Area of Law: Credit, Debt and Bankruptcy
Answer # 259
Filing for personal bankruptcyRegion: Ontario Answer # 259
Bankruptcy is a legal process, regulated by the Bankruptcy and Insolvency Act, by which you may be discharged from most of your debts. Filing for personal bankruptcy is a 5 to 10 step legal process, depending on the specific circumstances. The whole procedure from the day you file for bankruptcy, to the day you are discharged from bankruptcy and your debts are cleared, is about nine months.
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Step 1: Find and meet with a Licensed Insolvency Trustee (LIT)
The first step is to find a Licensed Insolvency Trustee, or LIT. An LIT is a person licensed by the Superintendent of Bankruptcy to administer proposals and bankruptcies, and is often an accountant. The trustee represents your creditors and is an officer of the court.
Once you have decided upon an LIT, arrange a meeting with them. To prepare for your meeting, you should gather together as much of your financial information as possible, such as your most recent credit card statements and loan documents. At your first meeting, the LIT will explain the bankruptcy procedure, evaluate your financial situation and help you decide whether bankruptcy is your best option. You may also discuss the their fee for handling your bankruptcy. Most charge in the range of $2,000-$3,000. This fee must be paid by the person filing for bankruptcy. If you do not have enough money to cover the fee up front, your LIT can make other arrangements with you. For example, the LIT may be able to collect the fee from your tax refund, or may accept monthly payments. If your income after expenses exceeds certain levels, you will be required to pay a portion of the excess to the LIT while you are in bankruptcy.
Step 2: The LIT files paperwork
After considering your options with the LIT, if you decide to pursue bankruptcy, the LIT will complete the necessary documents and file them with the Federal Government’s Office of the Superintendent of Bankruptcy (OSB). The LIT will also notify your creditors that you are filing for bankruptcy, and their phone calls to you will stop. Once you have filed for bankruptcy, you are considered to be an “undischarged bankrupt” and you are officially “in bankruptcy.” All legal claims against you by your creditors will stop, and all calls and questions will be handled by your trustee.
Step 3: Sale of your assets, if required
After your LIT files your paperwork, the third step involves them selling your assets, where your assets exceed those exempted by provincial and federal laws, and holding the proceeds in trust for distribution to your creditors. This includes all existing assets as well as those acquired prior to the discharge of your bankruptcy. Also, during the bankruptcy, you may also be required to make payments to your LIT for distribution to your creditors. These payments are called surplus income payments. The LIT determines how much you may be required to pay. This is calculated by taking into account your total income, income standards issued by the OSB, and your personal and family situation.
Gifts and transfers of property before filing for bankruptcy
Any gifts or transfers of property that you may have made just prior to filing for bankruptcy need to be divulged to your LIT and can be reversed by the court. Any transfers you made in the year before you filed for bankruptcy (five years for related parties) will need to be reviewed by your LIT. You will also need to tell your LIT if you made any payments or gave preferential treatment to any of your creditors in the three months before declaring bankruptcy (12 months for related parties).
Step 4: The LIT notifies your creditors of the bankruptcy
Upon filing for bankruptcy, the LIT will notify all of your creditors. Depending on the expected size of your estate and whether there are requests from creditors or the OSB, there may be a meeting of creditors.
Step 5: Attend creditors’ meeting, if requested
If you are required to attend a meeting with your creditors, this takes place approximately three weeks after filing for bankruptcy. This meeting will only be scheduled if more than 25% of your creditors request it. At this meeting, your creditors are informed of your financial situation.
If this is the first time you have declared bankruptcy, the value of your assets is small, and your creditors are large companies such as credit card companies and banks, they will probably not require a meeting. The purpose of the meeting is: to allow creditors to obtain information about the bankruptcy; confirm the appointment of the trustee; appoint up to five inspectors to supervise the administration of your estate; and allow creditors to give directions to the trustee.
Step 6: Attend an examination by an OSB officer, if required
The sixth step after filing for bankruptcy is a possible examination by a representative of the OSB. The purpose of the examination is to question you regarding the details of the bankruptcy and the disposition of your property. The OSB only requests such examinations in certain circumstances, where they are not satisfied with some of the information they have received.
Step 7: Financial counselling seminars with trustee
In most cases, a bankrupt will not have enough assets for a sale, and will not be required to attend a meeting with the creditors or undergo an examination by an OSB officer. Usually, once the bankruptcy paperwork is filed, the next step for the bankrupt is to attend two mandatory financial counselling sessions with the LIT. The first counselling session will generally take place within three weeks of filing for bankruptcy. You and your LIT or one of their staff will go over possible reasons for your financial difficulties, your financial management skills, and how you plan to budget in the future. Your second counselling session will generally take place about four months after the date you filed for bankruptcy. During the second session, you and the LIT will again discuss financial planning strategies and effective budgeting.
Step 8: Your LIT prepares a report to the OSB, if required
In certain circumstances, the LIT prepares a report regarding your application for discharge and submits it to the OSB. Although this report is not usually required, it can be helpful to the bankrupt if, for example, you were convicted of an offence under the Bankruptcy and Insolvency Act, or your conduct before or after bankruptcy might influence the court to refuse your discharge. It gives the LIT an opportunity to further describe your financial situation and analyze the various details of your bankruptcy, including the reasons for filing, and can give further details about your conduct.
Step 9: Discharge hearing, if required
If it is not your first time filing for bankruptcy, or if one of your creditors objects, it may be more difficult to have your debts discharged. For those who do not qualify for an automatic discharge, the LIT will make an application for discharge to the court. At the hearing, the LIT will present evidence to support your application. If the LIT had previously submitted a report to the OSB, the judge will review it. The court can make one of the following four orders:
- Absolute Discharge. This means that your debts are cleared as of the date your bankruptcy was filed, and no further action is required on your part.
- Conditional Discharge. This requires you to fulfill certain conditions before your absolute discharge will be granted. Usually, it means that you will have to make certain payments.
- Suspended Discharge. This is an absolute discharge that does not take effect until a future date.
- Discharge Refused.
Step 10: Final Discharge
The final discharge is the last step in a bankruptcy procedure. In most cases, first-time bankrupts will receive an automatic discharge nine months after filing for bankruptcy, if the following conditions are met:
- your monthly payments are calculated to be less than $100,
- your discharge is not opposed by the OSB, the LIT or a creditor,
- you have attended 2 financial counselling sessions, and
- you are not required to pay a portion of your surplus income into the bankruptcy estate as per the standard established by the OSB.
If you are required to make payments from your surplus income, you will be eligible for an automatic discharge after contributing part of the surplus to your estate for 21 months.
People who are going bankrupt for the second time also may qualify for an automatic discharge within 24 to 36 months, depending on whether they have excess income and made a minimum payment of $100 per month.
If you have surplus income of less than $200, you are not required to make payments and you will receive an automatic discharge 24 months after filing.
If you have surplus income of $200 or more, you must pay minimum monthly payments of 50% of the surplus income and you will be automatically discharged 36 months after filing.
If you are granted an automatic discharge, there is no court hearing and the trustee sends you a copy of the discharge.
Debts not cleared by bankruptcy
Being discharged means that you are out of bankruptcy and your debts are officially cleared. However, there are certain types of debts that are excluded from discharge. These include:
- spousal and child support payments,
- a fine or penalty imposed by the court,
- debt arising from fraud, and
- student loans, unless you ceased attending school for at least seven years after the date of discharge. However, if you acted in good faith, upon application to the court, you may be released from the student loan earlier, based on financial hardship.
Being discharged from bankruptcy generally marks the end of your bankruptcy procedure. However, your bankruptcy stays on your credit record for six or seven years from the date of your discharge (depending on where you live and the policy of your credit reporting agency). This will affect your ability to get loans and other kinds of credit in the future.
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