The final step in Canadian bankruptcy reform goes into effect on September 18, 2009 when the last of the new laws go into force. It is this trustee’s opinion that the new bankruptcy laws coming into force on September the 18th. are a mishmash of the good and the ugly.

The Good:
• Dollar Threshold for a Consumer Proposal Is Raised:
Consumer and commercial debts of an individual, excluding debts secured by the individual’s principal residence, are not more than $250,000.
For debt greater than this amount or as an alternative a Division I Proposal can be filed.
• Preventing Lenders from Cancelling Certain Contracts when a Person Files Bankruptcy or a Proposal:
This change places limits on the exercise of “ipso facto contract clauses” in bankruptcy. This will prevent the punitive and spiteful actions of some lenders who, as a matter of course, cancel all contacts of a person who enters into bankruptcy even if the contract is current.

We like these changes because the raising of the Consumer Proposal threshold to $250,000 makes Consumer Proposals available to more people.

We like the new law protecting lenders from cancelling certain contracts because it is fair and helps debtors get a fresh financial start.

The Ugly:
When Discharged:
- 9 month automatic discharge for 1st. time bankrupts who fulfill all their duties and who do not have excess income. e.g. less than $3,062.00 a month take home pay for a family of 3.
- 21 months (or more at the court’s discretion) for 1st. time bankrupts who fulfill all their duties. And who have excess income. e.g. more than $3,062.00 a month take home pay for a family of 3.
-24 months for 2nd time bankrupts who do not have excess income… e.g. less than $3,062.00 a month take home pay for a family of 3.
-36 months for 2nd time bankrupts who have excess income. e.g. more than $3,062.00 a month take home pay for a family of 3.

We do not like these changes because they make it more difficult for a person to get a fresh financial start. The ability for a person to get a fresh financial start has always been a tenet of Canadian bankruptcy law. That tenet is now in jeopardy or perhaps non existent now.

Let’s compare Canada with the US. In Canada a bankrupt where the three person family’s take-home pay is more than $36,744.00 p.a. will have to wait at least 21 months before he is eligible to be discharged. A person in Washington State is discharged in 4 months so long as his family of three has gross annual income of less than $US 69,577.00.

The effect of these changes is that many more consumer proposals will be filed.

The federal government announced today. August 6, 2009, that the remaining new bankruptcy laws would go into force on September 18, 2009:

*When Discharged:

This Law goes into force on September 18, 2009.

- 9 month automatic discharge for 1st. time bankrupts who fullfill all their duties and who do not have excess income. e.g. less than $2,862.00 a month take home pay for a family of 3 for 2009.

- 21 months (or more at the court’s discretion) for 1st. time bankrupts who fullfill all their duties. and who have excess income. e.g. more than $2,862.00 a month take home pay for a family of 3 for 2009.

-24 months for 2nd time bankrupts who do not have excess income.. e.g. less than $2,862.00 a month take home pay for a family of 3 for 2009.

-36 months for 2nd time bankrupts who have excess income. e.g. more than $2,862.00 a month take home pay for a family of 3 for 2009.

*High Income Tax Debt:

This Law goes into force on September 18, 2009.

Bankrupt individuals with more than $200,000 in personal income tax debts representing 75 percent or more of their total unsecured liabilities will not be eligible for an automatic discharge. These individuals will have to seek a Court order to be discharged of their debts.

*Dollar Threshold for a Consumer Proposal Is Raised:

This Law goes into force on September 18, 2009.

Consumer and commercial debts of an individual, excluding debts secured by the individual’s principal residence, are not more than $250,000.

For debt greater than this amount a Division I Proposal can be filed.

NEWS FLASH - July 7, 2008 - The following bankruptcy law changes have gone into force today, Monday, July 7, 2008:

*The Wage Earner Protection Program Act (“WEPPA”) and Regulations. The WEPP will compensate individuals for amounts earned, but not paid, during the six months preceding the bankruptcy or receivership of their employers under the BIA. The WEPP will help protect workers by providing a guaranteed payment of a maximum of $2,000 in respect of wages, salaries, commissions, vacation pay,
severance pay, termination pay or compensation for services rendered, and up to $1,000 in respect of disbursements owing to travelling salespeople incurred should their employer declare bankruptcy. More information can be found at the government website.

NOTE: The requirement to pay severance pay and termination pay went into effect on January 27, 2009.

*Reduction of the student loan discharge period from 10 to seven years. This amendment will apply where the debtor obtains his or her discharge on or after July 7, 2008 (PROVIDED that at the time they filed they had ceased to be student for the required seven years) or the debtor had or becomes bankrupt on or after July 7, 2008.

The amendment that will reduce to five years the period a bankrupt will have to wait to make a “hardship” application to have student loan debt or obligation discharged (BIA , s. 178(1.1) is also now in force. This amendment applies to all debtors notwithstanding when the bankruptcy or the process that results in the bankruptcy is initiated.

*Provision of protection of all registered retirement savings plans (RRSP’s, RRIF’s and DPSP’s (Deferred Profit Sharing Plans).
o Contributions made in the 12 months prior to the date of bankruptcy will be recovered (clawed back) for the benefit of the bankruptcy estate for RRSPs in provinces without RRSP exemption laws (BC, Alberta, Ontario, NB, and NS);
o There will be no upper cap on the amount of RRSPs that can be protected;
o There will be no need to set up the RRSPs in a locked in plan to make them eligible for exemption;
o The court will have no jurisdiction to extend the one year claw back period period in an appropriate case.

NEWS FLASH - July 7, 2008 - The following bankruptcy law changes have gone into force today, Monday, July 7, 2008:

The Wage Earner Protection Program Act (“WEPPA”) and Regulations. The WEPP will compensate individuals for amounts earned, but not paid, during the six months preceding the bankruptcy or receivership of their employers under the BIA. The WEPP will help protect workers by providing a guaranteed payment of a maximum of $2,000 in respect of wages, salaries, commissions or compensation for services rendered, and up to $1,000 in respect of disbursements owing to travelling salespeople incurred should their employer declare bankruptcy. More information can be found at the government website.

Reduction of the student loan discharge period from 10 to seven years. This amendment will apply where the debtor obtains his or her discharge on or after July 7, 2008 (PROVIDED that at the time they filed they had ceased to be student for the required seven years) or becomes bankrupt on or after July 7, 2008. The amendment that will reduce to five years the period a bankrupt will have to wait to make a “hardship” application to have student loan debt or obligation discharged (BIA , s. 178(1.1)) is also now in force. This amendment applies to all debtors notwithstanding when the bankruptcy or the process that results in the bankruptcy is initiated.

Provision of protection of all registered retirement savings plans (RRSP’s, RRIF’s and DPSP’s (Deferred Profit Sharing Plans).
o Contributions made in the 12 months prior to the date of bankruptcy will be recovered (clawed back) for the benefit of the bankruptcy estate for RRSPs in provinces without RRSP exemption laws (BC, Alberta, Ontario, NB, and NS);
o There will be no upper cap on the amount of RRSPs that can be protected;
o There will be no need to set up the RRSPs in a locked in plan to make them eligible for exemption;
o The court will have no jurisdiction to extend the one year claw back period period in an appropriate case.

It is not known when the balance of the new bankruptcy laws will go into force. We have been advise it will be in the later part of this year.

NEWS FLASH, DECEMBER 14, 2007- It was announced today that Bill C-12 - an Act to amend the Bankruptcy and Insolvency Act, the Companies’ Creditors Arrangement Act, the Wage Earner Protection Program Act and Chapter 47 of the Statutes of Canada, 2005 has received Royal Assent.

This has caught everyone by surprise as the Senate was scheduled to hear 21 more witnesses in February, 2008. It is also surprising given that when the last bankruptcy bill was rammed through a few years ago the Senate committee expressed its disappointment in the “fast tracking” of the legislation that did not allow it to hear the many groups that were scheduled to make representations. As a result the Senate Committee received assurances that there would be the opportunity for the Senate Committee to review the legislation in early 2006 and that the legislation would not come into force until June 30, 2006 at the earliest. The Minister of Industry, David L. Emerson, confirmed this in a letter dated November 24, 2005.

Speculation is that a federal election is imminent. If Parliament is dissolved for the election before the Bill received Royal Assent, the next Parliament would have to start over from the beginning, with a new Bill. No one in Parliament wants this, because of the election advantage of having the new wage protection scheme passed into law.

This bill was passed without changes. A summary of the major changes affecting consumer bankruptcy is given here. Many of the flaws in Bill C-55 were corrected by Bill C-12, but other flaws exist which will go uncorrected.

For more information please refer to the following:
• Government of Canada News Release;
• Senate Report.

News Flash! October 25, 2007. Bankruptcy Reform is back on track. The Conservative government reinstated the Bankruptcy Reform package on Thursday, October 25, 2007, in a motion that was approved by all parties. The bankruptcy package had died when parliament was last prorogued.

Bankruptcy Reform in Canada has been subject to many delays since it was rushed through the House and the Senate on November 25, 2005, just before the adjournment of parliament for an election that brought the Harper Conservatives to power.

The major changes proposed by Bankruptcy Reform are:
1. Guaranteed payment for wages and vacation pay owing, in the six months prior to bankruptcy or a receivership, to a maximum of $3,000 per employee;
2. All registered retirement savings plans and registered retirement income funds will be exempt from seizure in a bankruptcy. Currently only employer sponsored plans and retirement savings plans offered through insurance companies are exempt from seizure, in the provinces of BC, Alberta, Ontario, New Brunswick, Nova Scotia and PEI. The other provinces have passed provincial legislation to make RRSPs and RRIFs exempt;
3. Student Loans will be eligible to be written off in a bankruptcy if the student has terminated his studies seven or more years ago. This is a decrease from the current ten-year wait;
4. Debtors who have surplus income, in accordance with directives issued by the Superintendent of Bankruptcy, will no longer be eligible for an automatic discharge after nine months. They will be required to stay in bankruptcy a further 12 months and to continue making surplus income payments to the trustee.

Second time bankrupts, with surplus income, will be required to stay in bankruptcy and make surplus income payments for a total of three years. This is tougher than the current laws, which sees a second time bankrupt discharged on a sliding scale, with postponement of discharge tied largely to how long it was between bankruptcies.

The Senate is expected to hold exhaustive reviews of the proposed legislation including hearing submissions from stakeholders and other interested parties.

You can read more about Bankruptcy Reform at this link.

June 13, 2007 - Bankruptcy Reform Back on track. First reading passes in the House. Bill C-62, an Act to amend the Bankruptcy and Insolvency Act, the Companies’ Creditors Arrangement Act, the Wage Earner Protection Program Act and chapter 47 of the Statutes of Canada, 2005 received first reading in the House of Commons this date.

The Bill had been hung up in the House over the issue of exempting RRSPs and RRIFs. The Bloc Québécois refused to approve passing of the Bill as it felt that the wording concerning RRSPs and RRIFs infringed on Quebec’s jurisdiction. In order to get the Bill passed unanimously, the wording concerning RRSPs and RRIFs was changed to make RRSP and RRIF exemptions in accordance with the laws of the province, where the provinces have such exemptions. The provinces that have RRSP and RRIF exemptions are Saskatchewan, Manitoba, Quebec, Prince Edward Island and Newfoundland and Labrador.

This change in RRSP wording will result in the following:

* A one year claw back will only be in effect for RRSPs in provinces without RRSP exemption laws;
* There will be no upper cap on the amount of RRSPs that can be protected;
* There will be no need to set up the RRSPs in a locked in plan to make them eligible for exemption;
* The court will have no jurisdiction to extend the one year claw back period period in an appropriate case.

Insolvency professionals and everyone interested in a fair and just bankruptcy system will be very upset with the proposed change to RRSPs. The change in wording governing the exemption of RRSPs opens the system up to abuse as a person will be able to set aside funds in an RRSP thereby protecting them in a bankruptcy and then once the person is discharge the funds can be used with impunity.

The Bill still has to go to the Senate, probably in the fall. The Senate can be expected to give the bill a thorough review, including hearing expert testimony.

You can Read Bill C-62 online

For more information on bankruptcy reform please refer to this link.

Bankruptcy Reform is Not Dead Yet.

The Minister of Labour, Jean-Pierre Blackburn introduced a ways and means motion on December 11, 2006, to introduce an Act to amend the Bankruptcy and Insolvency Act, the Companies’ Creditors Arrangement Act, the Wage Earner Protection Program Act and chapter 47 of the Statutes of Canada, 2005.

The next step is a vote on the motion and introduction of the actual bill.

The bankruptcy reform legislation is not without controversy. The Legislation was rushed into law to beat the non confidence vote held on November 28, 2005. The Senate committee expressed its disappointment in the “fast tracking” of the legislation that did not allow it to hear the many groups that were scheduled to make representations. As a result the Senate Committee received assurances that there would be the opportunity for the Senate Committee to review the legislation in early 2006 and that the legislation would not come into force until June 30, 2006 at the earliest. The Minister of Industry, David L. Emerson, confirmed this in a letter dated November 24, 2005.

A report to the Senate, prepared by insolvency experts and stakeholders after many months of work, was largely ignored in the legislation.

The Canadian Association of Insolvency and Restructuring Professions (CAIRP) supports the new laws but is suggesting some changes.

Many trustees across Canada are unhappy with the new laws because it takes discretion away from trustees and makes the process more formula based. Also, what has been a tenet in Canadian bankruptcy, that an unfortunate but honest debtor deserves a fresh financial start, is being eroded.

On the whole bankruptcies are going to be more costly to debtors and it’s going to take longer to get a discharge.

For more about bankruptcy reform please refer to these blogs.

Changes to the Bankruptcy and Insolvency Act put on hold.

The Canadian Association of Insolvency and Restructuring Professionals (CAIRP) advised their members today that it is highly unlikely that the changes to the Bankruptcy and Insolvency Act will be proclaimed prior to 2007.

We had previously been advised that the new bankruptcy laws, which were rushed into law on November 25, 2005, just before the defeat of the Liberal government on November 28, 2005, would not come into force until June 30, 2006 at the earliest. The Senate was promised the opportunity to review the legislation and hear the scores of experts and special interest groups who were scheduled to make submissions. The new Conservative government is not bound by these commitments.

CAIRP explained in its April 12, 2006 Bulletin to its members that a period of nine to twelve months is required by office of the Superintendent of Bankruptcy to draft or amend the related rules, devlop or modify its system, and train its staff. It will also take some time for trustees to train their staff, and for software providers to modify their programs.

We like the changes to the bankruptcy laws which: 1) Cancels the stay of proceeding when the trustee is discharged; 2) Prevents lenders from cancelling certain contracts when a person files bankruptcy or a proposal; 3) Requires debtors to attend counselling before a consumer proposal is completed and the remaining debt erased and 4) Raises the threshold for consumer proposals from $75,000 to $250,000.

The new bankruptcy laws, which were rushed into law on November 25, 2005, just before the defeat of the Liberal government on November 28, 2005, will not come into force until June 30, 2006 at the earliest. The Senate was promised the opportunity to review the legislation and hear the scores of experts and special interest groups who were scheduled to make submissions. There is the hope that this flawed legislation will not be enacted without significant changes.

Cancellation of the Stay of Proceeding When the Trustee is Discharged: (Subsections 69.3 (1.1)) This change makes it clear that once a trustee is discharged the stay of proceedings is terminated. One of the effects of this is that if a bankrupt is not discharged from bankruptcy and the stay of proceeding is cancelled upon the discharge of the trustee then there is no protection provided that person and the creditors can pursue him or her for the outstanding debt. This change reinforces the integrity of the Canadian bankruptcy system.

Preventing Lenders from Cancelling Certain Contracts when a Person Files Bankruptcy or a Proposal: (Subsections 66.34 and 84.2) This change places limits on the exercise of “ipso facto contract clauses” in bankruptcy. This will prevent the punitive and spiteful actions of some lenders who, as a matter of course, cancel all contacts of a person who enters into bankruptcy even if the contract is current.

Requiring the debtor to Attend Counselling before a Consumer Proposal is Completed: (Subsection 66.38) This was always the intention but was overturned by the courts because the wording was not specific. This now makes it clear that a person who has refused or neglected to receive counselling will not receive a Certificate of full performance.

Raising the Threshold for Consumer Proposals from $75,000 to $250,000: This opens up consumer proposals to more debtors.

The Canadian Association of Insolvency and Restructuring Professionals; CAIRP, supports these changes.

The Report of the Senate Committee on Banking, Trade and Commerce November, 2003, recommended these changes.