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Bankruptcy Reform – Will it Help Me?

Will the rules be updated soon enough to help today’s financially troubled consumers?

On December 14, 2007 the government passed Bill C-12 that incorporated the changes passed as part of the old Bill C-55, which was passed on November 25, 2005 and became Chapter 47 of the Statutes of Canada, but was never proclaimed into law.

On July 7, 2008 the Minister of Labour signed an Order in Council to implement three sections of the new rules:

First, student loans are now dischargeable in a bankruptcy that occurs once a student has been out of school for seven years, as compared to the old ten year rule. Second, most RRSPs are now exempt from seizure in a bankruptcy (except for contributions made in the year preceding bankruptcy). Third, a bankrupt now loses their tax refund for the entire year of bankruptcy.

The remainder of the new rules will be brought into force on September 18, 2009. Please contact a trustee for further information now to determine if you should file bankruptcy now, or wait until the new rules are in force.

Changes included in Bill C-12

Wage Earner Protection

The most newsworthy aspect of the 2005 Bill was the creation of the Wage Earner Protection Program Act that would guarantee wage payments of up to $3,000 per employee whose employer goes bankrupt. The government in 2005 estimated that this program may cost up to $50 million, and help 10,000 to 15,000 workers who have unpaid wage claims when their employers go bankrupt. It was unknown whether the cost of this program and its administration would be funded by a federal payroll tax or increased income taxes.

Student loans

Under existing laws, a student loan is only automatically discharged in a bankruptcy if the debtor ceased to be a student at least ten years earlier.

Under the Bill C-12, this period would have been reduced to seven years. In addition, in cases of undue hardship, a bankrupt could apply to the Court to have their student loans discharged after five years. Proving hardship would require convincing the court that the bankrupt had acted in good faith and would continue to experience financial difficulties if without relief from the student loans.

Since the Senate Committee on Banking, Trade and Commerce had released a report recommending a five year period for discharging student loans, it is unclear why the government opted for this “seven or five” year solution.

Exemption for RRSPs

Under current laws most non-locked in RRSPs are seized in a bankruptcy, and the funds distributed to the creditors. This is perceived to be somewhat unfair, since generally employer sponsored pension plans are not seized in a bankruptcy.

Bill C-12 exempts all RRSPs from seizure in a bankruptcy. To prevent abuse, RRSP contributions made in the 12 months prior to bankruptcy would not be exempt from seizure.

The government’s press release announcing Bill C-55 stated that the seizure exemption would apply only if the bankrupt individual locked in the RRSPs, and that a cap would also be applied to the amount a bankrupt could protect. However, we have not been able to find any references to these clauses in the legislation.

High income tax debt

Bill C-12 makes it more difficult for individuals with high income tax debt to be automatically discharged from bankruptcy. Individuals owing more than $200,000 in personal income tax debt, representing 75% or more of their unsecured debts, would not be eligible for an automatic discharge.

To be discharged of their debts, they would be required to obtain a court order. The court could refuse to discharge the debts, or the discharge could be suspended for a period of time, or the court could require the bankrupt to repay a portion of the debt. How the court will actually have deal with this provision is unknown.

However, this provision will probably have convinced more debtors to attempt to file a proposal under Division 1 of the Bankruptcy & Insolvency Act to deal with their debts.

Mandatory surplus income payments

Under current law, any bankrupt who earns more than a prescribed amount must pay a portion of that surplus income into the bankruptcy estate. Payments end when the bankruptcy is discharged, which is usually in nine months.

Bill C-12 will change the surplus income rules by preventing automatic discharge after nine months.

A first-time bankrupt with surplus income would be required to pay that surplus income into the bankruptcy estate for 21 months, or further if ordered by the Court. For second-time bankrupts, the period would be 36 months.

It was unclear whether a materiality limit would be placed on surplus income. If someone had $1 of surplus income each month, would their bankruptcy be extended for 12 months? $100? $400?

Regardless, it this provision would probably have caused more debtors to consider filing a consumer proposal to avoid an extended bankruptcy.

Consumer proposal debt limit

Bill C-12 increases the individual debt limit for consumer proposals from $75,000 to $250,000.

Where does bankruptcy reform stand now?

Check this page regularly for updates.

If you have financial difficulties now, putting off action until bankruptcy reform will probably make your solution harder, not easier. A licensed bankruptcy trustee can advise you on all the options and detailed arrangements that would be best for your personal situation, and your first consultation will be free. Contact a trustee today.