New Bankruptcy Laws Proposed: Should you go bankrupt now, or wait for the new laws?

Bill C-12 was passed by the House of Commons and the Senate on December 14, 2007. It is expected to come into force early in 2009.

Here are some reasons to WAIT until the law is passed to go bankrupt:

First, under current law, a student loan is only automatically discharged in a bankruptcy if the debtor has been out of school for over ten years. Under the new law, a student loan is automatically discharged if you have been out of school for seven years, and you can apply to court to have the loan discharged after five years. Therefore, if you have a student loan that is between seven and ten years old, it may be prudent to wait until the new legislation becomes law. Further information can be found at www.student-loan-bankruptcy.ca.

Second, RRSPs will now be exempt from seizure in a bankruptcy in certain circumstances. To prevent abuse, contributions made in the 12 months prior to bankruptcy are not exempt, and the RRSP will only be exempt if the individual “locks in” the funds, subject to a maximum cap. Therefore, if you have RRSPs that are not locked in, you may be better off waiting to file bankruptcy until the new law takes effect.

Third, the new rules make it harder for a person who owes a substantial amount to Revenue Canada to go bankrupt and discharge their debts in the normal first-time bankruptcy period of nine months.

Changes contained in section 172.1 of the Act state that if you are an individual, and owe more than $200,000 in tax debt, and that debt is more than 75% of your total debt, you will not be eligible for an automatic discharge after nine months. You must attend a court hearing, and the bankrupt will have to convince the court that they should be discharged from their debts, based on their efforts to repay the debts, their financial situation when the debt was incurred, and their future financial prospects. If you can’t deal with your significant debts to Revenue Canada, a bankruptcy sooner rather than later may be in your best interests.

Fourth, under current law, the bankrupt person automatically loses their tax refund for the prior year(s), and the period up to the date of bankruptcy in the year of bankruptcy. Under proposed changes to section 67(1)(c) of the Act, in the year that a person goes bankrupt, that person will lose their tax refund for the entire year. Thus if you go bankrupt on June 30, 2006, instead of just losing your tax refund for the period from January 1 to June 30, 2006, you will now lose your tax refund for all of 2006 (if the new law is passed).

Here are some reasons why it may be better to go bankrupt NOW, before the new law is passed:

First, Section 168.1 of the Bankruptcy & Insolvency Act is amended to lengthen the period that many people will be bankrupt. Under current rules, a first time bankrupt is eligible to be discharged after nine months. Under the new rules:

	a first time bankrupt with no surplus will be bankrupt for 9 months (unless opposed);
	a first time bankrupt with surplus will be bankrupt for 21 months (unless opposed);
	a second time bankrupt with no surplus will get an automatic discharge after 24 months (unless opposed); and
	a second time bankrupt with surplus will get an automatic discharge after 36 months (unless opposed)

What does this mean? If you have income over the government allowed threshold (which for a single person is $1,713 in take-home pay per month), it is likely that your bankruptcy will be extended for a further 12 months, and you will be required to continue to pay that surplus income into your bankruptcy estate for your creditors.

Many people who can pay a portion of their debts feel better about themselves if they can make payment arrangements with their creditors. These new provisions will no doubt cause more people to avoid bankruptcy by filing a consumer proposal, which for many people is the best solution.

Summary

As noted above the legislation has just been presented to Parliament; over the next few weeks and months we will review the impact of this legislation and post our comments on this as more information becomes available.

These new laws are complicated, so we recommend that you contact a licensed trustee in Ontario (click on your city on the left hand side of this page) for advice on your specific situation.