For some people, bankruptcy is a way out of financial trouble, but a way into professional problems.
Every Canadian may use the protections and relief provided by the Bankruptcy and Insolvency Act, but some people may prefer not to do so.
Take, for example, a lawyer. If a lawyer files for bankruptcy, he must notify the Law Society. In addition, he’s not permitted to operate his own trust account while he remains an undischarged bankrupt. A work-around for lawyers is to have another lawyer administer a trust account on his or her behalf — a rare occurrence. From a practical standpoint, a practicing lawyer can’t file for bankruptcy.
The same can be said of chartered professional accounts. If a CPA files for bankruptcy, he or she is expelled from the profession. In the few cases I have seen over the years, CPAs resign from the profession before they file and apply for re-admission after they have completed their bankruptcies. Re-admission is not guaranteed, so in effect a practicing CPA can’t file for bankruptcy either.
People with professional designations or special operating licences should check with their professional or licencing bodies before filing for bankruptcy. Many organizations place serious restrictions on their members should they become bankrupt, or simply declare them ineligible for membership. (Corporate directors must also resign if they become bankrupt.)
So, here’s what an insolvent person can do instead of declaring bankruptcy.
If a client is experiencing serious financial problems, seek independent, professional — and unemotional — advice. Don’t rely on the client’s own diagnosis of his or her financial problems.
To avoid bankruptcy, possible solutions include:
- Debt restructuring. Depending on the severity of the situation, the client’s income earning potential and his total debt load, it may be possible to restructure his debts to lower payments and create a reasonable repayment plan. This may include the re-mortgaging of property or other assets or arranging a lower-interest consolidation loan.
- Informal negotiated debt settlements. Informal debt settlements may be possible if you are dealing with only a few creditors. It may be possible to negotiate an interest reduction or freeze. While it is possible to request a reduction in principal, it’s risky because the creditor’s participation is voluntary and it may come with high fees.
- Consumer proposal. A consumer proposal, filed under the Bankruptcy and Insolvency Act, is often a better option than bankruptcy, and may be more acceptable to a professional board or licensing body. In my experience, professional associations don’t have rules regarding consumer proposals, even if they have ones on bankruptcy. Still, check with the professional organization before filing a proposal.
- Personal bankruptcy. Investigate the career consequences of filing for bankruptcy. Depending on your client’s circumstances, there may be a professional work-around that makes bankruptcy possible, if not palatable, for your client.
Once your client has considered his options, he can make an informed decision. At this point, you can help him develop a plan to deal with his problem and begin his recovery.