In our last blog entry we explored the importance of time and information in relation to debt collection. This one will look at what to do if you receive a Bankruptcy notice or a Consumer Proposal from one of your customers. These are important documents that you need to act on if you have any hope in recovering some of what is owed to you.
When a consumer in Canada decides to file for bankruptcy or submit a consumer proposal they must make contact with a Licensed Insolvency Trustee. It is this Trustee that will send you documents verifying the bankruptcy or consumer proposal, provided the consumer notified their Trustee that you are a creditor. It is up to you to fill out the Proof of Claim document and forward it along with evidence of your claim (usually an invoice or work order) to the consumer’s Trustee. It is imperative to forward all payments made towards outstanding debt to the Trustee as it is mandated by law if they’ve filed for bankruptcy.
The major difference between a Consumer Proposal and a Bankruptcy is that the latter is enforced by the Office of the Superintendent of Bankruptcy Canada. With a consumer proposal your customer uses a Trustee to help facilitate paying down of debt without the use of bankruptcy. The consumer would first meet with the Trustee to determine if a Consumer Proposal or Bankruptcy is more appropriate. In the event of a consumer proposal the consumer makes small monthly payments to the Trustee. Once some funds have accumulated the Trustee will then disburse those funds among the creditors. If the consumer defaults on their payments to the Trustee than bankruptcy may be the next step
Like a consumer proposal, a consumer begins the bankruptcy proceedings by having a Trustee facilitate the payment of bad debt; the key difference is the consumer is now placed in bankruptcy and after surrendering all assets to the Trustee is protected from those debts. The Trustee then liquidates the assets to repay creditors who are grouped into categories arranged by priority of repayment, the most common two being secured and unsecured creditors. Generally secured creditors are banks, governments, and crown corporations, while all other entities normally will fall into the unsecured creditor category. Once in bankruptcy, the consumer is protected until they have been discharged.
The bankrupt party may apply for discharge at any time, so long as they have paid off their accounts. With first and second time bankruptcies the court will discharge automatically after a period of time; 9 months for first time and 21 months for second-time bankruptcies. Bankruptcies will also remain on the consumer’s credit file for up to seven years with a first time and up to fourteen years on a second bankruptcy, depending on jurisdiction.
When a consumer is in true dire straits financially a bankruptcy or consumer proposal may be their only option. As a business owner trying to get paid for your work it is up to you to make sure to fill out the necessary documentation so you can recover at least some of the money that is owed to you. If you wish to learn more about the Bankruptcy and Insolvency Act please visit the Government of Canada’s website.