. Doug is a â€œbankruptcy trusteeâ€ in Canada, which is not the same thing as a bankruptcy trustee here in the U.S. Canada has an oversight agency called the â€œSuperintendent of Bankruptcy,â€ which is akin to our U.S. Trustee Program within the Department of Justice.
According to the Superintendent of Bankruptcy: “A trustee in bankruptcy is a person licensed by the Office of the Superintendent of Bankruptcy (OSB) to administer bankruptcy and proposal estates. An officer of the Court, the trustee has an obligation to look after the rights of the creditors and to investigate the affairs of the debtor.” (I can’t help but applaud the Canadian government for avoiding the acronym “SOB” for this agency. Good catch on that one, guys.)
So a Canadian bankruptcy trustee is a combination of debtorâ€™s attorney, creditors’ attorney, and trusteeâ€”one stop shopping.
Doug has appeared on Canada AM (Canada’s Most-Watched Morning Show), Till Debt Do Us Part, CBC Newsworld and CTV’s Provincewide. He and fellow firm shareholder Ted Michalos appeared before the Senate Banking, Trade and Commerce Committee in February of 2008 to testify about proposed changes to Canadian bankruptcy legislation. (Apparently, the Canadian government actually has hearings and takes testimony prior to overhauling their bankruptcy legislation.)
Russ DeMott: Doug, thank you for agreeing to spend some time on this interview with me. Before we begin, Iâ€™d like to establish a few ground rules.
Doug Hoyes: Youâ€™re welcome, itâ€™s my pleasure. What are the rules you propose?
Russ DeMott: We canâ€™t discuss your health care system.
Doug Hoyes: Is that it? No discussing our health care system?
Russ DeMott: None. It gets people really riled up down here.
Doug Hoyes: Weâ€™ve heard that. No problem. Weâ€™ll stay off that subject.
Russ DeMott: Letâ€™s divide this into two areas: exemptions of assets and distributions to creditors. Tell me about your exemptions up there.
Doug Hoyes: Exemptions vary by province. In Ontario (our largest province, which has exemptions that are similar to those in the rest of Canada), the following assets are exempt from seizure by the trustee, up to the following amounts:
- Household furniture – $11,300
- Tools of the trade – $11,300
- Clothing and personal effects – $5,650
- One motor vehicle – $5,650
In addition, in Canada, an RRSP (Registered Retirement Savings Plan) is exempt from seizure, except for any contributions made in the year prior to bankruptcy.
Russ DeMott: What about the homestead exemptionâ€”the amount of equity the debtor may retain in her home?
Doug Hoyes: There is no homestead exemption in Ontario.
Russ DeMott: Give us an overview of how the Canadian bankruptcy system works.
Doug Hoyes: The minimum bankruptcy period in Canada for a first time bankrupt is nine months (or 24 months for a second bankruptcy). During that period the bankrupt is required to provide proof of their family income (such as copies of pay stubs) to the trustee each month. If the bankrupt has income higher than the threshold set by the government, they are required to pay a penalty of half of their surplus income to the trustee, for distribution to the creditors. Hereâ€™s a simple example:
A single person (weâ€™ll call him Joe Smith) with no dependents in 2011 has a surplus income threshold of $1,926. If Joe has net income (take home pay, after taxes) of $2,526 in the month, he is $600 over the limit, so he is required to make a payment of $300 to the trustee.
The trustee is required to average the bankruptâ€™s income for a minimum of the first six months of the bankruptcy (for a first time bankrupt), and if the bankruptâ€™s average income is more than $200 over the limit (or over $2,126 in the above example), the bankruptcy is extended for an additional 12 months, and the bankrupt is required to make that additional surplus income payment ($300 in this example) for a further 12 months.
The threshold increases based on your family size.
In simple terms, the more you earn while bankrupt, the more you pay, and the longer you pay.
So, if a prospective bankrupt believes they may have surplus income (perhaps due to getting a raise, or overtime, or a bonus), or if they own assets that are not exempt and will be seized in a bankruptcy (such as equity in a house, or a tax refund), they may instead decide to file a consumer proposal, which is a negotiated settlement with the creditors.
Hereâ€™s another example: Joe Smith from the above example expects to pay $300 per month for 21 months in his bankruptcy based on his current income, or $6,300. He also expects to get a tax refund of $2,000 for the year of bankruptcy (which will go to the trustee), and he may get overtime and be required to pay even more, so his bankruptcy may end up costing him up to $10,000. He therefore decides to offer a consumer proposal to his creditors where he pays $200 per month for five years, or $12,000. Itâ€™s a win-win: the creditors get more than they expected to get in the bankruptcy, and the debtor pays a fixed $200 per month, which is more manageable than the $300 or more he may have paid in the bankruptcy.
Russ DeMott: With the consumer proposal, must all the creditors accept the proposal? What if one creditorâ€”especially one holding a large debtâ€”rejects the proposal.
Doug Hoyes: Each creditor gets one vote for each dollar they can prove they are owed. A simple majority of 50% +1 is required for approval of the proposal, so if one creditor holding more than 50% of the unsecured debt votes against the proposal, the proposal is rejected.
Russ DeMott: That’s interesting. Here it’s sort of an all-or-nothing process, and usually the only means of settlement is a lump sum settlement, which only works in rare cases in which clients have some source of funds for their debt settlement.
The Canadian system, like ours in the U.S., has a means test. In my next post, Canadian Bankruptcy (Part Two), Iâ€™ll ask Doug to explain how the Canadian means test works. We’ll also explore how materially different it is from our means test here in the U.S.
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