Under Section 66.4 of the Bankruptcy and Insolvency Act, a bankrupt individual who receives a sudden windfall (like an inheritance) can file a consumer proposal to legally annul their bankruptcy and buy their way out of the process early.
Filing for personal bankruptcy provides immediate relief from overwhelming debt, but it also comes with strict legal duties, such as reporting your income monthly and potentially surrendering assets. Occasionally, an individual currently going through bankruptcy experiences a sudden, dramatic change in financial fortune. This could be a large inheritance, a substantial lottery win, or landing a highly lucrative job. When this happens, Canadian law provides a rare but highly effective legal manoeuvre: converting your bankruptcy into a consumer proposal.
Governed by Section 66.4(2) of the Bankruptcy and Insolvency Act (BIA), this process allows an undischarged bankrupt to offer a lump-sum payment or a structured repayment plan to their creditors. If accepted, the bankruptcy is completely annulled, allowing you to bypass the heavy restrictions of bankruptcy and keep your newly acquired assets. Because this involves complex negotiations and formal court approval, it is highly advisable to search our directory for an experienced insolvency lawyer or Licensed Insolvency Trustee (LIT) to navigate these legal waters.
Step-by-Step Process to File a Section 66.4 Proposal in Canada
This procedure is a federal right, meaning it applies uniformly whether you are dealing with the Supreme Court in British Columbia or the Superior Court of Quebec. The process flips the usual insolvency route in reverse, moving from the most severe state (bankruptcy) to a negotiated settlement.
Step 1: Immediate Disclosure of the Windfall
By law, you must inform your LIT immediately if you receive a windfall while undischarged from bankruptcy. 📜 Whether it is an inheritance from a relative in Nova Scotia or a legal settlement, failing to disclose this money is an offence under the BIA. In a standard bankruptcy, this windfall automatically becomes the property of your bankruptcy estate and is seized to pay your creditors.
Step 2: Drafting the Section 66.4 Proposal
Instead of letting the LIT simply seize the funds, you can instruct them to draft a Section 66.4 Consumer Proposal. The goal here is to offer your creditors a deal. For the proposal to be legally viable, your offer must provide a better return to the creditors than they would receive if you simply remained in bankruptcy. Your LIT will calculate the exact mathematics required to make the offer appealing.
Step 3: Securing Inspectors’ Approval (If Applicable)
If creditors have appointed inspectors in your bankruptcy, you must obtain their approval before taking any further action. Under Section 66.4(2)(a) of the BIA, if inspectors are appointed, the consumer proposal must be approved by them before the LIT can officially file it or proceed. If there are no inspectors, this step is bypassed.
Step 4: Creditor Review and Voting
Once filed, the proposal is sent to your creditors. They are given 45 days to review the offer. A meeting of creditors may be called if those holding at least 25% of the proven debt value request it. For the proposal to pass, it requires a simple majority vote (50% plus one dollar) based on the dollar value of the claims held by the voting creditors.
Step 5: Court Approval and Annulment
If the creditors accept the proposal, it must be approved by the local bankruptcy court. There is a mandatory 15-day waiting period following creditor acceptance. 🏛️ Once the court approves the proposal, your bankruptcy is legally annulled. You are no longer considered bankrupt; you are now in a consumer proposal, which you can immediately pay off using your windfall.
How Much Does it Cost in Canada?
Using Section 66.4 involves specific financial calculations rather than flat fees.
- The Proposal Offer: The amount you must offer depends entirely on your total debt and the size of your windfall. For example, if you owe $50,000 and inherit $100,000, your creditors will expect 100 cents on the dollar (a full $50,000 repayment) because remaining in bankruptcy would guarantee them that amount anyway.
- LIT Tariff Fees: The LIT takes their regulated fees from the proposal fund. You do not pay out of pocket; it is calculated as a percentage of the funds distributed to creditors.
- Legal Fees: If you retain a private lawyer to oversee the LIT and ensure your inheritance is protected, expect standard hourly rates of $350 to $600 CAD depending on your province.
| Factor | Staying in Bankruptcy | Filing a Section 66.4 Proposal |
|---|---|---|
| Windfall Seizure | The entire windfall may be seized up to the total debt amount plus interest. | You negotiate a specific settlement amount; you keep the rest. |
| Credit Report | Stays as an R9 (severe) for 6-7 years after discharge. | Converts to an R7, which clears 3 years after the proposal is paid off or 6 years from the date of filing, whichever comes first. |
| Legal Duties | Must continue monthly income reporting and strict BIA duties. | Bankruptcy duties are cancelled immediately upon court approval. |
How Long Does the Process Take?
Transitioning out of bankruptcy via Section 66.4 is relatively swift. The creditor voting period takes 45 days, followed by a 15-day waiting period for court approval. ⏳️ Therefore, the entire legal transition takes roughly two months. If you pay the proposal as a lump sum immediately after approval, you will receive your Certificate of Full Performance within a few weeks, completely freeing you from the insolvency system.
Frequently Asked Questions (FAQ)
Why would creditors agree to a Section 66.4 proposal?
Creditors usually agree because a well-drafted proposal offers them more money than the standard bankruptcy process would yield, or it offers them the money much faster than waiting for your bankruptcy discharge.
Can I use a high-paying job offer to file a Section 66.4?
Yes. If you secure a job with a very high salary during bankruptcy, your “surplus income” penalty would skyrocket. You can use Section 66.4(2) to negotiate a fixed monthly proposal payment instead of facing unpredictable and massive surplus income penalties.
Does annulling the bankruptcy erase it from public record?
While the bankruptcy is legally annulled, the OSB public registry will still show that a bankruptcy was filed and subsequently annulled by a proposal. However, resolving it via a proposal looks significantly better to future lenders.
Do I need to hire a separate lawyer for this?
While your Licensed Insolvency Trustee can handle the paperwork, a LIT is technically an officer of the court. Hiring your own insolvency lawyer guarantees you have someone advocating exclusively for your financial interests.
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