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Bankruptcy Canada Trustees Talk — The insider's view of Bankruptcy in Canada

Bankruptcy and Consumer Proposal Rate in Canada Increases

Personal bankruptcy filings in Canada increased in June, 2010, according to personal bankruptcy statistics released by the Office of the Superintendent of Bankruptcy. In the month of June 11,900 Canadians filed a bankruptcy or a proposal, up 7% from the 11,123 filings in May, 2010. Over the twelve months ending in June, 145,233 residents of Canada filed a proposal or bankruptcy, up 6.2% from the 136,749 who filed over the twelve months ending in June, 2009.

For the twelve months ended June 2010 the rate of filings increased everywhere but in Manitoba and Nunavut. Here’s a summary of the rate of increase in personal insolvencies (which includes bankruptcies and proposals) filed by consumers in Canada for the twelve months ended June, 2010:

What does the increase in insolvency filings in Canada mean for the average Canadian?

A quick review of the number shows that in virtually every province the number of insolvencies filed increased, but a more detailed look at the number reveals a very important trend: personal bankruptcy filings in Canada are actually decreasing, while the number of consumer proposals filed is increasing dramatically.

As noted above, over the last twelve months in Canada the total number of residents of Canada declaring insolvency increased by 6.2%, to 145,233. However, the number of personal bankruptcies actually decreased by 1.5%, from 106,933 to 105,360. So why are total filings up 6.2%? Because the number of proposals filed by consumers increased by an astounding 33.7%, from 29,816 to 39,873 filings in the last twelve months.

These numbers prove that the average Canadian is increasingly choosing to file a consumer proposal as an alternative to personal bankruptcy.

Why are consumer proposal filings increasing in Canada?

Bankruptcy numbers are falling, and consumer proposals are increasing for two reasons:

First, the economy in Canada is still showing weakness, which is why overall numbers are still increasing.

Second, and most importantly, in September 2009 the federal government implemented new bankruptcy rules that make filing bankruptcy a longer and more expensive process for many Canadians. The most significant new rule involves the calculation of surplus income. In simple terms, under the new surplus income and bankruptcy in Canada rules, if your family income is higher than the allowable limit set by the government, your bankruptcy will last for an extra year, and you will be required to make extra payments for that extra year. That means that a first time bankrupt, instead of being discharged in nine months, may not be discharged for 21 months.

Clearly, many Canadians with debt problems have analyzed their options, and have decided that a consumer proposal is a better option than bankruptcy for dealing with their debts, and that’s why consumer proposal numbers continue to increase.

With a consumer proposal you make one fixed monthly payment, and that payment doesn’t increase even if your income increases. You know exactly what you are required to pay to discharge your debts, and that’s a great feeling.

To find out if a consumer proposal is right for you, contact a licensed consumer proposal administrator today for a no charge initial consultation. The numbers don’t lie; a consumer proposal may be the right option for you.

Posted on Monday, August 30th, 2010
Filed under: Consumer Proposal andbankruptcy Canada andbankruptcy reform
posted by Doug Hoyes @ 5:35 am No Comments

Bankruptcy in Canada for Seniors With Tax Debt

An interesting debate has emerged in the pages of the Financial Post over the last two weeks regarding the need for senior citizens to file bankruptcy in Canada. The debate started with an article by Jonathan Chevreau published on August 11, 2010 titled No Immunity to Bankruptcy. That day Mr. Chevreau also published a blog post titled Freedom 60? 33,516 Canadians 60 or older filed for bankruptcy from 2008 to 2010. I was interviewed for both the newspaper column and the blog post; here’s a quote from the newspaper:

Between 2006 and 2010, between 7% and 9% of the debtors handled by Toronto bankruptcy trustees Hoyes Michalos & Associates Inc. were 60 years of age or over, says principal Doug Hoyes.

In the two and a half years between January 2008 and May 2010, 33,516 Canadians age 60 or over filed for bankruptcy, according to Industry Canada.

That quote is accurate. In fact, after holding steady in the 7% range between 2006 and 2009, in the first seven months of 2010 the percentage of people aged 60 or over who have filed a consumer proposal or a personal bankruptcy has increased to 9%. That statistic clearly indicates that more seniors are experiencing financial difficulty, and are making the decision to formally deal with their debt.

Here’s the key problem, as quoted in the Financial Post article:

Of course, the problem with carrying debt into retirement is that it must be serviced with less income than when working full-time. Some adapt by making only the minimum monthly payments on credit cards, which leads to a downward debt spiral, a journey that often ends with a trip to offices like Hoyes.

In the past, most seniors were able to retire with no debt. The fortunate ones owned their own house with no mortgage, so when they retired they were able to live comfortably from their savings and pensions. Unfortunately today an increasing number of seniors are retiring with debt, so when their income drops at retirement it often becomes impossible to both service debt and pay normal day to day living expenses. I’ve met with a number of seniors who retired in good financial shape, but as the recession worsened they ended up helping their grown children deal with their money problems, and that often depletes their retirement nest egg, and can even lead to new debt.

But there’s more to the story than that; here’s another excerpt from the Financial Post article:

Hoyes guesses half the seniors he sees choose bankruptcy, although he lays out four less extreme options. He points out that most retirees don’t need to file for bankruptcy because the main reason for considering it is to ward off creditors that threaten to garnishee wages or seize assets. Retirees have no full-time wages, so don’t have significant wages that can be seized. Also, “it is very difficult, if not impossible, for a creditor to garnishee a pension,” Mr. Hoyes says.

This is where it gets interesting. On the day the article was published, Mr. Chevreau was contacted by a reader who said that he was 70 years old, and he owed a significant amount of back taxes, and CRA was taking all of his Canada Pension Plan income each month. As any good journalist would do, Mr. Chevreau contacted me to ask for my side of the story, since Revenue Canada’s actions to seize pension plans would appear to contradict my statement that “it’s very difficult for a creditor to garnishee a pension.”

My response to Mr. Chevreau was that yes, it is very difficult for a typical creditor, like a bank or credit card company, to garnishee a pension. However, Canada Revenue Agency is not a “typical” creditor. CRA has more power than your typical credit card company or other creditor.

On August 18 Mr. Chevreau reported on this continuing story in an article in the Financial Post titled Government gives with one hand, garnishees with other, where he tells the story of “Sam” (not his real name), the 70 year old who is not getting any CPP or OAS benefits because CRA is taking all of it, and applying it against his tax debt. Here’s an excerpt from the story:

Generally, if you owe money on credit cards or other unsecured debt, there’s no mechanism for creditors to garnishee a pension, says Doug Hoyes, a principal with Toronto based bankruptcy trustee Hoyes Michalos & Associates Inc.

According to Hoyes, the Ontario Wages Act only permits creditors to garnishee up to 20% of a person’s wages or 50% for child support. However, he says, “standard garnishment rules don’t apply to the CRA. They can do whatever they want.”

Hoyes regards the legal definition of garnisheeing wages as a court order to take some of your paycheque. But the rules are different when the government is itself the creditor. “It doesn’t go to court. They can just decide to take CPP and OAS until they get what they want.”

He has seen cases similar to Sam’s in the past, but they were “rare circumstances, generally where the tax debt was large and often where the taxpayer was delinquent in filing tax returns on time.”

CRA spokeswoman Caitlin Workman confirms the tax agency can garnishee “all types of pensions,” both government and private. This is permitted under Section 224.1 of the Income Tax Act, with similar provisions in five other acts. However, she says it’s rare to garnishee more than 20% of such benefits. “It’s very much a last resort after the taxpayer’s ability to pay has been determined.”

So there you have it. If you owe taxes to CRA, and if you get Canada Pension Plan or Old Age Security payments, Canada Revenue Agency can withhold some or all of your monthly pension payments in satisfaction of your tax debt.

As I said in the article, while I have seen cases like Sam’s, it is generally very rare that CRA would take all of someone’s pension. They will typically only take everything if you owe a significant amount in taxes, and if you were delinquent in filing your taxes on time. As the CRA spokeswoman stated, it is rare that they will garnishee more than 20% of pension benefits, but it is possible.

What Can You Do if CRA is Taking Your CPP Pension For Taxes Owing?

If you owe back taxes and CRA is taking your pension, you have a number of options.

First, you can contact CRA and work out a re-payment plan. If you have other assets that you can sell to raise cash, you may be able to pay your taxes with that money, at which point CRA will stop taking your pension. You may also be able to negotiate a monthly payment plan to free up some of your pension.

If you can’t make a plan directly with Canada Revenue Agency, you could try to get a debt consolidation loan; you borrow from a bank, and use the money to repay CRA. If you pay your taxes in full, CRA will release the flag on your pension payments.

If you don’t qualify for a loan, which is often the case once you retire because your income has dropped, your next option is a consumer proposal. In a consumer proposal a settlement is reached with all of your creditors, including CRA. In many cases you may end up paying less than the full amount owing. If your largest debt is taxes, CRA must agree to your proposal, so a consumer proposal is not always an option where tax debts are involved.

If a consumer proposal isn’t possible, your final option for dealing with tax debt is personal bankruptcy. Upon your discharge from bankruptcy in Canada your tax debts are discharged.

Owing money to the tax man isn’t fun at any age, but it can be even more stressful if you are a senior citizen on a pension, so if you have tax debts, contact a licensed bankruptcy trustee for a no charge initial consultation to review your options.

Finally, my thanks to Mr. Chevreau and the Finanicial Post for bringing this issue, and possible solutions, to the attention of senior Canadians.

Posted on Monday, August 23rd, 2010
Filed under: Bankruptcy Alternatives andConsumer Proposal andbankruptcy Canada
posted by Doug Hoyes @ 2:17 am No Comments

Debt Settlement Plans

I have written quite a few pieces were I am critical of the “debt consulting” industry and persons presenting themselves as credit counsellors when they have little or no formal education or credentials. It’s not that I begrudge any of these people a livelihood – I just wish they’d pick a career that doesn’t involve gouging an already desperate portion of the population.

Ted Michalos, Bankruptcy Trustee

Ted Michalos, Bankruptcy Trustee

If you are unfamiliar with the term debt settlement it generally means some sort of negotiated deal to repay a portion of your debt. The service is real – most creditors will accept a partial repayment, particularly in a lump sum, once your debt has gone into collections. The trick here is one of timing. The debt settlement companies charge an upfront fee plus a percentage of the settled debt. They pay themselves first before they actually settle with your creditors and they can’t settle with your creditors until they have “saved up” enough of your payments to offer a deal.

That’s a bit confusing, so an example might help. Let’s say you owe $50,000 on your credit cards. The debt settlement company tells you they can settle with your creditors for $25,000. The upfront fee is $2,000 and they’ll charge another 20% of the settled amount – $5,000. Let’s say you agree to $1,000 a month. So the first 7 months will go to pay them and then your payments will go into a savings account until they accumulate enough to offer one of your creditors the 50% deal. During this time you have no legal protection and in many cases the creditors simply proceed to collections and then take legal action against you. To stop the legal action you end up filing a consumer proposal or perhaps bankruptcy (of course you won’t get any of the money back from the debt settlement company).

An alternative might be a consumer proposal whereby you offer the same settlement (50%), but it would play out quite differently. A consumer proposal can be spread over five years which would give you a much lower payment. Just to keep the comparison similar though, we’ll say you can pay the $1,000 per month. Your proposal will run for 25 months (the debt settlement plan would run for 32 assuming the creditors don’t cut it short). By law, the fees for the trustee are taken directly from the settlement; they are not added on top. In addition, after the preparation fee has been paid, $1,500, a trustee only receives payment when the creditors are paid – not in advance. Further, all of the creditors receive payments at the same time – you don’t settle with one, then save up and settle with the next. Most importantly, if you file a proposal you have legal protection from wage garnishees, collection agents and other legal actions.

If you’ve responded to a debt settlement ad and/or are actively considering this solution for your financial difficulties please make certain you understand the process that the company you will be dealing with is going to follow. As long as you understand the risks and the pitfalls of a debt settlement plan then you can add itn to the list of options to deal with your debts. Most people don’t take the time to “read the fine print” and as such go into these plans with high expectations only to have their creditors continue to pursue them, including collection actions and wage garnishees.

Be careful and consider all of your options before you sign.

Posted on Monday, August 16th, 2010
Filed under: Bankruptcy Alternatives andDebt Options
posted by Ted Michalos @ 4:08 am No Comments

Debt-Free Forever: A No-Nonsense Book Review

In addition to our usual commentary on bankruptcy in Canada, we occasionally review books that may be of interest to our readers. You can see all book reviews in our book review section.

Today we review Debt Free Forever: Take Control Of Your Money And Your Life by Gail Vaz-Oxlade, the host of TV’s Til Debt Do Us Part.

Gail Vaz-Oxlade's Debt Free Forever: Take Control Of Your Money And Your Life

I must confess that I am biased, because I have appeared twice on Till Debt Do Us Part as an “expert”. My first appearance was back on Episode #36, that first aired in 2007, called Single Mom Shake Up. My job was to explain the bankruptcy option to Tammy, the person featured on that episode. She was able to cut her expenses, and with the support of her family she avoided bankruptcy.

I also appeared in Season 8, on episode number 103; you can watch the entire episode on the Till Debt Do Us Part section of the Slice web site. (Warning: This is a very emotional episode; I had to give some difficult advice, as did Ms. Vaz-Oxlade; sometimes our advice is not taken, and that’s a difficult reality when you are a professional advisor).

As anyone who was watched Till Debt Do Us Part will know, Gail Vaz-Oxlade has a very “no nonsense” approach to money problems. She strongly believes that ultimately you are responsible for your behavior, so only you can change your behavior to eliminate money problems. I like that approach.

That no-nonsense approach is easy to see in Debt Free Forever: Take Control Of Your Money And Your Life as Gail Vaz-Oxlade starts at the same place I start in every meeting I have with someone in financial trouble: Figure Out Where You Stand. She gives practical tips on how to analyze your spending, and, most importantly, how to face up to your debt.

In my experience facing up to your debt is the hardest step to take in your journey to financial freedom. It’s hard to make a list of all of the money you owe, but it’s absolutely essential if you want to go on the next step, which is Part Two of the book: Make a Plan.

Doug Hoyes, Bankruptcy Trustee, Appearing on 'Til Debt Do Us Part

Her advice is always practical; you don’t need a math degree to follow her advice. She keeps it simple, using her trademark “jar” method of saving, where you put cash in your food jar, gas money jar, and so on to keep budgeting simple.

Speaking of budgeting, that’s Chapter 4, Create a Budget That Balances. Again, Gail gives practical advice on how to create a household budget, and how to cut expenses to make your budget balance. She illustrates the concept with what she calls the “Life Pie”, where money is allocated to life’s expenses, and you have to learn to divide the pie up to keep your spending in check.

While Debt Free Forever: Take Control Of Your Money And Your Life focuses on budgeting, spending control, and setting goals, Chapter 11 does deal with subject matter near and dear to my heart: Cope When the Caca Hits the Fan. She starts the chapter off by telling it like it is:

One of life’s hard truths is that it doesn’t matter how carefully you plan, how hard you work, or how diligent you are in taking care of the details, crap happens!….It’s nice to think that life is predictable, but it’s not ………Having made a budget, made a debt repayment plan, made up your mind to live your life consciously and take care of your money, you may dream that it’ll be smooth sailing from here on in, but it is only a dream. Sometimes life sucks.

Yes, I couldn’t agree more. Every day I meet with Canadians who were doing well, but then they got sick, lost their job, got divorced, or had some other tragedy derail their dream of financial independence. Sometimes, stuff happens. Fortunately, Gail Vaz-Oxlade carries her “no-nonsense” approach to the discussion of bankruptcy in Canada as well. Here’s what she has to say:

Bankruptcy isn’t the worst thing in the world. Living in the hell you’ve created is….

For many people, the decision to go bankrupt isn’t an easy one to make. It’s a thorny path. But if that’s what it’ll take to get you out of hell, then do it.

Wow. No-one will ever accuse Ms. Vaz-Oxlade of “sugar coating” her opinions. She’s right: in my experience it takes the average person six months of soul-searching before deciding to file bankruptcy. Bankruptcy is a last resort for dealing with your debts, but sometimes it is necessary.

If you are looking for a book that contains practical, easy to understand advice, Debt Free Forever: Take Control Of Your Money And Your Life is just what you are looking for. The advice is easy to understand, but it’s not easy to implement. Making change is hard, and it takes sacrifice, but if you are up the challenge, this book can help.

Posted on Monday, August 9th, 2010
Filed under: Book Reviews andbankruptcy Canada
posted by Doug Hoyes @ 2:05 am No Comments

Consumer Proposal: One of the most important financial tools available to Canadians

The consumer proposal is probably the least known of the processes to deal with overwhelming debt, but it is the mechanism that has the greatest capacity for good given our current economic environment. Let’s face it, right now the number one biggest risk to the Canadian economy isn’t the high dollar, it isn’t our level of productivity, it isn’t the strength of our largest trading partner – it is the state of our personal finances.

Barton Goth, Bankruptcy Trustee

After that bold statement I must insert my disclosure. My name is Barton Goth, I am a licensed Trustee in Bankruptcy and Consumer Proposal Administrator here in Edmonton. So I definitely have a bias. However, this statement is not made based solely on observations made in my daily practice, but based on the current state of our overall economy. Let us review:

• During the 2000s, the average Canadian’s asset growth was less than half the pace of the 1990’s and the growth in debt was twice as rapid (Roger Suave, The Current State of Family Finances 2009)

• In recent years household debt has surged three time faster than income and now stands at a record high of more than $1-trillion (Canada’s Brewing Debt Storm, The Globe and Mail Apr. 16, 2010, by Paul Waldie and Steve Ladurantaye)

• The average Canadian owes about $1.47 for every dollar of disposable income (Certified General Accountants Association of Canada, CIBC Economics, National Bank economics and Statistics Canada)

• For many years, debt was rising about 2.5 percentage points faster per year than income, this gap had widened to 4 to 5 percentage points by 2005 and rising by approximately 9 per cent in 2008. (Defusing Canada’s debt bomb, Globe and Mail Apr. 17, 2010, by Don Drummond, Chief economist, TD Bank Financial Group)

As a result of these alarming trends I think the traditional focus of our finances is going to have to move away from the saving and investment side of things, and toward dealing with the debt that more and more people are becoming burdened by. This is why a consumer proposal currently is one of the most important financial tools available to Canadian families. It is a tool that gives Canadians the ability to regain control of their finances before they are forced to consider a bankruptcy. As a result, I predict that we will continue to see a major increase in the number of proposals filed as people begin to realize the gravity of their financial position and begin to investigate what can been done to resolve these difficulties.

For those of you unfamiliar with consumer proposals, you are not alone. The idea of a consumer proposal is relatively new (first introduced into the Canadian insolvency legislation in 1992), but has provided a way for many Canadians over the years with a middle of the road option that contains many of the advantages associated with a bankruptcy, while avoiding some of the more significant disadvantages. A consumer proposal is especially advantageous for those people who cannot afford to pay their debts in full but have enough money coming in each month that realistically they should not be forced into the filing of a bankruptcy, a reality that an increasing number of Canadians are faced with each day.

The consumer proposal is one of the options available through the Bankruptcy and Insolvency Act that provides a court sanctioned way to negotiate a settlement with your unsecured creditors (i.e. credit cards, personal loans, taxes etc.). There are many advantages to filing a consumer proposal. For instance, in a proposal you do not automatically lose any of your assets as you would in a bankruptcy. You are able to have a reduced impact on your credit over the long term than filing bankruptcy, and most importantly, you are able to bring the payments on your existing debt to a manageable level that will fit in your budget. At the same time, because the consumer proposal is a court sanctioned settlement, you only need a majority of your creditors to cooperate with the proposal and you benefit from court protection which mandates that all your unsecured creditors must participate in the proposal and can no longer collect on or charge any interest on these debts.

At a time when the average family is faced with waning savings, growing debt, aggressive lending practices and an uncertain economy, the consumer proposal may prove to be one of the most needed of all financial tools, and one that will assist many families in an effort to regain control of their finances and truly put their house in order.

If your one of the many Canadians who are currently struggling with your finances I have one word of advice, act now and schedule a time to review your finances with a consumer proposal administrator . If you are proactive, rather than reactive, you will be able to catch things early. The earlier you recognize the difficulties you face and the earlier you act, the more likely you will be able to qualify to file a consumer proposals and the quicker you will be able to regain control of your finances.

Posted on Monday, August 2nd, 2010
Filed under: Consumer Proposal andDebt Options
posted by Barton Goth @ 5:26 am No Comments

Pat Foran: The Smart Canadian’s Guide to Saving Money

On this web site we provide many tips for dealing with your debt. We have an interactive debt options calculator that tells you what it will cost to deal with your debts, and we have an on-line support group so you can discuss your alternatives anonymously with others in your situation. These tools are great, but sometimes you want advice from an old-fashioned source: a book.

Books are great. You can carry them with you, and if you drop them, you don’t need to re-boot! So, occasionally over the the next few months, we will provide you with some book reviews of books that can help you deal with your debts, and save money.

Today we review The Smart Canadian’s Guide to Saving Money, Second Edition, written by Pat Foran of CTV’s Consumer Alert. I was first interviewed by Pat Foran for the first edition of the book a few years ago, and he interviewed me again prior to the release of this second edition. He also interviewed me for a story that ran on Canada AM back in 2008 about how to financially survive the holidays.

When I was interviewed on Canada AM I was very impressed by Pat Foran’s preparation and professionalism. We all think of television as very glamorous, but it isn’t. On the day of the interview is was Pat himself who met me at the reception desk at the CTV studio in Toronto, and he walked me back to the studio. While we walked we chatted about some of the questions he wanted to ask me. He had already done his research, so he knew what he wanted to ask. We got to the studio and the camera operator was ready. Pat showed me where to sit (he wanted a shot with a Christmas tree in the background), and he helped me put on my microphone. He then glanced at his notes, and then asked my seven or eight questions in rapid succession, with barely a glance down at his notes again.

The final interview was brief and concise, no doubt due to his skill as an editor, taking the five minutes of my answers and editing them down to a few brief comments. He used graphics to give viewers a very concise “to do” list of how to avoid money problems. I thought is was a great piece.

Mr. Foran’s greatest skill, in my view, is his ability to take difficult concepts and “boil them down” to simple, easy to understand tips that everyone can use in their every day life.

The first version of this book was called The Smart Canadian’s Guide to Building Wealth, and it was a good book. The Second Edition, in my view, is much better, because it focuses on Saving Money, which of course is the first step to building wealth.

Pat Foran's The Smart Canadian's Guide to Saving Money

Part 2 of this book is about saving money, and covers topics like a Tax Free Savings Account, understanding interest rates, and trimming the grocery bill.

Readers of this blog will be most interested in Part 1, where Pat Foran discusses Reducing Debt. He gives a great summary of all debt management options, including chapters on:

Of course I am most proud of Chapter 24, Declaring Bankruptcy, because that’s the chapter where I was interviewed. I gave Mr. Foran some details on our study of “Joe Debtor”, the average person who declares bankruptcy in Canada. It turns out that Joe Debtor is very similar to many Canadians, carrying over $50,000 in unsecured debt, and earning about $2,100 per month after taxes. We also discussed the causes of bankruptcy in Canada, including unemployment, marriage break up, and many other causes.

I appreciated the fact that Mr. Foran gave a very balanced view of the process, both good and bad, and he also took time to discuss alternatives to bankruptcy, including a consumer proposal.

Of course the book only has a few pages on bankruptcy; most of the book discusses ways to increase your wealth, so I recommend it as a book for both Canadians in financial trouble, and for those who have finished the bankruptcy process and are looking to start building their wealth.

Bankruptcy is supposed to give you a fresh start, and Pat Foran’s book The Smart Canadian’s Guide to Saving Money, Second Edition, written by Pat Foran is a great first step in that process.

Posted on Monday, July 26th, 2010
Filed under: Book Reviews andDebt Options
posted by Doug Hoyes @ 5:05 am No Comments

Running the Numbers

What does it mean to “run the numbers”? This is an expression that accountants and other financial professionals use to mean “look at how much it costs” to do a certain thing.

Ted Michalos, Bankruptcy Trustee

Ted Michalos, Bankruptcy Trustee

For example, when you buy or lease a car, you determine what the total cost of the car is and then look at how much the monthly payment will be based on your down payment, the length of time you will be making payments and of course the interest rate. You “run the numbers” to see what you can afford. If you are considering a debt consolidation loan, you can use an on-line debt consolidation loan calculator to “run the numbers.”

This same concept can be (and should be) applied to all of your living expenses. Most people know how much money they have coming in – they can add up their paycheques, their government cheques, and any other money they receive in a month. What many people don’t seem to know is how much money they have going out – what they are spending.

It is not complicated to figure out how much you are spending, but it does take some effort. The simplest approach to determining how much you spend is to write down every dollar that you spend. Start by doing this for a day, then a week, then a month, perhaps two. The longer the period of time you keep track of the better the numbers you have will be.

This means that you have to write down when you spend cash, when you use your debit card, when you write a cheque or use a credit card. If there are two (or more people) paying the bills then everyone needs to keep track of what they are doing. If you’re a husband and wife and only the wife writes things down then you’ll only have half the picture. Better than nothing, but not really useful in the long run.

Once you’ve recorded all of your expenses for a month you have to sit down and sort them out – which ones are for food, for rent, for your car or other travel, etc. It doesn’t matter how you group things together as long as you know what items make up each number. (In other words, if you decide to lump all of your rent and utilities together as one item then every month you need to do the same thing. You can’t include the cable bill this month and then put it someplace else next month).

Once you have all of your expenses sorted out you can decide whether on not that’s how you want to spend your money. In a lot of cases (things like rent) you don’t have a lot of choice, but for other items (such as groceries, or entertainment, coffee breaks, etc) you can decide how much you are willing able to spend.

This is “running the numbers” for your living expenses. If you write down the money coming in at the top of the page, list the money going out beneath it, you’ll have a monthly budget. By subtracting the money going out from the money coming in you can determine how much money you have left over to save, or pay down debt, or to buy the things that you need from time to time.

If your budget is in the negative (the money going out is larger than the money coming in) then you need to look at ways to either increase the money coming in – get a second job, rent a room, whatever – or you need to look at ways to reduce the money going out – cut back on your expenses.

The people that we speak to most frequently have determined that the item causing them the most difficulty every month is the money going out to deal with their debts. For many Canadians, this can be the largest part of their budget – exceeding the amount they pay for their rent or mortgage.

If after you’ve run the numbers you determine that you need to do something about your debt, that’s when you should consider speaking to a financial professional to review your debt management options.

Running the numbers gets you started – once you have a budget you can look at different debt management solutions to deal with your debts to see which one fits your budget and is right for you.

Posted on Monday, July 19th, 2010
Filed under: Debt Options
posted by Ted Michalos @ 4:59 am No Comments

Let the Truth Set You Free

My name is Barton Goth, and I am a licensed Trustee who practices here in bankruptcy. As I have been born and raised here in Edmonton, I can remember fondly the glory days of Edmonton Oilers and have been watching very closely the misfortunes of good old Peter Pocklington. Now I don’t know if this is a household name in the rest of Canada, but in Alberta you would find very few who are unfamiliar with good old Peter Puck.

Barton Goth, Bankruptcy Trustee

Despite being born and raised in London, Ontario, and owning two Ford dealerships in the area, he moved to Edmonton, Alberta and this is where he really began to make a name for himself. By the mid-1970s, Pocklington had purchased Gainers Food, Palm Dairies, Canbra Foods and many other smaller companies that were eventually built into a fairly diverse business empire. But the purchase that began everything didn’t come until the late 1970’s when he added the Edmonton Oilers to his holdings, and more importantly, bought the rights to Wayne Gretzky. From here Pocklingon’s popularity sky rocketed. He proceeded to move the Oilers to the National Hockey League, won 5 Stanley cups, and ultimately became one of the wealthiest men in Canada and needless to say a beloved figure in the Edmonton business landscape. Now if all that isn’t enough to become noticed, on August 9, 1998 Peter Pocklington did the unthinkable – he traded the most beloved hockey player of all time, Wayne Gretzky, to the Los Angeles Kings for $15 million in cash and a handful of draft picks.

So why am I talking about Peter Pockington on a blog dedicated to bankruptcy? Well, despite the fame and fortune, like many Canadians, Pocklington’s finances were not in as good shape as they may have appeared, to the point that on August 11, 2008, with debts of almost $20 Million and reported assets of only $2,900, he assigned himself into bankruptcy in the State of California. This is where the story gets more interesting, as in the early hours of March 11, 2009, Pocklington was arrested by the FBI for bankruptcy fraud. More specifically Pocklington was accused of making false statements in bankruptcy and making false oaths and accounts in bankruptcy.

This last week Peter Pocklington, former Edmonton business man, once an aspiring politician, pled guilty to one count of perjury and failing to property disclose assets that were in his control. Whether this was a case of poor legal advices as Pocklington claims or a bad decision, the result is the same.

So what can be learned from the adventures of the flamboyant entrepreneur who has made so many headlines? I think over the ages, mothers have said it best – honesty truly is the best policy! The Canadian Bankruptcy and Insolvency Act (BIA) hinges on this important principle. Early on in the introduction the legislation itself states: “The Act [BIA] permits an honest debtor, who has been unfortunate, to secure a discharge so that he or she can make a fresh start and resume his or her place in the business community.”

When a person is facing financial difficulties, there are often many parties providing information and support. The problem is that some of these parties are not intimately familiar with the legislation and the problems that can exist where property is gifted away, sold at less than fair market value, or simply not disclosed. As a result, it is important that you first meet with a licensed trustee before you make any decisions. Every trustee linked through the Bankruptcy Canada network will provide you with a free initial consultation. Remember this is a meeting that you want to be prepared for. Make sure to have a list of your debts, a copy of your budget, and be sure to disclose all assets and major transactions that you have entered into in the most recent past. If you approach this meeting sincerely, make the proper disclosures, you will find it is very easy to predict what will transpire should a bankruptcy or consumer proposal be filed, and you will be able to avoid the difficulties that have befallen our good friend Peter.

Posted on Monday, July 12th, 2010
Filed under: bankruptcy Canada
posted by Barton Goth @ 5:17 am No Comments

Debt Management Plans

A debt management plan, also referred to as credit counselling, is a voluntary repayment plan to deal with your debts. The most common alternatives to a debt management program are a debt consolidation loan, or a consumer proposal.

Ted Michalos, Bankruptcy Trustee

Ted Michalos, Bankruptcy Trustee

The idea behind a debt management program is simple – your debts are pooled together (they are not paid off like with a loan) by a not for profit agency so that you only have to make one monthly payment. In most cases, there will be no new interest charged to the debts included in a debt management plan. Instead your payments go directly towards reducing the debt.

Debt management plans are an excellent solution for people that can afford to repay their debt in full, but need relief from the interest they are being charged. They are not really an alternative to bankruptcy, but rather it is an option to consider while you still have the ability to make payments.

If you compare a debt management program to a consolidation loan what you will find is that the consolidation loan costs you more (since you will still be paying some sort of interest on the debt), but the consolidation loan is also better for your credit report. If you file a debt management plan your debts will be reported as an R7 – this designation simply means you have entered into a plan to repay your debts at less than the full amount of your original contracts (i.e. less or no interest). With a consolidation loan your credit might be rated an R1 – the highest possible rating, assuming you make all of the loan payments on time as required.

Interestingly, a consumer proposal receives the same credit rating as a debt management program, an R7. A consumer proposal is a legal procedure (administered by licensed trustees in bankruptcy) where you repay a portion of your debts. Like the debt management program there are no interest charges, but unlike the debt management program, in a consumer proposal you usually only repay 30 to 50% of the debt. Also unlike the debt management plan, consumer proposals are a direct alternative to bankruptcy.

So which should solution should you be considering?

Well, if you can afford to repay your debt in full and you qualify for a consolidation loan then this is probably the correct solution for you to use.

If you can afford to repay the debt, but the interest charges are killing you, or if you have applied for a consolidation loan and been rejected then a debt management program might be the place to start.

If repaying the debt in full will be difficult, or you know that you cannot afford to repay the debt in full, then a consumer proposal is likely the best route for you to consider.

The trick with all of these solutions is to consider each option carefully and then make a decision based on what you can realistically afford to repay. If after you “run the numbers” none of these options make any sense then you may have to consider personal bankruptcy, which is discussed in detail on this site.

Posted on Monday, July 5th, 2010
Filed under: Bankruptcy Alternatives andConsumer Proposal andDebt Options andbankruptcy Canada
posted by Ted Michalos @ 5:46 am No Comments

Consumer Proposals: A need for more administrators or a slippery slope?

In June 2010, the Office of the Superintendent of Bankruptcy (OSB) initiated a In June 2010, the Office of the Superintendent of Bankruptcy (OSB) initiated a Review of the Trustee Licensing Regulatory Framework . First a little bit of background: the OSB is a division of the Federal Government who has been charged with the administration of all estates and matters to which the Bankruptcy and Insolvency Act. Their main role is “to maintain investor and lender confidence in the Canadian marketplace by protecting the integrity of the bankruptcy and insolvency system.” As a result they play a crucial role in many areas, including the review of Trustees’ and debtors’ actions in all aspects of bankruptcy, reviewing the performances of official receivers and senior bankruptcy analysts, and the issuing or renewal of Trustee licenses.

Barton Goth, Bankruptcy Trustee

While most of this review is pretty bland, there is one item being considered that could have some dramatic ramifications on the Canadian Insolvency industry as we know it. That is the issue of whether non-trustees should be able to serve as administrators of consumer proposals. For those of you who are not aware, a consumer proposal is mechanism within the Bankruptcy and Insolvency Act that provides a legally binding way for debtors to negotiate a settlement with their creditors and avoid a bankruptcy. It is a win-win as the debtor is permitted a mechanism where they can avoid a bankruptcy and the creditors in turn receive a greater recovery than that would under bankruptcy. Currently all consumer proposal administrators in Canada are licensed bankruptcy trustees.

The question that has been raised is whether or not the OSB should appoint or designate administrators of consumer proposals who are not licensed trustees.

As you can imagine, being a licensed trustee here in Edmonton, Alberta , I have some strong opinions on this issue. To be clear I don’t think it is a good idea and I see this as a very dangerous path.

One vital requirement of administering a consumer proposal is that it requires a thorough assessment of each individual debtor, and to be able to conduct a proper assessment you must be well versed in all aspects of the Bankruptcy & Insolvency Act, the Income Tax Act and other relevant provincial legislation. This is no small task and one that takes a significant amount of training to be able to do appropriately, training that is largely what the Trustee licensing process is designed to do.

There are other reasons that I am nervous about this potential change in policy, but what I want to specifically address were 3 issues identified in the OSB’s consultation paper. Although, I did find it interesting that unlike the other changes being considered there was no real background or justification in this paper as to why the administration of consumer proposals was becoming an issue. The only section that addressed this potential change referenced an argument made by In February 2008 by the Ontario Association of Credit Counselling Services (OACCS) when they appeared before the Standing Senate Committee on Banking Trade and Commerce.

The three of the main reasons advanced by the OACCS to be appointed as administrators were:

1. Availability

By expanding the ability to administer consumer proposals outside the trustee community it would allow for the availability of a credible alternative to Canadians for unbiased advice and consumer choice related to consumer proposals;

2. Diminishing Revenues

It would help to create an additional revenue stream, a revenue stream that was adversely impacted by the OSB’s issuance of a position paper issued by the OSB entitled “Referral Agreements between Trustees and a Third Party.” For reference, this position paper was put forward as there were many of largest of the credit counseling who were regularly preparing files for consumer proposals and acting as agents for certain trustees in a manner that contravened the intent of the Bankruptcy and Insolvency Act.

3. Serve to correct the current monopolistic approach taken by the OSB that that limits access to the consumer proposal option for those in need. Here are my comments:

1. Availability

Regarding their first point, that of availability of a credible alternative for unbiased advice. I see three components of this issue: knowledge, access and any potential biases. The first question I have is are people aware of what a consumer proposal is? Is the knowledge out there among the various stakeholders? Well clearly the trustee community and most reputable credit counselors are familiar with the general concepts behind a consumer proposal. There is nothing that prevents a credit counselor from discussing the existence of this option with a consumer debtor, just as there is nothing preventing me from discussing the presence of debt management plans or the like with people who walk in my office. Now do these discussions happen? Are the credit counselors accurately informing those they meet with? While I live in Alberta and can’t speak to what happens in Ontario or other areas of the province, I know where I practice, they are. The trustees and credit counselors here in Alberta have a good working relationship, and it is not uncommon for us to refer clients back and forth depending on their needs. So from my stand point, knowledge isn’t the issue.

The second component of this discussion is access. Is access an issue? Are consumers having difficulty meeting with a licensed trustee to discuss the filing of a consumer proposal ? Currently, I would say no, access is a non-issue. I have never run into someone who was unable to arrange a time discuss the filing of a consumer proposal with a licensed trustee or even suggested anything similar. Now, over the long term, I can see this as a potential argument. Just like society in general, we are all facing a mass baby boom retirement. This mass retirement has the potential to bring a host of economic and social difficulties that we will all be forced to deal with. The key is that this is a societal challenge, not simply a challenge that the trustee community is going to have to address. Arguably, this same phenomenon will impact accounts, lawyers, doctors, teachers and, I would assume, credit counselors. The result is that the average professional, including trustee’s and credit counselors, are going to have to take a close look at how we manage our practice’s, take greater advantage of the areas we are able to delegate and investigate ways that technology may be able to help us realize efficiencies that weren’t available historically. But this is not unique to our demographic. So I agree there is a challenge, but watering down the requirements to administer will potentially result in making it more difficult to find a qualified credit counselor, assuming there are fewer of them to manage the existing pool of debtors and the credit counselor is in turn have less time to do so, as they would now have to worry about all the issues associated with administering consumer proposalss and managing the related trust accounts.

The third point was that of a potential bias. Clearly there is a potential bias among the trustee community: we can administer proposals so it can very easily be suggested that the advice we give may be colored as a result of what services we can offer. Unfortunately, this potential bias is very difficult to overcome. However, one of the best ways to deal with this potential bias is to ensure that there is a lengthy and rigorous training requirement with an emphasis on professionalism and ethics. In addition, it is important that all efforts are made throughout this training requirement to look into the character of the potential candidate, whether this be through reference checks, an interview requirement, or, even better, a mandated experience requirement that involves being directly mentored by a licensed professional who is committed to the integrity of the profession. This does two things, first it helps to ensure that the potential candidates will be of the highest quality. Second, because people have sacrificed a large amount of time and energy in obtaining the certification the threat of losing that certification has significant weight. Interestingly enough, this is exactly model that trustee licensing process follows and while I am not going to argue that this process is perfect, it goes a long way to ensuring that the people administering proposals are capable, committed and willing to uphold the same principles and values that insolvency system is based.

In reality, this potential bias is going to exist regardless of who is administering proposals. If the ability to administer a consumer proposal is extended to include people outside the trustee community, these new designates are immediately going to be inherently at risk of holding that very same bias. Furthermore, this new group of designates has not been put through as rigorous of a training process and may not have as much respect for the insolvency system. The threat of losing their license may not have as much weight. As a result, I see a very slippery slope that may result in a much less consistent administration of proposals.

2. Diminishing Revenues

I was surprised this was used as an argument. Let me give you a little background so you can appreciate where I am coming from. As a licensed trustee what we do is directed by the legislation, directives issued by the Office of the Superintendent of Bankruptcy and how the courts have interpreted the both of these. If we look at the rules laid out by the above sources, we see there has been very clear direction given about referral agreements between Trustees and third parties. It is very clear that only Trustees are licensed to administer Consumer Proposals, and that this function cannot be delegated or outsourced.

There are four distinct sections of the Bankruptcy & Insolvency Act that are identified by the Office of the Superintendent of Bankruptcy.

Rule 49. Trustees shall not, directly or indirectly, pay to a third party a commission, compensation or other benefit in order to obtain a professional engagement or accept, directly or indirectly from a third party, a commission, compensation or other benefit for referring work relating to a professional engagement.
Rule 44. Trustees who are acting with respect to any professional engagement shall avoid any influence, interest or relationship that impairs, or appears in the opinion of an informed person to impair, their professional judgment.

Rule 47. Trustees shall not engage in any business or occupation that would compromise their ability to perform any professional engagement or that would jeopardize their integrity, independence or competence.

Rule 50. Trustees shall not obtain, solicit or conduct any engagement that would discredit their profession or jeopardize the integrity of the bankruptcy and insolvency process.

OACCS is saying that their revenue is being diminished as a results of no longer being able to participate in consumer proposals, but they have never had the power to do so. As I read these three rules, I must agree with the Office of the Superintendent that referral agreements entered into by trustees in bankruptcy and other parties are contrary to the BIA and its rules. In cases where such agreements existed, neither the trustees nor the credit counselors involved were acting in an acceptable manner, as was clarified in a position paper by the OSB. So whether or not the enforcement of these principles had a detrimental impact on the revenues of the credit counseling agents is immaterial – it should never have been done. Arguing that revenue is being lost because they can’t do what they never had the right to do in the first place is not a logical reason to extend the right to be involved to a group who already has a record of crossing the line of what is considered acceptable.

3. Monopolistic Approach

The third argument presented is that of a monopolistic approach that limits access to consumer proposals. Now I have already commented on the limited access argument, but the monopolistic approach I find somewhat intriguing. I must admit, I don’t see a monopoly. The definition of a monopoly is when one company has exclusive rights to offer s specific service, and from the statistics presented by the OSB in their position paper in 2008 there were 253 firms operating under a corporate license and 28 practicing without a corporate license – hardly a monopoly. This is like saying that doctors or lawyers have a monopoly, and again just doesn’t make sense. There are no restrictions on the number of trustees able to operate, the number of firms allowed per region – the emphasis is on being qualified.

Conclusion

As you can see, I don’t agree with the arguments supporting change to the administration of consumer proposals. To be involved in any insolvency related engagement, you need to be properly trained and properly qualified, and I am not in support of any sort of streamlining or watering-down of our industry. While I can appreciate that many files are straight forward, whether or not it is a bankruptcy, a consumer proposal or a receivership, the problem is that the potential exists for significant complication in every file, and these complications are not always obvious at the outset. Whether this is a significant change in financial circumstances, an undisclosed asset or allegations of fraudulent misrepresentation or the need to have a specific claim adjudicated on by the court, the possibilities for complexities are immense, and a firm grasp of the legislation and procedures is necessary to be involved in any level of these administrations.

Having said that, I am sympathetic to the plight of our credit counseling colleagues and the efforts they are making to expand their industry. Credit counselors play a crucial role and add value to our industry as a whole, as they serve a growing segment of the market place that needs their help.

The challenge is really how credit counselors can expand their revenue stream. While I have heard of a number of models (i.e. the expanding of the credit counseling component required in any consumer proposal or bankruptcy) and many of those alternative models have merit, I think that OACCS may want to look to what is being done in Alberta. In Alberta, as a province, we have chosen to opt into Part X of the BIA. For those unaware of what is contained in this section of the Act, it discusses the Http://www.bankruptcy-edmonton.com/orderly-payment-of-debts-in-alberta.htm program (OPD).

The OPD program is much like a debt management plan, a familiar concept in the credit counseling community. But there is one big difference – the OPD program is court-sanctioned. The credit counselor makes an application through the court system for a consolation order, and with this consolidation order there is an automatic stay of proceedings that puts an immediate stop to any collection activity that creditors are currently taking. This is the same type of court protection that is in place with a consumer proposal or an bankruptcy. The advantage of this is that credit counselors in other provinces would be given one more tool in their arsenal, a tool that gives them a very significant ability to stop garnishment, creditor harassment and the like. More importantly I believe this serves the public good as it provides another option for the consumer.

This is an approach that has been successfully taken by the credit counselors who practice in Alberta, and not only has it proved to be a successful way for the credit counselors to expand their product offering and derive additional revenues, it is an option that is very beneficial to consumers. I am pleased that this is the approach that has been taken here in Alberta, and I regularly refer debtors to credit counselors who provide this service. I find it is a unique product offering that fits in between consolidation loans and consumer proposals and more importantly it is a way that we can address some of the issues identified by OACCS but at the same time serves the public good by benefitting all the stakeholders involved.

Posted on Monday, June 28th, 2010
Filed under: Consumer Proposal andbankruptcy reform
posted by Barton Goth @ 4:08 am No Comments

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