Personal Bankruptcy Hell and Debtor Compliance Program in Canada[1]

Personal Bankruptcy Hell:[1]
Your Client’s Worst Nightmare

Debtor Compliance Program in Canada
Bad News for Your Client — Good News for You [2]

The Bad News, and the Good in Canada

Building the Story—Canada Caselaw Developments

Canada Caselaw that deals with OSB oppositions to discharge over the past two years is focused largely on debtors that have shown noncompliance with the BIA—for example in not filing appropriate documents to prove income and expenses, debtors that are repeat filers or those who have otherwise come under §173 of the BIA by way of gambling, credit card abuse, speculative or risky investments, or extravagant living.

A decision by Registrar J.B. Hanebury at the Court of Queen’s Bench of Alberta, in Re Bury (Debtor), 2007 A.B.Q.B. 490, effectively summarized the principles on which the BIA operates and the circumstances under which discharges may be suspended, refused or made conditional:

(a) the purpose of the Act is remedial in nature, to assist well-intentioned but unfortunate debtors to discharge their debts and carry on as useful citizens;

(b) a discharge is a privilege that is earned, not a right, and an application for discharge can be refused, issued conditionally or suspended;

(c) in exercising its discretion, the court should balance the interest of the creditors in being paid, the interest of rehabilitation of the debtor and the integrity of the bankruptcy process and the public’s perception of it;

(d) the court looks to see that the debtor has learned from the bankruptcy process and has modified his behavior to ensure that the same problems won’t reoccur;

(e) with repeat debtors or debtors who are ill-intentioned, dishonest, indifferent or misleading, the purpose of the Act shifts toward the protection of society, the upholding of the integrity of the Act and the sanctioning of inappropriate behavior; and

(f) depending on the circumstances, the conditions of discharge could involve the imposition of conditions for the payment of funds to the debtor’s estate, even when there is no apparent ability to make those payments.

To illustrate how the courts are interpreting this in a practical way, the following section includes examples of caselaw in which the OSB has opposed the debtor’s discharge.

Gambling

In Re Bury (Debtor), 2007 A.B.Q.B. 490, a 67-year old debtor in poor health with more than $1 million in unsecured debt was given a discharge conditional on attending a gambling recovery program; undertaking not to obtain, use or possess credit cards for three years; repayment of $12,000 to his estate; and filing and paying income taxes for 2007-09 on time. The discharge is also suspended for two years after the conditions are met. The court noted that although Mr. Bury saw himself as a well-intentioned and unfortunate debtor, he was in fact a second-time debtor who gambled compulsively, had not attended a gambling recovery program, blamed his circumstances on the woman with whom he had had an affair and provided no reason why his plan to go back into business after discharge couldn’t be implemented before discharge.

It should be noted, as in the following case, that the courts tend to take a particularly unfavorable view when a debtor, whose gambling caused the bankruptcy, gambled not just his own assets away, but also gambled with money belonging to others (i.e. his creditors). This is considered especially damaging in situations where gamblers buy items on credit (without any hope of paying that credit card bill) in order to resell them, usually at a loss, in order to fund their gambling activities.

In Thanabalasingam (Re), 31-811850, unreported decision (Oct. 27, 2006), the court ordered a discharge conditional on repayment to creditors of $75,000 (slightly more than one third of the monies owed) and on counselling for gambling. In this case, the debtor had incurred $200,000 in consumer debt by gambling and by claiming to have given $100,000 to a friend as an investment without any receipt (after which the friend was reported to have left the country). The debtor had an income of $30,000. The debtor’s testimony was not considered credible, particularly after he testified that he had not purchased goods on credit in order to resell them, but then admitted having done so upon being shown proof that he had.

In Hatem Daou (Re), 31-854087, Unreported decision (July 20, 2007), the debtor received a discharge conditional on signing an undertaking not to revoke his gambling self-exclusion for five years, filing income and expense statements and paying surplus income as indicated and paying $10,000 to his estate. His discharge was suspended for 12 months concurrent with the conditional discharge. The court noted that the conditions could have been more severe, but the debtor appeared remorseful, had taken steps to address his gambling problem and was earning well below standards by driving a taxicab.

See also Dawood (Re) [2007] O.J. No. 1747; Duong (Re) [2006] O.J. No. 3544; Elkareh (Re) [2007] O.J. No. 1748; Ismail (Re) [2007] O.J. No. 532; and Thai (Re) [2007] O.J. No. 54.

Speculation/Risky Investments

In Mensah (c.o.b. Ransford Enterprises) (Re) [2006] O.J. No. 4392, a discharge was granted conditional on the payment to the trustee of $80,000, an amount that the court noted would signal to the credit community that credit is a privilege, not a right; that debtors must remember that they are spending the money of other people and that the BIA is not there to erase the serious consequences of speculating with the money of others. The debtor had entered into a rash and hazardous business speculation, kept no records, provided testimony that was not credible and had nearly no assets.

In Potestio (Re) [2007] O.J. No. 1753, however, the court granted a discharge with a suspension of only three months. While the debtor admitted to continuing to do business after he realized that was insolvent (thus triggering BIA §173), his conduct was not found to be rash or speculative—instead, he tried everything possible to save his failing business and was thus found to be an honest but unfortunate debtor.

Extravagant Living

In Rahayi (Re) [2007] O.J. No. 2216, the debtor used credit cards to fund a lifestyle that left him almost $300,000 in credit card debt, including a preference of $5,700 to a friend. His discharge was opposed, in part, on the grounds of unjustifiable extravagance in living, the preference, and a continued use of credit despite knowing he was insolvent. A discharge was granted conditional on repayment of $20,700, an amount that was mitigated somewhat due to a lack of misconduct in the obtaining of the credit.

In Rudzki (Re) [2007] O.J. No. 173, the court ordered a discharge conditional on the repayment of $26,000 in monthly instalments of $400 for a married debtor who was approximately $200,000 in debt as the result of money spent on his girlfriend—his conduct was considered extravagant living.

Lack of Financial Management

In Yim (Re), 31-447623, unreported decision (Oct. 11, 2006), a debtor who owed $213,000 on credit cards was given a discharge conditional on a written undertaking not to obtain, apply for, use or possess credit cards of any kind for five years, along with a payment of $1,000 at $50 per month. The trustee was allowed to monitor the debtor to ensure that he did not apply for any more credit cards. The court considered the misuse of credit cards unacceptable (this included using credit cards to pay other credit card bills without any hope of repaying the original debt); however, the debtor is on long-term disability due to colon cancer and has no expected date of return to work and no surplus income.

Repeat Bankruptcy

In Baylis (Re) [2007] B.C. J. No. 1569, the OSB opposed a third-time debtor’s application for discharge on the basis of a failure to disclose an amount of money in his bank account at the time of the assignment into bankruptcy, failure to provide the trustee with income tax and monthly income information and failure to attend his second counselling session. (The first two bankruptcies involved financial difficulties that resulted from getting into a marriage and then getting out of the marriage along with a business failure.) The court found that while the circumstances did not warrant an outright refusal of the discharge, they did warrant a discharge conditional on the debtor providing statements of income and expense for a period of 24 months and all other outstanding information, along with attending the counselling session.

In Miller (Re) [2007] N.S.J. No. 35, the OSB recommended that the debtor be given a 10-year suspended discharge. This was his third bankruptcy since 1996. All three bankruptcies involved significant tax debts. The court suspended his discharge for eight months taking into consideration his age, the length of time that he had been bankrupt and that his creditors had been or would be paid back in full out of an inheritance that he received from his wife.

See, also, Tang (Re) [2007] O.J. No. 1220; and Loeb (Re) [2007] O.J. No 1215.

News You Can Use

In a situation where your client does not fit the category of an “honest but unfortunate” debtor, it is essential to be prepared for—and to prepare your client for—the application to be opposed, if not by a creditor or the trustee, then by the OSB (or by a combination of these parties).

In general, you can expect one or more of the following conditions to be imposed on a discharge:

·        repayment of a percentage of debts, particularly those incurred through BIA §173 facts, in order to make monies available to creditors and to allow the debtor to show rehabilitation;

·        for gamblers, an undertaking not to gamble for a specific period, including the requirement for the debtor to sign on to the self-exclusion list maintained by gaming authorities;

·        for gamblers, a requirement to attend a recognized gambling counselling program for a specific period of time; and

·        for those who have abused credit cards as part of their debt, a prohibition against credit card use for several years, including a notation to that effect being placed on their credit reporting agency files in order to protect potential creditors. (The trustee should place these notations on the files of Equifax, TransUnion and Experian.)

·        for those who are substance abusers, to attend substance abuse counselling for a specified period of time and report back to the court.

The discharge may also be suspended for a period of time, often made concurrent with the imposition of the above conditions. Only in rare cases where the abuse of the BIA has been very serious do the courts generally refuse a discharge.

As the legal counsel for the debtor, you may not be able to completely counter the opposition to your client’s discharge, but there are considerations that you can discuss with your client.

First, the courts generally regard honest but unfortunate debtors much more favorably than dishonest ones. Therefore, if it is clear that your client has been less than honest in the past, your client should do all in his or her power to be completely upfront and straightforward in all current and subsequent dealings with the insolvency process—to provide a “clean slate” and then to move forward in a more positive light.

Second, it is essential that your client comply with all requests made for paperwork, appearances and/or counselling sessions required under the estate’s administration. In the case of a debtor who has listed gambling as part of the issue, the debtor should show a genuine desire for rehabilitation by attending a recognized gambling counselling program on a continuing basis. Gambling is often an addiction and should be treated as such.

Third, ensure that your client understands that they must take responsibility for his or her own situation. The courts tend not to favor debtors that continue to blame others for their misfortune while not accepting that it was their own decisions and actions that ultimately allowed them to incur unmanageable levels of debt.

Fourth, the OSB and the Canada Revenue Agency both actively pursue opposition in cases where income tax debt constitutes a significant portion of the total debt. If your client has not already done so, it is essential for them to seek expert advice in order to put their income tax and other tax filings on a sound foundation for the future. Returns that have not been filed on time should be filed as soon as possible and all subsequent returns must be filed and paid on time. If your client is self-employed, they should demonstrate that they are putting money for monthly, quarterly or annual tax payments into a separate savings account as income is received to show that they have learned from the past and are committed to avoiding a repetition of the same mistake.

Fifth, if your client is relying on medical, business or other circumstances in order to explain their situation, they must be able to back that up with documentation that will be acceptable to the court, such as a doctor’s certificate, receipts for money loaned, or business records.

Sixth, if your client is capable of earning an income, they should be doing so. The courts have not looked favorably on debtors who say they will go back to a business or a job after they’re discharged from bankruptcy. The time to demonstrate a commitment to earning income and showing rehabilitation is prior to the discharge hearing.

If a conditional discharge is imposed, you should note that the BIA does offer some relief to debtors who have no reasonable probability of being in a position to comply with its terms. This is usually sought in situations where a monetary amount has been set for the debtor to pay into his or her estate, and where the debtor has no ability to pay this amount. In these cases, the debtor can apply to the court under BIA §172(3) after one year has passed from the date of the conditional order to modify that order. Proper reasons for requesting the modification or suspension of the original order are essential.

Good News, Bad News Highlights

Despite systemic challenges, the OSB is taking debtor compliance seriously and you should expect that absolute discharges from bankruptcy will be opposed by the OSB if your client does not fit the “honest but unfortunate” debtor that is the focus of Canada’s bankruptcy and insolvency system. In particular, clients should expect to be challenged on the issues of conduct and compliance.

The bad news, of course, is that your client may well be facing a conditional and/or suspended discharge, or even a discharge refusal. While you may be able to suggest ways in which your client can improve their chances of receiving a discharge, you may not be able to achieve an absolute discharge where there has been conduct before or during bankruptcy that shows noncompliance or abuse of the BIA.

The good news is that the OSB’s focus on the conduct and compliance of debtors is serving to strengthen the integrity of the insolvency system as a whole by helping to ensure that those seeking to abuse the privilege of a fresh financial start do not find an easy option in their discharge application hearing. This is a key factor in protecting the integrity of the bankruptcy system across the country.