What is a Conditional Discharge in Bankruptcy?

A conditional discharge in bankruptcy occurs when the Courts attach one or more criteria – such as prescribed payments over a certain timeframe – for a person to satisfy before releasing a person from their debts and status as a bankrupt individual. Once the bankrupt individual completes all the conditions to the approval of the Court, they will receive their absolute discharge.

What Leads to a Conditional Discharge?

Generally, conditional discharges are the result of a creditor, Licensed Insolvency Trustee (LIT) or the Office of the Superintendent of Bankruptcy opposing an absolute discharge; usually because the bankrupt individual has failed to meet one or several of their duties.

Common reasons a person may receive a conditional discharge include failing to:

• Disclose all property and deliver all non-exempt property to the LIT
• Provide the LIT with RRSP statements, insurance policies, tax records and returns
• Surrender all credit cards in to the LIT for cancellation
• Attend two mandatory financial counselling sessions
• Report household income and expenses to the LIT and make all required payments
• Attend a meeting of creditors or an examination by the OSB, if required
• Keep the LIT advised of their place of residence throughout the bankruptcy process

Absolute Discharge vs. Conditional Discharge

Ideally both an absolute discharge and conditional discharge will achieve the same result – the bankrupt individual will shed their bankrupt status and gain a debt free fresh start. A bankrupt individual may obtain an absolute discharge after 9 to 21 months after filing their bankruptcy provided they meet each of the conditions above and no one objects.

The key difference between the two scenarios is an absolute discharge produces that outcome immediately, whereas a conditional discharge postpones the absolute discharge to a later date and attaches specific terms the bankrupt must first satisfy. In other words, a conditional discharge is an absolute discharge in principle, but with strings attached.

What Happens if You Aren’t Discharged from Bankruptcy?

The Courts can also refuse a discharge altogether. This would mean the bankrupt individual retains their bankrupt status and the debts they owed when they entered the process – and cannot borrow more than $1,000 without informing a creditor they are bankrupt.

The bankrupt individual can continue work with the LIT to address their duties and satisfy whatever requirements they may have failed to meet during the bankruptcy process. However, they may not reapply for a release until the LIT agrees this has occurred. An undischarged bankrupt may also annul their existing bankruptcy by making a Consumer Proposal instead.

Other Types of Discharge

Beyond absolute, conditional and refused, a suspended discharge is the final type of discharge a bankrupt individual may encounter. In effect, this is an absolute discharge which is – for any number of reasons – delayed until a specified date. Unlike a conditional discharge, a suspended discharge does not have any additional criteria to meet, aside from the prescribed waiting period.

Summary

After the long and duty-filled 9- to 21-month bankruptcy process, receiving a conditional discharge can seem discouraging – especially if additional payments are one of the required criteria. However, for those who have failed to meet the requirements of their bankruptcy, this is often a best-case scenario. It offers a second chance to complete the bankruptcy process and a clear timeline and certainty about their financial fresh start.

Bankrupt individuals must be cautious, however, to ensure they take these conditions seriously and make every effort to meet them, else risk having their conditional discharge changed to a refused discharge. It’s important to work closely with the LIT and keep them informed about any challenges or obstacles they may encounter in satisfying the stipulations of their conditional discharge.