Doug Hoyes Trustee in Bankruptcy

New Bankruptcy Rules Lead to Spike in the Number of Bankruptcies Filed
By Doug Hoyes, BA, CA, CIRP, Trustee in Bankruptcy, Hoyes, Co-Founder, Michalos & Associates Inc

In 2005, and again in 2007, Parliament passed changes to the Bankruptcy & Insolvency Act, but the changes did not fully come into force until September 18, 2009. One goal of the new rules was to make personal bankruptcy more expensive for debtors, and therefore encourage them to deal with their debts on their own, or file a consumer proposal (http://www.hoyes.com/consumer-proposals.htm). Debtors rushed to file bankruptcy prior to the new rules, and as a result September 17, 2009 was the busiest single day for personal bankruptcy filings in Canadian history.

Under the new rules the debt limit for filing a consumer proposal, excluding mortgages on the debtor’s principal residence, was increased from $75,000 to $250,000, which will result in an increasing number of consumer proposals in the future.

The most significant changes in the new rules are amendments to the surplus income rules. A bankrupt is permitted to earn a set amount of net income each month while bankrupt. Under the old rules, the bankrupt made payments to their estate based on their income, but it was largely up to the individual trustee to determine whether or not an extension of the bankruptcy period was required. The new rules remove the discretion from the trustee. If a bankrupt’s average net income for the first six months of the bankruptcy is more than $200 per month over the threshold set by the government, a first bankruptcy is automatically extended from nine months to 21 months, and the bankrupt is required to pay half of their surplus income into the estate for the balance of the 21 months. (A second bankruptcy with surplus is extended to 36 months.)

As a result, the cost and length of many bankruptcies will be extended, resulting in greater costs for debtors, and greater realizations for creditors.

At this time it is unclear how exactly the new rules will be enforced. It is up to each individual trustee to request copies of pay stubs and proof of income and deductions each month from each bankrupt, and it is the trustee’s responsibility to calculate the surplus owing, and collect the required amounts. The government has removed the trustee’s discretion in this area due to the government’s perception that trustees were not doing an adequate job of verifying a bankrupt’s monthly income and collecting the required payments. If the government does not change their methods for monitoring trustee compliance in this area, it is possible that the new rules will have minimal impact.

The burden of ensuring debtor and trustee compliance with the new surplus income rules will most likely fall to creditors, who initially are expected to be more proactive in requesting proof of income in cases where they expect a debtor to have surplus income.

In light of these new rules, at Hoyes, Michalos & Associates Inc. (www.hoyes.com) we will continue our practice of encouraging debtors to seek solutions other than personal bankruptcy where practical, and we expect to continue to assist debtors with the filing of consumer proposals where possible. In the past creditors have accepted proposals where the proposal resulted in realizations greater than in a bankruptcy, and we anticipate that creditors will continue to accept all reasonable proposals.