New Canadian Bankruptcy Laws - Canadian Bankruptcy Reform

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.

It is estimated that the new laws will come into force in approximately 12 months from December 14, 2007.

For more information please refer to the following:

Summary of the Major Changes Affecting Consumer Bankruptcy

High Income Tax Debt: 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. They will have to convince the Court that the relief they are seeking is justified on the basis of their efforts to repay their debts, their financial situation when the debt was incurred and their future financial prospects. The Court will be able to fix conditions on the discharge. Specifically, the Court may refuse to discharge these individuals from bankruptcy, suspend their discharge for a period of time, or require the bankrupt to comply with any requirement as the Court may direct. This is meant to be an anti-abuse measure targeting high-income individuals who may strategically use bankruptcy to avoid paying large income tax debts.

Exemption for RRSPs: RRSP and RRIF exemptions will be 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 wording change 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.

Dollar Threshold for a Consumer Proposal is Raised: A consumer debtor can now be considered for filing a consumer proposal if the individual's aggregate debts, excluding debts secured by the individual's principal residence, are not more that $250,000. This is an increase from $75,000.

Mandatory Surplus Income Payments: Bankrupts will be required to make surplus income payments to the estate in accordance with directives issued by the Superintendent of Bankruptcy. Trustees will no longer have the discretion to recommend that a bankrupt should pay less of their surplus income than the amount determined according to the Superintendent's directive. First-time bankrupts with surplus income will be required to make payments for nine months. If, at that end of the nine-month period, the surplus remains, the bankrupt will be required to make additional payments for a further 12 months and for a further time as the Court may order. Second-time bankrupts with surplus income will be required to make payments for 24 months. If the surplus income remains after 24 months, the bankrupt will be required to make surplus income payments for a further 12 months and for such further time as the Court may order. The changes are intended to require bankrupts who have the financial ability to make reasonable contributions to their creditors to do so prior to obtaining their discharge.

Automatic Discharge of Second-Time Bankrupts: Second-time bankrupts will be eligible for an automatic discharge after 24 months from the date of bankruptcy. This measure will only apply to those who have completed mandatory counselling and who have made payments of their surplus income to the creditors.

Student Loans: Student loan debt will be eligible for discharge in bankruptcy if seven years have passed since the former student has terminated his/her studies. In addition, in cases of undue hardship, a bankrupt may apply to the Court to obtain the discharge of the student loans after five years. For the Court to discharge on hardship grounds, it must be satisfied that the debtor has acted in good faith and is expected to continue to experience financial difficulties.

Note: The "hardship provision" will be available to those people whose date of bankruptcy was prior to the coming into force of this provision.

Prohibition on Ipso Facto Clauses in Bankruptcy: The amendments place limits on the exercise of "ipso facto" contract clauses in bankruptcy. An ipso facto clause is a contractual term that generally allows a creditor to terminate a contract or a supply of service if an individual enters into proceedings under an insolvency statute. For consumers, the primary concern over ipso facto clauses relates to basic services, such as telephone, gas, electricity and leases. This prohibition previously existed only in the case of consumer proposals and is now extended to bankruptcy situations.