New Canadian Bankruptcy Laws - Canadian Bankruptcy Reform

Consumer Insolvency:

Summary of Changes to the Bankruptcy and Insolvency Act.

High Income Tax Debt: Bankrupt individuals with more than $200 000 in personal income tax debts representing 75 percent or more of their total unsecured liabilities will not be eligible for an automatic discharge. These individuals will have to seek a Court order to be discharged of their debts. They will have to convince the Court that the relief they are seeking is justified on the basis of their efforts to repay their debts, their financial situation when the debt was incurred and their future financial prospects. The Court will be able to fix conditions on the discharge. Specifically, the Court may refuse to discharge these individuals from bankruptcy, suspend their discharge for a period of time, or require the bankrupt to comply with any requirement as the Court may direct. This is meant to be an anti-abuse measure targeting high-income individuals who may strategically use bankruptcy to avoid paying large income tax debts.

Exemption for RRSPs: RRSP and RRIF exemptions will be in accordance with the laws of the province where the provinces have such exemptions. The provinces that have RRSP and RRIF exemptions are Saskatchewan, Manitoba, Quebec, Prince Edward Island and Newfoundland and Labrador.

This wording change will result in the following:

• A one year claw back will only be in effect for RRSPs in provinces without RRSP exemption laws;
• There will be no upper cap on the amount of RRSPs that can be protected;
  
• There will be no need to set up the RRSPs in a locked in plan to make them eligible for exemption;
• The court will have no jurisdiction to extend the one year claw back period period in an appropriate case.

 

Dollar Threshold for a Consumer Proposal is Raised: A consumer debtor can now be considered for filing a consumer proposal if the individual's aggregate debts, excluding debts secured by the individual's principal residence, are not more that $250,000. This is an increase from $75,000.

Mandatory Surplus Income Payments: Bankrupts will be required to make surplus income payments to the estate in accordance with directives issued by the Superintendent of Bankruptcy. Trustees will no longer have the discretion to recommend that a bankrupt should pay less of their surplus income than the amount determined according to the Superintendent's directive. First-time bankrupts with surplus income will be required to make payments for nine months. If, at that end of the nine-month period, the surplus remains, the bankrupt will be required to make additional payments for a further 12 months and for a further time as the Court may order. Second-time bankrupts with surplus income will be required to make payments for 24 months. If the surplus income remains after 24 months, the bankrupt will be required to make surplus income payments for a further 12 months and for such further time as the Court may order. The changes are intended to require bankrupts who have the financial ability to make reasonable contributions to their creditors to do so prior to obtaining their discharge.

Automatic Discharge of Second-Time Bankrupts: Second-time bankrupts will be eligible for an automatic discharge after 24 months from the date of bankruptcy. This measure will only apply to those who have completed mandatory counselling and who have made payments of their surplus income to the creditors. They must appear before the Court to seek a discharge, even when no opposition has been filed.

Student Loans: Student loan debt will be eligible for discharge in bankruptcy if seven years have passed since the former student has terminated his/her studies. In addition, in cases of undue hardship, a bankrupt may apply to the Court to obtain the discharge of the student loans after five years. For the Court to discharge on hardship grounds, it must be satisfied that the debtor has acted in good faith and is expected to continue to experience financial difficulties.

Note: The "hardship provision" will be available to those people whose date of bankruptcy was prior to the coming into force of this provision.

Prohibition on Ipso Facto Clauses in Bankruptcy: The amendments place limits on the exercise of "ipso facto" contract clauses in bankruptcy. An ipso facto clause is a contractual term that generally allows a creditor to terminate a contract or a supply of service if an individual enters into proceedings under an insolvency statute. For consumers, the primary concern over ipso facto clauses relates to basic services, such as telephone, gas, electricity and leases. This prohibition previously existed only in the case of consumer proposals and is now extended to bankruptcy situations.