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Bankruptcy Alternatives

Bankruptcy Rate Drops in Canada

by Doug Hoyes

The bankruptcy rate in Canada dropped in 2010, according to statistics recently released by the Office of the Superintendent of Bankruptcy. That’s good news, right? Yes and no.

First, let’s review the numbers. In 2010 a total of 135,008 Canadians filed a consumer proposal or personal bankruptcy. That’s an 11% drop from the 151,712 who filed in 2009. That’s a drop of 16,704 people, and yes, that’s good news. Fewer Canadians declared themselves insolvent in 2010. Now let’s take a look behind the numbers.

Personal Bankruptcy Rate Falls, By Consumer Proposals Increase Dramatically

Personal bankruptcies dropped from 116,381 to 92,694, a drop of over 20%. But consumer proposal filings increased by almost 20%, increasing from 35,331 to 42,314.

So why did personal bankruptcy filings drop, while consumer proposal filings increased? Two reasons:

First, the economy in Canada was somewhat better in 2010 than it was in early 2009, as we were still in “recovery mode” after the credit crisis and stock market correction in late 2008. A better economy generally means lower unemployment, higher consumer spending, and generally fewer personal bankruptcies. So it’s not surprising that the total number of insolvencies (bankruptcies and proposals) dropped, and that the number of personal bankruptcies also decreased significantly.

It’s also not surprising that, in a good economy, Canadians in debt are more likely to choose a proposal over bankruptcy if they can’t pay their bills. In a proposal you make a payment each month, and that money is distributed to your creditors. If you don’t have a job or a source of income, a proposal probably isn’t possible. If you are working and do have an income (just not enough to pay your bills in full), then a consumer proposal is a great solution. Clearly there is a greater chance of Canadians having jobs during good economic periods, so during recessions proposal filings are likely to drop, while in good times they may proportionately increase.

Second, the government changed the bankruptcy rules in 2009, making bankruptcy more expensive for Canadians with surplus income. As a result, in 2010 more Canadians chose to file a consumer proposal as a way to avoid bankruptcy.

So yes, it’s good news that bankruptcy numbers are down, but you have to take the numbers with “a grain of salt”, since part of the decrease in bankruptcy filings was due to a change in the rules.

Also, let’s not forget that debt in Canada remains a ticking time bomb, and massive credit card debt continues to lead to bankruptcy in Canada. Year to year bankruptcy numbers may rise and fall, but over the long term, as long as our debt remains high, Canadian will continue to file bankruptcy.

If you are interested in 2010 bankruptcy statistics for other areas of Canada, here’s list of other articles on bankruptcy statistics

If you are experiencing financial problems and think bankruptcy might be the answer, use our free debt options calculator to review your options, and then contact a licensed bankruptcy trustee today for a free initial consultation, and be sure to ask about a consumer proposal, the number one alternative to bankruptcy.

Posted on Monday, March 28th, 2011
Filed under: bankruptcy Canada
posted by Doug Hoyes @ 7:44 am No Comments

Massive Credit Card Debt Leads to Bankruptcy in Canada

by Doug Hoyes

Look in the mirror. It’s likely that you have more in common with the average person who files bankruptcy in Canada than you may think.

My name is Douglas Hoyes, a trustee with Hoyes, Michalos & Associates Inc. in Ontario, and today we released Joe Debtor, The Face of Bankruptcy, a comprehensive new research study profiling the average person who files a consumer proposal or bankruptcy in Ontario. We call this average person “Joe Debtor”.

Who is Joe Debtor? What does he look like?

Joe Debtor looks just like the average Canadian. He has a job, and may also own a home. He is very similar to the average person. The only difference between Joe Debtor and the average Canadian is that Joe Debtor has a huge amount of debt.

Here are some facts:

Comparison of Joe Debtor to Average Canadian
Personal Information:
Joe Debtor
Average Canadian
Male1 58% 49%
Female1 42% 51%
Average age2 41 41
Married or Common-law3 45% 52%
Divorced or Separated 26% 10%
Widowed 2% 6%
Single 27% 32%
Average family size3 2.3 2.6
Average monthly income4 $2,240 $2,419
Total credit card debt5 $24,390 $3,709
Total unsecured debt6 $59,814 $16,399

 

The Big Difference: Debt

Joe Debtor Debt Canada

Joe Debtor's Unsecured Debt

 

As you can see, the most significant difference between Joe Debtor and the average resident of Canada is debt. (That’s not surprising to readers of this blog; the most read post here on Trustees Talk is our post on Personal Debt in Canada: The Ticking Time Bomb.

The average Canadian has about $16,400 worth of consumer credit (debt excluding mortgages), while Joe Debtor has almost $60,000 in unsecured debt. That means that Joe Debtor has more than three and a half times as much debt, so it’s no surprise that Joe Debtor gets into financial trouble.

Simply put, debt is very dangerous.

To find out if you may have a debt problem, take this quick four question survey:

1 Are my debts, not including my mortgage, closer to the Canadian average of $16,400, or closer to Joe’s average of almost $60,000? If your debt is close to, or higher than $60,000, you owe more than Joe Debtor, and that’s an indicator that you may have a debt problem.

2 “Joe Debtor” owes $24,390 spread out over more than four credit cards. In other words, the typical bankrupt person in Canada has a lot of credit card debt. If you owe near that amount, and you are having trouble making your payments, you have a debt problem. If you are carrying a balance each month on any credit cards, you have a debt problem, because credit cards are the most expensive form of borrowing.

3 Am I afraid to open my mail? If you have bills that you haven’t opened because you know you can’t pay, you probably have a debt problem.

4 Am I “robbing Peter to pay Paul”? Do I take a cash advance from my line of credit to pay my credit card, and then next month will I take a cash advance from my credit card to make the minimum payment on my line of credit? If you are simply borrowing from one place to pay another, your debt, with interest, is gradually increasing, and you probably have a debt problem.

How can you solve your debt problem?

Start by taking inventory. Make a list of all of your debts, and the amount you owe. Make a budget to see where your money goes each month. If you can cut expenses and use the extra money to pay off your debts, great; that’s the perfect solution for you.

If you are like Joe Debtor and you have more debt than you can handle, consider filing a consumer proposal. You make one manageable monthly payment, and your unsecured debts are eliminated. If that’s not possible, filing bankruptcy in Canada may be your final option.

To find out more, use our free, on-line debt options calculator to review your options, then contact a consumer proposal administrator or bankruptcy trustee for a no-charge initial consultation.

 

1. Statistics Canada: Percentage of population over the age of 20, July 2010

2. Statistics Canada: Median age 2010

3. 2006 Census of Canada: Ontario

4. Statistics Canada: Personal Disposable Income per capita

5. Trans Union

6. Statistics Canada: Consumer Credit, Seasonally Adjusted per adult (18+)

Posted on Monday, February 28th, 2011
Filed under: bankruptcy Canada andConsumer Proposal andDebt Options
posted by Doug Hoyes @ 8:07 am No Comments

Debt Settlement Plans

by Ted Michalos

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

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

by Barton Goth

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

Consumer Proposal: Will My Creditors Accept My Proposal?

by Doug Hoyes

As we have discussed many time on the Bankruptcy Canada Trustee Talk blog, a consumer proposal is a great alternative to filing bankruptcy in Canada. The concept is simple: instead of going bankrupt, you offer to pay a portion of the amount owing to your creditors, and if they accept you avoid bankruptcy.

Douglas Hoyes, Canada Bankruptcy Trustee

Douglas Hoyes, Bankruptcy Trustee

But why would a creditor accept a consumer proposal? If you owe $50,000, why would they accept a deal where you repay perhaps only $20,000?

There are a number of reasons why a creditor would accept a consumer proposal:

First, and most obviously, a creditor would accept a proposal if they expect to generate more money in a proposal than they would generate in a bankruptcy. Obviously if they were going to get less money in a proposal, they would not accept it. Here’s a simple example:

Joe has $50,000 in debt. He supports his wife and three children, and after paying his normal living expenses like rent, utilities, food, transportation and other costs Joe only has $500 per month available to repay his debts. The minimum payments on his credit cards and other debts are $1,300 per month, so he is falling behind.

Joe met with a trustee, and the trustee calculated that based on Joe’s income and family size he would be required to pay $600 per month in surplus income payments, and his bankruptcy would last for 21 months, so Joe would pay approximately $12,600 during his bankruptcy. He’s worried that he won’t be able to afford the $600 per month in payments.

Joe’s trustee suggest an alternative: instead of going bankrupt, Joe could offer a consumer proposal of $300 per month for five years, or $18,000 in total.

Obviously Joe is paying $18,000 in a proposal, instead of $12,600 in a bankruptcy, but Joe is happy with that plan. He wants to avoid bankruptcy, and he wants to repay as much as he can to his creditors, and for him, $300 per month in a consumer proposal is much more manageable than $600 per month in a bankruptcy. Joe decides to file a proposal.

In this example the creditors are likely to accept the proposal because they are getting more in the proposal than they would get under any other alternative.

Whether or not the creditors actually accept the proposal will depend on a number of factors, including Joe’s prior history with the creditor, and the individual criteria that each creditor uses to decide on how they will vote on a proposal. A consumer proposal administrator can explain the likely chances of success for you at your no charge initial consultation.

Second, most creditors want to be seen as “helping the little guy.” Big banks and credit card companies in Canada don’t want to get a reputation for refusing all reasonable settlement arrangements, so if a consumer proposal is reasonable, most of them will accept it.

Finally, creditors want certainty. In a bankruptcy the amount of money they will realize will increase or decrease depending on the bankrupt’s income during the process. In a consumer proposal, once the proposal is approved, the payment amounts are fixed. There is certainty. Each creditor knows what they will get. That’s another example of how a proposal is a “win-win” solution. You have certainty because you know what you are required to pay each month, and your creditor knows what they will be receiving. There are no surprises.

Is a consumer proposal the right solution for you? The answer depends on the size of your debts, who you owe the money to, what you own, and what you can afford to pay each month. Try our free debt options calculator to review your options, and then contact a trustee to arrange for a free, no obligation initial consultation.

Posted on Monday, May 3rd, 2010
Filed under: Consumer Proposal
posted by Doug Hoyes @ 5:29 am No Comments

Consumer Proposal: The Best Way to Avoid Bankruptcy in Canada

by Doug Hoyes

Doug Hoyes, Bankruptcy Trustee

Doug Hoyes, Bankruptcy Trustee

This is a website devoted to discussing all aspects of bankruptcy in Canada, but today we will discuss the opposite of bankruptcy. Today I present my Top Three Ways to Avoid Bankruptcy in Canada.

Why would I, a bankruptcy trustee, want you to avoid bankruptcy? Because I strongly believe that bankruptcy should be a last resort, a strategy to be used only after all all other options have been evaluated and eliminated. I take every opportunity to encourage all Canadians to explore all financial options before making a decision. This week I was interviewed by the Globe and Mail for a story on How to Avoid Filing for Bankruptcy, and again I made the comment that bankruptcy is a last resort.

Why should you consider all options? Because there are many scams and unscrupulous people that will tell you they can help you avoid bankruptcy, but many times they will simply just take your money. You can read more in our article on Debt Management and Debt Settlement Plans: Scams, or a Good Alternative to Bankruptcy in Canada?

So what are my Top Three Strategies for Avoiding Bankruptcy in Canada?

3 Get help from family or friends. This is perhaps the most over-looked strategy. I have had hundreds of people over the years tell me that they are so embarrassed about their financial situation that they are afraid to discuss it with their family or friends. I’m not suggesting you should tell everyone you know that you are having financial trouble, but reaching out to your family or closest friends is often a good solution. Many times I have encouraged people, particularly younger people, to talk to their parents. While their parents may be disappointed that they are in financial trouble, they will often also try to work with them to solve their problems.

I’m not suggesting that you should borrow money from family or friends. Borrowing money is a good way to lose friends, and an even better way to make Christmas dinner very uncomfortable. What I am suggesting is that you should ask for advice from your family and close friends.

If you don’t ask, you don’t know how people can help. Perhaps a relative can help you find a better job, and with more income you may be able to repay your debts on your own. Perhaps a friend has an extra room at their house; you could rent a room and reduce your living expenses, which will free up cash to help you deal with your debts. Moving back in with your parents may not be fun, but as a temporary measure while you get back on your feet it may not be a bad solution.

Even if they can’t help you directly, getting some advice and empathy from a trusted family member may help you decide on your next steps.

2 My second best strategy for avoiding bankruptcy is to fix it yourself. In fact, this is the strategy used by the vast majority of Canadians who experience money problems. If friends and family can’t help, and if you don’t want to file bankruptcy, you need to take matters into your own hands, and attempt to fix the problems on your own. Here’s how:

Start by making a personal budget. Your budget should list all of your expenses each month. Some will be easy, like your rent and car insurance, because they are the same each month. To ensure that you don’t forget any, review your bank statements and credit card bills for the last few months to see where you spend your money. That should give you an accurate picture of your monthly spending. There are lots of on-line budget tools that can help, like Calendar Budget, an on-line tool where you enter your purchases each day, on a calendar. There are lots of budgeting tips on line as well.

Once you have a list of your expenses, review it. What can you cut? Can you reduce or eliminate your cable bill? Car pool to work? Make your own coffee? Once you see your expenses on a list, you can take steps to cut your expenses. That will tell you how much money you can free up to repay your debts faster.

Your debts are the final piece of the puzzle: Make a list of all of your debts, and arrange them from highest interest rate to lowest, so that the top of the list has your most expensive debts. Those are the debts you want to repay first.

Now, fix it yourself by making a plan to take whatever cash you can free up each month and apply that to your highest interest rate debts first. As one debt gets paid off, use that extra money to attack the principal on the next highest debt, and so on until all of your debts are repaid. If you can keep your expenses as low as possible, you may be able to repay all of your debts on your own.

1 But what if, even with drastically reducing your expenses, you still have more debts than you can repay on your own? You need outside help, and that brings me to my top strategy for avoiding bankruptcy in Canada: filing a consumer proposal. A consumer proposal is a legally binding deal that a consumer proposal administrator negotiates with your creditors. If it’s accepted, you make one monthly payment, your debts are dealt with, and you avoid bankruptcy.

A proposal will work best if you have a job, or a stable source of income, so that you can commit to monthly payments. The good news is that, in most cases, a consumer proposal can be negotiated for less that the full amount owing on your debts, and you avoid bankruptcy.

Which option is best for you? Or do you have no choice but to file bankruptcy? Start with some research: Read our articles on consumer proposals, or read questions posted on our anonymous question and answer blog about consumer proposals. You can even join our on-line support group that allows you to discuss consumer proposals and other options. These posts are real, and people just like you post both the pros and cons about proposals, so you can hear both sides of the story to help you make a decision.

My advice: talk to your family and friends, but also talk to an expert. A consumer proposal administrator and bankruptcy trustee will give you a free, no obligation initial consultation to help you make an informed decision, so do your research, contact a trustee today, and make an informed decision.

Posted on Monday, April 19th, 2010
Filed under: Bankruptcy Alternatives andbankruptcy Canada andConsumer Proposal andDebt Options
posted by Doug Hoyes @ 5:25 am 2 Comments