When filing for bankruptcy in Ontario, it is essential to understand your rights and the legal nuances that come with the bankruptcy process.
The Bankruptcy Insolvency Act outlines all of the legalities that surround bankruptcy in Ontario. Section 136 of the Act, in particular, outlines the priority levels of repayment after liquidating a debtor’s assets.
The Insolvency Trustees at David Sklar & Associates work with you to help you weigh your options for debt relief. Whether you opt for a consumer proposal or bankruptcy, our trustees can help ensure that you are adequately prepared and on the right track to financial freedom.
If you determine that filing for bankruptcy is the best option for you, David Sklar & Associates is prepared to provide you with the support you need. We ensure that you are adequately educated and prepared for your chosen path.
Declaring bankruptcy can feel overwhelming and daunting, which is why it’s essential to be aware of the Bankruptcy and Insolvency Act. The Bankruptcy and Insolvency Act outlines what you can expect from your bankruptcy and how your assets fit into the process.
What Is the Bankruptcy and Insolvency Act?
The Bankruptcy and Insolvency Act (BIA) was enacted in 1985 and is still the most important set of statutes governing bankruptcy in Canada. The Act outlines all the legalities involved when a consumer or commercial entity experiences insolvency.
The Bankruptcy and Insolvency Act in Ontario identifies creditors’ and debtors’ rights and defines what both are entitled to in a bankruptcy. It outlines which assets can, and cannot, be collected and liquidated for redistribution among creditors.
Assets Exempt in Bankruptcy in Ontario [H3]
- No limit on clothes
- Household furniture, utensils, equipment, food & fuel (up to $13,150)
- Commercial tools and instruments (up to $11,300)
- One vehicle (up to $6,600)
- Your home (if equity does not exceed $10,000)
- Most pension plans
- Certain life insurance policies
- RRSPs (exemptions of contributions other than in the 12 months before the bankruptcy date)
- For Farmers: Livestock, fowl, bees, books and tools for up to $29,100
What Does the Bankruptcy and Insolvency Act Seek to Achieve?
Before the Bankruptcy and Insolvency Act was passed, Canada’s bankruptcy procedures followed a confusing and complicated set of processes dictated by various laws. Many of which differed from province to province. BIA sought to remedy this by defining key terms and institutions on a nationwide basis.
Section 71 of the Bankruptcy and Insolvency Act (BIA)
Section 71 of the Bankruptcy and Insolvency Act in Ontario states that, when a debtor is bankrupt, a Licensed Insolvency Trustee must receive all of their assets not exempt from bankruptcy. The trustee must distribute the asset’s value to the appropriate creditors. It is important to note, however, that the priority of repayment for these creditors will differ.
Section 136 of the Bankruptcy and Insolvency Act
Section 136 of the Bankruptcy and Insolvency Act is particularly critical in bankruptcy law. The section codifies at a national level who can expect repayment from a bankrupt individual and in what order. At a high level, It outlines priorities and distinctions that are essential for the bankruptcy process:
The Distinction Between Secured & Unsecured Creditors
The primary purpose of Section 136 is to establish the priority of payment of unsecured creditors after the claims of secured creditors get dealt with. As such, Section 136 primarily relies on the distinction between secured and unsecured creditors, which the Act clearly defines in section 2.
The BIA rules a secured creditor as anyone who holds a mortgage, pledge, or lien “on or against the property of the debtor or any part of that property as security for a debt due.”
The Bankruptcy and Insolvency Act rules that a secured creditor has an explicit right to the debtor’s property in case of default. If the debtor-creditor agreement confers no such right upon the creditor, he is said to be an unsecured creditor.
Priority Rules with Insolvency
Section 136 of the Bankruptcy and Insolvency Act rules that the repayment priority of creditors in bankruptcy is as follows:
- Any secured creditors
- Any funeral and testamentary expenses if the bankrupt is deceased
- Any estate-related administration costs
- Dividend taxes paid to secured, preferred and unsecured creditors
- Preferred unsecured creditor claims (i.e., specific types of employee claims, child and spousal support claims, municipal taxes, landlord claims, and some pre-bankruptcy claims.
- Unsecured creditors with unspecified priority.
Please note that these priority rules apply to both declaring bankruptcy and filing consumer proposals in Canada. As such, the term bankruptcy can be substituted by proposal interchangeably.
1. Secured Creditors
Secured creditors are at the top of the priority list. However, various types of secured creditors rank differently in this hierarchy based on the debt and assets’ nature. A secured creditor collecting debt for a mortgage loan over land, for example, will take priority when it comes to collecting profit from the sale of the land.
2. Reasonable Funeral Expenses
As outlined in this section, the priority after secured creditors is reasonable funeral expenses if the debtor is deceased.
3. Costs Associated with the Administration of the Estate
The next priority goes to the costs associated with the administration of the estate. This includes any legal fees, the licensed insolvency trustee fees and disbursements.
4. OSB LEVY
The next priority is the levy payable to the Office of the Superintendent of Bankruptcy, who regulates Canada’s insolvency industry. This is similar to a tax which helps fund the insolvency system.
5. Any Employee of a Business Associated with the Bankrupted Individual
The next priority relates to certain employee wages not recovered as a deemed secured creditor under sections 81.3 or 81.4. This section limits claims to wages or disbursements incurred, and unpaid, for services rendered within six months of the bankruptcy date, and there is a cap of $2,000 per person for wages and $1,000 for disbursements of a travelling salesperson. There is also an allowance made for unpaid normal pre-filing pension contributions.
6. Additional Secured Creditors [H3]
The next priority belongs to any secured creditors who had a portion of their security applied to wage and pension claims.
7. Periodic Child or Spousal Support
Next to be repaid are any periodic child or spousal support costs that have accrued in the twelve months immediately preceding the bankruptcy, plus any lump sum payments that may be payable as well.
8. Municipal Tax
Municipal tax arrears levied within two years of the bankruptcy that do not constitute a secured claim on real property of the insolvent are the next priority.
According to the Canadian Bankruptcy and Insolvency law, the next priority belongs to any commercial rent due to landlords in the three months preceding bankruptcy, and three months after bankruptcy for accelerated rent (if the lease stipulates) up to the realization of the assets found on the property under lease.
10. Bill of Costs: Garnishments & Execution Against the Property
The next priority is the bill of costs for the first creditor who first attached by way of garnishment or execution against the property of the bankrupt, to the extent of the realizations from that property.
11. Unsecured Creditors
Unsecured creditors who don’t have a defined priority outlined under the Ontario Bankruptcy and Insolvency Act law get repaid on what is called a pro-rata basis. This means that, after repaying secured and preferred creditors fully, any remaining proceeds get divided between the unsecured creditors based on the amount owed to each party.
Unsecured Creditors Priorities
While the terminology and exact protocol in Section 136 of the Bankruptcy and Insolvency Act can seem esoteric, its final effect is clear. Precedent goes to those with an explicit legal claim to a debtor’s assets, and it is much better to have a secured loan than an unsecured one.
These unsecured creditors’ priorities are to be applied uniformly under Canadian Bankruptcy and Insolvency Law across the country. No province may abridge or interfere with the process.
Filing for Bankruptcy with David Sklar & Associates [H2]
Filing for bankruptcy can be a daunting and stressful process. The Licensed Insolvency Trustees at David Sklar & Associates are compassionate and will walk you through the entire process to ensure you are taking the best path to financial freedom.
We will help you weigh your options between a consumer proposal vs. bankruptcy and will help you streamline the process to make sure paperwork and relevant applications and submissions are made correctly and on time.
In addition to providing consumer proposal and bankruptcy services, our trustees offer credit counselling services to help you build the skills you need to better budget and set yourself up for financial independence.
David Sklar & Associates has multiple locations across Ontario and is prepared to help ease your stresses at this overwhelming time. You can book a free consultation at your convenience.