Legislated debt-reduction programs

January 23, 2015 by
Filed under: Bankruptcy, Debt Management, debt relief 

The Three Programs


1. Bankruptcy

Bankruptcy is a legal process carried out through a trustee in bankruptcy designed to relieve honest but unfortunate debtors of their debt burden. When individuals are in bankruptcy, creditors cannot initiate any collection actions against them.

At the end of the process, a first-time individual bankrupt is usually discharged from debts after nine months.

2. Consumer Proposal

A consumer proposal can be submitted to creditors only if an individual’s total debt does not exceed $250,000, not including debts secured by their principal residence.

A consumer proposal is a formal process that is carried out through a trustee in bankruptcy. The trustee puts together an offer to pay creditors a percentage of what is owed to them over a specific period of time, or extend the time the debtor has to pay off the debt, or a combination of both. Payments are made through the trustee, and the trustee uses that money to pay each of the creditors. The debt must be paid off within five years.

3. Division I Proposal

Also known as a “commercial proposal,” this is a formal procedure available to businesses or  individuals — there is no limit with respect to how much money is owed. This process is carried out through a trustee in bankruptcy who will put together an offer to pay creditors a percentage of what is owed to them over a specific period of time, extend the time the debtor has to pay off the debt or a combination of both. Payments are made through the trustee, and the trustee uses that money to pay each of the creditors.


The Program Administrators


Trustee in Bankruptcy

A trustee in bankruptcy is a person licensed by the Office of the Superintendent of Bankruptcy (OSB) to administer bankruptcy and proposal estates. An officer of the Court, the trustee has an obligation to look after the rights of the creditors and to investigate the affairs of the debtor, as required. The trustee also ensures that the rights of the debtor are not abused.

The trustee’s primary duties are to

  • review the situation and counsel the debtor on available alternatives;
  • prepare official documentation that is both filed with the OSB and used to notify creditors;
  • ensure the validity of creditors’ claims;
  • ensure that debtors are provided with mandatory counselling and access to mediation services if there is a dispute regarding any income they are required to contribute;
  • sell the debtor’s assets, except those exempt from seizure by provincial and federal laws, and hold the proceeds in trust for distribution to creditors;
  • administer the bankrupt estate from beginning to end;
  • assess the debtor’s conduct both before and during a bankruptcy, as well as the cause(s) of the bankruptcy; and
  • make an application for a debtor’s discharge (in the case of individual debtors).

Debtor/Bankrupt

A debtor is a business or person that is unable to meet debt obligations. A bankrupt is a business or person that has declared bankruptcy.

Both the debtor and bankrupt’s primary duties are to

  • attend the first meeting of creditors (if a meeting is requested by the creditors);
  • attend two counselling sessions (for bankruptcy and consumer proposals);
  • advise the trustee in writing of any address changes; and
  • generally assist the trustee in administering the estate or proposal.

In addition, the bankrupt’s must

  • disclose all of his or her assets (property) and liabilities (debts) to the trustee;
  • advise the trustee of any property disposed of in the past year;
  • surrender all credit cards to the trustee; and
  • attend an examination at the OSB, if required.

At the end of the process, the bankrupt is released from his or her obligation to repay the debts.

Under the Bankruptcy and Insolvency Act, some debts are not discharged by bankruptcy. These include

  • alimony payments and child support;
  • student loans (if it is less than seven years since the debtor ceased to be a full- or part-time student);
  • fines or penalties imposed by the Court; and
  • debts arising from fraud.

Creditors

Important: To participate in insolvency proceedings and share in the distribution of dividends, if any, creditors with unsecured claims must file a Proof of Claim with the trustee.

There are three main types of creditors:

  • Unsecured creditor— A creditor who comes forward but hasn’t taken measures to guarantee that he or she will be repaid.
  • Secured creditor— A person holding an instrument, such as a mortgage or a lien on or against the whole or part of the property of a debtor, as security for a debt due him or her from the debtor. This type of creditor is usually not affected by bankruptcy or proposals.
  • Preferred Creditor— A creditor who has been given priority under the Bankruptcy and Insolvency Actover other creditors in the distribution of dividends. Preferred claims include unpaid wages, commissions or other remuneration of any employee of a debtor and, under certain conditions, any debt or obligation of support to a spouse, common-law partner or child living separate from a debtor.

Creditors can become fully involved in the process by participating in meetings of creditors or by being named an inspector. (Inspectors are appointed by creditors to represent them before the trustee during the administration of proposals and bankruptcies. They are expected to assist the trustee and are required to supervise certain aspects of the trustee’s administration.) Creditors are duty bound to inform the trustee if they have information about possible irregularities on the part of the debtor.

Creditors will be provided with, among others, the following two documents:

  • Statement of Affairs— The bankrupt’s financial statement or balance sheet of assets and liabilities showing the estimated value of assets and the names and addresses of creditors and the amounts owed. This is usually presented at the beginning of the process.
  • Statement of Receipts and Disbursements— A statement detailing the receipt and disbursement of funds, interest received, fees charged by the trustee, all dividends distributed to creditors and particulars of property that is not sold. This is usually presented at the end of the process.

Office of the Superintendent of Bankruptcy

The Office of the Superintendent of Bankruptcy supervises the administration of the Bankruptcy and Insolvency Act. Its main duties are to

  • supervise the administration of estates in bankruptcy, consumer proposals and Division I proposals;
  • maintain a publicly accessible record of bankruptcy and insolvency proceedings;
  • record and investigate complaints regarding possible wrongdoing by someone involved in the insolvency process;
  • license private-sector trustees to administer estates; and
  • set and enforce professional standards for the administration of estates.

The OSB has 15 offices across Canada.


Understanding your credit rating


The most common ratings are “R” ratings. These are known as North American Standard Account Ratings and are the most frequently used. The “R” indicates that the item being described involves revolving credit. If you always pay on time, it will be coded an R1. If an amount was written off because you never paid it back, it is coded R9. The R ratings are a coding system that translates “on time”, “one month late”, “two months late”, etc., into two-digit codes.

R0 Too new to rate; approved but not used.
R1 Pays (or paid) within 30-days of payment due date or not over one payment past due.
R2 Pays (or paid) in more than 30-days from payment due date, but not more than 60-days, or not more than two payments past due.
R3 Pays (or paid) in more than 60-days from payment due date, but not more than 90-days, or not more than three payments past due.
R4 Pays (or paid) in more than 90-days from payment due date, but not more than 120-days, or four payments past due Pays (or paid) in more than 90-days from payment due date, but not more than 120-days, or four payments past due.
R5 Account is at least 120-days overdue, but is not yet rated “9.”
R6 This rating does not exist.
R7 Making regular payments through a special arrangement to settle your debts.
R8 Repossession (voluntary or involuntary return of merchandise).
R9 Bad debt; placed for collection; moved without giving a new address or bankruptcy.
Other rating indicators that might be found on a report are “I” for instalment credit or “O” for open credit line.

 

 

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