What’s the deal with bankruptcy?
This is not legal advice. This information is being provided for educational purposes only. If you require a lawyer, you should seek professional help (e.g. by making a post on Dynamic Lawyers).
The Globe and Mail recently reported on the boom within the bust (i.e. the boom of bankruptcy and insolvency lawyers and work during these poor economic times). As such, I thought I’d take some time to provide some information concerning bankruptcies generally – such as how does one go bankrupt, what does it mean to go bankrupt, and how is the bankruptcy administered?
How to go bankrupt
A person (which includes an individual or a corporation) may become bankrupt in one of three ways: (1) voluntarily (by making an assignment in bankruptcy), (2) involuntarily (by being petitioned into bankruptcy by one or more creditors), or (3) through a failed commercial proposal.
What does it mean to go bankrupt?
Bankruptcy is a formal legal status under the Canada Bankruptcy and Insolvency Act [“BIA”]. A debtor remains in bankruptcy until his or her discharge. Immediately upon the bankruptcy of the debtor, all proceedings by unsecured creditors against the bankrupt are halted. This is intended to prevent any creditor from obtaining an advantage or preference against the general body of creditors as represented by the trustee, and to avoid the trustee from having to dissipate the assets of the estate through defence of multiple legal proceedings in different forums.
Except with the permission of the bankruptcy court, no creditor may commence or continue any law suit, execution, garnishment, or other proceeding against the debtor [ss. 69.3 and 69.4 of the BIA]. This is referred to as a “stay of proceedings”. Bankruptcy does not stop or stay criminal investigations or matters; secured creditors can also enforce their security against the bankrupt. They do not need the court’s permission for repossessing their collateral after bankruptcy.
Bankruptcy is not a clearing house for all debts that the debtor has incurred. Once the debtor obtains an order of discharge, the order operates to discharge the debtor from all claims provable in the bankruptcy, except for certain types of claims (such as debts arising out of fraudulent misrepresentation).
Bankruptcy Administration
The BIA is administered by trustees in bankruptcy, as well as by the Superintendent of Bankruptcy, Official Receivers, and Registrars and Judges of the Bankruptcy Court. The trustee in bankruptcy is an individual person or corporation that is licensed by the Superintendent of Bankruptcy under the Department of Industry of the Federal government of Canada to carry on the bankruptcy administration of liquidating a debtor’s assets, and then making the distribution to the creditors. The trustee who assists the debtor through this cleansing process. The trustee in bankruptcy acquires title to the bankrupt’s property, administers the estate, communicates with creditors, reports to the Superintendent and to the Court, and pays out dividends. The trustee has a dual responsibility as both the bankrupt’s representative and as the representative of all the general creditors to the extent that he or she can act on their behalf against the bankrupt. The bankrupt chooses the trustee, normally pays for his or her services, and invariably meets with the trustee on several occasions before creditors enter the bankruptcy process.
