Section 136 of the Bankruptcy Act

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In Canada, the rules of bankruptcy are spelled out in the Bankruptcy and Insolvency Act. Section 136 of the act deals with which creditors are paid first during the bankruptcy process.

Bankruptcy in Canada

Bankruptcy in Canada works much like Chapter 7 bankruptcy in the United States. The Superintendent of Bankruptcy's website says that after you file a bankruptcy petition, a court trustee will seize and liquidate your nonexempt property. This money goes to your creditors. When you complete the bankruptcy, most of your remaining debts are wiped out. If your assets are worth $15,000 or less, the case is processed swiftly, by summary administration. Above that figure, it takes longer, as creditors are more likely to question you or request that the court appoint an inspector to oversee your bankruptcy.

What Canada Exempts

The Bankruptcy Canada firm says that, as in the United States, the assets exempt from seizure vary from province to province. Typical exemptions include:

  • A vehicle you need for work.
  • Heating fuel
  • Food
  • Household furnishings
  • Tools for your job
  • Your home
  • Your pets

Each province sets the dollar limit for exemptions in a given category. If there's no dollar limit, the exemption is limited to what you and your family need to live on.

Paying the Creditors

As part of the bankruptcy paperwork, you provide the trustee with a list of your debts and creditors. The trustee notifies your creditors that you've filed for bankruptcy. Unsecured creditors — lenders such as credit card companies that have no collateral for the debt — must file a proof of claim form to receive any money during the bankruptcy. Section 136 of the Bankruptcy and Insolvency Act dictates the order in which creditors must be paid. The top of the list:

  • Secured creditors
  • Funeral expenses if the petitioner has died
  • The costs and fees associated with bankruptcy, including lawyer's fees
  • The expenses of the Office of Bankruptcy
  • The debtor's employees' salaries or wages
  • Unpaid municipal taxes other than property taxes
  • Unpaid rent

After the priority creditors are paid in full, any remaining money is distributed among the remaining creditors, based on how much they're owed. A creditor who has, say, 40 percent of the remaining debt would get 40 percent of the remaining money. If the petitioner's employees included members of his family, they only receive their wages after other creditors are paid off in full.

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