Changes to the Bankruptcy & Insolvency Act that will affect the Consumer Debtor

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Good news! On July 7, 2008 two major changes to the Bankruptcy and Insolvency Act were enacted. These changes

  • reduce time one must wait before their student loans can be cleared by a bankruptcy or a proposal from 10 years to 7; and
  • Protect most Registered Retirement Savings Plan, Deferred Profit Sharing Plans and Registered Retirement Income Funds, with the exception of contributions made in the last 12 months.

Not only is the implementation of these changes good those currently investigating the bankruptcy process, they are very positive indicators that suggest the remaining changes are not far off.  A.  However, as of today (Aug. 8, 2008) these are the only changes that have become enacted, the remainder of the changes are still waiting for this bill to be proclaimed into active law and currently the remainder of the changes are not in effect.  Unfortunately, the government has given no indication of when these changes will be implemented, although the fact that the changes relating to RRSP’s and student loans have been implemented is a good sign that the government intends to finalize the process in the near future.  Although it is purely speculation, from my most recent discussions with a number of sources involved with the legislative process, it has been suggested that the changes are most likely to be implemented sometime in the fall of 2008.

Regardless of the timeframe, if you are currently investigating the filing of a bankruptcy or proposal, there are some significant changes that you should be aware of.  Below you will find a brief summary of the most significant amendments contained in Bill C-12 will have the most significant impact on how personal insolvency in Canada operates, the areas affected include:

  • Consumer Proposals Eligibility
    Under the current legislation, in order to qualify to file a consumer proposal, you must have less than $75,000 of debt, not including any mortgages against your principle residence.  Under the new legislation this limit is increased to $250,000 (still excluding the mortgage on the principle residence).
  • Tax Refunds
    Right now the legislation stipulates that if you file for bankruptcy you will automatically lose your tax refunds up to the date you file bankruptcy.  However, most trustees require you to assign all refunds received in the year of bankruptcy to the bankruptcy estate regardless of whether they relate to before or after the actual date of bankruptcy.   Under the new legislation, all tax refunds prior to the end of the year you filed bankruptcy will come into the estate.  While this is clearly a legislative adjustment, it simply streamlining what is currently done in practice.
  • Secured loans At present, a secured creditor (i.e. a car loan) can terminate a loan or a lease simply because someone has filed a bankruptcy.  While this isn’t something that most institutions do, it is technically something that secured creditors are allowed to do.  Bill C-12 will not allow secured creditors to terminate upon the filing of a bankruptcy. As most secured creditors don’t routinely repossess cars upon the filing of a bankruptcy it won’t play a role in many situations, but it will bring a greater certainty in the process and ensure that we can easily predict what will happen when someone does file for bankruptcy.
  • High Income Tax Debt
    Right now if a debtor with significant amounts owing to Canada Revenue Agency for outstanding taxes files for bankruptcy, their automatic discharge will be opposed and the court will determine what is necessary for the bankrupt to be cleared from their debts. With Bill C-12 this changes.  If a debtor owes more than $200,000 in personal income taxes and if this represents greater than 75% of the bankrupt’s total unsecured debt, the bankrupt will not be eligible for an automatic discharge.  Therefore a discharge hearing must be scheduled as follows:
    • For 1st time bankrupts who don’t have any surplus, a hearing will be scheduled after 9 months;
    • For 1st time bankrupts with surplus, a hearing will be scheduled after 21 months;
    • For 2nd second time bankrupts with no surplus, a hearing will be scheduled after 24 months;
    • For 2nd second time bankrupts with surplus, a hearing will be scheduled after 36 months; and,
    • For people who have filed bankruptcy 3 or more times a discharge hearing will be scheduled after 36 months.
  • Automatic Discharges
    Bill C-12 will also change the existing system of Automatic discharges.  Right now, if you have fulfilled all your obligations under the Bankruptcy and Insolvency Act you are eligible for an automatic discharge, unless opposed by a creditor or your trustee.  This system is changing in an attempt to reduce amount of court intervention that is needed.  The new rules state that a bankrupt who has completed his duties and responsibilities as required, will be eligible to have an automatic discharge as follows:
    •  1st time bankrupts with no surplus  will be eligible for an automatic discharge 9 months from the date they filed bankruptcy (unless opposed);
    • 1st time bankrupt with surplus will be eligible for an automatic discharge 21 months from the date they filed bankruptcy (unless opposed);
    • 2nd time bankrupts who have no surplus will be eligible for an automatic discharge 24 months from their date of bankruptcy (unless opposed); and
    • 2nd time bankrupts with surplus will be eligible for an automatic discharge 36 months from the date of bankruptcy (unless opposed).

As you can see there are a number of changes on the horizon, changes that you should consider as you are developing a plan to deal with your current financial situation.  While it is difficult to predict when the changes will be implemented, it is important that you understand how the rules may be adjusted in the near future.  Should you have any additional questions about how Bill C-12 will impact the filing of a bankruptcy or proposal in Edmonton, feel free to contact me directly or to contact one of the other professionals at Goth & Company Inc. and we would be happy to help you understand what these changes will mean for you.