12. Introduction to Bankruptcy
The Bankruptcy Court in Canada is responsible for administering and overseeing the federal Bankruptcy and Insolvency Act (BIA). This Act regulates the process of bankruptcy, consumer proposals and insolvency. The Bankruptcy Court is a court of record, and its primary objective is to ensure that the rights of all parties involved in bankruptcy proceedings are upheld.
The Bankruptcy Court has decision-making power in bankruptcy cases. The court decides matters connected with a bankruptcy case, from the filing of the petition through final discharge of the bankruptcy. The court determines whether a debtor is eligible for bankruptcy, approves the bankruptcy plan, and oversees the bankruptcy proceedings.
The court determines if a trustee is required to manage the debtor’s file and assets. The main job of the trustee is to execute the bankruptcy plan. The bankruptcy plan is a detailed plan of action for the liquidation or reorganization of the debtor’s assets and to satisfy creditors’ claims.
A trustee is the representative of the estate and is responsible for prioritizing and satisfying creditors’ claims. To achieve this goal, trustees may hire professionals such as accountants, attorneys, and appraisers. The trustee is responsible for collecting the debtor’s assets, selling them, and distributing the proceeds to creditors. The trustee will also provide information and advice to the debtor about their legal responsibilities and options for dealing with their debt.
Roles of Receiver and Trustee
A receiver or trustee is a third party appointed by a court through a court order or by a secured creditor through a letter of appointment to take control of property, supervise liquidation (bankruptcy) proceedings, and then, remit the proceeds according to priorities established by common or statutory law. There are two types of receivers; court-appointed receiver and privately appointed receiver, appointed by a secured creditor.
Creditors may not want to close a business immediately as the value of the business may be greater if operations are maintained. In some cases, it may make more sense to keep the business running, with paying customers, so that the creditors can receive as much of the value they are owed as possible.
Receivers or trustees can help creditors by managing the business, in the best interest of the creditors, for a period of time, thereby maximizing the value of the assets to ensure the creditor receives the greatest percentage of what they are owed.
While we often use the terms trustee or receiver interchangeably because both are tasked with securing as much value as possible for the creditors, a receiver acts primarily on behalf of secured creditors, where a trustee works on behalf of the unsecured creditors.
Bankruptcy plans identify and prioritize debts. The first debts to be paid off are to secured creditors who have interest is a particular property to “secure” the debt. Mortgages, car loans, and liens are common examples of secured debts. If the individual or business defaults on the loan payments, a secured creditor may force the debtor to sell or forfeit the property to satisfy the debt. The second category of debts are to unsecured creditors, who do not have an interest in any particular property.
Discharge of Debtor
Once the process is complete, the individual or business will have the debts absolved. A bankruptcy discharge releases the debtor from monetary obligations that existed at the time the petition was filed and ends the bankruptcy case. In deciding whether to grant the authorization; for example, the court may consider whether the process that led the business to begin the bankruptcy process was reasonable within the circumstances. However, depending upon whether the person or business has declared bankruptcy before or not, there are some differences.
In the case of a debtor who has not previously filed bankruptcy in a Canadian jurisdiction, the debts are automatically discharged 9 months after the date of bankruptcy unless, in that 9-month period, an opposition to the discharge has been filed or the debtor fails to make any required payments under the proposal.
In the case of a debtor who has been a bankrupt one time before in a Canadian jurisdiction, the debts are automatically discharged on the expiry of 24 months after the date of bankruptcy unless, in that 24-month period, an opposition to the discharge has been filed or the debtor failed to make payments under the proposal.