Origins

Slavery and imprisonment has been the law's traditional and historical response to a person who fails to pay their debts as they fall due. It mattered not if the debtor had people depending on him (such as a father) nor did the amount of the debt matter.  If money was owed and the debtor could not pay, the creditor could have the debtor placed in jail.

Not all ancient legal systems dealt harshly with the non-payment of debts. The Old testament of the Christian Bible says that "every seventh year you shall grant a remission of debts".

Words

In bankruptcy law, and in commercial law generally, the words "debtor" and "creditor" are everywhere.

  A debtor is the person who owes money and she owes it to the creditor.

A person can voluntarily enter bankruptcy by relinquishing his financial being to a third-party specialist called a trustee. In Canadian bankruptcy law, such an action is called an "assignment" and is supervised by the Court.

A person can also be forced into bankruptcy by a creditor and through a Court order.

Another distinction is between an insolvent and a bankrupt.

An insolvent is a person who is unable to pay his or her debts as they fall due.

A bankrupt is a person whose financial being has been taken away from him, or put on probation so that all his financial decisions require supervision, usually for a limited period of time.

In words only a legal drafter sitting in a corner office in Ottawa could contrive, this is how the Bankruptcy and Insolvency Act (BIA) defines those two concepts:

"bankrupt" means a person who has made an assignment or against whom a bankruptcy order has been made or the legal status of that person;
"insolvent person" means a person who is not bankrupt and who resides, carries on business or has property in Canada, whose liabilities to creditors provable as claims under this Act amount to one thousand dollars, and who is for any reason unable to meet his obligations as they generally become due, who has ceased paying his current obligations in the ordinary course of business as they generally become due, or the aggregate of whose property is not, at a fair valuation, sufficient, or, if disposed of at a fairly conducted sale under legal process, would not be sufficient to enable payment of all his obligations, due and accruing due."

While we're dumping on legal drafters, we should also note that the 1867 Canadian Constitution, no slouch when it comes to legalese, give the federal government "exclusive legislative authority" for "bankruptcy and insolvency"

Why?

Although this article is designed to reflect Canadian law, most other free and democratic countries have similar bankruptcy legislation.

Although this is a point argued by politicians or creditors in general, the law does not lightly extend bankruptcy protection.

The general purpose of bankruptcy is to give an honest debtor a second chance.

In 1927, the Ontario Court aptly described the purpose of bankruptcy relief as follows (Re Newsome 3 DLR 828):

"... to enable an honest debtor, who had been unfortunate in business, to secure a discharge, so that he might make a new start, and in this case, although the unsecured creditors receive nothing."

In 1995, Canada's Supreme Court (Husky Oil v Canada 1995 3 SCR 453) opined that:

"Our bankruptcy system serves two distinct goals.  The first is to ensure the equitable distribution of a bankrupt debtor's assets among the estate's creditors inter se.

"Bankruptcy serves this goal by replacing a regime of individual action with a regime of collective action. While the pre-bankruptcy regime of individual action allows creditors to pursue their separate and competing claims to the debtor's assets, bankruptcy's regime of collective action sorts out those diverse claims and deals with the debtor's assets in a way which brings benefits to creditors as a group (reduced costs, increased recovery)....    

"The collectivization of insolvency proceedings can only be achieved by denying to creditors the use of pre-bankruptcy remedies.

"The second goal of the bankruptcy system is the financial rehabilitation of insolvent individuals.  This goal is furthered through the opportunity for an insolvent individual's discharge from outstanding debts."

How

One of the odd features of Canadian bankruptcy law is the large number of participants in a bankruptcy. One would think that given the obvious fact that the bankrupt is, well bankrupt! ... that the process would not require so many participants.

Generally, the first step in bankruptcy is the appointment of a trustee who steps in and henceforth takes over the financial being of the bankrupt. The bankrupt loses much of his financial independence and is in some ways, treated by the law as if he were a child ( at least, for so long as the bankruptcy status is in place, which is not forever).

In a nutshell, the trustee sells off all the bankrupts property and distribute the proceeds between the creditors.

But not all property can be sold off by the trustee. Legislation exists to allow the bankrupt or retain a thin core of property and in some cases, even their house.

The creditors can no longer interact directly with the bankrupt but must interact through the trustee.

An inspector may be appointed  to represent the creditors.

The trustees are certified by a national professional agency.

The federal government sustains the position of Superintendent of Bankruptcy.

Overseeing all of this lawyer's brew is the Court, one in each province. Usually, but not always, a public court file is opened where the entire financial crisis of the bankrupt is set out for all to see.

Bankruptcy is not a secret process.

It is intentionally publicized. However, bankruptcy notices are designed by bureaucrats. One could not imagine a more innocuous unattractive information square in the newspaper then a bankruptcy notice. Try looking for one in your local daily newspaper.

The most important advice I give to clients if and when they consider bankruptcy is to "keep their mouths shut". In spite of the hug or well wishes your deflated ego might need, do not broadcast your trouble and that includes siblings and neighbors. You would be surprised to know who among has been or is bankrupt. those who come out of the process least scarred are those who "kept their mouths shut".

glass If you like to be nosy and provided the federal government does not change its URL next week, as they still have not figured out how valuable stable links are, there is a name search capability available online for bankrupts since 1978, at https://strategis.ic.gc.ca/sc_mrksv/bankruptcy/bankruptcySearch/engdoc/. For reasons I cannot fathom, given the usefulness  of this type of information and commerce, the government charges $8 per search so get your credit card ready.

The trustee, in consultation with the creditors, will generally give the bankrupt some marching orders for a set period of time (as in months) after which, all of the bankrupts debts are discharged - vanished - gone - hasta la vista baby!

Those marching orders usually involve an affordable monthly payment.

You would have to be a complete idiot, and there are some out there, to mess around with these marching orders.

Further, do not antagonize the trustee. Although, for the record, they are officers of the court, they often approach their files as if they were partial to the bankrupt. One needs only to look at the bankruptcy trustee ad section of the Yellow Pages to sense the warm and cuddly invitation trustees issue to potential bankrupts. Word gets around.

One insolvent tells another tells another tells another.... just like I hope you will do with duhaime.org!

The BIA is filled with nice little tools available to an insolvent person such as the possibility, in some provinces, of avoiding bankruptcy and the forfeiture of your assets through a consolidation order. In Québec, although my civil law is a bit rusty, the process is known by its familiar name of "la loi Lacombe", so-called after the fella who championed the statute in the provincial legislature.

There are many other related issues that will require development in further articles but that which, if you are interested in insolvency, bankruptcy or debt problems, you ought to be aware of such as, but not limited to, how to deal with credit bureaus and your bad rating, how to require creditors to accept a longer-term on the debt and smaller periodic payments (eg. consumer proposal), how to make a peace offering to your creditors to avoid bankruptcy, how to effectively use mediation to minimize the impact of bankruptcy,  and how to manage your trustee or, to perhaps use words they would prefer to see from a Canadian lawyer, how to get along famously with your trustee. There are also several provincial laws that nip away at the federal government's jurisdiction over bankruptcy.


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