What is bankruptcy? 

Bankruptcy is the legal word and definition applied to an individual person or a company or organization that has reached a point where they cannot pay their bills and creditors. 

The procedure known as bankruptcy is generally initiated by the debtor, (person or organization in debt), but in some cases, Creditors, (those who are owed), will try to file a bankruptcy petition against the debtor to try to recoup their losses.

Bankruptcy in the United States  

In the United States, bankruptcy is a matter which is placed under Federal jurisdiction by the United States Constitution.  This means that all bankruptcy cases are always filed in the United States Bankruptcy Court, but claims, exemptions and their validity are highly dependent upon State law. This means that State law plays a major role in most bankruptcy cases.

Chapters 

There are six different types of bankruptcy, called “Chapters” in the United States.

These are 

Chapter 7 - this is a basic liquidation for individuals and businesses

Chapter 9 - this is municipal bankruptcy

Chapter 11 - this is a process that allows for the re-organization of an corporation, but occasionally is used by individuals who have large debts and large assets

Chapter 12 - this is a process designed specifically for the rehabilitation of fishermen and farmers

Chapter 13 - this is a process which is designed as a repayment or rehabilitation plan for individuals with a regular source of income

Chapter 15 - this is a process which has been designed for international and cross border cases of bankruptcy where the home base or the debtor was not originally in the United States. 

Personal Bankruptcy 

For individuals, the two most common forms of bankruptcy are Chapter 7 and Chapter 13.    

Chapter 7 for Individuals 

If you use Chapter 7 bankruptcy, it means you, (the debtor), will surrender your properties to a bankruptcy trustee who will oversee the liquidation of those properties and then distribute the proceeds to the creditors.  In exchange for this you will receive a discharge from your debt.  Chapter 7 bankruptcy has it’s limitations as it can only be used once over a period of eight years.

Chapter 13 for Individuals 

If you have a regular source of income and would prefer to maintain your assets, you may choose Chapter 13 which is a repayment plan.  This will mean that a portion of your income now and for three to five years will be given over to the debtors for repayment of debts.  As the debtor you will have the opportunity to retain ownership and possession of your assets, which some people prefer. However, the amount of debt and income are important factors in determining whether this Chapter is an option for you.  

Business and Corporate Bankruptcy 

For business, the two most common forms of bankruptcy are Chapter 7 and Chapter 11.

Chapter 7 for Business and Corporations   

If you use Chapter 7 bankruptcy, it means you, (the debtor), or your company, will surrender your properties to a bankruptcy trustee who will oversee the liquidation of those properties and then distribute the proceeds to the creditors.  In exchange for this you or your company will receive a discharge from your debt.  Chapter 7 bankruptcy has it’s limitations as it can only be used once over a period of eight years.

Chapter 11 for Business and Corporations 

Chapter 11 bankruptcy allows the debtor to continue to retain ownership and control of the assets under a kind of rehabilitation and restructuring process. Here, the debtor is renamed a debtor in possession because they are continuing to run the day to day operations of the company. The courts are naturally involved during this process and both debtors and creditors work with the court to negotiate a plan suitable for all. 

Bankruptcy in Canada  

In Canada, as in the United States, bankruptcy is a matter which is set out by Federal Law.  In Canada it is named the Bankruptcy and Insolvency Act and is applied to both business and to individual persons.  In Canada there is a Federal Agency responsible for the administration of bankruptcies. This agency is named the office of the Superintendent of Bankruptcy.  Bankruptcy estates are administered by Trustees in Bankruptcy, who most often are specialists in accounting or law or both. 

Businesses and Individuals who find themselves in financial distress have two options designed to resolve their problem. These are:

Bankruptcy  

In Canada, Bankruptcy is the surrendering your assets for the purpose of eliminating or being discharged from your debt.  In all cases a Trustee in bankruptcy will perform the duties necessary to complete the bankruptcy procedure.  The process is nearly identical to the Chapter 7 process in the United States.  (See above).

Consumer Proposals 

In Canada a person can file a proposal if they prefer an alternative to bankruptcy.  This process is similar to the Chapter 13 procedure in the United States. In fact it is a repayment plan.  The Office of the Superintendent of Bankruptcy has named this program Consumer Proposals. 

How It Works 

A settlement is negotiated between a debtor and their creditors.  Often the best individuals to assist in negotiations of this type are Trustees in Bankruptcies because they have specialist knowledge exclusively in the area of consumer and corporate debt.  

Monthly payments are then made by the debtor for a period of five years, (maximum).

Funds are distributed to the creditors by a Proposal Administrator, (who is a licensed Trustee in Bankruptcy) and the creditors are prevented from taking any other legal or collection action.

A Consumer Proposal can only be made if a debtor has debts that exceed $5000.00 to a maximum of $75,000. This does NOT include the mortgage on their principle residence. 

Benefits of the Consumer Proposal is similar to those of the Chapter 13 program in the United States. 

It is best to engage the advice of a Trustee in bankruptcy before making a decision as to the path you choose. We have listed many reliable professionals in your area and invite you to browse this selection.