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Bankruptcy & Insolvency

How to maximize returns when a client declares bankruptcy

This is the fourth in a series of articles by the Office of the Superintendent of Bankruptcy (OSB) on how the insolvency system works and how dealing with it can be made easier for you, the certified credit professional.

If you’ve ever been involved in a bankruptcy proceeding, then you know that any individual or corporation that declares bankruptcy must complete a Statement of Affairs (SoA) listing all of their assets and liabilities.

A copy of the SoA, together with a Notice of Bankruptcy and a Proof of Claim, are sent by the bankruptcy trustee to all creditors. To establish the validity of your claim, you must complete the Proof of Claim and provide supporting documents such as a statement of account or other evidence.

Because you will have to go through your files anyway to determine the amount owed, the process provides an ideal opportunity early in the bankruptcy for you to confirm the accuracy of the SoA. It could also help you maximize the amount of money you are able to recover.

Ensuring the accuracy of the SoA

As you go through the documents you have on file (such as a loan application, financial statement, credit-bureau information or proof of income), compare the assets listed in your documents with those listed on the Statement of Affairs. This will help you ensure that all of the information provided on the SoA is accurate and complete. At the same time, it may raise questions that can lead to the discovery of additional assets or income.

In the case of a loan application, for example, compare the assets listed on it with those listed on the Statement of Affairs. If there are more assets on the application than on the SoA, it could mean:

What to do if you suspect the debtor has disposed of assets

Bring this to the attention of the trustee as soon as possible; sometimes trustees can reverse dispositions of assets that occur shortly before bankruptcy. This brings money into the estate that will then be available for distribution to creditors.

the bankrupt client inflated assets to convince you to grant the loan;
the client failed to declare all assets to the trustee to prevent the trustee from being able to sell them; or
the client disposed of some assets shortly before bankruptcy so the trustee could not take control of them.

If you suspect the debtor has disposed of assets recently, it’s important to bring this to the attention of the trustee as soon as possible; sometimes trustees can reverse dispositions of assets that occur shortly before bankruptcy. This brings money into the estate that may then be available to creditors.

If you have reason to believe the debtor should be in possession of assets that are not mentioned on the SoA, inform the trustee. If you are correct, it is possible the assets could be recovered.

Conversely, if there are fewer debts and liabilities listed on the loan application than are listed on the SoA, perhaps the client did not disclose all of their debts on the loan application so that their financial situation would look better.

For personal bankruptcies, the SoA will contain additional information, such as income and expenses, that you should compare against your files.

For example, when you compare the information you have against the Statement of Affairs, you notice a high income on the loan application, but a low income on the SoA. This could mean:

the client inflated the amount to ensure the loan would be approved, or
the debtor minimized the figure on the SoA to avoid having to pay surplus income to the bankrupt estate.

It should be stressed that only in a minority of cases do discrepancies mean that assets are missing or fraud has occurred. In many cases, discrepancies simply mean that the debtor’s circumstances changed between when they applied for the loan and when they declared bankruptcy.

However, if you have reason to suspect an offence has been committed, you should contact the trustee or the Office of the Superintendent of Bankruptcy. If it is determined that a fraud has occurred, creditors can apply to the court to have debts obtained by fraud excluded from the bankruptcy. In other words, the debtor will still be liable and will have to pay them back.

For more detailed information regarding the circumstances under which debts may be excluded from a personal bankruptcy, see Section 178 of the Bankruptcy and Insolvency Act.

Protecting your interests

If you notice a discrepancy that leads you to believe the SoA is not accurate, contact the trustee. Most importantly, don’t assume that the trustee has all the information he or she needs to detect such discrepancies. In some cases, creditors know more about the debtor than either the trustee or the Office of the Superintendent of Bankruptcy. It is very possible that you have useful information that will aid the trustee in proceeding with the file while also protecting your interests as a creditor.

At the Office of the Superintendent of Bankruptcy, we welcome your feedback on estate- and bankruptcy-related matters. For the contact numbers of division offices, visit our website at www.osb-bsf.ic.gc.ca and click on “Contact Us” at the top of our home page. To provide specific feedback on this article, please contact the Credit Institute of Canada directly at generalinformation@creditedu.org or visit www.creditedu.org.

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