Fraud and Bankruptcy

June 4, 2020

Debts that were incurred by fraud will not be discharged in a bankruptcy or a proposal.  Although there may be a stay of proceedings – preventing a creditor from taking legal action during the bankruptcy, unless application is made to the bankruptcy court allowing them to proceed in spite of the bankruptcy – the debt will need to be dealt with after the bankruptcy is finished.

Section 173 of the Bankruptcy & Insolvency Act sets out facts for which a discharge may be refused, suspended or granted conditionally.  Section 173(1)(k) reads “the bankrupt has been guilty of any fraud or fraudulent misrepresentation”.  Which means that the bankrupt’s discharge may not be completed if there is a finding of guilt by a court.  The point is that a simple allegation of fraud or even one or two elements may not be enough to have any material impact on the bankrupt’s application for discharge.

Fraud is a very serious matter that involves more than an error, omission or overstatement.  Errors, omissions and overstatements are common in credit circles and many lenders are complicit in helping debtors qualify for loans they ought not have by exaggerating income or understating the severity of risk.  Banks themselves have long had the practice of promoting and bonusing front line staff for helping clients qualify for credit cards, and other debts they should not have qualified for.

Fraud is something that is contemplated and deliberate, it is must be argued in the courts with precision.   Many people exaggerate their status or their income, especially when trying to qualify for a loan.  Merely making an untrue statement on an application is unlikely, on its own, to lead to either a charge or finding of fraud.   Such information can be verified in a number of ways by the lender and if the lender failed or neglected to perform its due diligence it is as culpable as the debtor.

A fraud that used to be commonplace in bankruptcies was EI overpayments, a finding of fraud would be made a tribunal and the debtor would not be able to escape the requirement to make restitution by filing an assignment into bankruptcy.  The CRA, responsible for the collection of government debts, appears to have abandoned the tribunal process for such findings and now most folks who had received EI in error, by making false statements (knowingly or otherwise) have the balances discharged by bankruptcy.

For a bankruptcy court to make a finding of fraud, upon application for discharge, the case for fraud must be very clear, otherwise the matter will be referred to be heard by a judge in a court specifically convened for hearing that matter.  The point here is that the allegation alone is not sufficient for a finding and neither is circumstantial evidence.  The case must have clarity and certainty, the fraudster must have purposely intended to deceive and defeat his or her creditors.

All of this leads us to contemplate the process that will used to deal with fraudulent claims for the CERB benefits after the filing of 2020 T1 returns.  Some CERB recipients are unsophisticated and believe that receipt of the payment alone is proof of qualification.  Indeed, the government’s own ineptitude, by not having some checking protocol in place upon application, has contributed to a higher number of unqualified applicants receiving the benefits than may have otherwise been the case.

After filing 2020 tax returns the CRA will determine who repay the benefits.  Which leads to two important questions;

  1. Will unqualified recipients be required to first pay taxes and any applicable penalties for funds received during the preceding year in addition to being required to repay the principal amount of overpayment? And
  2. Will the government be using a finding of fraud to prevent unqualified recipients from simply going bankrupt on the overpayments?

Our office has seen a number of cases of people who clearly did not qualify for the benefit receiving it.  Mostly they are people on the lower end of the socioeconomic spectrum, typically already in receipt of long-term government benefits.  It is not unusual for disabilities to run in families, and for family residences to include adult children.  If a family of four (a married couple and two adult children) were in receipt or ODSP benefits and had no loss of income they would not qualify for CERB benefits. 

Such a family would receive $2,681 for ODSP.  If each person in the family also applied for, and received, CERB the family would get $10,681 per month, in addition to a tax liability during 2021.  The family would ordinarily have received an annual income of $31,416 for the year of 2020.  Adding in four months of CERB payments that income rockets up to $63,416, less applicable taxes that become payable on April 30, 2021.

Absent an assignment into bankruptcy it seems inconceivable that the family described would have any mechanism for repayment of the obligation.  After all, how much can reasonably be clawed back from monthly disability benefits without creating a further societal burden?  An arbitrary finding of fraud, by a tribunal, would be grossly disproportionate with social justice in a circumstance where even ODSP administrators are so confused about the CERB benefit that they have been advising people with disabilities to make application.

We wait…