While creditors have every right to pursue consumers who still owe them money, it can be incredibly stressful for the borrower when the funds aren’t available to repay such debt. In order to stop the pressure, some borrowers may resort to filing for bankruptcy or a consumer proposal. While this may result in lost assets and credit damage, it can stop actions from creditors thanks to a rule called “stay of proceeding”.
So, what exactly is an automatic stay of proceedings, and how does it work?
Key Points
- A stay of proceedings in bankruptcy is a legal protection that automatically takes effect when you file for bankruptcy or consumer proposal.
- Any creditor actions, like collection calls or legal threats, will stop.
- A stay of proceedings will stop once you are discharged from bankruptcy or when you complete your consumer proposal.
What Is A Stay Of Proceedings In Canada?
A stay of proceedings in Canada essentially stops (“stays”) creditors from continuing to pursue you for the money you owe them.
When you file for bankruptcy or a consumer proposal, a stay of proceedings is automatically initiated. Once you inform your Licensed Insolvency Trustee (LIT) that you’re filing for bankruptcy or a consumer proposal, your trustee will report to the courts and all parties involved that you’ve filed accordingly. At that point, a stay will be put in place, which will stop any threat of legal action.
How Does A Stay Of Proceedings Work?
When you file for bankruptcy or a consumer proposal, a stay of proceedings will take effect automatically and immediately. No further court orders are needed. This feature protects you against creditor actions.
The stay of proceedings will remain in place during your bankruptcy or consumer proposal and will cease when your bankruptcy is discharged or when you’ve completed it your consumer proposal. However, since your debt will have been dealt with by then, you won’t need the “stay” protection any longer.
How Fast Does It Go Into Effect?
A stay of proceedings is an automatic feature of a bankruptcy and consumer proposal filing, which means it will take effect immediately. There’s no need to request a stay of proceedings, since you’ll get one the moment you file.
For this reason, any actions from creditors will immediately stop when you file. That means any wage garnishments and other actions will stop the moment you file. However, it may take a few days before collection calls stop while the paperwork is underway.
What Does A Stay Of Proceedings Stop?
A stay of proceedings will stop the following actions:
- Collection agency calls
- Wage garnishments
- Threats of litigation from creditors
- Lawsuits already started
- Court judgments
- Documents filed with the court by creditors
- Court order enforcements
Keep in mind, however, that a stay of proceedings doesn’t apply to the following:
- Child support
- Spousal support
- Repayment of debts based on falsified information
- Fines and penalties
- Student loan debt (if you finished within the last 7 years)
Will A Stay Of Proceedings Stop Lawsuits In Progress?
Lawsuits that have already started and are underway will be ceased immediately once a stay of proceedings is in motion. Even if a creditor has successfully sued you, the enforcement of the court order will be stopped with the introduction of a stay of proceedings.
Your trustee has many duties and obligations throughout your bankruptcy. One of them is to deal with your creditors and any actions they may want to take against you accordingly. If any one of your creditors wants to take you to court and sue you for monies owed, the stay of proceedings will protect you.
Does A Stay Of Proceedings Stop The Canada Revenue Agency (CRA) From Coming After You?
You may owe the federal government taxes, but a stay of proceedings applies to any income tax debt you may have as well. Once you file for bankruptcy or a consumer proposal, your trustee will notify the CRA. At this point, they will be required to stop any collection efforts, just as your creditors would.
Before an automatic stay of proceedings is initiated, the CRA can start putting a freeze on your bank accounts or even take measures to have your wages garnished. But once that stay of proceedings is put into effect, all such activity must cease. That’s why it’s so important to start some sort of process to protect yourself from having any further assets taken from you.
When it comes to the CRA, a lien can eventually be placed on your home if a stay of proceedings is not initiated early enough. Once that lien has been placed, filing for bankruptcy or a consumer proposal afterward won’t do anything to eliminate it.
Are There Any Debts Exempt From The Stay Of Proceeding In Canada?
Certain exceptions exist when it comes to a stay of proceedings and the extent of protection that it offers:
- Car Debt. Your car can still be repossessed if you have missed car payments and are defaulting on your auto loan. The lender who loaned out the funds for an auto loan may also choose to place a lien on the vehicle.
- Spousal And Child Support. Any spousal support or child support payments can still be collected, regardless of any filing of bankruptcy or consumer proposal.
- Debt From Fraud. Any debts accumulated from fraudulent activity or misrepresentation on your part won’t be covered by a stay of proceedings.
- Student Loan Debt. If you’ve recently completed or left school, your student loan probably won’t be covered.
How Long Do The Stay Of Proceedings Last?
Your stay of proceedings will cease once you are discharged from bankruptcy or your consumer proposal has been completed. However, there’s usually nothing to worry about in terms of creditors seeking legal action because your debt is included in the bankruptcy (with certain exceptions). Since your debt would be waived with your discharge, creditors typically have no basis to take you to court to recoup their owed funds.
Can Creditors Fight A Stay Of Proceedings?
Yes, creditors have the right to request that a stay of proceedings be lifted, but only if they go through the proper sequence of actions. The only way a creditor can seek legal action against you is if they apply to the court to lift the stay of proceedings and are successful in doing so.
Common reasons why creditors may fight a stay of proceedings include the following:
- Secured creditors looking to recover collateral
- Allegations of misconduct or fraud by the debtor
- The creditor shows that the stay causes significant financial hardship
Once a motion has been brought before the court, the creditor will be in the position to argue to have the stay of proceedings lifted in order to identify the precise amount that is owed. The creditor may also be required to argue that the type of debt owed is not covered by bankruptcy or a consumer proposal. You may then defend yourself in court and argue against this testimony in order to help ensure your stay remains.
It should be noted that motions to lift a stay of proceedings by a creditor are rather uncommon.
What Happens If Creditors Violate A Stay Of Proceedings?
Creditors who try to continue their actions to collect unpaid debts following a bankruptcy or consumer proposal can face legal repercussions. If this happens to you, be sure to let your Licensed Insolvency Trustee know right away. Trustees can take steps to make sure that creditors comply with the law.
Bottom Line
Once you file for bankruptcy or a consumer proposal, a stay of proceedings is automatically put in place and your creditors are notified of it right away. At this point, you’re protected against any threats of lawsuits from creditors, as long as the debts they seek fall under the law of bankruptcy in Canada. If you’re vulnerable to being legally threatened to repay your debts, speak with a Licensed Insolvency Trustee who will help you choose the right path of protection for you.
