Understanding Section 136 of the Bankruptcy and Insolvency Act

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:

  1. Any secured creditors
  2. Any funeral and testamentary expenses if the bankrupt is deceased
  3. Any estate-related administration costs
  4. Dividend taxes paid to secured, preferred and unsecured creditors
  5. 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.
  6. 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.

9. Landlords

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.

Take Your First Step Towards A Debt Free Life

If you are overwhelmed by debt and live in the Toronto area, call us at 416-498-9200 to book a FREE, confidential appointment. We will review your financial situation in detail and discuss all of your options with you. Alternatively, you can fill out the form below and our team will reach out to you. 

Share This!

Share on facebook
Share on twitter
Share on linkedin
Share on reddit
Share on pinterest

Ready to live debt free?

I have to say, I never thought that such process could have been so quick and easy. But then again I guess that's what happens when you deal with professionals. I dealt personally with Rodha Lewis, who was very attentive to my personal issue and very professional on her work. She's someone who will actually take her take and talk to you about the process and help you as much as she can. I am very grateful to her and very appreciative of her work. I couldn't have dealt with someone better. Thank you very much Rodha for your work.
fidel Cruz
14:35 24 Jun 21
I just completed my proposal and I am thrilled. Rhoda was delightful to work with. She helped me end the phone calls and start rebuilding my life. I highly recommend the services here and will always recommend to anyone who asks. Definitely seek out their services if you are in need of some help.
Maria Curbelo
13:43 23 Jun 21
Very professional and fast service! Also, personable!.. they don't treat you like a number, but like a person.From the time I first contacted them, until I was set up there has been not more than 7 days.I dealt with Jackie, she was great!
Jelena Petrovic
18:06 20 Jun 21
I would just like to say thank you to David Sklar & associates for helping me out in this difficult time I was in way over my head, I was introduced to Jackie Stanley, at that moment things got better the calls stop. Jackie was so professional helpful, trusting answered all my calls all my Text, and emails professionally and respectful!! I can’t believe it, and now I’m gonna build my credit rating back up and have my life back Thank You, Jackie Stanley at David Sklar& associates, for doing an outstanding Job!!!!
Mark Simmonds
21:50 16 Jun 21
I am not very good at putting words together especially when your speechless for all the help from such a friendly happy non judgemental team. From being financially stressed and depression hitting all at once I connected with Jackie Stanley💯❤❤ from David Sklar team in a whole other level,she is an absolutely joy to deal with and very informative let me know there is light at the end of the tunnel.. despite my struggle the amazing lady Jackie Stanley was able to put a smile on my face and make me laugh super happy and grateful 🙏I was able to connect with her from David Sklar &Associates team I 💯 percent recommend her (Jackie Stanley) and will continue to recommend her. To any one looking to get out of debt or have any questions belive me when I say you will not be disappointed with Jackie she's such a great person and I'm lucky to have been able to recieve the help and guidance from such a wonderful person and you will be also...look no further no where but up from here ...Thank you So so much Jackie much appreciated
Richelle Barriault
17:57 16 Jun 21
Reached out to Jackie, who was very cordial and professional. Highly recommended.
The Lit Lion
16:54 16 Jun 21
I must admit that I am so glad I called! I spoke to Rhoda Lewis who right away made me feel at ease. She's so caring and supportive I highly recommend her. Thanks to her my life is now on track! Thank you David Skylar & Associates Inc!
Grace Muller
17:55 25 May 21
Very professional and courteous. Jackie was very helpful and understanding. She was happy to answer any questions I had and we were able to process everything quickly with no hassle.
Nicholas Burnett
17:07 19 May 21
I would say my experience with David Sklar was spectacular, they made it really easy for my through the whole process and now 9 months later my bankruptcy is discharged.i would recommend David Sklar to anyone.
HN
23:00 06 May 21
I had a nagging defaulted student loan that was holding me back. There were a few smaller issues that were compounding. The lockdowns really forced me to look into building back my credit and starting fresh.Ashley at David Sklar & Associates at the Keele and Finch location was a blessing. She was thorough in her explanations and answered any concerns I had. She gave me the options and let me decide what was best. After conferring with her, I decided bankruptcy was the best option. She made the process of filing for bankruptcy easy.There's nothing to be afraid of. Stigma attached to bankruptcy but you can reset if you work hard to make it happen.I highly recommend speaking with Ashley if you have any concerns about debt solutions.
A M
14:39 04 May 21