Assignment into bankruptcy – ways it can happen

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When an individual or business can no longer keep up with its debt obligations or satisfy its liabilities, it is considered “insolvent”. Insolvency is not a formal legal state, but when insolvent, a debtor is capable of becoming bankrupt, which is a formal legal state. There are various possible ways that insolvent debtors can become bankrupt under the Bankruptcy and Insolvency Act (BIA).

Voluntary assignment

Debtors may, of their own accord, decide to assign themselves into bankruptcy and surrender their property to a Licensed Insolvency Trustee. By doing so, they dispose of their property and distribute the proceeds to benefit creditors in exchange for a release from their debts, and provide all creditors with an opportunity to participate in that distribution.

Application for bankruptcy order by creditor

Where a debtor is insolvent, a creditor may seek an order of the court assigning the debtor into bankruptcy.

In order for a creditor to obtain an order for bankruptcy, the creditor must be owed at least $1,000.00 by the debtor, and must prove the debtor has committed an “act of bankruptcy” in the last 6 months.

Several acts of bankruptcy are enumerated in the BIA, but the most common is failing to pay debts as they become due (i.e. having unpaid debts to numerous creditors).

Upon satisfying the court of the above, the court will make an order assigning the debtor into bankruptcy and appointing a Licensed Insolvency Trustee.

Rejection of a debt proposal

Rather than resorting to bankruptcy, an insolvent debtor may seek the assistance of a Licensed Insolvency Trustee to make a “proposal” to creditors. Through a proposal, a debtor offers creditors a compromise on the amount and/or timing of repayment, but on terms that are better than what would be expected in a bankruptcy. The creditors vote on this proposal. If the creditors vote to reject the proposal, the debtor is then automatically deemed to have made an assignment into bankruptcy.

Violating the terms of a proposal

Even if a proposal is accepted, a debtor may be deemed assigned into bankruptcy if the debtor then fails to abide by the proposal’s terms; in some circumstances this is automatic, and in others it requires a court application.

Debtors are wise to consult with an insolvency lawyer to determine whether bankruptcy is the optimal solution for managing their debt. Creditors should likewise seek counsel to identify the best debt recovery option to maximize their chances of repayment.

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