consumer proposal,  personal bankruptcy,  personal finance

What happens if you ignore your creditors?

A reader asks:

What are the consequences if a person is declared bankrupt and ignores their debtors?

Victor Fong, Licensed Insolvency Trustee responds:

The question is using incorrect terminology: a debtor is the person who owes the money.

The person who is owed money is called a creditor.

Therefore, the question should be rephrased as:

What are the consequences if a person is declared bankrupt and ignores their creditors?

First off, a person is not “declared bankrupt” just because he can’t pay his creditors. He is insolvent.

To be insolvent means that he cannot pay his debts as they become due.

To answer your question regarding the consequences of ignoring creditors, the chain of events usually looks like this:

  1. The debtor will get calls from the creditor. If he ignores them, the debt will be sent to an agent acting on the creditor’s behalf – usually a collection agency or a law firm.
  2. The agent would likely have the debtor’s place of employment and banking information because the debtor would’ve provided this information to the creditor when he had applied for credit with them. The debtor will receive calls, letters and emails from the agent threatening to take legal proceedings to garnish his wages and bank account. If he ignores them, they’ll initiate legal proceedings in small claims court.
  3. The agent must give 20 days notice to the debtor that they’ll obtain a default judgment against him in small claims court if he doesn’t file a statement of defense. If the debtor fails to do so, the agent will obtain a default judgment.
  4. A copy of the judgment will be sent to the debtor. If he fails to pay it, the agent will have the Sheriff’s Office issue a Writ of Garnishment to the debtor’s place of employment (to garnish his wages) and/or the debtor’s bank (to garnish his bank account).

The only way to stop legal proceedings from starting or continuing is to either settle with the creditor (which in most cases is unsuccessful because the debtor is broke and has no money to settle with) or file a proceeding under the Bankruptcy and Insolvency Act, such as a consumer proposal or a personal bankruptcy.

When an insolvency proceeding is filed under the BIA, a Stay of Proceedings comes into effect which prevents a creditor from starting or continuing any legal proceedings to recover their debts.

The Stay is temporary. It becomes permanent when:

  1. The debtor completes his bankruptcy and is discharged from his debts; or
  2. The debtor completes his consumer proposal payments and is discharged from the rest of his debts.

Victor is the President of Fong and Partners Inc. He is a Licensed Insolvency Trustee and Chartered Professional Accountant. With many years of experience in the insolvency field, Victor has been involved in both corporate and consumer insolvency engagements. Previously with a large national firm, Victor founded Fong and Partners Inc. so that he could dedicate his professional life to help people from all walks of life to deal with their debt.