Gambling debt in a Canadian bankruptcy: how section 173 shapes the discharge

Gambling is written into the Act

Most people who file for bankruptcy in Canada never see a courtroom. A first-time bankrupt is usually discharged automatically, and the debts are released. That changes when the file shows that gambling played a part in how the debt was built up. The Bankruptcy and Insolvency Act, section 173, lists the facts that can block an ordinary discharge. Paragraph 173(1)(e) covers a bankrupt who "has brought on, or contributed to, the bankruptcy by rash and hazardous speculations, by unjustifiable extravagance in living, by gambling or by culpable neglect of the bankrupt's business affairs".

The wording matters. Gambling does not have to be the only cause. It is enough that it "contributed to" the bankruptcy. Casino play, sports betting and online slots all sit under the same word; the Act makes no distinction between a provincial site, a licensed private operator or anything else.

What the court must do once a section 173 fact is proven

Section 173 on its own only names the facts. The consequence is in section 172. Under subsection 172(1) the court has a free hand: it may grant or refuse an absolute discharge, suspend it for a specified time, or grant it on terms or conditions. Subsection 172(2) narrows that choice. On proof of any fact listed in section 173, the court shall:

• refuse the discharge;
• suspend the discharge for such period as the court thinks proper; or
• require the bankrupt, as a condition of discharge, to perform such acts, pay such moneys, consent to such judgments or comply with such other terms as the court may direct.

In other words, once gambling is shown to have contributed to the bankruptcy, a clean, unconditional discharge is no longer one of the options under subsection 172(2). The court picks between refusal, suspension and conditions. Subsection 172(3) leaves a door open: if, more than one year after the order, the bankrupt shows there is no reasonable probability of complying with its terms, the court may modify them.

How the issue reaches a hearing

The automatic discharge rules are in section 168.1. The timing depends on whether this is a first bankruptcy and whether the bankrupt has to make payments under section 68.

Each of these applies only if no one has filed an opposition in time. Under section 168.2, the Superintendent of Bankruptcy, a creditor or the trustee may oppose the automatic discharge by notice that sets out the grounds. When that happens, the trustee must apply without delay for a hearing date, unless the matter goes to mediation under section 170.1.

The trustee's report is where gambling usually surfaces. Section 170 requires it to cover the bankrupt's affairs, the causes of the bankruptcy, the bankrupt's conduct before and after the initial bankruptcy event, and any other fact that would justify the court in refusing an unconditional discharge. At the hearing, the report is evidence of the statements in it. If the causes listed include gambling, the section 173 question is on the table.

What a conditional discharge can look like

A Yukon decision shows the mechanics. In Anh Thi Dinh (Re), 2017 YKSC 24, the bankrupt owed $982,827.07 to the Canada Revenue Agency, 91.54% of her total debts, so the court applied the tax-debtor rules in section 172.1, which offer the same three choices as subsection 172(2). An audit had recorded casino chip purchases of $79,780 in 2008 and casino transactions of $930,480 in 2009. At the hearing she testified that her gambling addiction, not health costs as she had first sworn, was the main cause of her financial difficulty.

Justice Gower granted a conditional discharge. The terms included repaying $196,565.41 to the estate at $200 a month plus tax refunds, with the bankruptcy continuing until that sum was paid, and providing proof to the trustee that she had attended a professional assessment of her gambling addiction and followed any recommended treatment or counselling, including Gamblers Anonymous, before discharge. The decision also notes that while a conditional discharge is outstanding, the estate stays open and the trustee keeps charging its tariff fee.

That case was tax-driven, and the amounts reflect it. The point for anyone else is the shape of the order: a payment condition, a treatment condition and a bankruptcy that stays open until both are met.

The consumer proposal route

A consumer proposal is the other formal option under the Act, and it works differently. According to the Office of the Superintendent of Bankruptcy, it is open to people whose total debts, not counting debts such as a mortgage on the principal residence, do not exceed $250,000, the same figure used in the definition of consumer debtor in section 66.11. The term cannot exceed five years. Creditors have 45 days to accept or reject it, and if no meeting is requested in that time, the proposal is deemed accepted. Once the terms are met in full, the debtor receives a certificate of full performance and is released from the debts included in the proposal.

A proposal has its own risk. Under section 66.31, where payments are due monthly or more often, the proposal is deemed annulled once arrears equal three payments. A relapse that eats the monthly payment can therefore undo the arrangement.

Practical points

• Gambling debts are not on the section 178(1) list of debts that survive a discharge, so a discharge releases them like other provable claims.
• What the court looks at is how the debt arose. A trustee has to report the causes of the bankruptcy, so describing them accurately from the start matters; in the Yukon case, the changed explanation weighed against the bankrupt's credibility.
• Conditions can include treatment. If gambling is still part of daily life, the responsible gaming page lists tools such as deposit limits and self-exclusion, and the way GoingGambling evaluates casinos explains how those tools are checked in reviews.

Which route fits a particular situation is a question for a Licensed Insolvency Trustee. This article explains what the Act and the cited decision say; it is not legal or financial advice.