Nov 2008 - Personal Bankruptcy

Financial Advisors and Trustees in Bankruptcy

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Bankruptcy and Insolvency in a Changing Economic Climate:– Impact of the 2008 Global Financial Crisis on

individuals’ assets, debts, and their financial planning.


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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.


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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.


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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


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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


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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.


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– 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.


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– High consumer spending has helped fuel the robust economies in many parts of Canada


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– 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.


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• 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.


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• 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.


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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


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• In Canada, we are currently seeing a significant surge in insolvencies.

Consumer Bankruptcies - 2008% Change Over Same Month, Previous Year

Jun Jul Aug SeptCanada 6.20% 19.00% 2.40% 29.80%BC -1.30% 13.90% 10.50% 32.70%


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How Does Bankruptcy and Insolvency Relate to Estate Planning?

– Ageing population seeking effective and sustainable financial planning.


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Individuals may seek to restructure their financial holdings to prevent creditor attachment and thereby preserve the assets for family members.


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– Creditor ability to challenge asset transfers or other transactions.


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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.


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– Potential liability if you are privy to a transaction that is later found to be impeachable under insolvency legislation.


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Personal Insolvency Processes– Select Process– Sign Documents– efiling– Immediate Stay of Proceedings

– Garnishments Cease– Legal Proceedings Cease– Collection Action Ceases


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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


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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


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Personal Insolvency Processes– Proposals

• Voting• Prohibitions on Termination of Contracts• Financial Counselling• Consequences of Default• Completion of Obligations• Certificate of Full Performance – Debts

Extinguished


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Personal Insolvency Processes– Bankruptcy

• Stakeholder Rights are Governed by Legislation• Reporting of Income• Surplus Income Payments• Assets• Financial Counselling• Completion of Obligations• Discharge


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Transactions Which Can be Challenged

• The comments in this section apply to Bankruptcies and, unless the Proposal provides otherwise, to BIA Proposals


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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


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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.


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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


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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.


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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


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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.


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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.


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Transactions Which Can be ChallengedPreferential 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);


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Transactions Which Can be ChallengedPreferential Transactions Immune from Attack:

• Employee’s claim for injuries which are not covered by Worksafe BC (in limited situations and for limited amounts).