When does the emphasis of the bankruptcy system shift from debtor rehabilitation to creditor protection and system integrity?
The Debtor is 74 years old, sick and infirm, and a fourth-time bankrupt. His prior bankruptcies were in 1982, 2003, and 2008. The Debtor’s trustee sought to monitor his income for a total of three years (a period equal to that of a second time summary administration bankrupt with “surplus income” within the meaning of s. 68 of the Bankruptcy and Insolvency Act (the “BIA“)). The Debtor’s net income in 2017 and 2018 was around $36,000, respectively, and out of this income, $3,000 was paid into his estate.
Given the Debtor’s anticipated medical expenses and the status of various pension and income support programs that he participates in, his income for the foreseeable future will be below the Superintendent’s standards for “surplus income”. The Court had the discretion to deviate from the s. 68 standard that a bankrupt is ordinarily called upon to pay.
The Debtor’s stated reason for filing for a fourth bankruptcy was a “reduction in income due to retirement”. His $31,000 debt consisted almost entirely of a significantly “under water” car loan. The Debtor admitted that his prior bankruptcies also stemmed from him accumulating auto loan debt on successive vehicles until it became untenable, and then filing for bankruptcy. The Court held that the proximate cause of the Debtor’s 2016 filing was a failure to plan in respect of loans.
By the time that an individual has entered a third or subsequent bankruptcy, the purpose and intent of the BIA shifts from its remedial purpose of assisting well-intentioned but unfortunate debtors to one of protecting unsuspecting potential creditors. The best intentions and hopes of such bankrupts become subordinated to the need to protect others from the bankrupt’s demonstrated financial incompetence, negligence, and carelessness. To even consider a discharge for such bankrupts, a court must be satisfied that the bankrupt has gained sufficient insight and made sufficient changes such that it is not reasonably possible that further bankruptcy will occur. The BIA cannot be considered to bestow a license to incur debts and be purged of them at periodic intervals.
Mala fides, misconduct, or turpitude are all relevant in determining a proper disposition, but the lack of such elements does not, in and of itself, entitle a third or subsequent bankrupt to token or no conditions as a prerequisite to their discharge. When there is surplus income, a “3+” bankruptcy should generally have a longer period in which that surplus is paid into and for the benefit of the estate. Absent exigent circumstances, a 36-month insolvency period sends an incorrect message that a third or subsequent bankruptcy is “just like a second except that it has to go to Court”.
It is incumbent upon a debtor to realize that it is more likely than not that one’s senior income, even without medical difficulties, will be lower than in one’s peak years. Age alone does not give the debtor a “free pass” from the BIA’s objects and principles. That said, even 3+ debtors have the right to get on with their lives after performing the duties imposed by the BIA and any such additional obligations as may be appropriate. The BIA is neither a penal statute nor a punitive one. It is a commercial regime that sets out a regulatory framework for the “orderly liquidation of a bankrupt’s estate and the distribution of the value of the assets of the estate to the bankrupt’s creditors”.
The Court found that it could not grant an absolute discharge in this case because it did not believe that the Debtor appreciated the seriousness of his multiple filings. A nominal suspension was likewise inappropriate. The Debtor demonstrated little to no insight into his harmful financial habits. His application for discharge was based on compassionate grounds alone. While the Debtor was not someone for the Court to “punish”, he was a person whose legitimate rehabilitative interests must be balanced against the legitimate interests of his current and unsuspecting potential creditors.
- the Debtor’s stress and health risks could be alleviated, in the sense that most of his BIA obligations were at an end; and
- the Debtor would remain subject to his s. 199 obligation to disclose his undischarged status to unsuspecting potential creditors during the suspension period. Such status will also remain on his credit report, available to those making lawful inquiry of it.
The Court ordered that the Debtor’s discharge shall be suspended for a period of three years such that his exit from the bankruptcy process will be approximately five and a half years after his 2016 filing.
Appearances: Joe Wilkie, for the Trustee, MNP Ltd. and Henry Richard Burns, appearing personally.