It’s essential to learn about creditor rights law and debtor rights. Learn how to avoid bankruptcy court. People find themselves in repayment issues during legal issues such as family law disputes and probate.
Payday loans with punishingly high interest rates often lead to unbreakable debt cycles, and pushy collection agencies only compound the problem by pressuring already cash-strapped people to pay up or else.
They can threaten to take your car or even the furniture from your home or claim they’ll file a costly lawsuit if they’re not paid back within a set time. A water or power company can shut off your service, leaving you both in debt and the dark. There are legal AI tools that can assist you with these issues for cheap.
Creditors’ rights
When individuals are deep in debt and unable to climb out, it’s often up to insolvency trustees to step in and work things out between you and your creditors.
As officers of the court, insolvency trustees can lay out all the different options available to you depending on your specific circumstances, acting as an impartial go-between for you and your creditors, be them credit card companies, payday loan firms, collection agencies who have been assigned your debts, or leasing and financing firms who are all waiting in line to get paid.
Once they’ve assessed your financial situation, they can oversee the process of getting your debts discharged, whether it be through a consumer proposal or outright bankruptcy.
Credit rights and debt collection often relate to real estate, foreclosures, and corporate restructuring. If you get involved in any nasty bankruptcy litigation, it is crucial to speak to financial institutions first to understand your options. If they are not working with you, you should talk with a law firm.
What Are Your Rights as a Debtor in Canada?
Insolvency trustees are licensed and regulated by the federal government through the Office of the Superintendent of Bankruptcy. Depending on the severity of your money troubles, they can walk you through either the consumer proposal process or full-on bankruptcy, which the Superintendent of Bankruptcy describes two solutions available to “honest, but unfortunate” debtors who seek to be rescued from under their ruinous financial situations.
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Consumer proposals allow people in non-mortgage debt of up to $250,000 to formulate a payment plan for their creditors to be paid back. However, the proposals often only involve a portion of the original amount or a deadline extension for when it was supposed to be paid in full.
However, people who take this route have only five years to make good on the plan set out in a consumer proposal. Consumer proposals allow people in a financial crisis to avoid bankruptcy and keep their assets as long as their creditors are on board and they follow the plan set out in the proposal.
Insolvency and foreclosure
Insolvency trustees aid in developing consumer proposals to make them attractive to creditors, who risk getting paid nothing if they allow someone to go bankrupt. After being filed with Canada’s Office of the Superintendent of Bankruptcy, your creditors have six weeks to decide whether to accept or pass on a proposal, which can offer pennies on the dollar of the original debts.
Should they accept that debtors can be on the hook for monthly payments to chip away at their many debts or lump sum payments depending on the conditions in the consumer proposal? This option is much more attractive than bankruptcy since it allows you to keep assets, including cars, investments, savings, and homes while halting the need to pay unsecured creditors.
They also halter other creditors from continuing with any lawsuits or efforts to garnish your wages. As long as you follow the terms set out in the consumer proposal, the process culminates in your debts being wiped out, though it stays on your credit record for a few years.
Insolvency and foreclosure
While this path is open to people in debt up to $250,000, people owing more than that can file a Division 1 proposal. Should their creditors reject the plan, they are automatically declared bankrupt, which, by all accounts, is the last resort for individuals and companies buried in debt.
Once an individual gets a formal declaration of bankruptcy, insolvency trustees take over and work with creditors while taking possession of any assets you may own. However, under provincial laws, clothing, work-related tools and other household items are exempt assets.
Once the insolvency trustee has your assets, they get sold off, and the funds are used to pay back your secured creditors and any fees associated with the bankruptcy process. The consumer proposal and bankruptcy options require those who file to go through mandatory financial counselling sessions to ensure it doesn’t happen again. The last step is called a discharge, when the process ends after declaring bankruptcy.
It releases debtors from their legal obligations related to their debts, with some exceptions, including spousal and child support payments, court-ordered fines, or civil or criminal restitution orders. According to the Office of the Superintendent of Bankruptcy, the process leading up to a discharge can take at least nine months, depending on a bankrupt person’s circumstances and dealings with their insolvency trustee.
Secured creditors and bankruptcy law
Credit bureaus note bankruptcy for up to seven years, but that time period differs from province to province. Consumer proposal and bankruptcy information become public, and the records are available to anyone, be they potential business partners, landlords, opposition researchers, or political candidates.
Consumer and business bankruptcies and insolvencies dropped dramatically in Canada throughout the COVID-19 pandemic. According to the Canadian government, there were just more than 99,000 insolvency filings with the Office of the Superintendent of Bankruptcy in 2020, a nearly 30 percent drop from the year before. Statistics show the most significant single-year drop in insolvency filings “ever recorded.”
However, in terms of the amount of money involved, individual insolvencies and bankruptcies pale in comparison to corporate bankruptcies. The 2008 financial crisis, for example, is credited with causing two of the biggest corporate bankruptcy cases in the world, those of Lehman Brothers Investment Bank and Washington Mutual.
Lehman Brothers had more than $691 billion in assets at the time of filing, while WaMu had $328 billion. A year later, two automotive giants, General Motors and Chrysler, went bankrupt, and the resulting financial chaos made waves across the world economy for years to come.
Bankruptcy litigation
Lawyers we know in Toronto have seen some gruesome bankruptcy proceedings where the borrower lost everything. The lawyers weren’t involved, and the person owed secured debt. Of course, repossession of the house and business ended up happening.
For those who don’t know, secured debt is when you put your personal property on the line. Always get legal advice from a lawyer who practices in the correct practice areas. You want a lawyer who has experience dealing with lenders and debtor rights.
Debtor Rights conclusion
Things can get more complicated than what we discussed in this article. They can involve fraudulent conveyance and the federal court. When it comes to corporate debt, receivers, receiverships, and reorganization can make things even more complicated.
If you do things right, things will typically work out for the best. Speak with a law firm to learn about debtor rights.
People get into debt problems for different reasons. Sometimes, it’s because of a divorce; other times, it’s because of healthcare debt or shareholder fraud.
Companies must follow the best debt collection practices. They have a right to get repaid and to follow the law. Talk to a law firm so you can protect the debtor’s property.
Creditors’ rights laws are almost as old as the concept of credit itself. The law of debt and negotiable instruments is tightly intertwined with how the law has evolved in situations where people and companies become unable to pay their debts.
The language involved is somewhat esoteric and hard to understand by most everyday people, but as long as they’re frugal, lucky, and responsible enough with their finances, they likely won’t have to deal with creditors and their legal rights anyway.
We hope you learned a bit about debtor rights in this article!
