q Understanding Creditor and Debtor Rights - Advocate Daily
Advocate Daily logo
Court System Not Divorce Act Needs Overhaul

It’s important 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 get people into unbreakable cycles of debt, 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 amount of time. Meanwhile, a water or power company can shut off your service, leaving you both in debt and in the dark.

Understanding Creditor and Debtor Rights

Creditors’ rights

When individuals are deep in debt and unable to climb out, it’s often up to insolvency trustees to step in and try to 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 the topics of real estate, foreclosures, and corporate restructuring. If you get yourself involved in any nasty bankruptcy litigation, it’s important to speak to financial institutions first, to see what your options are. If they are not working with you, you should speak 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 as two solutions available to “honest, but unfortunate” debtors who seek to be rescued from under their ruinous financial situations.

Learn more about the law:

Consumer proposals allow people in non-mortgage debt of up to $250,000 to formulate a payment plan for your creditors to be paid back, though 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. But 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.

Rights as a Debtor in Canada

Insolvency and foreclosure

Insolvency trustees aid in the development of consumer proposals to make them attractive to creditors, who run the risk of 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, debtors can be on the hook for monthly payments to chip away at their many debts, or lump sum payments depending on the conditions laid out 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 also halting the need to make payments to unsecured creditors. They also have the effect of halting other creditors from continuing with any lawsuits or efforts to garnish your wages. The process, as long as you follow the terms set out in the consumer proposal, 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 what’s known as a Division 1 proposal, but should your creditors reject the plan, it results in people being automatically declared bankrupt, which by all accounts is the last resort for individuals and companies buried in debts. 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 at the time, although things like clothing and work-related tools and other household items are exempt assets under provincial laws.

Once the insolvency trustee has your assets, they get sold off and the funds are used to pay back your secured creditors and pay off any fees associated with the bankruptcy process. Both the consumer proposal and bankruptcy options require those who file to go through mandatory financial counselling sessions to hopefully ensure it doesn’t happen again in the future. When the process is coming to a close after declaring bankruptcy, the last step is called a discharge.

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 or more, the time dependent upon a bankrupt person’s circumstances and their dealings with their insolvency trustee.

Insolvency and foreclosure

Secured creditors and bankruptcy law

Bankruptcies are noted by credit bureaus for up to seven years, but that time period differs from province to province. Meanwhile, both consumer proposal and bankruptcy information becomes public and the records are available to anyone, be they potential business partners, landlords, opposition researchers in case or political candidates.

Consumer and business bankruptcies and insolvencies dropped dramatically in Canada over the course of 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 near 30 percent drop from the year before. Statistics show that it was the largest single-year drop in insolvency filings “ever recorded.”

But individual insolvencies and bankruptcies pale in comparison to corporate bankruptcies in terms of the amount of money involved. The 2008 financial crisis, for example, is credited as the cause of two of the biggest corporate bankruptcy cases in the history of the world, those of Lehman Brothers investment bank and Washington Mutual. In the case of Lehman Brothers, the firm had more than $691 billion in assets at the time of filing, while WaMu had $328 billion. A year later saw two automotive giants, General Motors and Chrysler, go bankrupt as well 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 very ugly 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 that don’t know, secured debt is when you put your personal property on the line. Always get legal advice from a lawyer that 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 talked about in this article. It can involve fraudulent conveyance and the federal court. When it comes to corporate debt, things can get really complicated with receivers, receiverships, and reorganization.

If you do things right, things will normally work out for the best. Learn about debtor rights by speaking with a law firm.

People get into debt problems for different reasons, sometimes it’s because of a divorce, other times it’s because of healthcare debt, or because of shareholder fraud.

Companies have a duty to follow the best debt collection practices. They have a right to get repaid, but also 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, with the law of debt and negotiable instruments 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, regular people, but as long they’re frugal, lucky, and responsible enough with how they manage their finances, they likely won’t have to deal with creditors and their legal rights anyways.

We hope you learned a bit about debtor rights in this article!