Proposed Changes to the Bankruptcy and Insolvency Act: Personal Bankruptcies and Consumer Proposals

Parliament has made some changes to the Bankruptcy and Insolvency Act (the “BIA”) which are likely to have a significant impact on personal bankruptcies and consumer proposals in this country.  The amendments to the BIA have yet to come into force, however, it is anticipated that this event will occur over the course of 2008.

The following is a sampling of the amendments to the BIA which will impact personal bankruptcies and consumer proposals.  A more detailed summary of the changes to the BIA can be found on the website of the Office of the Superintendent of Bankruptcy Canada.*

• Bankrupts with High Income Tax Debt (BIA s. 172.1) – First-time bankrupts with personal income tax debt in an amount exceeding $200,000, representing 75% or more of total unsecured proven claims, will no longer be eligible for an automatic discharge from bankruptcy.
• Surplus Income (BIA s. 168.1) – First-time bankrupts who have surplus income will be required to contribute the surplus income to their estate for 21 months.  Second-time bankrupts will be required to contribute the surplus income to their estate for 36 months.  In both cases, the requirement to contribute the surplus income are subject to a change in circumstances that impact on the surplus income obligation.
• Definition of Income (BIA s. 68) – The definition of “total income” has been amended to include amounts received by the bankrupt between the date of bankruptcy and the date of discharge, including amounts for wrongful dismissal, pay equity settlements or workers’ compensation, but not including amounts received during the same time period as a gift, inheritance or other windfall.  Moreover, a requirement to pay surplus income is enforceable against income that would otherwise be exempt, and income earned but not yet received is included in the definition of “total income.”
• Discharge of Second-Time Bankrupts (BIA s. 168.1(b)) – Second-time bankrupts will now be eligible for an automatic discharge after 24 months if there is no surplus income and after 36 months if there is surplus income.
• Income Tax Refunds (BIA s. 67(1)(c)) – Income tax refunds for both the pre- and post-bankruptcy period will form part of the estate of the bankrupt.
• Debts not Released by Order of Discharge (BIA s. 178(1)(e)) – Debts for services obtained through false pretences or fraudulent misrepresentations, together with debts for property obtained in such circumstances, will now be included as undischargeable debts.
• Student Loans (BIA s. 178) – The waiting period before which a student loan may be discharged is reduced from 10 years to 7 years. The period before which an application may be made to court to request a discharge on the basis of hardship is reduced from 10 years to 5 years.
• Definition of Consumer Debtor (BIA s. 66.11) – A consumer proposal may be filed by someone with up to $250,000 in debts (up from $75,000), excluding mortgages on their principal residence.
• Mandatory Counselling (BIA s. 66.38(2)) – Debtors making a consumer proposal will now have to undergo mandatory counselling in order to receive a certificate of full performance of the consumer proposal.

As previously noted, these changes to the BIA have yet to come into force.  Anyone considering a personal bankruptcy or consumer proposal should seek the advice of a qualified bankruptcy professional.