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What is Chapter 11 and what is the Canadian equivalent?

Bankruptcy seeks the dual purpose of benefiting the debtor as well as the creditor by finding a happy medium where the debtor can comfortably meet their monthly obligation and the creditors recoup their investment.

U.S. Laws

In the U.S. there are two basic types of bankruptcy proceedings under the bankruptcy law contained in Title 11 of the United States Code. A filing under Chapter 7 is called liquidation. It is the most common type of bankruptcy proceeding. Liquidation involves the appointment of a trustee who collects the non-exempt property of the debtor, sells it and distributes the proceeds to the creditors. Bankruptcy proceedings under Chapter 11 involves the rehabilitation of the debtor to allow him or her to use future earnings to pay off creditors. Under some Chapter 11 proceedings, a trustee is appointed to supervise the assets of the debtor. A bankruptcy proceeding can either be entered into voluntarily by a debtor or initiated by creditors.

After a bankruptcy proceeding is filed, creditors, for the most part, may not seek to collect their debts outside of the proceeding. The debtor is not allowed to transfer property that has been declared part of the estate subject to proceedings. Furthermore, certain pre-proceeding transfers of property, secured interests and liens may be delayed or invalidated. Various provisions of the Bankruptcy Code also establish the priority of creditors' interests. Chapter 11 of the Federal Bankruptcy Code allows the debtor (business) to continue normal business activities while reorganizing its finances so that it may pay its employees, reduce obligations to its creditors and produce a return for its stockholders. The debtor retains possession of assets and continues operation. The plan may last up to 6 years. The theory is that an ongoing business is of greater value than if foreclosure takes place and assets are liquidated.

After a successful Chapter 11, the business can continue with a restructured debt load and operate more efficiently than it previously did. In doing so, it can preserve jobs and assets. Repayment of debts is made from future profits, sale of some assets, mergers or recapitalization.

Canadian Laws

In Canada, the Bankruptcy and Insolvency Act (BIA) covers corporate and individual bankruptcies with the exception of certain specialized companies, such as banks, insurance, trust or railway companies. There are also other laws such as the Wind Up Act for corporations and a Companies’ Creditors Arrangement Act for companies that have an aggregate debt in excess of $5 million. Under the BIA, a company or individual has to commit an act of bankruptcy before they become voluntarily “bankrupt”. Such acts include:

None of these acts mean that the person is then immediately bankrupt. For example, a debtor may have good reason not to pay a creditor. A person can be forced into bankruptcy by a creditor’s petition, provided that the debt to the petitioning creditor is at least $1,000 and the debtor has committed an act of bankruptcy. A Court then decides whether the debtor is to be declared bankrupt unless the debtor consents to the petition, in which case a trustee is assigned and the bankruptcy proceeds normally. (Fishermen, farmers or workers earning less than $2,500/year cannot be forced in bankruptcy.) The BIA provides for an order of preference in the distribution of the property by the trustee out of the bankrupt’s estate. The trustee will sell the property and secured creditors will foreclose on their items. What is left is distributed in this order:

All assets obtained during bankruptcy (for example, lottery winnings or inheritance) go towards paying the creditors. In addition, a bankruptcy does not erase the liability of someone who co-signed a loan. Bankruptcy is a matter of public record and although not the subject of newspaper publication it is available to all credit bureaus. Individual first time bankrupts are automatically discharged after nine months, unless a formal objection is raised. Until discharged, a bankrupt remains fully responsible for the debts covered by the bankruptcy. An absolute discharge has the effect of erasing those debts. Debts not erased by bankruptcy include family maintenance payments, a Court fine or a debt obtained by fraud.