Bankruptcy is a legal mechanism that allows a person in financial difficulty to use a large part of his property to pay off his debts. The property is given to a person called the "trustee" who manages it. The trustee will try to get as much money as he can out of the property. He will then remit the money to the creditors, depending on their rights.

The person who declares bankruptcy is called the "bankrupt". After some time has passed, the bankrupt will be "discharged". This means that the bankrupt will no longer have to pay most of the debts that he owed before his bankruptcy, even if his creditors didn’t receive all of the money that they were owed.

There are two kinds of bankruptcies: the one where the person in debt decides on his own to give his goods and the one where his creditors force his hand.

One of the special effects of bankruptcy is stopping law suits and other measures taken against the bankrupt to force him to pay.

Any “insolvent” person can declare bankruptcy if he meets certain conditions:

• He resides, carries out activities or has property in Canada;
  
• He is not already undergoing bankruptcy;
  
• He has debts that total $1,000 or more.

A person is considered “insolvent” if he is in one of these three situations:

• He is unable, for one reason or another, to pay what he owes when it is due.
  
• He stopped paying his usual obligations (taxes, bills from service providers, credit card bills, suppliers, employees, etc.).
  
• All of his property is insufficient to pay off all of his debts.

The word “person” includes deceased persons, partnerships, cooperatives, and companies, except for those of the financial or railway sectors.

If you are thinking about declaring bankruptcy, you must consult a bankruptcy trustee. The trustee will evaluate your financial situation and determine if the Bankruptcy and Insolvency Act allows you to declare bankruptcy.

You can find a bankruptcy trustee by looking in the phonebook or by visiting the website of the Superintendent of Bankruptcy.

A trustee is a person who manages the bankruptcy. In order to obtain his licence, he must have management skills and knowledge of the law. The trustee is not a government employee. His expenses and fees are paid from the bankrupt’s property, and not by the government.

As a part of his work, the trustee meets people who are in financial difficulty, analyses their situation, and makes recommendations on the various options that are available to them. If the trustee recommends bankruptcy, he takes care of the process.

If bankruptcy is the chosen option, the person in financial difficulty becomes “the bankrupt”. The trustee seizes all of the bankrupt’s property, which can legally be seized, no matter where that property is located. For example, if the bankrupt’s snow blower is at his brother-in-law’s house, the trustee can force the brother-in-law to give it to him. The trustee can also seize any property you get during the bankruptcy, as well as the part of your salary that exceeds your everyday needs.

The trustee applies the law. For example, he makes sure that neither the bankrupt nor any of the creditors abuse the bankruptcy process or hide things.

The trustee must identify the creditors, notify them of the bankruptcy, and ask them to attend a meeting. In order to participate in the meeting and, eventually, be paid, each creditor must provide the trustee with proof of the debt that the bankrupt owes him. Usually, the trustee determines whether or not the proof of the debt is valid. He must allow other creditors to look at these proofs.

The trustee protects the interests of the creditors. The creditors can moreover meet to approve the trustee’s management or to appoint people who will supervise the trustee’s management. The creditors can even choose to replace the trustee!

Finally, the trustee liquidates all of the seized property: this means that he sells the property to obtain money to partially reimburse the creditors. To do this, the trustee can carry out a sale:

• By a simple contract of sale;
  
• By tender (in other words, a “call for offers”. The people interested in getting the property send a bid letter indicating the amount they are willing to pay for the property);
  
• By public auction (that is when property is sold to the highest bidder at an auction).

Sometimes, yes. In order to be paid, a creditor can make an application to force his debtor to declare bankruptcy. The creditor must, however, show that:

• He is owed a debt that is not disputed;
  
• The debtor’s debts add up to at least $1000;
  
• The debtor committed an “act of bankruptcy” in the six months before the application.

An “act of bankruptcy” is an action that leads to the conclusion that the debtor is in financial difficulty. For example, the debtor’s property is seized, he hides his property in another country, he stops paying his bills and other debts, etc.

The creditor who wants to force his debtor to declare bankruptcy must apply to the court. The debtor will have the opportunity to present his arguments against having to declare bankruptcy, in particular by proving that he can pay his debts.

The first thing to do is to find the trustee who is in charge of the file.

In order to confirm that your debtor is going through bankruptcy and to find out the name of the trustee managing the file, you can consult the website of the Office of the Superintendent of Bankruptcy or call your regional office.

Next, you must communicate with the trustee and provide him with proof of the amount owed to you. You need to act as quickly as possible. If the trustee doesn’t know that you exist, nothing prevents him from distributing all of the money he has to the other creditors.

No. Some of your property will not be used to pay off your creditors. The trustee cannot seize this property.

The rules about which property cannot be seized are different for every province. In Quebec, when property is seized during a bankruptcy, the debtor has the right to keep certain property, including:

• His RRIFs and RRSPs, apart from the money that he contributed to them during the 12 months before the bankruptcy (except in certain situations);
  
  
• Up to $6000 worth of the property in his main residence, which he uses for his and his family’s basic needs. The trustee determines the value of each item of property;
  
  
• Food, fuel, linen and clothes necessary for his and his family’s life;
  
  
• Instruments of work necessary for his profession or work (a plumber’s toolbox, a programmer’s computer, a taxi driver’s or a travelling sales person’s car);
  
  
• Family papers and portraits, medals and other decorations, as well as property used to compensate for his or a member of his family’s disability.

The family residence also has a particular protection. See the question "Can the family residence be seized during bankruptcy?"

A house that is the main residence cannot be seized and sold to pay the creditor if the debt is less than $10,000, except if:

• the debt is secured by a prior claim or a hypothec (other than a legal hypothec resulting from a judgement);
  
• the claim is a claim for support;
  
• the house is already being seized.

Note that the spouse of the bankrupt can oppose the seizure if she owns (or co-owns) the house. A co-owner of a house can oppose the seizure of the house by the trustee. This is because the co-owner has the right to prevent the sale of the house by buying the part that belonged to the bankrupt.

If the spouse doesn’t own or co-own the house, she cannot oppose the seizure even if she registered a notice of family residence for the house.

To find out how to oppose a seizure, read our Infosheet called Seizures, certified reports, service... the work of bailiffs.

If your spouse declares bankruptcy and you have a joint bank account together, the trustee cannot seize all of the money in the account. In fact, the trustee must separate your money from the money of your bankrupt spouse. If the trustee seizes all of the money, you can oppose this seizure.

No. There are certain debts, which due to their nature, are not eliminated by personal bankruptcy. This is the case for:

• Debts resulting from support payments;
  
• Debts resulting from a fine, a penalty, a restitution order, or another similar penalty imposed by the court;
  
• Debts resulting from a civil liability trial for sexual assault, assault causing injury or causing death;
  
• Debts resulting from fraud, false declarations, or illegal acts;
  
• A neglected or forgotten creditor’s rights to seek reimbursement for the debt owed to him because the bankrupt failed to reveal his existence to the trustee;
  
• A student loan, if the bankrupt stopped attending school less than 7 years ago. A judge can, in exceptional cases, bring this period down to 5 years if he is convinced that the bankrupt made efforts to pay off the loan and that he will be unable to do so.

Thus, not only do all of these debts continue to exist even after the discharge of the bankrupt, but the interest related to these debts continues to accumulate (See the question “How does bankruptcy end?”).

During bankruptcy, it is still possible for the bankrupt to get credit from businesses and financial institutions. Even though it may be difficult to get credit because of your precarious financial situation, there is no law that says that you can’t get credit because of bankruptcy.

However, when applying for credit, the bankrupt must be open about his situation and inform his future creditor that he is bankrupt. Not informing someone who is giving you credit that you are bankrupt is an offence that can be punished by a $5000 fine, one year of imprisonment, or both.

First of all, as many people know, bankruptcy affects a credit report for a period of 6 to 7 years after the bankrupt is discharged. If it isn’t the first bankruptcy, this period could be extended up to 14 years. That said, a negative indication about bankruptcy in a credit report doesn’t prevent someone from getting credit. A person can always convince a credit provider to trust her.

Bankruptcy can also affect employment. Certain professional orders refuse to have a member who is bankrupt. Up until a discharge is given or, in certain cases, until a committee has given a favourable verdict to return to work, a bankrupt person cannot practice her profession. This is the case with lawyers and notaries.

It is also impossible for a bankrupt to start or manage a company or to continue to be on the board of directors.

Bankruptcy ends with the “discharge” of the bankrupt. The discharge, as indicated by its name, means that the process is finished and that the bankrupt is free of his debts.

For a bankrupt who is undergoing his first bankruptcy, it is possible to be discharged automatically. In fact, if the creditors don’t oppose and the bankrupt has used the consultation services set out in the law, after 9 months, the bankrupt can be discharged. The certificate of discharge that the trustee must give to the bankrupt proves the discharge.

But the bankrupt must go before a court to be discharged if the bankrupt isn’t undergoing his first bankruptcy, if the bankrupt did not use the consultation services, or if the bankrupt is not eligible for an automatic discharge. The court may give the bankrupt:

• An absolute discharge – the bankrupt is discharged of all of his dischargeable debts;
  
• A suspended discharge – the bankrupt will obtain an absolute discharge after a certain amount of time determined by the court without other conditions;
  
• A conditional discharge – the bankrupt will be discharged only if he respects the conditions that were imposed in the judgement by the court;
  
• A refused discharge – this type of judgement is exceptional and is rendered in cases of severe fraud, multiple bankruptcies (more than two times) or in other cases of abuse.

There are alternatives other than bankruptcy to get out of a financial crisis. In fact, bankruptcy should always be seen as the last option. It is important to know that a court can refuse a bankruptcy which is rashly declared or delay the bankrupt’s discharge.

The main options that aim to make it easier to manage debts are:

Debt consolidation

This solution consists of taking out a loan from a financial institution in order to pay all of one’s creditors. This option allows the debtor to pay one creditor instead of many, which makes managing one’s finances easier. The interest rate is also generally better.

For example, Marie-Claude owes $1500 on one credit card, $1750 on another credit card, and $825 to the garage. She decides to borrow $4075 from her usual financial institution. With the $4075 loan, she pays off all of her debts. Then she starts to repay the loan.

Volontary deposit

Voluntary deposit allows the debtor to deposit, from each pay, part of his salary at court; the court then takes care of distributing the money amongst the different creditors. The debtor can register for voluntary deposit by going to the civil court clerk of the Court of Quebec closest to him. He will have to provide certain information and prepare a list of his creditors and the amounts due to them.

A debtor in difficulty who uses this alternative avoids having to declare bankruptcy, and his creditors cannot seize his salary. But, this alternative does not protect the debtor against seizure of his immovable property (house, chalet, etc.) nor against the seizure of other property (vehicles, money in a bank account, investments, etc.).

The proposal in bankruptcy

This is a contract between the debtor and his creditors that attempts to settle the debts. In this contract, the debtor proposes to his creditors the amount of money that he intends to pay to each of them and the moment when he will be able to make the payments. After this, the creditors must meet to accept or refuse the debtor’s offer by a majority vote. If the creditors accept, the proposal will then be sent to the court and it will become the new contract between the debtor and the creditors.