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New Bankruptcy Rules in Canada: What You Need To Know

New bankruptcy rules will come into force in Canada on September 18, 2009. If you are in financial trouble and are considering bankruptcy, what do you need to know? Here’s a brief summary of the new rules that will impact on consumers. More details will emerge as we become familiar with these new rules, so it is strongly recommended that you consult a Canadian bankruptcy trustee for full details on how these rules will impact on your situation.

Let’s start with the good news:

First, it will be easier to file a consumer proposal if you have a lot of debt. Under the old rules you could only file a consumer proposal if your total debt, not including the mortgage on your principal residence, was $75,000 or less. If you had $50,000 in credit card debt and a $30,000 car loan you were not eligible to file a consumer proposal. Effective September 18, 2009 that limit is increased to $250,000, so many more Canadians will now be eligible to file a consumer proposal.

Second, under current rules if you have a car that is leased or financed, the lender can decide to repossess the car if you go bankrupt. Most banks today will let you keep your car if you go bankrupt, provided you continue making the loan payments. However, there are two large Canadian banks that have a policy to automatically repossess your car if you go bankrupt. Effective September 18 they will not be able to cancel the contract simply because you filed for bankruptcy, so if you continue to make your payments you can keep your car. This will help people who need a car to get to work, and are willing and able to continue with their payments. Of course if the car is more than you can afford you can still surrender the car to the lender, and any resulting shortfall will be included in your bankruptcy.

Now, for the bad news.

If you have surplus income, your bankruptcy will last longer under the new rules. Each month that you are bankrupt you are required to send copies of your pay stubs and proof of other income to your trustee, and your trustee then determines what you must pay. For example, in 2009 the threshold for a single person is $1,870 per month. If your take home pay is more than $1,870 per month you are required to pay at least half of the amount you are over the limit to the trustee. So if you earned $2,070 this month, you are $200 over the limit, so you would pay an extra $100 this month to the trustee, who would then include that money in the funds to be distributed to the creditors. Under current rules you are only required to pay for nine months, unless you were bankrupt previously, or have excessive income, or if a creditor objects to your discharge.

If you file bankruptcy after September 18, 2009 and if you have surplus income, you will be automatically bankrupt for 21 months, or 36 months if you were previously bankrupt. That means that for many Canadians what would have been a 9 month bankruptcy may now be a 21 or 36 month bankruptcy, with the payments based on your income continuing for 21 or 36 months. In other words, for Canadians with surplus income, the cost of bankruptcy just went up.

There are other rule changes, such as the rule that if you have tax debts of more than $200,000, and they represent more than 75% of your total debt, you are not eligible for an automatic discharge; a court hearing will be required to end your bankruptcy.

Why did the government increase the cost of bankruptcy? I don’t know. It may be that the creditors lobbied the government to increase the cost of bankruptcy so that they can recover more money. It may be that the government wanted to discourage bankruptcy. It’s also possible that the new rules do not represent a significant change from current practice. In most provinces if you have significant surplus income the bankruptcy court will add an additional 12 months to your bankruptcy, so automatically making the bankruptcy last for 21 months is just codification of existing practice, and it eliminates the need for a court discharge hearing, which streamlines the process for everyone and eliminates uncertainty.

It could also be argued that the new rules make bankruptcy more expensive, and therefore encourage people to file proposals as an alternative to bankruptcy. I am a big believer in proposals because in my experience most people want to find a way to pay at least something back to their creditors, so if the new rules encourage proposals, that’s not a bad result.

However, many people have no choice but to file bankruptcy. They can’t afford a proposal, and so a bankruptcy is a necessary solution to their problems.

In the final analysis, why the rules were changed, or what you and I think of the new rules is irrelevant. The rules are changing, so it’s important for all of us to read and understand the new rules so we can effectively evaluate our options. How will the new rules impact on you? Do some research on the new bankruptcy rules, and then contact a licensed bankruptcy trustee to review your situation and decide how best to deal with your financial problems.