September 18, 2009 - New Canadian bankruptcy laws in force.
The new laws aim to make the insolvency system fairer and to reduce the potential for abuse, while respecting the fundamental objective of providing a fresh start to the honest, but unfortunate, debtor. Some of these changes are:
Consumer Proposal - debt threshold increase. A consumer proposal may be filed by someone with up to $250,000 in debts, excluding mortgages on their principal residence. The previous limit was $75,000.
Surplus Income – mandatory payments. Bankrupts who have surplus income will be in bankruptcy longer and have to contribute the surplus to their estate as prescribed by the Bankruptcy and Insolvency Act legislation.
Bankrupts with High Income Tax Debt - will not be eligible for an automatic discharge. Bankrupts with personal income tax debt which exceeds $200,000, or represents 75% or more of total unsecured proven claims will have to seek a Court Order to be discharged from their debts. This is to prevent the use of bankruptcy by high-income individuals as a strategy to avoid large income tax debt.
Automatic discharges from bankruptcy. As long as a bankrupt has complied with their duties and there is no opposition an automatic discharge will be granted as follows:
- A 1st time bankrupt with no surplus income - 9 months
- A 1st time bankrupt with surplus income - 21 months
- A 2nd time bankrupt with no surplus income - 24 months
- A 2nd time bankrupt with surplus income - 36 months
Debtor protection for basic services. The protection afforded to debtors under Division I and II proposals against the impact of "ipso facto" clauses (a clause that allows a creditor to terminate an agreement on the basis of the filing of a proposal) will be extended to bankruptcies. This will insure consumers have access to basic services such as electricity, gas, telephone, and leases after bankruptcy. Also, a secured lender cannot terminate a contract simply due to the filing of a bankruptcy.
These bankruptcy laws changed on July 7, 2008:
Student Loans - the period in which a student loan is discharged from bankruptcy is reduced from 10 years to 7 years. The new time frame affects those who file for bankruptcy now, and to any current undischarged bankrupts. The “hardship provision” which allows for an application to have student loans discharged is now available after only 5 years.
RRSP Exemption – amounts held in RRSPs are exempt from seizure in bankruptcy. Where provincial legislation exempts RRSPs from execution, the provincial legislation will apply. Where provincial legislation is silent regarding the treatment of RRSPs, they will be exempt subject to a claw back on any contributions made within 12 months of filing bankruptcy.
Income Tax Refunds – both pre and post bankruptcy tax refunds will form part of the estate. Previously unless assigned to the estate, post-bankruptcy income tax returns were not part of the estate.
The summary provided is for general information only, please contact a Deloitte professional to understand how the changes may apply to your financial situation.