Although there are various formats and structures of debts that you could have with your client, such as credit cards, lines-of-credit, loans and mortgages, ultimately, there are only two types of debts: secured or unsecured.
It is important to distinguish between these two basic types of debt as there are different enforcement actions that can be taken and they are treated differently under the Bankruptcy and Insolvency Act.
What are your options when a debt is not performing?
There are three broad options available to you.
- Collection activities
- Legal proceedings
- Bankruptcy proceedings
Collection Activities include but are not limited to the following:
- Sending default or late payment notices to the debtor
- Freezing the account until payments are brought up to date
- Hiring a collection agency to collect the debt for you
- Seize the assets provided as collateral (with proper notice periods)
Benefits
- Immediate availability as rights are included in the credit agreement
- Potential customer retention
Disadvantages
- Debt may remain uncollected
- Client may deplete other assets they own therefore reducing the probability of any monetary recoverability
Legal Proceedings include but are not limited to the following:
- Obtain a Court judgment against your client for the full amount of the debt which will allow you to:
- Obtain a garnishment Order against your clients assets and/or wages
- Register the judgment against your client’s land and/or buildings (including their personal residence)
Benefits
- Provides access to client assets and income even when this right did not exist in the credit agreement
- May result in higher recovery of funds (if client does not declare bankruptcy or file a proposal)
Disadvantages
- Initial out-of-pocket expenses related to court proceedings and registrations
- May be years before any recovery of funds awaiting sale of land or property
Bankruptcy Proceedings include but are not limited to the following:
- Have a Receiver realize on your security either privately through the terms of the security agreement or through court appointment
- Petition your client into Bankruptcy
Benefits
- Ability of receiver to utilize expertise in maximizing realization on security
- Ability of Trustee in Bankruptcy to investigate and examine financial transactions leading up to the Bankruptcy
- Ability of Trustee in Bankruptcy to realize on assets wherever they may be located in the world
Disadvantages
- The formal realization payment order - CRA source deduction debts and the new WEPPA debts are payable before any secured creditor or unsecured creditor.
- Requirement to share proceeds of realization pro-rata with all other unsecured creditors
- Professional fees
