Filing Bankruptcy: Key Steps in the Bankruptcy Process
Overview of the bankruptcy process
The fundamental principle of bankruptcy is to permit an honest, but unfortunate, debtor to obtain a discharge from his/her debts. Because of your inability to pay your debts, you assign all of your assets, except those exempt by law, to a licensed trustee in bankruptcy (licensed insolvency trustee). Filing for bankruptcy and bankruptcy discharge process relieves you of most debts, and legal proceedings against you by creditors should stop. The principal function of the trustee in a bankruptcy process is to take possession of all the assets of the bankrupt person and sell or dispose of these assets for the equitable benefit of the creditors.
Initial steps in filing for bankruptcy
The key initial steps in filing for bankruptcy are as follows:
- Contact a trustee office in your area and arrange for an in person meeting or telephone consultation to discuss your options.
- Assuming that a bankruptcy filing is the right choice, complete the application form and submit it to the trustee office.
- Meet with the trustee and sign the bankruptcy documents.
Effect of filing for bankruptcy
When the trustee registers the signed bankruptcy documents with the Official Receiver the person making the assignment becomes officially bankrupt on that date.
At this point:
- Your unsecured creditors will not be able to take legal action against you or garnish your salary or wages, unless otherwise authorized by the bankruptcy court.
- Following consultation with the trustee, you may continue making payments on secured debts with respect to those financed assets you wish to maintain ( e.g. house mortgages, leased vehicles, etc.).
- In a summary administration bankruptcy filing, a first meeting of creditors may be called in the first 30 days if 25% or more of the unsecured creditors request it. The purpose of the meeting is to enable the creditors to obtain more information if needed on the bankrupt’s financial situation. The bankrupt will be advised in writing of the time and place of the first meeting of creditors.
- The first counseling session will also likely be completed within the first month or so after the bankruptcy filing. The trustee’s office will contact you with regard to your second counseling session which is usually held a few months prior to your discharge.
Duties of the bankrupt
The bankrupt must adhere to the following basic general duties:
- Disclose all property to the trustee and deliver all non-exempt assets to the trustee.
- Deliver all credit cards to the trustee for cancellation.
- Deliver all business and financial books and records to the trustee, including tax records.
- If applicable, attend at the first meeting of creditors and/or an examination under oath.
- Provide assistance to the trustee in realizing on the bankruptcy estate assets.
For more detailed information, see Duties of the Bankrupt.
The bankrupt is normally “in bankruptcy” and undischarged of his debts for a period of 9 months (see Discharge from Bankruptcy). During this time, the bankrupt must also adhere to the following:
- Must submit monthly income and expense forms to the trustee and any applicable surplus income.
- Must attend two counseling sessions.
- Must advise the trustee of any changes of address, telephone numbers, or employment.
- Must immediately report and relinquish to the trustee, all funds that are won in a lottery, received in an inheritance, or from any other source of this nature.
- Must not obtain any credit over $500 without informing the lender that you are in bankruptcy.
Cost of filing bankruptcy
Trustees normally charge a basic amount to be paid toward the cost of administering the bankruptcy. For example, a common fee may be $260 to start and $170 per month during the bankruptcy process. This amount can vary depending on the circumstances of each individual. The payment can also be applied toward any surplus income which may be required to be paid to the trustee.
Surplus or “excess” income
During the bankruptcy process, you are free to earn a salary or carry on self employment. However, statements of household income and expenses must be submitted to the trustee at the end of each month in order to establish if a “surplus” of income exists. If it does, a portion (generally 50%) of the surplus is required to be paid over to the trustee for eventual distribution to unsecured creditors.
The surplus is determined by comparing the household income to the Standards set by the Office of the Superintendent of Bankruptcy. These standards are updated each year and vary by the number of persons in the household (see Surplus Income). Your trustee can provide current information on the standards, allowable deductions, as well as more details on how the excess income is calculated .
Bankruptcy discharge process
Generally, a bankrupt will be automatically discharged from bankruptcy after a period of between 9 and 36 months depending on whether it is a second bankruptcy and/or the bankrupt is earning surplus income. The automatic discharge occurs unless there has been more than one prior bankruptcy or the discharge is opposed by the trustee, a creditor, or the Superintendent of Bankruptcy. If so, a court hearing will be scheduled.
At a discharge hearing the bankrupt could have his application for discharge suspended for a particular period of time. The court may also impose a conditional discharge, i.e. requiring a partial repayment of the debts. In severe cases, such as where significant bankruptcy offences have been committed or there have been more than three prior bankruptcies, the discharge can be refused altogether.
For more details see Bankruptcy Discharge.
Debts surviving bankruptcy
Once the bankrupt has received an absolute discharge, all debts are extinguished with the exception of the following:
- Child support payments and spousal maintenance.
- Fines or penalties imposed by the court.
- Debts obtained by fraudulent means or fraudulent misrepresentations.
- Non-declared debts that would have the effect of defrauding creditors.
- Student loans where schooling was completed less than seven years prior to bankruptcy.
Some debtors also choose to continue paying on secured debts such as house mortgages or car loans in order to keep those assets.
(Please note: You should consult with your trustee for more detailed information regarding these types of debts.)
Role of the trustee in bankruptcy process
The web site of the Superintendent of Bankruptcy provides the following description of a bankruptcy trustee:
“A trustee in bankruptcy is a person licensed by the Superintendent of Bankruptcy to administer proposals and bankruptcies and manage assets held in trust. The trustee can give a debtor information and advice about both the proposal and bankruptcy processes and make sure that both the debtor’s rights and the creditor’s rights are respected.”
The trustee acts as an officer of the court. In order to file for bankruptcy in Canada, or to file a proposal to your creditors under the Bankruptcy and Insolvency Act, you must use a licensed trustee.
Exempt assets in bankruptcy
You are permitted to keep some assets in a bankruptcy. These exemptions are set by various federal and provincial laws. For personal bankruptcy in B.C., the following assets are exempt:
- $4,000 worth of household goods.
- $10,000 worth of Tools of the Trade
- A motor vehicle worth $5,000 (and $2,000 for maintenance debtors).
- Equity in a home valued at $9,000 ($12,000 if living in the Capital Regional District and the Greater Vancouver Regional District).
- All necessary clothing and all required medical aids (of a debtor or a dependent)
- Registered homestead to a value of $2,500.
- Certain insurance investments, where the designated beneficiary is a spouse, child, grandchild, or parent of the person whose life is insured.
- RRSP investments except for amounts invested in the year prior to bankruptcy.
Income tax returns during bankruptcy
During the bankruptcy year, the trustee must prepare and file income tax returns from January 1st to the date of bankruptcy. The return is called a pre-bankruptcy tax return. Also, the trustee normally prepares a second tax return from the date of bankruptcy to the end of the year. This is called a post-bankruptcy tax return.
If any refunds are forthcoming from these returns, or any prior year return, they will be forwarded to the trustee and will form part of the estate assets.
Further information on filing bankruptcy and bankruptcy process
If you have questions about filing bankruptcy and bankruptcy process in British Columbia, please contact our bankruptcy trustee. We will be glad to help.