Debtors beware

Anyone contemplating bankruptcy could be in for a surprise if they wait until Sept. 18, says a Red Deer bankruptcy trustee.

Anyone contemplating bankruptcy could be in for a surprise if they wait until Sept. 18, says a Red Deer bankruptcy trustee.

Sharon Stapley, a chartered insolvency and restructuring professional with the Red Deer office of Algers & Associates Inc., said some significant changes to Canada’s Bankruptcy and Insolvency Act will take effect that day. And these will result in some bankrupts having to wait much longer to be discharged.

Currently, said Stapley, first-time bankrupts are eligible for automatic discharge after nine months. Those assigned into bankruptcy for a second time are eligible after 24 months.

“Under the new legislation, the surplus income of a first-time bankrupt will be reviewed at the end of the eighth month, and depending on whether or not they have surplus income they may or may not be eligible for an automatic discharge at the end of the ninth month.”

Those with surplus income above the defined limits will have to wait an additional 12 months for their discharge.

In the case of second-time bankrupts, their surplus income will be assessed after 21 months, and if it exceeds the threshold their bankruptcy will be extended to 36 months.

“It’s big, so anyone who’s considering bankruptcy at this time might want to be looking at these ramifications,” said Stapley, explaining that assignments prior to Sept. 18 will be subject to the old rules.

“They may want to go sooner than later.”

Another change of note will affect bankrupt individuals with large income tax debts.

“If your tax debt, for income tax, is over $200,000 and is more than 75 per cent of the (total) debt, you are not eligible for any kind of automatic discharge,” said Stapley.

Instead, a court order must be obtained.

With respect to consumer proposals — which allow debtors to settle with their creditors by paying them an agreed-upon amount — the maximum allowable indebtedness for such proposals to be made has increased from $75,000.

“That threshold has now been raised to $250,000,” said Stapley.

Some legislative changes have already occurred.

For instance, a Wage Earner Protection Program has been created that helps ensure the payment of outstanding wages to people whose employment has been terminated as a result of a bankruptcy or receivership. And the waiting period before student loans can be discharged has decreased to seven years from 10, with the timeline for discharges due to hardship dropping to five years.

“That’s a nice change for the students,” said Stapley, who is vice-president of the Alberta Association of Insolvency and Restructuring Professionals.

She said her organization is trying to raise public awareness of the changes.

“Certainly, when we’re talking to people we’re letting them know that there are changes coming, and they may impact their decision.”

For instance, a longer period of bankruptcy means debtors must continue to report their monthly income to the trustee, with a percentage going into the pot for creditors.

“So if you’re in bankruptcy for 36 months, you’re making payments for 36 months to your creditors.

“It’s a long haul.”

An extended bankruptcy period also increases the likelihood of a cash windfall, like an inheritance, becoming part of the bankruptcy assets. And it lengthens the time that the bankrupt’s credit bureau rating will be affected — to as long as 15 years in the case of second-time bankrupts.

The economic downturn has resulted in a big jump in personal bankruptcies. In Alberta, the figure for the second quarter was 91 per cent higher than it was for the same period last year.

“Our workload has more than doubled,” said Stapley of the impact at her firm.

Many people, she said, were living paycheque to paycheque before the recession hit.

“Suddenly there’s no paycheque. It doesn’t take very much to push them right over the edge.”

Debt issues can have a profound effect on people’s lives, said Stapley.

“It can affect your relationships; it can affect your health. It’s not just about not being able to pay your bills — it’s far-reaching in people’s lives when you’ve got financial difficulties.”

The legislative amendments resulted from recommendations made by a Senate committee. The Office of the Superintendent of Bankruptcy Canada has said the changes are intended to “make the insolvency system fairer and to reduce the potential for abuse.”

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