The Pendulum Swings

Many, many years ago, when someone went bankrupt, there was no standard requiring the individual to contribute to their bankruptcy from their income.  Then when the law was amended in 1992, the federal government established a formula for how much a bankrupt is to pay, based on household income and size.  And suddenly bankruptcies were resulting in more dividends to creditors – happy for the creditors.  But what happened was, the focus was less on what the bankrupt was doing with their income, as long as they paid what the guideline said.  The guideline was treated more like a fixed rule than merely a tool.  So we were seeing some bankrupts continuing to gamble, to stockpile savings, and to hide behind the guideline – happy for the bankrupt.

We saw those 1992 amendments, which introduced automatic discharges, mandatory counselling and consumer proposals, make the law more debtor friendly.  The pendulum was swinging in their favour.  That wasn’t necessarily to the creditors’ disadvantage, especially since it would involve less court hearings and more funds available for distribution.  But it did mean that bankrupt estates were being administered less on a case-by-case basis and more by a formula.

A decision that came out of the Ontario Court of Appeal last year said that the bankrupt “was not entitled to retain any surplus income that exceeded his reasonable living expenses.”  And so there we have it – the guideline is just that, a guideline.  And Licensed Insolvency Trustees still get to exercise their discretion in realizing assets.  What a novel idea.  Especially since creditors are trusting Licensed Insolvency Trustees to liquidate all available assets to maximize the dividend to them before they have to forgive the balance of the debt.  Seems like the pendulum is swinging back.

So, if you ever find yourself to be a creditor, get involved.  How?  File a claim.  Ask the LIT for copies of the bankrupt’s cash flow reports.  Communicate, ask questions, and even consider opposing the discharge.  It might very well help to increase the funds available for distribution – happy indeed.