The New Bankruptcy Rules: Some Predictions

September 21st, 2009 by A Licensed Insolvency Trustee

Since the federal government announced back on August 19 that new bankruptcy rules in Canada would come into force on September 18, 2009, I have posted three articles describing the new bankruptcy rules in Canada. For an overview of the new rules, please see the following articles:

  • New Bankruptcy Rules in Canada: The Good News and the Bad News
  • Surplus Income: How the New Rules Could Extend the Cost of your Bankruptcy in Canada
  • Consumer Proposals will Increase under the new Bankruptcy Rules in Canada

As promised, the new rules came into effect on September 18; what happened? Here’s an insider’s view:

My firm has a large representative sample of people in financial trouble. As soon as the new rules were announced, we received a flood of calls from people in debt. Many of them wanted to file before the new bankruptcy rules were implemented, because under the new rules if you have surplus income of more than $200 per month, your bankruptcy is automatically extended for an extra year. For example, in a first bankruptcy under the old rules $300 per month in surplus income would still mean you were probably discharged in nine months. Under the new rules, you are now automatically bankrupt for 21 months, and that means you are now paying for 21 months. In short, your bankruptcy will cost twice as much as before, which is what caused the flood of calls to our offices.

As a result, on September 17 we filed three times as many personal bankruptcy filings as we would on a normal day. In fact, across Canada there were about 1,700 personal bankruptcies and consumer proposals filed, which is also about three times the normal number. Obviously Canadians wanted to get their bankruptcy filed under the old rules.

Here’s another interesting note: On September 18, the first day of the new rules, the government’s electronic bankruptcy filing system was down! As a result, there were no bankruptcies filed on Friday September 18. I’m amazed that the system would not work given the many years the government has had to implement the new rules, but that’s the way it goes sometimes.

What do I see for the future? I have two predictions.

First, I suspect that all bankruptcy trustees in Canada will be doing some very detailed math to explain the surplus income calculation to every debtor before they file bankruptcy. Seven months into each bankruptcy the trustee is required to determine the bankrupt’s average income over the first six months, and if their average income per month is more than $200 over the limit, the bankruptcy is extended. If a bankrupt is paid a salary twice a month, their income doesn’t change, so the calculation is easy.

But what happens if you are paid either weekly or bi-weekly? If you get paid weekly, there are four months each year where you get five paycheques per month, and that may cause your average surplus income to exceed the limit. The same is true for a person paid bi-weekly in a three paycheque month. I suspect that the result of these new rules will be that bankrupts may delay their filings until after their extra paycheque month.

For example, if you are paid weekly on a Friday, a quick check of the calendar will reveal that there are five Fridays in October. That may mean that weekly payees will want to wait until November to go bankrupt. When you meet with your trustee, be sure to ask them to explain the implications of these new rules in your specific situation.

Second, as I have already predicted, I believe the number of consumer proposals will increase. If you are expecting a Christmas bonus, or overtime, that may be enough to increase your income such that your bankruptcy will last for an extra year. In that case a consumer proposal may be the preferred solution. You can negotiate a set monthly payment that won’t increase, even if your pay goes up.

All trustees in Canada are quickly learning and adapting to the new rules, so it is imperative that you consult a Canadian bankruptcy trustee to review how these new rules will impact on your situation, so that you can make a fully informed decision to deal with your debts.

A Licensed Insolvency Trustee

Please post a follow up comment below:

(Note: comments are reviewed by moderators and then posted after approval. In addition, due to high volume some of the comments might not be posted.)