Professional Colleagues Q&A
Questions on Bankruptcies, Consumer Proposals and Debt Relief.
My name is Richard Killen, CEO and founder of Richard Killen & Associates Ltd.
I am a Licensed Insolvency Trustee.
I am often asked by other professionals such as accountants, financial planners and lawyers questions about their clients. Listed below are some of the questions i receive regarding bankruptcies, consumer proposals and debt relief. Should you have a question, please complete the form on the bottom.
Insolvency Trustee Questions From Lawyers, Accountants and Financial planners
If I suspect one of my clients should declare bankruptcy, should I refer them to an Insolvency Trustee, a bankruptcy Lawyer or both? And if both, which one first?
RK: This is not as perplexing a question as it might appear on the surface. Both a trustee and a lawyer are officers of the court, especially in the context of dealing with an inquiry from a person believing himself (I am going to use the masculine gender throughout these answers just to keep the reading from getting to awkward) to be insolvent and seeking information and direction regarding the legal resolution of their financial (read “debt”) problems. The difference between the trustee and the insolvency lawyer is profound, but somewhat complimentary as far as the debtor is concerned. The lawyer can provide legal advice and represent the debtor before the court and elsewhere, as the debtor’s circumstances require. The trustee is not there to provide legal advice and in fact does not “represent” the debtor. His job is to provide specific, objective information about the various solutions available under the Bankruptcy and Insolvency Act (BIA).
The big difference between the two professionals is that the lawyer is an advocate and is there to represent the interests of his client, the debtor. The trustee, on the other hand, is an administrator entrusted by the BIA to administer whatever process the debtor choses. The trustee is, so to speak, neutral between the creditors’ interests and those of the debtor. The lawyer is not.
Everyone contemplating a bankruptcy or a proposal, the two principal options available through the BIA, is entitled to and should avail themselves of independent legal advice (ILA). Therefore, as an accountant, financial consultant, or even a lawyer practicing in a field other than insolvency, you may have a client who needs help from the BIA. You can’t go wrong referring your client to an insolvency lawyer. The lawyer can analyze the person’s situation and ensure that his rights are fully protected should he proceed with a bankruptcy or proposal.
On the other hand, most people who come to Richard Killen & Associates for the free consultation don’t see themselves as having a problem requiring legal advice. They see it as a practical, financial problem: they can no longer make their debt payments. They don’t usually visit a lawyer before coming to us. Perhaps the cost of a legal consultation is prohibitive, but mostly they just don’t see the need, believing themselves to be just ordinary, honest people who have somehow find themselves into an unsolvable situation and need help to deal with it. Practical rather than legal.
From the trustee’s point of view it doesn’t matter. We can and will advise the debtor of the options available to him, the probable evolution of the process and we will respond to all the practical questions a person will have such as: “Will I ever be able to get credit again?” and “Will I lose my car if I go bankrupt.” For most of these questions the trustee is uniquely placed to answer them, largely because the trustee is the person who will actually make both the decision and take the action in question.
The trustee will also advise the debtor of his right to ILA and recommend he obtain it. If, in the trustee’s opinion the debtor is likely, or even remotely likely, to have a “legal” problem, or if the debtor’s circumstances are such that he stands to lose significant assets or experience any other compromise outside the normal summary bankruptcy situation, the trustee should and undoubtedly will insist that the debtor obtain ILA before proceeding.
In the final analysis, as I said earlier you can’t go wrong sending your client to an insolvency lawyer. But, no matter who you send him to he should receive all the protection by the law and the spirit of the law.
Do you manage business and personal bankruptcies or just personal?
RK: All trustees can administer both corporate and personal insolvency processes. However, because they are processes they will have a procedural element. Like an assembly line there will be a beginning, a middle and an end, and depending on the process in question the middle can long drawn out or short and quick. And because there are many unforeseeable aspects to any insolvency administration most trustees tend to be set up to handle primarily one or the other.
In our case, Richard Killen & Associates Ltd., we are geared mainly for the personal side of things.
There is one interesting side to this, however. Many people in business, incorporated company, who find their business situation has gotten out of hand and call us for a free consultation discover that their solution does not lie in doing anything with the corporation. Cost may be prohibitive, but often putting the company into bankruptcy will result in no practical benefit to them personally. In other words they won’t be any closer to a solving their problems than they were before the company went bankrupt. Therefore, even if your client has a corporation which is trouble, it may be advisable to make a call to us. We can help you establish the perspective to really help your client fix the problem.
I am in the process of filing many years of tax returns for a client. The client will owe a considerable sum (over $50,000) of back taxes to the CRA. My client is unemployed and currently has no way of paying the CRA the outstanding amount. Should I file the clients returns or wait until after he has a discussion with an insolvency trustee?
I have a client that has a large amount outstanding with the CRA. If my client goes bankrupt, are outstanding taxes included in the bankruptcy?
I am an accountant and have a client that I believe should talk with a insolvency trustee. Can I attend the meeting with my client should they request? Secondly, do you think it is a good idea for me (their accountant) to attend the meeting?
If one of my clients is self employed and declares personal bankruptcy is the business separate from the bankruptcy or are they tied together? Does it make a difference if the business is a sole proprietorship, a partnership or an incorporated company?
RK: Whether the business is incorporated or a sole-proprietorship/partnership makes a world of difference. An incorporated business, a corporation, is in effect a person of it own. A separate person from the owner/operator. Should the owner declare personal bankruptcy the only connection the bankruptcy will have with the corporation is that whatever shares the bankrupt holds in the corporation will vest in the trustee, to be disposed of for the benefit of his personal creditors. If the corporation is viable it can continue to operate, subject to the trustee’s interest in that corporation by virtue of the shares vesting in the trustee. Often, with a small, one-person operation, those shares can be sold back to the bankrupt, effectively allowing him to continue to earn a living.
If the business is a sole-proprietorship the business is not a separate person from the bankrupt. It is the bankrupt. So any assets or debts he has as a result of the business are his personally, along with any personal or consumer debts he has. In other words, there is no separation between his personal assets and debts and those of the business. They all belong in the bankruptcy.
Having said that, a bankruptcy is generally not designed to put a person out of work. It is usually the intention of the trustee, subject to the approval of the creditors, to allow the bankrupt to continue to operate his business as long as the basic rights of his creditors are not neglected. Most often a compromise is there to be made which has the effect of benefiting both sides.
A partnership is still a sole-proprietorship with a twist: somebody else is involved with the assets and debts which relate specifically to the business. If that person is not bankrupt, then the trustee will have to take the other party’s interests into consideration when administering the bankrupt’s estate. It sort of makes the trustee the new partner, though the trustee does not want to become involved in any operations and essentially will be interested in divesting himself of that interest, usually by selling it to the partner. If the partner is also bankrupt then everything belongs to the trustee, or trustees if the partner’s bankruptcy is being administered by another trustee. It can get pretty tangled and that is why the initial consultation with trustee is so important. Independent legal advice will also be required.
One thing to make clear is that the generally understood purposes of the Bankruptcy and Insolvency Act are twofold:
- to make an equitable distribution of the bankrupt’s property among his creditors and
- to all the bankrupt a reasonable opportunity to become financially rehabilitated. Trustees try very hard to obtain a balance between the two.
A client will shortly be filing for divorce. Friction around money (debt) is the main reason for the breakup. Is it better to file for bankruptcy before or after filing for divorce?
RK: There is no absolute answer to that question. There are potentially so many issues involved in a marital breakup (financial, psychological, emotional, practical, etc.) that every situation has its own answer.
However, I can say that it is probably never too early to obtain that free consultation that we offer. Most lawyers specializing in family law will recommend a visit to a trustee or to an insolvency lawyer before things are too far gone. Information, especially reliable information, is a big help to making good decisions.
I have a client that has registered RRSP investments. Will my client be forced to sell these if they file for bankruptcy or do a consumer proposal?
RK: The Bankruptcy and Insolvency Act exempts RRSP investments that have been in place longer the 12 months prior to the filing of a bankruptcy. Therefore, most RRSPs that we see do not have to be liquidated as a result of the bankruptcy. Of course, the question does not even apply should your client do a proposal or Consumer Proposal instead of a bankruptcy. None of his property is on the line in a proposal.
From time to time we encounter a person who has liquidated all his RRSPs prior to consulting with us. This is usually done in an effort to keep up with the debt payments. Admirable as this is, I find the look of surprise and consternation on their face when we point out the BIA’s stance on RRSPs very troubling. They very often could have provided at least as much money to the creditors through a proposal without losing the money it has taken them years to build up for their old age. Plus, there is the tax they had to pay when they cashed the RRSPs in. Not a happy moment, and one which probably would have been prevented if they had seen us a lot earlier.