The financial landscape can be precarious, and both individuals and businesses may face financial difficulties that lead to insolvency or bankruptcy. In British Columbia (BC), the Bankruptcy and Insolvency Act (BIA) is a critical piece of legislation that governs these processes. This blog aims to provide an in-depth understanding of the BIA in BC, including its implications, procedures, and the rights and obligations of debtors and creditors.

 

What is the Bankruptcy and Insolvency Act?

The Bankruptcy and Insolvency Act is a federal law that applies across Canada, including British Columbia. It outlines the legal framework for dealing with bankruptcy and insolvency, providing mechanisms for individuals and businesses to either discharge their debts through bankruptcy or make arrangements to repay their debts through a consumer proposal or a Division I proposal. The primary goal of the BIA is to offer a fresh start to honest but unfortunate debtors while ensuring fair and equitable treatment for creditors.

 

Key Concepts in the BIA

Before diving into the specifics of how the BIA operates in BC, it’s essential to understand some fundamental concepts:

 

1. Bankruptcy: A legal process through which a debtor who is unable to meet their debt obligations can be relieved of most debts. It involves the liquidation of the debtor's assets to pay creditors.

 

2. Insolvency: A financial state where an individual or business is unable to pay their debts as they come due. Insolvency does not automatically lead to bankruptcy, but it is a precursor.

 

3. Consumer Proposal: An alternative to bankruptcy for individuals with debts up to $250,000 (excluding a mortgage on their principal residence). It involves negotiating with creditors to repay a portion of the debt for up to five years.

 

4. Division I Proposal: Similar to a consumer proposal but for businesses or individuals with debts exceeding $250,000. It provides a structured repayment plan approved by creditors and the court.

 

The Bankruptcy Process in BC

The process of declaring bankruptcy in BC involves several steps and requires the oversight of a Licensed Insolvency Trustee (LIT). Here’s a step-by-step overview:

 

1. Initial Consultation: The debtor meets with a Licensed Insolvency Trustee to discuss their financial situation and explore possible solutions. The LIT provides advice on whether bankruptcy or a proposal might be the best course of action.

 

2. Filing for Bankruptcy: If bankruptcy is deemed appropriate, the LIT helps the debtor complete the necessary paperwork and file for bankruptcy. This filing initiates a legal process that halts most collection actions against the debtor.

 

3. Automatic Stay of Proceedings: Once bankruptcy is filed, an automatic stay of proceedings comes into effect. This stay stops most creditors from pursuing any further collection activities against the debtor.

 

4. Asset Liquidation: The LIT takes control of the debtor’s non-exempt assets, which are then sold to repay creditors. In BC, certain assets are exempt from seizure, including necessary clothing, household furnishings, tools of the trade, and a portion of home equity.

 

5. Creditors’ Meeting: A meeting of creditors may be called where the creditors can ask questions about the debtor’s financial affairs and the proposed distribution of assets.

 

6. Bankruptcy Discharge: Most first-time bankruptcies are discharged after nine months if the debtor fulfills all their duties, including attending credit counseling sessions and providing required information to the LIT. A discharge releases the debtor from most debts, offering a fresh financial start.

 

Consumer Proposals in BC

A consumer proposal is a viable alternative to bankruptcy for many individuals facing financial difficulties. Here’s how it works:

 

1. Proposal Preparation: The debtor, with the help of a Licensed Insolvency Trustee, prepares a proposal to repay a portion of their debts for up to five years. The proposal should offer creditors more than they would receive in a bankruptcy.

 

2. Filing the Proposal: The proposal is filed with the Office of the Superintendent of Bankruptcy (OSB) and submitted to creditors.

 

3. Creditor Voting: Creditors have 45 days to accept or reject the proposal. If the majority of creditors (in dollar value) accept the proposal, it becomes binding on all creditors.

 

4. Court Approval: The proposal must be approved by the court to ensure it is fair and reasonable. Once approved, the debtor makes regular payments to the LIT, who distributes the funds to creditors.

 

5. Completion: Upon successful completion of the payments, the debtor is released from the remaining debts included in the proposal.

 

Division I Proposals

For businesses or individuals with debts exceeding $250,000, a Division I proposal can be a more suitable option. The process is similar to a consumer proposal but with some differences:

 

1. Proposal Development: The debtor works with a Licensed Insolvency Trustee to develop a proposal that outlines how they intend to repay creditors.

 

2. Creditor Meetings: A meeting of creditors is mandatory for a Division I proposal. Creditors vote whether they want to approve or reject the idea.

 

3. Court Hearing: If the creditors accept the proposal, it must be approved by the court. If rejected, the debtor is automatically deemed bankrupt.

 

4. Implementation: Once approved, the debtor makes payments according to the proposal, and the LIT distributes the funds to creditors.

 

The Role of Licensed Insolvency Trustees

Licensed Insolvency Trustees play a crucial role in the administration of bankruptcy and insolvency processes under the BIA. They are licensed by the Office of the Superintendent of Bankruptcy (OSB) and are responsible for:

 

- Assessing the debtor’s financial situation and providing advice.

- Administering bankruptcies and proposals.

- Ensuring compliance with legal requirements.

- Safeguarding the interests of both debtors and creditors.

- Facilitating the fair distribution of assets.

 

Debtor and Creditor Rights

The BIA provides protections and rights for both debtors and creditors:

 

- Debtor Rights: Debtors are entitled to a fresh start free from most unsecured debts after the discharge from bankruptcy or completion of a proposal. They also have the right to keep exempt assets and receive credit counseling.

 

- Creditor Rights: Creditors have the right to vote on proposals, attend meetings of creditors, and receive a fair distribution of the debtor’s assets. They can also challenge the discharge of a debtor if there is evidence of misconduct.

 

Conclusion

Bankruptcy and insolvency can be challenging, but the Bankruptcy and Insolvency Act in BC provides a structured framework to address financial difficulties. Whether through bankruptcy, consumer proposals, or Division I proposals, the BIA offers solutions for individuals and businesses to manage their debts and work toward financial recovery.

 

FAQs:

Q1. What is the Bankruptcy and Insolvency Act (BIA)?

The Bankruptcy and Insolvency Act (BIA) is a federal law in Canada that governs the processes of bankruptcy and insolvency. It provides mechanisms for individuals and businesses to deal with debt problems, either through bankruptcy, which involves liquidating assets to repay creditors, or through proposals that offer a structured plan for repaying debts over time.

 

Q2. Who administers bankruptcy and insolvency in British Columbia?

In British Columbia, the processes under the BIA are administered by Licensed Insolvency Trustees (LITs). These professionals are licensed by the Office of the Superintendent of Bankruptcy (OSB) and are responsible for overseeing bankruptcy and insolvency proceedings, including managing the assets and liabilities of debtors.

 

Q3. What is the difference between bankruptcy and insolvency?

Insolvency is a financial state where an individual or business cannot meet their debt obligations as they come due. Bankruptcy, on the other hand, is a legal process that formally declares a person or business insolvent and involves the liquidation of assets to repay creditors.

 

Q4. What is a consumer proposal?

A consumer proposal is an alternative to bankruptcy for individuals with unsecured debts of up to $250,000 (excluding a mortgage on their principal residence). It allows debtors to negotiate with creditors to repay a portion of their debts for up to five years. This process is overseen by a Licensed Insolvency Trustee.

 

Q5. What is a Division I proposal?

A Division I proposal is similar to a consumer proposal but is intended for businesses or individuals with debts exceeding $250,000. It involves a formal plan to repay creditors over time, subject to approval by creditors and the court. If the proposal is rejected, the debtor is automatically deemed bankrupt.

 

Q6. What happens to your home if you file for bankruptcy?

The treatment of your home depends on the amount of equity you have in it. In BC, there is a homestead exemption that protects a portion of your home’s equity. If your equity exceeds this exemption, the trustee may sell the home and distribute the excess equity to your creditors. If the equity is below the exemption, you may be able to keep your home.

 

Q7. What is surplus income in bankruptcy?

Surplus income refers to the amount of income a bankrupt individual earns above a certain threshold set by the government. If you earn surplus income, you may be required to make additional payments to your trustee during your bankruptcy. These payments help repay your creditors and can affect the length of your bankruptcy.

 

Q8. Can you file for bankruptcy if you have student loans?

Yes, you can file for bankruptcy if you have student loans. However, student loans are only dischargeable if you have been out of school for more than seven years at the time of filing. If it has been less than seven years, the student loans are not discharged unless you can prove severe financial hardship under the "hardship provision."

 

Q9. What happens if your consumer proposal is rejected?

If your consumer proposal is rejected by creditors, you can revise and resubmit it, or consider filing for bankruptcy. If you are unable to reach an agreement with your creditors through a proposal, bankruptcy may be the next viable option.

 

Q10. Can you operate a business while in bankruptcy?

Yes, you can operate a business while in bankruptcy, but there are restrictions. You must disclose your bankruptcy status to anyone you do business with. Additionally, any income generated from the business may be subject to surplus income payments to your trustee.

 

Q11. What happens to co-signed debts in bankruptcy?

If you file for bankruptcy, any co-signer on your debts will still be responsible for repaying the full amount of the debt. Your bankruptcy does not release co-signers from their obligations.

 

Q12. Can you travel outside the country while in bankruptcy?

Yes, you can travel outside the country while in bankruptcy, but you must inform your Licensed Insolvency Trustee of your travel plans. Additionally, if you have any court appearances or other obligations related to your bankruptcy, you must ensure these are met.

 

You can also check the information regarding How to Claim Bankruptcy