Bankruptcy: Inform Yourself
9 September 2020
MS PATRICIA CHAMOUN & MS ISABELLA ARDUINI
LEGAL AND BUSINESS ADVICE
Since the start of the pandemic, many individuals and businesses have managed to weather the storm thanks to various government assistance programs. However, it is very likely that some will have to consider bankruptcy once these “cushions” are no longer available. Therefore, it is important to understand the various options available to them.
The term “bankruptcy” can be considered frightening to many. Bankruptcies and restructurings are indeed disruptive. However, they can be beneficial for individuals and the economy as they are designed to preserve value and prevent the waste of valuable assets. Our clients often feel embarrassment, defeat and even shame when they find themselves in a context of insolvency. These are completely normal emotions. On the other hand, it is important to know that the purpose of bankruptcy is to:
- Promote economic stability;
- Establish a balance between liquidation and reorganization;
- Ensure fair treatment between creditors; and
- Ensure a transparent and predictable process.
Advantages of bankruptcy
One of the main advantages of bankruptcy is that it gives the debtor time and space. The automatic stay of proceedings prevents creditors from taking any action to collect debt. It therefore puts a stop to evictions, seizures and lengthy court proceedings which can be stressful.
Although a bankruptcy remains registered for a number of years, this time can be used to improve credit ratings and to learn how to live within one’s income to prevent future financial problems. Through this process, the bankrupt will also learn through mandatory credit counselling from a qualified counsellor who has obtained a certificate from the Office of the Superintendent of Bankruptcy, how to rebuild credit and develop new and effective financial habits.
The benefit to creditors is that the BIA provides strong protections, requiring debtors to disclose important information about their operations and imposing strict controls on the debtor’s actions. As a result, it is more likely that a creditor will recover his or her claim through the bankruptcy process rather than through the judicial process, which can be more cost efficient.
Disadvantages of bankruptcy
Another common misconception is that after one is liberated from bankruptcy, the bankrupt is released from all prior debts. However, there are certain amounts owed that a bankrupt will never be discharged from, including fines, alimony, fraud, liability for a claim that was not disclosed to the trustee and student debt. Moreover, in a corporate bankruptcy, the company may not apply for a discharge unless it has satisfied all the claims of its creditors in full.
After emerging from bankruptcy, the individual’s credit score will be very low. This can hinder on one’s ability to obtain credit cards, mortgages, or loans for years to come. After a first bankruptcy, a record can be kept on your credit report for up to 6 years, and for any subsequent bankruptcies, for up to 14 years.
Furthermore, a bankrupt person cannot be a director of a corporation and some professional orders prohibit undischarged bankrupt persons from practising as directors.
Bankruptcy should not always be seen as a failure, but as an opportunity for a fresh start. Whether you are an individual or a corporation, be sure to carefully weigh all your options before filing for bankruptcy and contact a professional to assist you in the matter.
For more information on initiating a bankruptcy application, the proposal to creditors and eligibility requirements, please visit chamounlegal.com.
A cautionary note: This document provides an overview of insolvency proceedings in Canada and is not intended to communicate specific advice applicable to any particular factual situation. Readers are cautioned against making decisions based on this material alone. This document should not be used as a substitute for professional advice on the circumstances of any individual case.
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