In previous articles I have discussed issues in bankruptcy and insolvency from the debtor’s perspective.
But as we all know, creditors are negatively affected when a customer files an assignment in bankruptcy or a consumer proposal.
A creditor has advanced money or supplied goods or services in good faith to an individual debtor with the expectation that its customer will make payments in the normal course. The debtor defaults on his or her obligation to the creditor and files an assignment in bankruptcy or a consumer proposal.
The creditor will receive a notice of the bankruptcy or consumer proposal together with a proof of claim form. The creditor must now determine how to deal with the prospect of not recovering the money owed to them and consider alternatives to minimize the loss.
Before discussing the options available to creditors, we must first define the types of creditors. The Bankruptcy and Insolvency Act broadly categorizes creditors based on the following criteria:
1. Secured creditors hold a collateral interest in one or more assets of the debtor;
2. Preferred creditors are provided with an elevated status by legislation such as a spouse for child support arrears; and
3. Ordinary creditors are commonly referred to as unsecured creditors and include credit card companies, cellphone providers and the government for certain claims such as outstanding income taxes.
The remedies available to creditors are determined by whether it is a bankruptcy or a consumer proposal that has been filed and the credit relationship that exists between the creditor and the debtor.
Secured creditors are not affected by a debtor’s bankruptcy or consumer proposal and are free to avail themselves of remedies that are contained in the security documentation governing the lending relationship with the debtor. This includes repossessing the asset charged by the security agreement.
This is not to say that a secured creditor cannot participate in the bankruptcy or the consumer proposal. In certain circumstances where the value of the collateral supporting the loan is lower than the amount outstanding, a secured creditor could become both a secured creditor and an unsecured creditor by valuing its security to an amount that equals the value of the collateral and filing an unsecured claim for the balance.
In a consumer proposal, creditors have the option of either accepting or rejecting the terms of the consumer proposal. In cases where the consumer proposal does not receive the required approval, creditors are free to pursue collection of the amounts owed to them.
In situations where the consumer proposal has been approved or in the case of a bankruptcy, the only available remedy for most preferred creditors and all ordinary creditors is to file a proof of claim with the trustee in bankruptcy with the required supporting documents. Even though a creditor may have received a notice from the trustee, this alone does not mean a creditor will participate in a distribution that may be made in the bankruptcy or consumer proposal. A creditor must file a proof of claim to be eligible to receive a payment toward its claim.
The exception concerns claims for alimony and child support arrears. The spouse may file a proof of claim as a preferred creditor and receive a dividend but the filing of a claim does not compromise the rights of a spouse to pursue collection of any remaining amounts owed outside of the bankruptcy or consumer proposal.
The above is a general overview of the impact on creditors when a bankruptcy or a consumer proposal is filed by a debtor. In the case of a commercial insolvency, there are other remedies that creditors may pursue to minimize a loss. These are best discussed with insolvency legal counsel or a trustee in bankruptcy.
» Wayne K. Palmer is a senior manager in BDO’s Brandon office. He is responsible for both the consumer and commercial practices in Brandon and surrounding areas, including Boissevain, Minnedosa, Neepawa and Dauphin. Wayne has more than 25 years experience in the financial recovery services field.