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Settlements

Settlements: unfair repayment of creditors

The Bankruptcy and Insolvency Act is frequently modified to make the insolvency system fairer for all Canadians. The goal is to reduce inequities in cases of personal bankruptcy while providing a fresh start for honest people who are overwhelmed by debts.

Settlements are similar to preferences in that they are deemed to be unfair to other creditors. In bankruptcy proceedings, settlements are defined as transactions where a fair market value is not received for an asset given away.

Bankruptcy and settlements

The initial part of the bankruptcy procedure is a careful analysis of your financial situation. Your trustee must be informed about all assets and liabilities, including any assets transferred in the past few years. This includes settlements. If the trustee determines that settlements have unfairly diminished the value of your bankruptcy estate, they can start proceedings to get the asset back.

Settlements and reviewable transactions are also known as Transfers at Undervalue. Like preferences, settlements depend on the relationship of the recipient to the debtor, and when the settlement was made.

Settlements to non-arm’s length parties

Non-arm’s length is the legal term for people who are related.

Settlements to family members may be examined by the Court as potential transfers at undervalue if the settlement took place within 12 months of the bankruptcy. However, the trustee will also investigate settlements made up to 5 years before the bankruptcy if they deem that the debtor intended to defraud other creditors, or if the debtor was insolvent at the time of the settlement.

If the trustee determines the transfer was made at undervalue for any of these instances, you may be required to pay the difference between the actual transfer and the fair market value.

Settlements to arm’s length parties

Arm’s length settlements refer to settlements made to non-related creditors.

The Court can grant a judgement for the difference between the actual transfer and the fair market value of the transfer to arm’s length creditors if the settlement took place within 12 months of the bankruptcy and if the debtor was insolvent at the time of settlement.

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