Nov 2008 - Personal Bankruptcy

1. Bankruptcy and Insolvency in a Changing
Economic Climate:
– Impact of the 2008 Global Financial Crisis on
individuals’ assets, debts, and their financial
planning.
Fi nanc i al Advi s ors and Trus t ees i n mnpbankrupt c y. c a
Bankrupt c y

2. Surge in Consumer Debt Levels:
• Flow of Funds into North America
– Wealth was being created in emerging economies
– Investors were seeking opportunities to invest that
wealth
– The capital markets in those emerging economies did
not provide the opportunities that investors were
seeking
– The wealth moved into the U.S. – one of the most
liquid and highly developed investment and capital
markets in the world.
Fi nanc i al Advi s ors and Trus t ees i n mnpbankrupt c y. c a
Bankrupt c y

3. Surge in Consumer Debt Levels:
• Flow of Funds into North America
– Glut of funds in North America looking for investment
opportunities.
– High competition in the consumer lending market:
– Credit cards
– Lines of credit
– Vehicle financing
– Retail purchase financing
– Lenders were willing to increase their risk tolerance in
order to place funds.
Fi nanc i al Advi s ors and Trus t ees i n mnpbankrupt c y. c a
Bankrupt c y

4. Surge in Consumer Debt Levels:
• Changes in Consumer Lending Practices
– Lenders who had traditionally based their lending
decisions on income level, assets, existing debt levels
and payment history moved to a much heavier
reliance on credit score.
– A Beacon or Fico credit core uses:
– Payment history
– Current debts vs credit limits
– Length of credit history
– New credit activities
– Types of credit used
Fi nanc i al Advi s ors and Trus t ees i n mnpbankrupt c y. c a
Bankrupt c y

5. Surge in Consumer Debt Levels:
• Changes in Consumer Lending Practices
– Lenders became willing to amortize debt over
longer periods.
– Governments relaxed regulations to allow
longer mortgage amortizations and low/no
down payments.
– CMHC insured mortgages – zero down
Fi nanc i al Advi s ors and Trus t ees i n mnpbankrupt c y. c a
Bankrupt c y

6. Consumer Credit Environment
– Over the past several years, consumer credit
in North America has been highly accessible
by borrowers.
– This has enabled the high spending rates by
consumers in the US and Canada over the
past several years.
Fi nanc i al Advi s ors and Trus t ees i n mnpbankrupt c y. c a
Bankrupt c y

7. Consumer Credit Environment
– Easy mortgage accessibility has created high
demand for housing, followed by increases in
real estate values.
– Increasing real estate values have allowed
home owners to borrow against the newly
created equity in their homes.
Fi nanc i al Advi s ors and Trus t ees i n mnpbankrupt c y. c a
Bankrupt c y

8. Consumer Credit Environment
– High consumer spending has helped fuel the
robust economies in many parts of Canada
Fi nanc i al Advi s ors and Trus t ees i n mnpbankrupt c y. c a
Bankrupt c y

9. Consumer Credit Environment
– In Canada, where we used to be net savers,
we have become net borrowers – the amount
of our debt is higher than our annual
disposable income.
Fi nanc i al Advi s ors and Trus t ees i n mnpbankrupt c y. c a
Bankrupt c y

10. Consumer Credit Environment
• Statistics Canada states that:
– By 2002, debt had surpassed disposable
income and that by 2005, Canadians owed
$1.16 for each dollar of disposable income.
Fi nanc i al Advi s ors and Trus t ees i n mnpbankrupt c y. c a
Bankrupt c y

11. Consumer Credit Environment
• The National Post, citing CIBC World
Markets indicates that, at the end of the
second quarter of 2008 Canadians had a
debt to income ratio of 1.3 to 1:
– Consumer credit represented 40% of personal
disposable income; and
– Mortgage debt represented 90.6% of personal
disposable income.
Fi nanc i al Advi s ors and Trus t ees i n mnpbankrupt c y. c a
Bankrupt c y

12. Current Global Economic Instability
• Sub prime mortgage crisis in the US
• Failure of financial institutions
• Global credit freeze
• Plummeting stock and commodity values
• Governments step in with $Trillions in aid to
prevent financial collapse
• Global recession feared
Fi nanc i al Advi s ors and Trus t ees i n mnpbankrupt c y. c a
Bankrupt c y

13. • In Canada, we are currently seeing a significant
surge in insolvencies.
Consumer Bankruptcies - 2008
% Change Over Same Month, Previous Year
Jun Jul Aug Sept
Canada 6.20% 19.00% 2.40% 29.80%
BC -1.30% 13.90% 10.50% 32.70%
Fi nanc i al Advi s ors and Trus t ees i n mnpbankrupt c y. c a
Bankrupt c y

14. How Does Bankruptcy and Insolvency
Relate to Estate Planning?
– Ageing population seeking effective and
sustainable financial planning.
Fi nanc i al Advi s ors and Trus t ees i n mnpbankrupt c y. c a
Bankrupt c y

15. How Does Bankruptcy and Insolvency
Relate to Estate Planning?
• Individuals may seek to restructure their
financial holdings to prevent creditor
attachment and thereby preserve the assets
for family members.
Fi nanc i al Advi s ors and Trus t ees i n mnpbankrupt c y. c a
Bankrupt c y

16. How Does Bankruptcy and Insolvency
Relate to Estate Planning?
– Creditor ability to challenge asset transfers or
other transactions.
Fi nanc i al Advi s ors and Trus t ees i n mnpbankrupt c y. c a
Bankrupt c y

17. How Does Bankruptcy and Insolvency
Relate to Estate Planning?
• Vulnerability of beneficiaries to creditors, and
treatment of their future entitlements in the
event that a beneficiary makes a proposal to
creditors or goes into bankruptcy.
Fi nanc i al Advi s ors and Trus t ees i n mnpbankrupt c y. c a
Bankrupt c y

18. How Does Bankruptcy and Insolvency
Relate to Estate Planning?
– Potential liability if you are privy to a
transaction that is later found to be
impeachable under insolvency legislation.
Fi nanc i al Advi s ors and Trus t ees i n mnpbankrupt c y. c a
Bankrupt c y

19. Personal Insolvency Processes
– Select Process
– Sign Documents
– efiling
– Immediate Stay of Proceedings
– Garnishments Cease
– Legal Proceedings Cease
– Collection Action Ceases
Fi nanc i al Advi s ors and Trus t ees i n mnpbankrupt c y. c a
Bankrupt c y

20. Personal Insolvency Processes
– Assessment of the Debtor’s Financial
Situation
• Ability to Pay
• Exempt Assets
• Secured Creditors
• Debts that Survive
• Preferred Creditors
• Impact on Credit Rating
Fi nanc i al Advi s ors and Trus t ees i n mnpbankrupt c y. c a
Bankrupt c y

21. Personal Insolvency Processes
– Proposals
• Settlement Based on Ability to Pay
• Creditors Expect Higher Recovery than Bankruptcy
• Creditors Have Minimum Recovery Thresholds
• Flexibility
– Retention of Certain Assets
– Reviewable Transactions
– Manageable Payment Plan
– Can Alter Stakeholder rights
Fi nanc i al Advi s ors and Trus t ees i n mnpbankrupt c y. c a
Bankrupt c y

22. Personal Insolvency Processes
– Proposals
• Voting
• Prohibitions on Termination of Contracts
• Financial Counselling
• Consequences of Default
• Completion of Obligations
• Certificate of Full Performance – Debts
Extinguished
Fi nanc i al Advi s ors and Trus t ees i n mnpbankrupt c y. c a
Bankrupt c y

23. Personal Insolvency Processes
– Bankruptcy
• Stakeholder Rights are Governed by Legislation
• Reporting of Income
• Surplus Income Payments
• Assets
• Financial Counselling
• Completion of Obligations
• Discharge
Fi nanc i al Advi s ors and Trus t ees i n mnpbankrupt c y. c a
Bankrupt c y

24. Transactions Which Can be Challenged
• The comments in this section apply to
Bankruptcies and, unless the Proposal
provides otherwise, to BIA Proposals
Fi nanc i al Advi s ors and Trus t ees i n mnpbankrupt c y. c a
Bankrupt c y

25. Transactions Which Can be Challenged
• Settlements
– Transactions made gratuitously or for nominal
consideration.
– Void as against trustee in bankruptcy if:
• Made in the year preceding a bankruptcy
• Made in the five years preceding a bankruptcy IF
the trustee can prove:
– Settlor was insolvent at time of transaction;
– Settlor was rendered insolvent by the transaction; OR
– Settlor’s interest did not pass
Fi nanc i al Advi s ors and Trus t ees i n mnpbankrupt c y. c a
Bankrupt c y

26. Transactions Which Can be Challenged
• Fraudulent Conveyances
– If the court finds a transaction to be a fraudulent
conveyance, the property transferred vests in the
trustee.
– If the party who received the fraudulent conveyance
has sold the property, the trustee will be granted a
judgment against the grantee and may be entitled to a
charge against property purchased by the grantee
with the proceeds from sale of the fraudulent
conveyance.
Fi nanc i al Advi s ors and Trus t ees i n mnpbankrupt c y. c a
Bankrupt c y

27. Transactions Which Can be Challenged
• Fraudulent Preferences
– 3 month rule: Any payment or other benefit conferred on a
creditor with a view to giving that creditor a preference is
fraudulent and void as against a trustee in bankruptcy if made in
the 3 months preceding date of bankruptcy.
– Presumption: If a transaction has the effect of giving any
creditor a preference, it is presumed to be a preference, whether
or not it was made voluntarily or under pressure.
– 1 year rule: If the benefitting creditor is a person related to the
insolvent person, the presumption of fraud is for the one year
period prior to a bankruptcy
Fi nanc i al Advi s ors and Trus t ees i n mnpbankrupt c y. c a
Bankrupt c y

28. Transactions Which Can be Challenged
CHANGES COMING TO THE BIA:
• Transactions at Undervalue – Arm’s Length
– The following applies if:
• The transaction was with a person at arm’s length to the debtor;
• The transaction was a transfer at undervalue;
• The transaction occurred in the year prior to a bankruptcy;
• The debtor was insolvent or was rendered insolvent by the transaction; and
• The debtor intended to defeat the interests of creditors.
– The court can give judgment to the trustee against:
• The other party to the transaction:
• Any other person being privy to the transaction with the debtor; OR
• All of the aforementioned;
For the difference between the actual consideration given and the fair market
value.
Fi nanc i al Advi s ors and Trus t ees i n mnpbankrupt c y. c a
Bankrupt c y

29. Transactions Which Can be Challenged
CHANGES COMING TO THE BIA:
Transactions at Undervalue – Not at Arm’s Length
• The following applies if:
– The transaction was with a party who was not at arm’s length with the debtor;
– The transaction was a transfer at undervalue;
– The transaction:
• Occurred in the year prior to a bankruptcy; or
• The transaction occurred in the five years prior to a bankruptcy and:
• The debtor was insolvent or was rendered insolvent by the transaction; and
• The debtor intended to defeat the interests of creditors.
• The court can give judgment to the trustee against:
– The other party to the transaction:
– Any other person being privy to the transaction with the debtor; OR
– All of the aforementioned;
– for the difference between the actual consideration given and the fair market value
Fi nanc i al Advi s ors and Trus t ees i n mnpbankrupt c y. c a
Bankrupt c y

30. Transactions Which Can be Challenged
Reviewable Transactions:
• A transaction between parties who are not at arm’s length.
• Related parties (as defined by the BIA) are deemed to be not at arm’s length.
• It is a question of fact as to whether parties who are not related to each other are
dealing at arm’s length.
• Any non arm’s length transaction which occurs in the year preceding a bankruptcy
can be reviewed to determine whether or not the bankrupt received fair market value.
The court can give judgment to the trustee against
– The other party to the transaction; OR
– Any other person being privy to the transaction; OR
– All of the above;
• for the difference between the fair market value and the actual consideration.
– The court is required to use the values determined by the trustee unless other values are
proven.
A trustee is not restricted to remedies set out in the BIA and can take advantage of other
legislation such as the Fraudulent Conveyance Act, Fraudulent Preference Act, etc.
Fi nanc i al Advi s ors and Trus t ees i n mnpbankrupt c y. c a
Bankrupt c y

31. Transactions Which Can be Challenged
• Preferential Transactions Immune from Attack:
– Transactions involving exempt property or property that would
not vest in the trustee.
– Payments received by a secured creditor under a valid security
document.
– Payments made in the ordinary course of business.
– Transactions entered into to permit the debtor to remain in
business.
– Other situations based on case law.
Fi nanc i al Advi s ors and Trus t ees i n mnpbankrupt c y. c a
Bankrupt c y

32. Transactions Which Can be Challenged
Preferential Transactions Immune from Attack:
• Transactions in favour of preferred creditors:
– Funeral or testamentary expenses for a deceased bankrupt;
– Trustee’s fees and expenses;
– Superintendent of Bankruptcy levy
– Wages up to $2,000 services rendered in the 6 months
immediately preceding the bankruptcy;
– Child or spousal support;
– Certain municipal taxes;
– Rental arrears or accelerated rent (in specified circumstances)
– Costs of attachment by the first garnishing creditor (limited to
proceeds of garnishment);
Fi nanc i al Advi s ors and Trus t ees i n mnpbankrupt c y. c a
Bankrupt c y

33. Transactions Which Can be Challenged
Preferential Transactions Immune from Attack:
• Employee’s claim for injuries which are not
covered by Worksafe BC (in limited situations and
for limited amounts).
Fi nanc i al Advi s ors and Trus t ees i n mnpbankrupt c y. c a
Bankrupt c y