To be able to declare personal bankruptcy (referred to as consumer bankruptcy), a person must owe their creditors an aggregate of at least $1,000 and also be “insolvent”. Generally speaking, an insolvent person is someone who either cannot meet his or her obligations as they become due, has ceased making payments in the ordinary course, or has assets the value of which is not sufficient to pay his or her debts.
The objective of bankruptcy is fourfold: (1) it is intended to provide the bankrupt with a fresh start; (2) it supports the financial rehabilitation of the bankrupt; (3) it promotes the orderly distribution of the bankrupt’s assets amongst its creditors; and (4) it allows for the investigation into the affairs of the bankrupt with a view to analyzing what gave rise to the bankruptcy in the first instance.
There are two main ways to become personally bankrupt. You can either make a voluntary assignment into bankruptcy or one of your creditors can put you into bankruptcy (this is what is known as being petitioned into bankruptcy). By far the majority of personal bankruptcies are by way of a voluntary assignment.
When someone is considering declaring bankruptcy the first step is to speak with a Trustee in Bankruptcy. A Trustee in Bankruptcy will administer the bankrupt’s assets and deal with the bankrupt’s creditors. When someone declares bankruptcy, that person’s assets transfer to or vest in the Trustee in Bankruptcy so that the bankrupt’s assets may be distributed by the Trustee to the creditors in an orderly fashion. The Trustee in Bankruptcy is paid a fee for his or her service and this fee is usually payable out of the bankrupt’s assets or estate. It is important to remember that the Trustee works for the creditors’ interests and not the bankrupt’s. One of their objectives is to maximize the recovery for the creditors. A bankrupt should bear this in mind when dealing with the Trustee.
The bankrupt’s assets may be administered in a summary fashion (called a Summary Administration) or by Ordinary Administration. Most consumer bankruptcies are by way of Summary Administration which provides a more streamlined and cost-effective means of bankruptcy. To be eligible for a Summary Administration the bankrupt’s realizable assets must be of a value less than $15,000. Under a Summary Administration the Trustee in Bankruptcy’s fees are calculated based on a tariff. An Ordinary Administration applies when the bankrupt’s assets are of a value greater than $15,000. A meeting of the creditors is mandatory and there is more creditor involvement in an Ordinary Administration. The Trustee’s fees are based on the actual time spent administering the estate. This usually makes Ordinary Administrations more expensive and they are generally more complex than Summary Administrations.
Typically, if it is the first time a person is declaring bankruptcy, they can expect to be bankrupt for up to 21 months before being discharged from bankruptcy. If it is the second time, that period goes up to 36 months. While in bankruptcy a bankrupt can expect to pay a portion of his or her “surplus income” to the creditors. Surplus income is calculated using a number of different factors, but it is generally equal to 50% of the bankrupt’s net household income over and above a set allowance. For example, if a bankrupt’s net household income is $3,000 per month and the set allowance is $2,345 per month, the bankrupt must pay to its Trustee for the benefit of his or her creditors $327.50 per month (calculated as [$3,000 – $2,345] X 50%). The applicable set allowance depends on the living situation of the bankrupt. The obligation to pay surplus income is in addition to the Trustee’s division of the bankrupt’s assets among his or her creditors.
There is however certain property that is exempt from the bankruptcy and therefore does not become divisible among the bankrupt’s creditors, including:
1. Property held by the bankrupt “in trust” for any other person;
2. Property or money in an RRSP or registered retirement income fund, other than property or money contributed to any such plan or fund in the 12 months before the date of bankruptcy; and
3. Any property that is exempt under any applicable provincial laws (the Bankruptcy and Insolvency Act is a federal statute).
With respect to the third category, in British Columbia some of the exemptions are contained in the Court Order Enforcement Act and regulations. The exemptions under that legislation are as follows:
1. Necessary clothing of the bankrupt and the bankrupt’s dependents;
2. Household furnishings and appliances that are of a value not exceeding $4,000;
3. One motor vehicle that is of a value not exceeding $5,000 or $2,000 if the bankrupt is paying maintenance and support under the Family Maintenance Enforcement Act;
4. Tools and other personal property of the bankrupt not exceeding $10,000 that are used by the bankrupt to earn income from the bankrupt’s occupation;
5. Medical and dental aids that are required by the bankrupt and the bankrupt’s dependents; and
6. Equity in the bankrupt’s principal residence of up to $12,000 if the bankrupt lives in Greater Vancouver and $9,000 if the bankrupt lives outside Greater Vancouver.
One recent case to consider in respect of the motor vehicle exemption is Re Thow, 2010 BCSC 1561. That case appears to have changed the law on how this exemption is interpreted. The Court held that the motor vehicle exemption was simply not available where the vehicle had a value exceeding $5,000. The Court held this view despite the express wording of S. 71.2(2) of the Court Order Enforcement Act which provides that if the vehicle is sold under the Act the proceeds are to be paid firstly to any secured creditor with a security interest in the vehicle and then secondly to the bankrupt, but only an amount not exceeding the prescribed exemption. This wording clearly contemplates that a vehicle with a value exceeding $5,000 can be sold by the Trustee under the Act and that any proceeds above and beyond the value of the secured creditor’s interest is to be paid back to the bankrupt up to a total of $5,000. For example, if a vehicle with a $20,000 secured charge is sold by the Trustee for $30,000, then $20,000 of the proceeds would be distributed to the secured creditor first in satisfaction of their claim, then $5,000 would be repaid to the bankrupt (i.e. the value of the exemption) and the remaining $5,000 would then be distributed amongst the ordinary creditors of the bankrupt. Notwithstanding this obvious interpretation, the Court was of the opposite view. With respect, the decision is wrong and should not be followed. However, until there is greater clarity from the Courts on this issue, it would be wise for someone who is contemplating bankruptcy and who owns a vehicle with a value exceeding $5,000 to consider selling the vehicle and buying a vehicle with a value less than $5,000 before making the assignment into bankruptcy. That way, you will at least preserve your $5,000 vehicle exemption instead of running the risk that the Trustee will sell your vehicle and retain all of the proceeds for the benefit of the creditors alone.
Contact Alex Bayley of DuMoulin Boskovich LLP for your legal needs.