Collection practices: Debt alleged to fall under BIA s. 178(1)(e)

Certain creditors or their agents have been actively seeking debt recovery of amounts they allege fall under section 178(1)(e) of the Bankruptcy and Insolvency Act (BIA). This section provides that a debt or liability resulting from obtaining property by false pretenses or fraudulent misrepresentation is not released by a bankrupt's order of discharge. The practice is generally used in cases where a bankrupt has made a credit card purchase of some significance shortly before filing an assignment in bankruptcy. The creditor contends that, at the time of the purchase, such individuals must have been aware that they were insolvent and would be unable to satisfy their obligation to the creditor.

Creditors or their agents typically send a "warning letter" to the bankrupt during the bankruptcy stating their intention to pursue a court finding of fraudulent misrepresentation unless the bankrupt is willing to voluntarily repay the amount in question. The letter notes that legal steps will be taken should repayment not be made by the bankrupt after both the trustee and bankrupt are discharged. Of particular interest for the purposes of this position paper is the scenario where such a letter is sent to the bankrupt (who is either discharged or yet to be discharged) prior to discharge of the bankruptcy trustee.

Some concerns have been raised by various stakeholders who question the ethics of this collection technique as it appears to conflict with the public policy "fresh start" objectives of the insolvency regime. The Office of the Superintendent of Bankruptcy (OSB) has concluded that the BIA provides creditors the opportunity to seek redress by means of obtaining a civil court order granting a section 178(1)(e) exemption from debt discharge provided that creditors comply with the statutory requirements. However, it is the position of the OSB that sending the warning letter to the bankrupt prior to discharge of the trustee constitutes a violation of the stay of proceedings set out in section 69.3(1).

The OSB has conveyed this position in writing to creditors / creditor agents that are known to have been employing this collection technique in the hopes that they will agree to adjust their practices voluntarily in order to comply with the Act. However, should this adjustment not occur, the OSB has indicated that it will take whatever steps are necessary to protect the integrity of the insolvency process. One such creditor has responded to date, indicating that changes have been made to collection procedures in accordance with the OSB's position and, furthermore, that many trustees have supported the OSB's active involvement in cases of credit abuse.

Practitioners and debtors who become aware of non-compliant collection actions of this type that are initiated after publication of this position paper are asked to contact the appropriate OSB division office with details.

Trustees have an opportunity to contribute to a more informed bankrupt population by identifying at the time of assessment those debts that may be more likely to be subject to such actions by a creditor.