When "Voluntary" Payments Aren't Really Voluntary

If you've met with a Licensed Insolvency Trustee (LIT), you may have been told that you need to make monthly payments in order to file bankruptcy.

Often these are described as "voluntary fee payments."

Voluntary.

We'll come back to that word.

Most people assume that bankruptcy works like hiring a lawyer or an accountant. You pay a professional a fee and they provide a service.

That's not actually how most consumer bankruptcies work.

The Licensed Insolvency Trustee occupies a unique place in Canadian society. They are both an officer of the Court and a private business.

That combination creates an interesting tension.

As an officer of the Court, the trustee is expected to administer the bankruptcy according to the law.

As a private business, the trustee needs to generate revenue and earn a profit.

There is nothing wrong with that. Businesses are supposed to earn profits.

The important thing is to understand that trustees are not economically neutral participants in the bankruptcy system.

Like every other business, they respond to incentives.

And if you're considering bankruptcy, you should understand what those incentives are.

How Trustees Are Paid

Most people are surprised to learn that trustees are generally not billing consumer bankruptcies by the hour.

Instead, they are compensated through a tariff established under the Bankruptcy and Insolvency Act.

The more money that comes into the bankruptcy estate, the greater the compensation available under the tariff.

That immediately raises an uncomfortable question.

If trustee compensation increases as estate realizations increase, doesn't that create an incentive to maximize the amount of money flowing into the estate?

Of course it does.

The system is designed that way.

Trustees are required to maximize realizations for the estate.

That doesn't mean conducting a fire sale.

It doesn't mean acting improperly.

It means realizing upon assets that belong to the estate in a commercially reasonable manner.

This is how the trustee gets paid.

Through the assets of the estate.

One of Those Assets Can Be Your Income

When people hear the word "asset," they usually think of a house, a vehicle, or investments.

But bankruptcy law can also capture a portion of your future earnings.

The federal government establishes income thresholds each year. These are known as the Superintendent's Standards.

If your income exceeds the applicable threshold, you are required to make surplus income payments.

If your income falls below that threshold, you are not.

Simple.

Parliament created a detailed system to determine when post-bankruptcy earnings should become available to the estate.

That system is found in section 68 of the Bankruptcy and Insolvency Act.

Section 68 tells us when income should be paid.

It tells us how much should be paid.

It tells us how long it should be paid.

In other words, Parliament appears to have created a complete code governing the treatment of post-bankruptcy wages.

If your income exceeds the threshold, you pay.

If it doesn't, you don't.

At least that's what most people would assume.

The Part Nobody Talks About

Most consumers have never heard of Rule 59.

Most trustees rarely discuss it.

But I think consumers should know it exists.

Rule 59 deals with GST credits.

In practical terms, it recognizes that GST credits which would otherwise belong to the bankrupt become available to the estate to ensure the costs of administration are paid.

Importantly, those funds cannot be used to create a dividend for creditors.

Think about what that means.

The legislation appears to contemplate that a trustee can be compensated even in a low-income, no-asset bankruptcy.

The legislation appears to recognize a distinction between funding the administration of a bankruptcy and creating a dividend for creditors.

Those are not the same thing.

And that distinction matters.

When you work through the tariff calculations, the government levy, and the operation of Rule 59, a practical reality emerges.

There is a point at which the costs of administration have effectively been funded.

Only after that point do dividends to creditors begin to emerge.

Which leads to a question that I believe consumers should be asking more often.

So Why Are Voluntary Payments Being Requested?

Many trustees require monthly payments even when no surplus income obligation exists.

These payments are often described as voluntary fee payments.

But if you refuse to agree to them, many trustees will decline to administer your bankruptcy.

Which raises an obvious question.

How voluntary is a payment if the service is unavailable without it?

Now before someone accuses me of suggesting that trustees should work for free, let's deal with that immediately.

I'm not.

Professionals should be paid.

The question is not whether trustees should be compensated.

The question is how much compensation Parliament intended and where that compensation should come from.

Those are very different questions.

If section 68 already determines how much of a bankrupt person's wages belong to the estate...

And if Rule 59 already appears to contemplate trustee compensation in low-income estates...

Why is a bankrupt person being asked to make additional payments from wages that Parliament did not require them to contribute?

That's not a rhetorical question.

It's a real one.

The Ethical Question

At this point, someone will inevitably say:

"A trustee doesn't have to take every file."

That's true.

Trustees operate private businesses.

They are free to decide which engagements they accept.

But that isn't the question.

The question is why the engagement is being declined.

If the file is genuinely uneconomic to administer, that's one thing.

If the file is being declined because the bankrupt refuses to make payments from wages that Parliament chose not to capture under section 68, that's something else entirely.

And that distinction matters.

The Code of Ethics governing Licensed Insolvency Trustees contains some interesting provisions.

Rule 36 requires trustees to perform their duties with competence, honesty, integrity, and due care.

Rule 39 requires trustees to be honest and impartial and to provide full and accurate information to interested parties.

Rule 44 requires trustees to avoid influences, interests, or relationships that impair—or appear to impair—their professional judgment.

Notice something important about Rule 44.

It doesn't just address actual impairment.

It also addresses the appearance of impairment.

That should give all of us pause.

Because if Parliament has already determined how much of a bankrupt person's wages should be available to creditors...

And if Parliament has already contemplated trustee remuneration in low-income estates...

And if additional payments increase estate realizations and potentially increase trustee remuneration...

Then an informed person might reasonably ask whether economic incentives are influencing professional judgment.

That's not an accusation.

It's a question.

And it is exactly the kind of question professional ethics are designed to encourage us to ask.

Agency Matters

The purpose of this article is not to criticize trustees.

I am a trustee myself.

I understand the economic realities of the profession.

The purpose is to encourage consumers to think critically about the arrangements they are being asked to enter.

If you are being asked to make voluntary payments, ask questions.

What purpose do the payments serve?

How much money is expected to come into the estate?

Will creditors receive a dividend?

If they do, where is that dividend coming from?

If section 68 does not require surplus income payments, why are payments from wages being requested anyway?

These are not hostile questions.

They are informed questions.

And informed consumers make better decisions.

That's true in every marketplace.

Bankruptcy should be no different.

It's not about being difficult.

It's about being informed.