Personal Bankruptcy Hell and Debtor Compliance Program in Canada

assets; withholding information on the bankruptcy petition, schedules or statement of financial affairs; destroying property to hinder or defraud a creditor or trustee; knowingly making a false oath; or refusing to obey a court order. In fiscal year 2005, the U.S. Trustee Program filed 1,301 complaints either opposing or seeking the revocation of a consumer bankruptcy discharge. Of the 1,112 complaints that were resolved by judicial decision or debtor consent, the discharge was denied, waived or revoked in 1,104 (99.3 percent). This translates into preventing 1,753 debtors from discharging more than $219 million in general unsecured debt.[7]

The Story Behind the News

Back in Canada, the OSB in its 2002 report identified several challenges associated with maintaining an effective debtor compliance program. These included a rising caseload, an increasing complexity of cases and a scarcity of resources, including a reduction in police resources. While some of these issues were noted as being appropriate to address through recommendations to update legislation, the OSB also created the Investigation Group, Debtor Compliance, in 2003 — a three-year pilot project that in its first two years of operation investigated 49 cases of alleged breaches of the BIA, with deficits in those files amounting to more than $25 million. As of July 2005, prosecutors had filed a total of 231 charges in 17 cases.[8]

The OSB also undertook an organizational renewal exercise that created a three-region model (East, Ontario and West), with each region including a debtor compliance team. In August 2006, the OSB reported that, nationally, its debtor compliance focus for the coming year would include bankruptcies in which unpaid income taxes totalled $250,000 or more and represented at least 75 percent of liabilities. The Eastern region would focus on estates where credit card liabilities accounted for $100,000 or more of total liabilities. The Ontario region would focus on estates where consumer debt accounted for $100,000 or more of total liabilities, while the Western region would be paying special attention to repeat bankruptcies and credit card liabilities of $75,000 or more.[9]

In many situations, the OSB’s oversight of these issues can provide the court with information that is not otherwise readily available to it. For example, in the West, OSB personnel are monitoring second-time or multiple bankruptcies, often examining the bankrupt to determine if there were similar causes for the bankruptcies and what rehabilitative steps the bankrupt has taken to avoid the repeat filing. If they find similarities, the OSB will attend the discharge hearing to provide the court with copies of the documents from the earlier bankruptcy filings and a report of the official receiver’s examination. Thus, recurring patterns can be brought to the court’s attention with recommendations for a suspension of the discharge or a conditional discharge to allow the individual to show their rehabilitation by paying appropriate amounts. Where there is abuse, an outright refusal or lengthy suspension may be recommended.

Identifying the Fundamental Issues

The OSB’s Debtor Compliance Program often makes its presence felt at the hearing of an application by a debtor for discharge. According to BIA §172(1), the court may grant or refuse an absolute order of discharge or suspend the operation of the order for a specified time, or it may grant an order of discharge subject to any terms or conditions with respect to any earnings or income that may afterwards become due to the bankrupt or with respect to his or her after-acquired property.

However, §172(2) goes on to say that if the facts mentioned in §173 are proven, the court shall refuse the discharge; suspend the discharge for a period considered appropriate by the court; or make the discharge conditional on the debtor performing certain acts, such as paying monies, consenting to judgments or complying with other terms that the court directs.

The §173 facts include:

(a) the assets of the debtor are not of a value equal to 50 cents on the dollar on the amount of the debtor’s unsecured liabilities unless the debtor satisfies the court that this fact has arisen from circumstances for which the debtor cannot justly be held responsible;

(b) the debtor has neglected to keep such books of account as are usual and proper in the business carried on by the debtor and has sufficiently disclosed the business transactions and financial position of the debtor within the period beginning on the day that is three years before the date of the initial bankruptcy event and ending on the date of the bankruptcy, both dates included;

(c) the debtor has continued to trade after becoming aware of being insolvent;

(d) the debtor has failed to account satisfactorily for any loss of assets or for any deficiency of assets to meet the debtor’s liabilities;

(e) the debtor has brought on, or contributed to, the bankruptcy by rash and hazardous speculations, by unjustifiable extravagance in living, by gambling or by culpable neglect of the debtor’s business affairs;

(f) the debtor has put any of the debtor’s creditors to unnecessary expense by a frivolous or vexatious defense to any action properly brought against the debtor;

(g) the debtor has, within the period beginning on the day that is three months before the date of the initial bankruptcy event and ending on the date of the bankruptcy, both dates included, incurred unjustifiable expense by bringing a frivolous or vexatious action;

(h) the debtor has, within the period beginning on the day that is three months before the date of the initial bankruptcy event and ending on the date of the bankruptcy, both dates included, when unable to pay debts as they became due, given an undue preference to any of the debtor’s creditors;

(i) the debtor has, within the period beginning on the day that is three months before the date of the initial bankruptcy event and ending on the date of the bankruptcy, both dates included, incurred liabilities in order to make the debtor’s assets equal to 50 cents on the dollar on the amount of the debtor’s unsecured liabilities;

(j) the debtor has on any previous occasion been bankrupt or made a proposal to creditors;

(k) the debtor has been guilty of any fraud or fraudulent breach of trust;

(l) the debtor has committed any offense under this Act or any other statute in connection with the debtor’s property, the bankruptcy or the proceedings thereunder;

(m) the debtor has failed to comply with a requirement to pay imposed under §68;

(n) the debtor, if the debtor could have made a viable proposal, chose bankruptcy rather than a proposal to creditors as the means to resolve the indebtedness; and

(o) the debtor has failed to perform the duties imposed on the debtor under this Act or to comply with any order of the court.[10]

The OSB’s opposition to a debtor’s application for discharge therefore generally focuses on proving one or more of the facts contained in §173.

To Be Continued... See Part II – December 2007 of the ABI Commercial Fraud Task Force Committee eNewsletter.