A licensed insolvency trustee (LIT) is a federally regulated professional. Their job is to provide suggestions and services to individuals with debt issues. LITs also assist businesses struggling with debt.
LITs can provide individuals and businesses with a range of options to deal with debt. If you proceed with a proposal or bankruptcy, LITs handle creditors on your behalf. There is a fee for using an LIT, however, it is federally regulated and fairly priced. Also, LITs usually do not charge a fee for the preliminary consultation.
Licensed insolvency trustees work with the Government of Canada. More specifically, they represent the Office of the Superintendent of Bankruptcy Canada. For an LIT to be eligible for work, he or she must reach a certain level of training and become licensed. The Government of Canada does not employ them. They often are accountants employed by a debt services company that steps in as an LIT.
What authority does a Licensed Insolvency Trustee have?
A LIT works with the Office of the Superintendent of Bankruptcy. The Superintendent of Bankruptcy is responsible for regulating the LIT profession. They license and monitor LITs by referring to the Bankruptcy Act. In addition to the Bankruptcy Act, the Superintendent of Bankruptcy has a code of ethics for LITs, who must adhere to the applicable regulations. Their authority starts and stops in relation to these regulations. These regulations protect debtors and creditors. Given the expertise of an LIT, you don’t have to worry about scams or manipulation as you would with creditors.
Usually, a LIT is an accountant by trade that specializes in dealing with debt. They often come from a bankruptcy firm and step in to work with the Superintendent of Bankruptcy. While they work with the Superintendent of Bankruptcy, ultimately an LIT is an officer of the court. If they make an error in the process, the onus is on the LIT, not the Superintendent of Bankruptcy. Because of the duty of care an LIT must exercise, they have a lot of authority and discretion. It is their responsibility to follow the BIA and treat all stakeholders appropriately.
A LIT must meet with an individual before executing legal action. They cannot put a financial legal proceeding into action without understanding the circumstances. The purpose of the first meeting is to perform a debt assessment. They may find that the struggling individual has other options that aren’t as severe.
Sometimes an individual has other financial options. Other times, a consumer proposal or bankruptcy is the best solution. A consumer proposal is less serious than a bankruptcy. It does not involve the LIT taking control of your assets. Bankruptcy is more serious but sometimes necessary. If so, a LIT takes control of your assets and liabilities. This is the lawful process defined in the Bankruptcy Act. Once your assets and liabilities are in the hands of your LIT, they are responsible for settling the debt. LITs are highly trained professionals and help navigate individuals through the complex process.
What is the Bankruptcy and Insolvency Act?
The Bankruptcy and Insolvency Act, BIA for short, is a federal piece of legislation. The legislation is in place to help honest, unfortunate individuals struggling financially. Also referred to as the Bankruptcy Act, it protects the rights of both creditors and debtors. Within the BIA, each financial option has its own legal process explained in detail. An explanation of the impacted party’s corresponding roles is also within the BIA. Finally, the BIA informs LITs and the court of their duties and responsibilities. The BIA mainly assists individuals but helps businesses struggling with debt too.
The main part of an LIT’s job is to help individuals execute consumer proposals and bankruptcies. Both legal processes involve the use of the BIA, which is a major tool that LITs use.
What happens when you go through the consumer proposal or bankruptcy process?
Primarily, a stay of proceedings will become effective immediately once officially filed. A stay of proceedings is a legal ruling that further legal action must cease. This means creditors cannot attempt to contact you for payment any longer. After that, the process differs slightly depending on which option is effective.
The Consumer Proposal Process
A consumer proposal is a legally binding process administered by a LIT. On your behalf, your LIT will develop a proposal for creditors. The proposal is an offer to pay a portion of what they are trying to collect. The proposal could also include an offer to extend the time when debts are due. By law, the conditions in the consumer proposal cannot exceed five years. Part of the deal is your LIT pays creditors on your behalf. Your LIT won’t execute a consumer proposal unless they think it is appropriate for you.
The first step of the process is for your LIT to file the consumer proposal officially. As soon as this happens, a stay of proceeding becomes effective. Also, you no longer make payments to creditors directly. This includes garnishments, frozen bank accounts and any other action against you.
At this stage, a meeting is possible if one or more creditors have claims worth 25% of the total debt or more. Creditors are responsible for requesting a meeting. A request is due within 45 days of the consumer proposal filing date. Sometimes a LIT must arrange a meeting with creditors if ordered to do so by the court. If no meeting occurs, the proposal is automatically accepted by creditors.
The next step is for your LIT to create the actual consumer proposal. The proposal includes a section regarding your personal situation. This section includes a discussion regarding some causes of financial difficulties. The LIT will submit the proposal to creditors once it is complete.
Creditors have 45 days to accept it. It is not mandatory for creditors to accept the proposal, they can reject it too. Although, they only can reject it if a meeting with creditors occurred.
Under an accepted consumer proposal, you are responsible for making the payments. You must abide by the conditions within the consumer proposal as well. If any assets remain, you can retain them so long as you make the appropriate payments. Finally, you must attend two financial counselling sessions. Once you meet all the terms and conditions of your proposal, you become entirely debt free.
Under a rejected consumer proposal, you can attempt to make changes and resubmit it. If that is unsuccessful, you can consider other debt solutions or bankruptcy.
The Bankruptcy Process
Bankruptcy is a legal process which discharges most of your debts. The process is legal and safe for consumers in Canada seeking financial help. Under bankruptcy, your assets and liabilities come under the full control of your LIT. Your LIT decides how to distribute the money among creditors to settle the debt.
A bankruptcy becomes official once your LIT decides that it is the best course of action. They file all the necessary paperwork to start the process. This includes a statement of affairs which is a list of all your assets, debts, income and expenses. Also, an assignment of assets which assigns eligible assets to creditors. Accuracy and honesty are important for this documentation.
After the submission of all the documents, you become officially bankrupt. A stay of proceedings becomes effective at this point. Creditors can no longer attempt to collect debts. A LIT notifies creditors by sending out an electronic notice.
The next step is to complete your bankruptcy duties. You cannot obtain a discharge until you have completed your bankruptcy duties. Your duties include surrendering certain assets and attending two credit counselling sessions. You are also required to make the necessary payments. Additional personal information is often required too, such as for completing tax returns.
Lastly, you need to obtain a discharge from your bankruptcy. The majority of bankruptcies in Canada end in an automatic discharge. This occurs after 9 months for individuals going through their first bankruptcy. It can take longer depending on the circumstances. Obtaining a discharge is the most important step because it is what eliminates your debt.
It is possible to not obtain a discharge from bankruptcy. This is a rare instance in Canada. If it affects you, your LIT brings it to your attention.
When Should You Reach out to a Licensed Insolvency Trustee?
Virtually any individual suffering from financial issues can reach out to an LIT. They offer advice for any type of financial struggle. Although, it is not common to reach out to an LIT for minor debts. More often, an individual reaches out to a LIT if they’re considering a proposal or bankruptcy. Below you can find the instances where a proposal or bankruptcy would be appropriate.
Keep in mind that every individual’s situation is unique. Only a trained LIT can dictate if a proposal or bankruptcy is right for you. The instances below are merely guidelines. Before proceeding with either option, be sure that you have tried other solutions. A consumer proposal or bankruptcy has lasting effects on your credit and life. It is important that you have eliminated other options before taking the high road.
Opting for a Consumer Proposal
If you feel overwhelmed by your debt and have a steady income, a consumer proposal may be an option. The BIA considers your income to be an asset that is of value to creditors. In fact, your income is more valuable than the assets liquidated during bankruptcy. In simpler words, if you are insolvent but have a regular income, you’re a good candidate for a proposal. Insolvent means you owe at least $1,000 and are unable to meet debts when they are due.
If you want to maintain control over your assets, a consumer proposal is the better option. With your LIT, you may need to sell some assets to pay your debts, but at least you have a choice and say in the matter. With a bankruptcy, your LIT does all the leg work for you. This means you won’t necessarily lose your house or car.
There are some qualitative factors to a consumer proposal as well. First, when asked the question, “have you ever filed for bankruptcy?”, you can actually answer no. Also, the credit bureaus report consumer proposals for a shorter period than bankruptcies. This means a consumer proposal won’t impact your credit for as long as a bankruptcy would.
Going the Bankruptcy Route
Bankruptcy is the most extreme option when discussing debt solutions. If you are unable to repay debts while covering basic needs, such as food and shelter, a bankruptcy may be best. If you’re unemployed, a consumer proposal may not even be an alternative. Essentially, bankruptcy is ideal if you have no options and can’t manage your debt on your own. Also, if a proposal was unsuccessful, a bankruptcy may be your only other option.
While bankruptcy has severe repercussions on your credit, it is only one downfall. By filing for bankruptcy, you become debt free and be able to move forward. Taking a hit to your credit is worth it to become debt free.
Debt Management Program as an Alternative
Debt management programs, DMP for short, are debt relief that consolidates your debt. More specifically, your unsecured debt, such as credit card or personal loan debt. Compared to proposals and bankruptcies, DMPs have much less severe consequences on credit. With a DMP, it stays on your credit report for two years after finishing the program. If you do not finish the program, it stays on your report for six years. The duration is whichever option ends up being shorter for you. Keep in mind that the repayment period caps at five years but is usually around three years.
While a DMP still appears on your credit report, it won’t show on public record. The only people who know you used a DMP consist of you, your creditors and the agency. Both a consumer proposal and bankruptcy appear on the public record, anyone can see it there.
Other factors to consider with a DMP is the additional support you’ll get. Credit counselling agencies handling DMPs offer workshops, education and one-on-one mentoring. Not only can this help you get out of debt, it prepares you for a brighter financial future. LITs do not always provide this kind of support meaning that you could wind up in debt again.
Your payments are also lower with a DMP. Your credit counsellor reduces or eliminates interest as well as other fees. Under a DMP, you’re still repaying the principal which is an important factor. Future creditors will know you paid your debt in full with reduced or omitted interest and fees. If you can afford to make the monthly payments under a DMP, it is a much more attractive option.
Licensed insolvency trustees can help you with a range of debt solutions. If you are struggling with debt, consider reaching out to an LIT to get some advice. While a proposal or bankruptcy may seem extreme, it is definitely worth it if you come out debt free. Everyone deserves a debt-free life and a promising financial future!