- About bankruptcy
- Your employer is bankrupt
- Proof of Claim form
- Meeting of creditors
- Preferences or transfers at undervalue
- How funds are recovered and distributed
- Closing the bankruptcy
- Unclaimed dividends
Bankruptcy is a process governed by the Bankruptcy and Insolvency Act (BIA). Any insolvent person who has no other way to meet his or her financial obligations may file for bankruptcy, unless they have not been discharged from a previous bankruptcy.
In a bankruptcy, people or companies ("debtor") who can no longer pay their debts give all of their non-exempt property to a Licensed Insolvency Trustee (LIT) who then sells it and distributes the money to creditors. Bankruptcy can be voluntary or forced by a creditor through the Courts.
Roughly 90 percent of bankruptcies in Canada are consumer bankruptcies where the business-related debts make up less than 50 percent of the bankrupt's total debts.
When the bankrupt's realizable assets do not exceed $15,000, the bankruptcy may be processed under summary administration. Almost all consumer bankruptcies are processed this way.
Bankruptcies processed as summary administrations are simpler; for example, they don't require a meeting of creditors. If your debtor's bankruptcy is to be handled as a summary administration, you will find a notation saying so near the top of the documents you receive.
As soon as the debtor is declared bankrupt, creditors can no longer start or continue legal proceedings against the debtor without the Court's permission.
If you are a secured creditor, however, you can take possession of the asset on which you hold a security unless the Court, under certain conditions, orders otherwise. For example, a bank holding a security on a car may take possession of the car and sell it even if the debtor has declared bankruptcy.
Your employer is bankrupt
If you are an employee legally entitled to work in Canada, you have certain protections under the Wage Earner Protection Program (WEPP) concerning payment of your wages, vacation, severance and termination pay if your employer becomes bankrupt (or becomes subject to a receivership) under the Bankruptcy and Insolvency Act.
The program is delivered by Service Canada.
Proof of Claim form
After a bankruptcy has been filed, the LIT will send you a notice of bankruptcy as well as a list of creditors and the amounts of their claims.
If you are a creditor involved in a bankruptcy, the LIT will send you information as well as form(s) to fill out. To recover money owed to you, you must complete and submit a Proof of Claim to the LIT.
The LIT will also send a Proof of Claim form. You must fill out this form to share in the dividends and vote at the first meeting of creditors (if one is held). The form contains the name of the creditor and the bankrupt, the nature and amount of the claim, as well as other information. A list of instructions is usually included. You must attach a Statement of Account providing the details of the claim along with supporting documents or other evidence that establishes the validity of your claim.
If you are an unsecured creditor and you want to vote at the first meeting of creditors, you must file your completed form with the LIT before the meeting of creditors. Before the first meeting of creditors, the LIT will examine the Proof of Claim and decide whether your claim, in whole or in part, is accepted or disallowed. If your Proof of Claim is disallowed, you have 30 days to appeal the decision to the Court.
If you are a secured creditor, you do not have to fill out a Proof of Claim form unless the LIT asks you to or if you want to vote at the meeting of creditors and obtain a dividend for the unsecured portion of your claim.
If you want to vote at a meeting of creditors but are unable to attend, you may appoint another person to vote on your behalf. To do this, fill out the proxy form that was sent to you at the same time as the Proof of Claim form and return it to the LIT along with your Proof of Claim, or give the form to your proxy to present to the chairperson of the meeting at any time before the vote is taken.
Meeting of creditors
Within five days after his or her appointment, the LIT must send (1) a notice of the bankruptcy and (2) a notice of the first meeting of creditors (if one is held) to three parties: the bankrupt, any known creditors and the Office of the Superintendent of Bankruptcy (OSB).
If the bankruptcy is being dealt with as a summary administration, a meeting of creditors is not mandatory. Such a meeting will be held only at the request of creditors who hold at least 25 percent of the value of the proven claims, or at the request of the OSB.
The LIT may call a meeting of creditors any time during the administration of a bankruptcy and must do so when directed by the Court or when requested in writing by creditors holding 25 percent of the value of the proven claims.
At the first meeting of creditors, you will be able to:
- examine the affairs of the bankrupt by asking questions of the LIT and the bankrupt;
- review the LIT's preliminary report;
- confirm the LIT's appointment or replace him or her;
- instruct the LIT on the administration of the estate; and
- appoint inspectors.
Inspectors are appointed to provide the LIT with direction and the authority to take certain actions. (The Inspectors' Handbook provides more information about the role of inspectors.)
If you have already filed your Proof of Claim, you may:
- examine the Proofs of Claim of the other creditors;
- vote on a resolution (unless you are related to the bankrupt); or
- ask the LIT to examine any person regarding the affairs of the bankrupt.
Preferences or transfers at undervalue
A transfer of property (preference) can be set aside if, in the three months prior to the date of the initial bankruptcy event, the debtor made a payment to one creditor that favored the creditor over others. (If the creditor is not at arm's length from the debtor — such as a family member — the period extends to 12 months preceding the date of the initial bankruptcy event).
A disposition of property or provision of service for which no consideration is received by the debtor or the consideration received is less than the fair market value of the consideration by the debtor (transfer at undervalue) can be set aside if made in the one year before the initial bankruptcy event. If the creditor is not at arm’s length from the debtor, the disposition of property can be reviewed by up to 5 years before the initial bankruptcy event if the debtor was insolvent or was rendered insolvent by the transaction or the debtor intended to defraud, defeat or delay a creditor.
If you have reasonable grounds to believe that the bankrupt or someone else is guilty of an offence under the BIA or any other statute, you should contact the LIT in charge of the estate or the OSB.
How funds are recovered and distributed
To help creditors recover some of what they are owed, non-exempt property owned by the bankrupt as of the date of the bankruptcy, or acquired prior to the bankruptcy discharge, may be seized and sold by the LIT. Exempt property includes property protected by applicable provincial and federal laws (such as basic furniture or tools-of-trade), property held by the bankrupt in trust for another and, in some cases, goods and services tax (GST) payments.
In addition, the LIT determines the bankrupt's "surplus" income, i.e., the amount beyond what the bankrupt requires to maintain a reasonable standard of living. The bankrupt must pay this amount to the estate for distribution to the creditors after the costs of administration are deducted.
After the LIT has sold all of the bankrupt's property, he or she must prepare a final statement of receipts and disbursements and a dividend sheet. The dividend sheet contains a list of creditors who will receive dividends and the amount to which they are entitled. You will be paid the dividends to which you are entitled before the bankruptcy file is closed, which is before the discharge of the LIT.
Once the secured claims have been settled, the dividends are distributed in the order set out in section 136 of the Bankruptcy and Insolvency Act (BIA):
- Funeral fees.
- The costs of administration, including the fees and disbursements of the LIT and legal costs.
- A levy on the dividends of secured, preferred and unsecured creditors to defray the expenses of the supervision by the Office of the Superintendent of Bankruptcy.
- Claims of "preferred" creditors such as wages, salaries, commissions or compensation of employees of the bankrupt (unless the employee is related to the bankrupt — see below).
- Under certain circumstances, debts or obligations of support to a spouse or common-law partner or child living separate from a debtor.
These prior claims are subject to certain conditions and this list is not exhaustive.
The law gives priority to the claims of preferred creditors (e.g., bullets 5 and 6 above) over those of other unsecured creditors.
The claims of ordinary creditors, i.e., those who are not secured creditors and don't have priority under section 136 of the BIA, are satisfied on a pro rata basis: after all secured and preferred creditors have been paid in full, ordinary creditors divide the remaining funds among themselves in proportion to how much each is owed.
Closing the bankruptcy
Under certain circumstances, the process for discharging the bankrupt begins with the LIT issuing a report on the bankrupt's application for discharge. The report must analyze:
- the affairs of the bankrupt;
- the causes of the bankruptcy;
- the manner in which the bankrupt has performed his or her duties;
- the bankrupt's conduct before and during the bankruptcy;
- whether the bankrupt has been convicted of any offence under the Bankruptcy and Insolvency Act (sections 198–208); and
- any other fact that would justify the Court's refusal of the discharge.
The main effect of discharge is to release the bankrupt from all non-exempt debts. Such debts include orders to compensate an assault victim, Court-ordered fines, claims by a former spouse or common-law partner for child support or alimony and student loans.
A debtor whose discharge is not opposed by the Office of the Superintendent of Bankruptcy (OSB), the LIT or a creditor, and who has not refused or neglected to receive counselling, is automatically discharged after 9, 21, 24 or 36 months, depending on whether it is a first or second bankruptcy. The discharge also depends on whether or not the bankrupt is required to pay a portion of his or her surplus income into the bankruptcy estate per the standard established by the OSB.
As a creditor, you have the right to oppose the discharge of a bankrupt. If you oppose the discharge on grounds other than those mentioned in the LIT's report, you must notify the LIT, the bankrupt and the Office of the Superintendent of Bankruptcy of your opposition and grounds. In that event, the bankrupt will not be discharged automatically and the grounds for the opposition will be heard by the Court.
A creditor who opposes the discharge of the bankrupt must prove the facts on which his or her opposition is based. In other words, it is not enough simply to allege the reasons for the opposition; the creditor must also give the Court evidence in support of these arguments.
If it is not the debtor's first or second bankruptcy, or if a creditor, LIT or the OSB is opposing the discharge, the LIT must apply to the Court for a hearing about the bankrupt's discharge. The Court may grant or refuse an absolute order of discharge, suspend the operation of the order for a specified time or grant a discharge under certain conditions (a conditional discharge).
If a bankrupt is not discharged, creditors can take action to recover any debts from the bankrupt after the LIT is discharged.
The process of closing the administration of a bankruptcy begins when the LIT delivers a dividend sheet and final statement of receipts and disbursements to the OSB.
LITs are entitled to remuneration for administering the bankruptcy. LITs' fees and expenses depend on whether the administration is summary or ordinary. Section 128 of the Bankruptcy and Insolvency General Rules explains how an LIT's fees and expenses are established for services provided in summary administrations processed as bankruptcies.
In an ordinary administration bankruptcy, the LIT's fees may be decided by ordinary resolution at any meeting of creditors. In ordinary administrations, the LIT's fees are taxed (reviewed) by the Court.
If no objection is filed, or after the Court has dealt with all of the disagreements contained in the objections, the LIT distributes a final dividend to creditors who have proven their claims.
If an LIT is unable to deliver a dividend (for example, if he or she is unable to locate the rightful creditor when the dividends are distributed), he or she is required to forward the unclaimed dividends to the OSB. The OSB maintains a database of unclaimed dividends, which is a listing of creditors who are owed dividends but who could not be located by the LIT. You can find out whether you have an unclaimed dividend owing to you by searching the database: Unclaimed dividends search.
If you have a complaint about a bankruptcy, contact us.
More flexible, speedier and less costly than Court settlements, mediation enables people affected by a bankruptcy to participate directly in deciding how their disputes will be settled.
Mediation is available to resolve two kinds of disputes:
(1) disagreements over the amount of money (known as surplus income) that the bankrupt is required to pay to the LIT during the bankruptcy for the benefit of creditors; or
(2) the bankrupt failed to make surplus income payments and could have made a viable proposal but chose bankruptcy rather than propose a solution.
How do I find out if a person or a business has declared bankruptcy?
The easiest way to find out if a person or a business has declared bankruptcy is to do an online search of bankruptcy and insolvency records. The records contain basic debtor information for all bankruptcies and proposals registered in Canada since 1978.
There is a minimum charge of $8 per search and you can pay by credit card (Visa or MasterCard).
I own assets that are located on the premises of a company that has declared bankruptcy and have been unable to retrieve them. What should I do?
Contact the LIT and provide proof of ownership. He or she will then be able to get your property back to you.
In addition, the Bankruptcy and Insolvency Act contains specific provisions for suppliers who have not been paid for goods sold to a business.
Learn more about repossession of goods by unpaid suppliers.
I made an advance payment to a company that has declared bankruptcy. What can I do?
If you pre-paid for a service, you become a creditor and the LIT will send you a Proof of Claim form with your creditor's package. Follow the instructions on the form and in the package, and make sure you have all of the required documentation proving that the debtor owes you money.
To be recognized as a creditor and to be eligible to share in the distribution of dividends, if any, you must provide the LIT with a completed Proof of Claim.