Insolvency is a vital part of many economies because it allows businesses to recover from financial failure. Licensed insolvency trustees (LITs) are an important part of the process; they collect and liquidate assets in order to pay creditors, negotiate settlements with creditors, file tax returns on behalf of the debtor or bankrupt, apply for exemptions on behalf of the debtor or bankrupt, and distribute funds to creditors when they approve a plan.
How do LITs get paid?
They are compensated for their services by way of fees charged to the insolvent individuals who hire them in addition to commissions they receive on asset sales. However, they can also charge contingency fees in certain cases.
Fees charged to the debtor or bankrupt
LITs can charge a percentage fee on the money that is recovered from liquidating assets. This is known as a commission-based model, and if it applies, a LIT will likely advertise this prominently. They are only allowed to charge up to 15% of the money they recover for their clients.
For example, if the LIT sells a debtor’s car for $5000 and recovers 50% of what is owed to creditors, they can charge up to $750 (50% of the money recovered).
Fees charged by way of contingency fees
This is an alternative compensation model that applies when LITs are dealing with smaller cases or those that would be too expensive to charge a percentage fee. In this case, LITs charge a flat fee based on an hourly rate and the amount of time they spend working on the file.
For example, if a debtor hires a LIT for a $10,000 matter that takes 100 hours to complete, the contingency fee would be $10,000 divided by 100 hours, resulting in a fee of $100/hour. The LIT could then charge, for example, a flat rate of $4500 or an hourly rate of$50/hour.
As with commission-based models, contingency fees must not exceed 15% of the money that is recovered for the debtor.
For example, if the LIT were to sell a car for $5000 and recover 50% of what is owed to creditors, their fee would be $750 (50% of the money recovered).
What are commissions?
These are fees that are paid directly to LITs based on the value of funds they have recovered for creditors. Commissions are payable on the total value of all monies recovered (net of any fees charged) and can be anywhere from 1% to 10%. LITs must specify their commission policy in writing at the time they start working for their clients, but they do not have to advertise this information prominently.
For example, if a LIT sold a debtor’s car for $5000 and recovered 50% of what is owed to creditors, they would receive a commission of $250 (50% x $5,000).
What is the process?
LITs begin earning their fees when they start working for their clients (i.e. when the notice of proposal begins or when formal proceedings are started). They can begin charging commissions or contingency fees at this time, but it takes three months before any money is actually paid out. At that point, LITs can begin earning their fees.
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