People, from all walks of life, file for bankruptcy or a proposal. In my practice I have had teachers, carpenters, plumbers, housewives, doctors, nurses, lawyers, accountants, university professors, actors, labourers, airline pilots, truck drivers, students, airline stewards, mill workers, and more all file for bankruptcy or a proposal. No one is immune from a financial disaster!

The latest study available, published in 1998, called An Empirical Study of Canadians Seeking Personal Bankruptcy Protection by Saul Schwartz & Leigh Anderson of the School of Public Administration, Carleton University, reported the following demographics about their sample of people filing for bankruptcy:
• 59 percent were men
• 32 percent were under 30
• For 28 per cent of the people under 30, student loans were 50 per cent or more of the overall debt
• 43 percent were married (or living in a common law arrangement)
• 29 percent were formerly married
• 28 percent were single
• 15 percent were unmarried and had at least one dependent under 21 years old (this group is 10 percent of the general Canadian population)
• Slightly better educated than the general Canadian population
• For 10 percent, student loans were more than 90 per cent of total debt
• The only difference between the immigrants in our sample and the immigrants in the general population is the under-representation of Asians among the debtors.

Canadian vs. American Personal Bankruptcy – Which is Better?

The US and Canada share a similar culture, similar economy and similar laws. In the US bankruptcy reform was enacted on October 17, 2005. In Canada bankruptcy reform was passed into law on November 25, 2005 but has not yet been enacted.

The US Approach: In the US bankruptcies are handled by bankruptcy lawyers and not trustees, as in Canada. Consumers can file Chapter 7 (Canada = personal bankruptcy) or Chapter 13 (Canada = proposal). The states set bankruptcy exemptions, as the provinces do in Canada. Some states allow their residents to choose between the state and federal exemptions.

Bankruptcy reform in the US brought in a means test to decide whether Chapter 7 or Chapter 13 must be filed. The means test is two tiered. The first test is whether a person’s income is below the median income for his state. If it is he can file Chapter 7. If it is not, a second test is required. This one brings into the factor the person’s expenses. Most of the people who go through this test are allowed to file Chapter 7. The ones who do not are required to file Chapter 13 and make prescribed payments for 5 years.

By Canadian standards the means test is quite generous. For example under the new laws in Canada payments to creditors kick in when a family of 3 has gross monthly income greater than $3,600. In New York the cut off for a family of 3 is a monthly gross salary of $4,948. The cut-off is even higher in the US because if a person has income higher than the median he goes through another stage where his expenses are factored in. A high percentage of these people are allowed to file Chapter 7, thereby not having to pay additional money to their creditors.

Which System is Better? From the perspective of the bankrupt the US citizen who goes into bankruptcy gets a better deal than the Canadian; mainly because the real estate exemptions in the US are generally very much higher. For more on this refer to this Blog. Other advantages for the American bankrupt are a quicker discharge in Chapter 7 of 4 months (Canada = 9 months) and a higher cut off before being required to file Chapter 13 (Canada = proposal).

From the perspective of which is better for society and the economy it is this writer’s opinion that the US system is superior to the Canadian. My reason for this is that I subscribe to the conclusions of a research study by Wei Fan and Michelle White published in the Journal of Law & Economics, vol. 46:2, October 2003.

This study found that locations with more lenient bankruptcy rules have higher levels of self-employed individuals, meaning that these regimes encourage enterprise. America’s liberal business bankruptcy laws are repeatedly cited as a factor in the US’ prodigious advantage over Europe in entrepreneurship.

Comparison of Canadian and American Personal Bankruptcy for Major Bankruptcy Aspects under the New Laws. (The Dollars quoted are: $US for US references and $CA for Canadian references.)

Cost:
• Canada: A minimum of $1,700.
• US: Approximately $1,800.
Note: In the US an individual can file bankruptcy without a bankruptcy lawyer. The paper work is detailed and complex and should only be attempted in the most straight forward bankruptcy.

Length of time to get a discharge:
• Canada: 9 months in a bankruptcy with no excess income.
• US: Usually 4 months.

Cut-off amount for paying additional money to creditors:
• Single Person:
• Ontario Resident – Monthly gross income greater than $2,200.
• New York Resident - Monthly gross income greater than $3,400

• Family of 3:
• Ontario Resident - Monthly gross income greater than $3,600.
• New York Resident - Monthly gross income greater than $4,948
Note: The cut-off is even higher in the US because if a person has income higher than above he goes through another stage where his expenses are factored in. A high percentage of these people are allowed to file Chapter 7, thereby not having to pay additional money to their creditors.

Allowable Exemptions (Assets that can be retained in a bankruptcy):
• Ontario: Home = Nil, Vehicle = $5,650, Household goods = $11,300, Tools of the trade = $11,300.
• New York: Home = $50,000, Vehicle = $2,400, Household goods = $10,000, Tools of the trade = $5,000.

Counselling:
Ontario: Two counselling sessions are required to be taken (usually with the trustee) during the term of the bankruptcy or consumer proposal.
New York: A counselling session is required before bankruptcy is filed and again once before the discharge.

Debt that is Erased in a Bankruptcy:
• Canada: Certain kinds of debt are NOT erased by the bankrupt’s discharge. They are:
o Fines imposed by a Court;
o Money owing for things stolen;
o Things obtained by misrepresentation;
o Alimony or maintenance payments;
o Award of damages by a court for intentionally inflicting bodily harm or sexual assault;
o Student loans if bankruptcy is filed prior to or within ten years after the finish of studies.
• US: The US has similar debt to Canada’s that cannot be erased in a bankruptcy. In addition Income Tax debt in most cases cannot be erased and student loan debt cannot be erased unless it would be an undue hardship to repay the student loans.

Second Time Bankrupts:
• Canada
o If there is no excess income the discharge is in 24 months.
o If there is excess income the discharge is in 36 months or more if the court so orders.
• US:
o A person can file Chapter 7 again if it has been more than 8 years since he or she was discharged from the previous Chapter 7 bankruptcy.
o A Chapter 13 can be filed if:
 The debtor received a discharge under Chapter 7, 11 or 12 more than four years ago; or
 The debtor received a discharge under Chapter 13 more than two years ago.

Bankruptcy charges laid. We previously reported bankruptcy charges laid on another matter on our Blog of January 26, 2006.

MILTON, ON, April 3, 2006 /CNW/

The Royal Canadian Mounted Police, Greater Toronto Area Commercial Crime Section, Toronto West Site, recently charged an individual with offences under the Bankruptcy and Insolvency Act.

As a result of the RCMP investigation Naser KAZEM, 36, of Toronto, Ontario, was charged with four counts under the Bankruptcy and Insolvency Act relating to the disposition of property obtained on credit and not paid for. His first appearance is scheduled for April 28th, 2006 at Old City Hall in Toronto.

The RCMP and the Office of the Superintendent of Bankruptcy continue to investigate a number of allegation of breaches of the Bankruptcy and Insolvency Act including the fraudulent disposition of property, failing to keep proper books of account and failure to comply with duties.

“This partnership will continue to focus its efforts on undertaking criminal investigations where evidence of wrong doing exists. The objective is to maintain confidence in the integrity of the Bankruptcy and Insolvency Process,” stated Inspector Brian Verheul of the RCMP GTA Commercial Crime Section.

For further information: A/Sgt. Michele Paradis, NCO i/c Corporate Communications and Media Relations, RCMP “O” Division, Cellular (416) 992-4409, Pager (416) 715-2375