Bankruptcy and Consumer Proposal Definitions

Assets and Property

In a personal bankruptcy in Canada, you must assign all your assets to the trustee, except for exempt property (such as basic furniture, tools-of-trade and, under certain circumstances, the goods and services tax credit payments). Exempt property will vary from province to province. Your trustee can tell you what bankruptcy exemptions in your province. Read more about how bankruptcy affects your house and car.

Bankrupt

This is the legal status of a person who declares bankruptcy until a discharge order is issued.

Bankruptcy

The legal process where an individual or business resident in Canada files for protection from their creditors under the Bankruptcy and Insolvency Act.

Further reading: What are the different types of bankruptcy in Canada

Bankruptcy and Insolvency Act

The Bankruptcy and Insolvency Act (the Act or BIA) is the federal law which regulates bankruptcy and consumer proposals in Canada. The Act also regulates corporate debt recovery programs including bankruptcy, commercial proposals and CCAA proceedings. The BIA defines all rules and procedures around the process of filing bankruptcy as well as the administration of proposals. It falls under the responsibility of the Office of the Superintendent of Bankruptcy (OSB) at Industry Canada. A layman’s description of Bankruptcy and Insolvency can be found at the OSB webpage (Bankruptcy and Insolvency at a Glance).

Bankruptcy Court

This is a court in which a judge or registrar will decide on the bankrupt’s application for bankruptcy discharge and other insolvency matters.

• In New Brunswick, The Court of Queens Bench of New Brunswick in Bankruptcy and Insolvency is the court that handles all bankruptcy and consumer proposal matters.

• In Nova Scotia, The Supreme Court of Nova Scotia in Bankruptcy and Insolvency is the court that handles all bankruptcy and consumer proposal matters.

• In Prince Edward Island, The Supreme Court of Prince Edward Island in Bankruptcy and Insolvency is the court that handles all bankruptcy and consumer proposal matters.

Bankruptcy Discharge

Bankruptcy Estate

The term used to describe the assets administered under bankruptcy. These are assets assigned to the Bankruptcy Trustee and sold for the benefit of creditors.

All funds received by a Licensed Insolvency Trustee from any source are placed into a trust fund. This would include surplus income payments, funds from the sale of non-exempt assets, tax refunds as appropriate etc. Out of these funds, the trustee is entitled to a set fee as determined by a Government set tariff and then any remaining funds are distributed by the Trustee to the Unsecured Creditors.

Bankruptcy Trustee

Certificate of Full Performance

Once you have made all required payments and completed your duties in a proposal, your consumer proposal administrator will issue to you and the creditors a Certificate of Full Performance, which officially discharges the debts included in your proposal.

Co-signer

Your bankruptcy does not eliminate the responsibility of anyone who has guaranteed or co-signed a loan on your behalf. For example, if your parent co-signed a loan for you, that parent would be liable to pay the loan in full even if you decide to declare bankruptcy. Your trustee can advise you on how co-signers can be protected in bankruptcy.

Consumer Proposal

A legal agreement between a debtor and creditors to settle debts for less than the full amount owing filed under the Bankruptcy and Insolvency Act. A consumer proposal is available to individuals (not corporations) with total debts (excluding the mortgage on their principal residence) not exceeding $250,000. If two people, such as a husband and wife, have common debts, they may file a joint consumer proposal, provided their debts (excluding mortgage) do not exceed $500,000. A consumer proposal is sometimes called a Division II proposal. Individuals with debts of $250,000 or more may file a Division I proposal to creditors. A consumer proposal can only be filed by a Licensed Insolvency Trustee acting in their capacity as a Consumer Proposal Administrator. Consumer proposals are sometimes referred to incorrectly as Government Debt Settlement programs.

Further reading: Consumer Proposal vs Debt Consolidation

Consumer Proposal Administrator

An administrator of consumer proposals is a trustee in bankruptcy or a person appointed by the Superintendent of Bankruptcy to administer consumer proposals. All trustees at Powell Associates Ltd. are licensed consumer proposal administrators.

Counselling

Both individual bankrupts and those making a consumer proposal are required to go through counselling sessions with a qualified counsellor. You will be required to attend two sessions, which primarily cover good financial management (including prudent use of consumer credit and budgeting principles); developing successful strategies for achieving financial goals and overcoming financial setbacks; restoring one’s credit rating and at any overtime, and where appropriate, making referrals to deal with non-budgetary causes of insolvency (e.g.: gambling, addiction, marital and family problems, etc.)

Credit Counselling

Every individual who files personal bankruptcy or makes a consumer proposal to creditors must attend two mandatory credit counselling sessions during the process. The objective of the credit counselling process is to help the debtor identify causes of financial problems and develop tools and strategies (such as personal budgeting) to better manage money and credit after bankruptcy. Credit counselling also refers to the service offered by not-for-profit credit counselling agencies to help you develop a repayment plan to repay your debts in full known as a Debt Management Plan. We have an in-depth article on debt management plans.

Credit Rating

Credit bureaus, or credit reporting agencies, collect information about consumers’ financial affairs and sell the information to their clients, such as credit grantors, employers, and insurance companies. These agencies obtain information from various sources, including loan applications; public records which provide information related to such matters as bankruptcy, court judgments, and conditional sales contracts; and from credit grantors and collection agencies who provide credit files on a monthly basis. These files contain information such as the account number, the outstanding balance, and a nine-point rating scale, for example: R1 indicating that payment was made on time; R2 that payment was made 30 days late, but not more than 60 days; and R9 indicating a bad debt or one that has been placed for collection and it also applies to bankruptcy.

It should be noted that your credit rating is set by your creditors. Credit bureaus only pass on that information to their clients. The decision as to whether or not to grant credit to an applicant is made by the credit grantor, not the credit bureau. It is the lender’s individual credit scoring system that determines access to credit.

Creditor

A creditor is a person, institution or business to whom money is owed. Secured creditors are creditors who have taken some measure to protect themselves and hold a mortgage, pledge, lien or similar instrument on, or against, your property. If they are not paid, they can enforce their claims by recovering the assets on which they hold security.

Unsecured creditors are creditors who do not have any security for the debt owed to them.

A preferred creditor has a priority claim to funds in the bankruptcy estate.

Debt Consolidation

Debt consolidation is the taking out of a new loan to repay several outstanding loans. The objective is to combine several high interest debts into one, lower interest loan payment. Sometimes debt consolidation can refer to the consolidation of several debts into one, monthly payment through a debt relief program including a debt management plan, debt settlement program or consumer proposal. While each of these programs can consolidate debts, they are not considered a new debt consolidation loan but rather a debt repayment plan.

Debt Management Plan (DMP)

A debt repayment agreement between a debtor and a creditor, made with the assistance of an accredited credit counsellor, allows for the repayment, in full, of specified debts over a period of time, usually up to 5 years. Not all debts are included in a debt management plan and creditors are not legally bound to the agreement. A consumer proposal is a form of debt management program, and is a debt reduction or debt settlement agreement made between a debtor and his unsecured creditors with the assistance of a consumer proposal administrator.

Debt Settlement

An agreement in which the creditor agrees to accept partial payment from the debtor as payment in full. In Canada, there are two forms of debt settlement programs: informal debt settlement and formal debt settlement, known as a consumer proposal. A consumer proposal is a legally binding arrangement made through the Bankruptcy & Insolvency Act with the assistance of a consumer proposal administrator. Informal debt settlements are arrangements made with the assistance of a debt settlement company or debt counsellor in return for a fee.

Debtor

A debtor is a person who receives a loan or an advance of goods and services in exchange for a promise to pay at a later date. If you go bankrupt, you are a debtor.

Discharge From Bankruptcy

This is the final outcome of the bankruptcy process. A Certificate of Discharge is issued after the bankrupt completes all required duties and the bankruptcy period has finished. A bankruptcy discharge is a legal release from the requirement to pay debts as of the date of filing bankruptcy, with some exceptions. Bankruptcies can end in an automatic discharge (no court hearing required), an absolute discharge order, conditional discharge or suspended discharge (delay in your discharge date pending court requirements). This is dependent on how many times you have declared bankruptcy in the past, and if you have complied with your bankruptcy obligations.

Dividend

The amount a creditor receives out of the funds paid into a bankrupt’s estate or through a consumer proposal.

Division I Proposal

A formal offer to settle debts as of the date of filing between a debtor and creditors. Also called a commercial proposal, a Division I proposal can be filed by an individual and a corporation. In most cases an individual would only file a Division I proposal if their total debts, excluding the mortgage on their principal residence, are more than the $250,000 limit allowed in a consumer proposal.

Encumbrance

A claim or liability that is attached to property or some other right that may lessen its value, e.g. a lien or mortgage.

Equity

The difference between the market value of an asset and the debt secured against it.

Exempt Assets

Assets defined as exempt by provincial legislation that are not available to the trustee for the benefit of creditors.

First Meeting (of Creditors)

Meeting called by the trustee to consider the affairs of the bankrupt or debtor in a Proposal, to affirm the appointment of the trustee, to appoint inspectors, and to give such directions to the trustee as the creditors may see fit.

Garnishment

A legal process whereby a creditor requires a third party to turn over to the creditor, a debtor’s property such as wages or bank accounts.

General Security Agreement

A contract under which all the personal property of a debtor is pledged as security to a lender; (not used in all provinces).

Guarantor

A person who takes on financial responsibility for another’s debt.

Insolvent Person

A person is insolvent if either they are unable to meet financial obligations as they become due (they can’t make their monthly payments) or their debts are greater than what they own.

Inspector

Inspectors are appointed by creditors to represent them before the trustee during the administration of consumer proposals and bankruptcies. They are expected to assist the trustee by virtue of their experience and are required to supervise certain aspects of the trustee’s administration. It is very unusual for inspectors to be appointed in a personal bankruptcy or consumer proposal.

Judgement

A formal decision issued by a court on a matter under its consideration.

Joint Debt

A debt is ‘joint and several’ if more than one party is legally responsible for repayment of that debt. Spouses often co-sign mortgages or bank loans and these become joint debts. A joint debt can also be created by guaranteeing payment of some else’s debt.

Liabilities

Liability is another word for debt, or money that you owe to a creditor. Examples of liabilities would include credit card debts, bank loans, payday loans, student loans, unpaid bills, tax debts. Almost all unsecured debts are discharged in a bankruptcy or proposal to creditors.

Licensed Insolvency Trustee

A Licensed Insolvency Trustee is a person licensed by the Superintendent of Bankruptcy to administer consumer proposals and personal bankruptcy processes. Previously known as a Bankruptcy Trustee. The trustee works with you, your creditors, and the Office of the Superintendent of Bankruptcy, and is an officer of the court. The trustee can give you information and advice about both the proposal and bankruptcy processes and make sure that your rights, as well as those of the creditors, are respected. Learn more about trustees here.

Lien

A legal right that a creditor has in a debtor’s property. For example, Canada Revenue Agency has the ability to place a lien on your house if you have not paid your taxes, and the lien has the same impact as a mortgage. The lien is not discharged until you pay the lien, or sell the property and the proceeds from the sale of the property are used to pay the lien. Liens can also be used to freeze bank accounts.

For more information check out our article on judgments & liens.

Mediation

Mediation is a way of resolving conflict between two or more individuals. In the course of a bankruptcy, the parties involved in a disagreement can agree to work with an impartial and independent person, called a “mediator”, who will help them settle their dispute instead of going to court. Generally, the mediator is an employee from one of the Superintendent of Bankruptcy’s Division Offices. Mediation is more flexible, speedier and less costly than a formal court decision. It allows people affected by the bankruptcy to be directly involved in deciding how their disagreement will be settled. In bankruptcy, mediation is available to resolve two types of disputes: disagreements over the amount of money the bankrupt will pay to the trustee for the benefit of the creditors during the bankruptcy (called surplus income payment); and disagreements regarding the conditions that the trustee has recommended for bankruptcy discharge. When mediation takes place, the bankrupt and the trustee (or trustee’s representative) must be present. If a creditor requests mediation, that creditor must also be present.

Offences

The offences and sanctions provisions are contained in Part VIII of the Bankruptcy and Insolvency Act. These are criminal or quasi-criminal violations of law; a person guilty of an offence is liable to a fine or imprisonment.

Official Receiver

The Official Receiver is a federal government employee in the Office of the Superintendent of Bankruptcy and an officer of the court with specific duties under the Bankruptcy and Insolvency Act. The Official Receiver, among other things, accepts the documents that are filed in proposals to creditors and personal bankruptcy processes, examines bankrupts under oath and chairs meetings of creditors.

Order

The command of a Court or Judge.

Orderly Payment of Debts

A procedure prescribed in Part X of the Bankruptcy and Insolvency Act, governed by provincial courts, which allows a person to pay debts. Only available in Alberta, Nova Scotia, Prince Edward Island and Quebec (where it is known as Voluntary Deposit Service / Lacombe’s Law).

Preferred Creditor

A preferred creditor is paid in priority to regular unsecured creditors. In a business bankruptcy employees who are owed wages are preferred creditors and receive payments before regular unsecured creditors.

Property

Includes money, goods, land and every description of property, whether real or personal, situated in Canada or elsewhere. Real Property

Proposal

An offer to creditors to settle debts under conditions other than the existing terms. It is a formal agreement under the Bankruptcy and Insolvency Act.

Receiver

A person who has taken possession pursuant to a security agreement of substantially all of the inventory, accounts receivables or the other property of the debtor. “Receiver” also includes a person who has been appointed privately pursuant to a security agreement or by an order of the court for the protection or collection of property that is the subject of diverse claims, usually to seize and sell the property of the debtor. Registrar An Officer of a provincial court appointed by the Chief Justice with the powers and jurisdiction as specified under the Bankruptcy and Insolvency Act.

Registrar

An Officer of a provincial court appointed by the Chief Justice with the powers and jurisdiction as specified under the Bankruptcy and Insolvency Act.

Secured Creditor

A secured creditor holds security over any assets. A mortgage holder is a secured creditor because the mortgage is secured by your house. A car loan lender registers security over your car. If you don’t pay your mortgage or car loan, the secured creditor can seize the house or car.

Superintendent of Bankruptcy

The (Superintendent of Bankruptcy) is a federally appointed official who oversees the administration of the Bankruptcy and Insolvency Act in Canada.

Surplus Income

The Office of the Superintendent of Bankruptcy sets limits on what a person or family requires to live. Any income over that limit is called “surplus income”, and as a bankrupt, you are required to pay half of your surplus income to the trustee each month. The trustee sets the amount of payment by taking into account your total income, the standards issued by the Superintendent of Bankruptcy, and your personal and family situation. The Superintendent of Bankruptcy’s standards are set out in Directive #11. You must make all required surplus income payments to receive your discharge from bankruptcy.

Trustee in Bankruptcy

Unsecured Creditor

An unsecured creditor does not hold security over any assets. Typical examples of unsecured creditors would be credit cards, payday loans, Canada Revenue Agency for taxes owed, and unsecured lines of credit.

Wage Garnishment

A garnishment is the ability of a creditor to seize a portion of your wages. Generally, a creditor requires a court order before they are able to obtain a garnishment. The only exceptions are Canada Revenue Agency, some loans from credit unions, and creditors for whom you have voluntarily agreed to allow them to garnish your wages. Most garnishments stop when you file bankruptcy or a consumer proposal.