How Are Funds Distributed To Creditors In Bankruptcy?

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Category: Bankruptcy FAQ | (2) comments

How Are Funds Distributed To Creditors In Bankruptcy - fbBankruptcy is highly regulated. In addition to the multitude of provisions contained within the Bankruptcy & Insolvency Act, there are numerous complementary pieces of legislation and decades of court cases. At its core, though, bankruptcy is very simple with a few key principles. For example, the honest but unfortunate debtor has the right to a fresh start. Our society believes in second chances, standing in stark contrast to the debtors’ prisons of medieval Europe. Equally important is the concept of fair and equal treatment of a person’s creditors.

To keep it simple, I view bankruptcy as a system of trade-offs. It is a balancing act between the rights of the debtor and the rights of the creditors.

The benefits are obvious: you are legally protected against the collection activities of your creditors. No more phone calls or nasty letters. No more threats of legal action and wage garnishees halted. Furthermore, you are not required to pay the full amount of your debts.

The trade-off comes from the requirement to make payments into bankruptcy based on what you own and how much money you earn and creditors receive their share of these bankruptcy proceeds.

There are many laws and regulations governing this process. Even though it may sound complicated, it’s straightforward for a licensed insolvency trustee to explain what will be the “cost of bankruptcy” for the typical individual.

How are bankruptcy funds distributed?

The distribution process can be explained in 4 basic steps:

  1. Funds paid into the bankruptcy are held by the trustee.
  2. A bankrupt’s creditors file claims to confirm the precise amount of the debt.
  3. The trustee approves these claims.
  4. The trustee then distributes the funds in a fair and equal manner.

What this means is creditor claim who has approved claims amounting to 10% of the total debt of an insolvent person receives 10% of the bankruptcy funds. If the claim is 30% of the debt, that creditor receives 30% of the funds. Once each creditor has received its share, the individual is released from the obligation to pay back the rest of the debt. It is called being discharged from the debt.

A big part of the trustee’s role is to make sure that all parties are treated fairly. Having the trustee distribute the funds provides confidence that one creditor is not receiving preferential treatment over another creditor. This is important because the system depends on the creditors’ confidence that they’ll be treated fairly.

Bankruptcy relieves people from the stress of debts that have become unmanageable. Banks and other lenders play a significant role by granting people access to more credit than they need. I meet with hundreds of people every year. Filing bankruptcy is not a decision that people take lightly. But with the help of a licensed insolvency trustee, those struggling with debts are able to get a fresh financial start. Call your local trustee to learn more about bankruptcy and if its the right option for you.

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  1. Lucy

    Can the “cost of bankruptcy” be paid in one lump sum at the beginning rather than an a out per month for a number of months? If so, is the bankruptcy discharged once it is paid?

    1. J. Douglas Hoyes, Trustee

      You can pay for the cost of bankruptcy up front, but if you have surplus income the exact amount you will be required to pay will not be known at the start of the bankruptcy.

      Regardless of when you make the payments, the bankruptcy will last for a minimum of nine months.


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