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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

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

What Sunburn Can Teach Us About Bankruptcy in Canada

I am a bankruptcy trustee in Canada, so every week I meet with many people in financial trouble. This past week was an interesting week, because I met with many people who had obviously spent too much time in the sun. Literally.

Doug Hoyes, Bankruptcy Trustee, Sunburn Sufferer

In Ontario, and in many parts of Canada, we have had a run of unusually warm weather. Many people spent a lot of time outdoors for the first time since last fall. The sun was shining, and many people have arrived in my office with sunburn. I’m not being critical of these people; I’ve spent the last week nursing my own sunburn as well. What’s most amazing to me is that we all know better. We have all had sunburn before. We know that we should wear sunscreen, and wear a hat, and avoid the sun, but we forget our sunscreen, don’t wear a hat, and then go outside in the sun, and we are amazed that we get sunburn!

My theory is that if we haven’t experienced the consequences of our actions recently, we forget the result. We’ve all heard the expression that “if a mother remembered the pain of childbirth, no woman would ever have more than one child.” Not being a woman I don’t know if that’s true or not, but it does illustrate the point.

Sunburn is the same. If we haven’t had sunburn for six months, we forget the pain of sunburn. We assume it won’t happen to us. We go outside, and are so happy to be out in the sun, we ignore the consequences.

So why am I talking about sunburn on a web site about bankruptcy in Canada? Because debt is like the sun. In small amounts, debt won’t hurt. But excessive exposure to debt, like excessive exposure to the sun, is very painful.

Over the last few years, while the Canadian economy was booming, many of us took on a lot of debt. We borrowed to buy a bigger house, a new car, and then we kept borrowing to furnish our home, to go on vacations, and to keep on spending. If your income continues to increase, that’s not a problem, but when your income drops, or when you forget to wear a hat in the sun, you get burned.

So what’s the solution? To avoid sunburn, stay out of the sun. To avoid excessive debt, only borrow when absolutely necessary. A mortgage on a small house may be fine if you can make the payments; a mortgage on a huge house, and two car loans, and carrying balances on credit cards is probably a recipe for disaster.

If you already have sunburn, drink lots of fluids, and talk to your pharmacist or doctor about what to put on it.

If you already have more debt than you can handle, talk to a bankruptcy trustee. There are many possible solutions, including filing bankruptcy in Canada. or a consumer proposal; your specific circumstances will determine the correct solution.

And stay out of the sun.

Posted on Monday, May 31st, 2010
Filed under: Consumer Proposal andbankruptcy Canada
posted by Doug Hoyes @ 5:28 am No Comments

Avoid Bankruptcy in Canada and Survive the “False Economy”

Bruce Gandossi, Bankruptcy Trustee

Bruce Gandossi, Bankruptcy Trustee

My name is Bruce Gandossi. I’m a chartered accountant and licensed trustee in bankruptcy with Sands & Associates in British Columbia. A few months ago I wrote an article asking the question: Will the Vancouver 2010 Olympics Impact Personal Bankruptcy Rates? Here’s what I said a few months before the Olympics about bankruptcy in Canada:

We may have a mini boom during the Olympics, as all of our hotels and restaurants will be full with visitors from around the world. But after that, incomes won’t be rising, and house prices won’t be rising, so debtors won’t be able to rely on overtime or a rising real estate market to deal with their debts.

As predicted, Vancouver residents were very busy in the months leading up to and including the Olympics. I live in Vancouver, and I work from my Vancouver bankruptcy office, and I can tell you from first hand experience that the Olympics were fantastic. Like many other Vancouver residents, I had the pleasure of experiencing the Olympics first hand. I went up to Whistler the week before the Olympics to see the preparations for skiing. I attended the opening ceremonies, and they were unbelievable. I watched the speed skating on the big oval in Richmond (my firm also has a bankruptcy office in Richmond), and I saw short track and hockey games in Vancouver.

Are we suffering a “hangover” from the Olympics? I’m happy to report that no, we Vancouver residents are not suffering a large let down. The Olympics were great, and we were happy to be a part of it.

However, there is no doubt that the Olympic jobs are now gone, and we are no longer living in the boom times created by the Olympics.  Obviously the end of the job boom can reduce income, and increase the risk of personal bankruptcy in Canada.

I’m not an economist, but I do meet with regular, hard-working Canadians every day, and based on what they tell me I worry that many are living in a “false economy.” The Olympics certainly helped us here in Vancouver, but all across Canada, and the world, government stimulus money has also helped bolster the economy, and keep our economy from sliding into an economic depression.

Government economic stimulus is somewhat like credit card debt. I use the credit card today to buy what I want, and I feel great. But, at some point in the future, I will need to repay what I borrowed, and that’s the “time of reckoning” that is not yet here. I hope the economy continues to recover, but as a trustee in bankruptcy I’m also a realist. We hope for the best, but prepare for the worst.

There is some great news when it comes to dealing with debt. Over the last eight months I have personally witnessed an increasing number of Vancouver residents choosing to avoid filing bankruptcy in Canada to deal with their debts; instead, they are choosing to file a consumer proposal. Recent changes in the rules make filing a consumer proposal a more attractive option for many Canadians. In a proposal I help you negotiate a settlement with your creditors, where you pay perhaps a third or a half of the total amount you owe over a three to five year period, and your creditors agree to write off the rest. If the creditors accept your proposal, you avoid filing bankruptcy in Canada. I tell people they need three things going for them to file a proposal:

  1. Age
  2. Health
  3. Income

First, you need to be old enough to understand a proposal, and young enough to have the time to make the payments over the next three to five years.

Second, your health should be sufficient so that you know you will be working for the next three to five years so that you can make your proposal payments.

Finally, to make payments you need a stable source of income. If you expect to get laid off next month, a proposal may not be your best option.

As my fellow residents of Vancouver look back fondly on our Olympic experience, I encourage everyone to look ahead to their future, and if you find you have more debt than you can handle, consider a consumer proposal as an option to deal with your debts. We will meet with all debtors initially without cost to assist you in the assessment of your options. Please contact a trustee today for your free initial consultation, and find out what options will work best to help you deal with your debt.

Posted on Monday, May 24th, 2010
Filed under: Bankruptcy Alternatives andConsumer Proposal andDebt Options andbankruptcy Canada
posted by bgandossi @ 6:05 am No Comments

Consumer Proposal: Will My Creditors Accept My Proposal?

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

Bankruptcy Canada: Where can I go for help?

Why do Canadians read over a quarter of a million pages on this Bankruptcy Canada website every month? Why are you reading this article? Simple: you want information about filing bankruptcy in Canada. Today, to make your research easier, we present a list of the top bankruptcy resources in Canada. Click on the links, do your own research, and then decide for yourself whether or not filing bankruptcy is the correct decision for you.

The most popular pages on our main site are also the best information pages.

The most popular page is the Bankruptcy Canada Frequently Asked Questions page, which isn’t surprising, since if you are looking for information, this is the place to go. We even mark the questions so you can see which questions are the most asked. If you have a question, it’s quite likely someone else has already asked that same question, so this is a great resource to get all of your questions answered.

If you can’t find your question, you can post a question on our anonymous bankruptcy Canada question and answer blog. This is the most widely read question and answer blog on bankruptcy in Canada, with well over 4,000 questions and expert answers.

Another great resource is the Bankruptcy Canada on-line Support Group. It’s free, it’s anonymous, and it allows you to talk to other Canadians struggling with debt. Here’s a sample of a discussion with various people considering bankruptcy. This is a real discussion, with real people, telling both the good and the bad about the process. Reading these comments you can see that you are not alone.

One of our most popular features is our debt options calculator. It’s free, only takes five seconds to use, and it estimates the costs for you of your various debt management alternatives.

Trustees Talk

This year we added a new feature, the Trustees Talk blog, where Canadian bankruptcy trustees give their views on current topics.

Here are the most popular posts from the Trustees Talk blog in the last twelve months, starting with the most read posts:

Surplus Income and Bankruptcy in Canada: How the New Rules Could Extend the Cost of your Bankruptcy in Canada (the most popular post in the last year, read by almost three times as many people as the second most popular article; obviously the surplus income rules are of great concern to most people considering bankruptcy in Canada).

Retirement, Pensions and Bankruptcy in Canada: The Future Is Up To You This article created the most disagreement from our readers. That’s fine; our goal is not to get everyone to agree with everything we say; our goal is to inform and educate, and stimulate discussion.

New Bankruptcy Rules in Canada: What You Need To Know More on the new rules, like the first article.

Personal Debt in Canada: The Ticking Time Bomb

Massive Increase in the Personal Bankruptcy Rate in Canada: Why, and What’s Next?

Debt Management and Debt Settlement Plans: Scams, or a Good Alternative to Bankruptcy in Canada?

New Bankruptcy Rules Hurt Some People They Were Designed to Help

Why a House is NOT an investment This was another controversial post, but as an increasing number of Canadians deal with the high cost of home ownership, and an increasing rate of foreclosures, more people are beginning to see this perspective .

Five Fears About Bankruptcy in Canada

Consumer Proposals Will Increase Under the New Bankruptcy Rules in Canada (yet another article on the new bankruptcy rules).

Other Sites

There are other great sites with information for people in financial trouble.

Moneyproblems.ca is one of the oldest and most established web sites in Canada, devoted exclusively to people with money problems. In addition to lots of great content, they also publish a Tip of the Day, a short, practical tip to help you save money and deal with your money problems.

If you want to avoid bankruptcy and want information on consumer proposals, Consumer-proposals.org has information devoted exclusively to Canada’s #1 alternative to filing bankruptcy.

Bankruptcy law is federal legislation, so the basic rules are identical everywhere in Canada. However, there are minor differences in each province, so provincial websites can help you understand issues specific to your province. You can get information on:

There are also sites for the major cities in Canada, so that you can read the thoughts and perspectives of trustees in various cities; the best of the sites include:

The point? There are lots of places you can go for information to research your alternatives, and to help you make a decision. If you don’t want to do a lot of research, contact a trustee today, to arrange for a free initial consultation. With or without prior research, they will walk you through your options, and help you make an informed decision.

Posted on Monday, April 26th, 2010
Filed under: Bankruptcy Alternatives andConsumer Proposal andDebt Options andbankruptcy Canada
posted by Sandra Sykora @ 5:56 am No Comments

What Earth Hour Can Teach Us About Avoiding Bankruptcy in Canada

On March 27, 2010 the world observed Earth Hour. At 8:30 pm local time everyone was encouraged to turn off their lights as a statement against climate change. So what does Earth Hour have to do with bankruptcy in Canada? The answer depends on how you perceive the value of Earth Hour.

Many people will tell you that it’s a great event. It forces us to think about the environment, and actually do something. Many people organize parties with their friends, so they can observe together.

Personally, I’m not convinced. Getting in my car and driving to a party, and burning candles made from petroleum products, and eating food that was shipped in from around the world probably doesn’t really do much to save the environment. Why? Because what I do for one hour per year is irrelevant compared to what I do the other 8,759 hours per year. Change can’t be for one hour; real change is permanent.

If you really believe that humans are causing climate change, and you really want to do something about, do something more than turning off your lights for one hour. Sell your car, and move to a place where you can walk to work, or ride your bicycle. Only eat locally grown foods. Get rid of electronics in your home that draw power when they are in standby mode, like your television (or at least put them on a power bar and shut the power when they are not in use).

Real change is very difficult, which is why we resist real change. It’s easy to shut my lights off for one hour. It’s more of a challenge to give up my car.

It’s easy to write a letter to government and tell them to pass laws to make everyone else conserve energy. It’s much more difficult to actual take responsibility for my own actions and make changes in my life.

And that’s the point: change is hard.

As a bankruptcy trustee in Canada I meet with and talk to dozens of Canadians every week who are in financial trouble. Many of them lost their jobs, or went through a costly divorce, or perhaps had a medical problem that caused them to lose time at work. When your income is reduced, to stay financially afloat you have to cut your expenses.

But cutting expenses is hard.

It’s hard to move to a smaller house when you can no longer afford a bigger house.

It’s hard to give up your second car, or to go from a newer leased car to a less expensive used car.

It’s even hard to give up channels on your TV, or go to the coffee shop less to save money.

But if you want real change in your life, you must make the tough decisions.

There is no “Money Hour”. You can’t just stay home and not spend money for one hour and assume that all of your money problems will be solved. You must make real, lasting change, over a long period of time. It will be difficult. It will be a challenge. But it will be worth it, because you will transform your life from the problem of spending more than you make, to actually having money in your savings account.

Imagine how great it would be to not have any debt payments, and to not get any telephone calls from collection agents. It is possible, but only if you take real action now. So here’s my advice:

Start by making a personal budget. Write down everything you will spend money on in the next six months. Then, start cutting. Start making your own coffee. Cancel your expensive telephone and cable service, or at least cut back to the basic essentials.

Always look for ways to save money. Subscribe to free resources on the internet that help you save money.

If you have too much debt, make a plan today to eliminate that debt. If you can cut expenses, than you can repay your debts on your own. If not, you may need to file a consumer proposal, or even consider personal bankruptcy.

For more information, consult a licensed consumer proposal administrator or contact a licensed bankruptcy trustee for a free initial consultation to determine your options, and start making changes today. It’s not a one hour solution, but it is a permanent solution, if you are willing to make the necessary changes.

Posted on Monday, March 29th, 2010
Filed under: Consumer Proposal
posted by Doug Hoyes @ 6:52 am No Comments

New Mortgage Rules in Canada: Too Little, Too Late?

Doug Hoyes, Bankruptcy Trustee

Doug Hoyes, Bankruptcy Trustee

In a press release dated February 16, 2010, the government of Canada announced new rules for mortgage funding:

The Honourable Jim Flaherty, Minister of Finance, today announced a number of measured steps to support the long-term stability of Canada’s housing market and continue to encourage home ownership for Canadians.

“Canada’s housing market is healthy, stable and supported by our country’s solid economic fundamentals,” said Minister Flaherty. “However, a key lesson of the global financial crisis is that early policy action can help prevent negative trends from developing.

The Government will therefore adjust the rules for government-backed insured mortgages as follows:

  • Require that all borrowers meet the standards for a five-year fixed rate mortgage even if they choose a mortgage with a lower interest rate and shorter term. This initiative will help Canadians prepare for higher interest rates in the future.
  • Lower the maximum amount Canadians can withdraw in refinancing their mortgages to 90 per cent from 95 per cent of the value of their homes. This will help ensure home ownership is a more effective way to save.
  • Require a minimum down payment of 20 per cent for government-backed mortgage insurance on non-owner-occupied properties purchased for speculation.

“There’s no clear evidence of a housing bubble, but we’re taking proactive, prudent and cautious steps today to help prevent one. Our Government is acting to help prevent Canadian households from getting overextended, and acting to help prevent some lenders from facilitating it,” said Minister Flaherty. “If some lenders aren’t willing to act themselves, we will act. These measures demonstrate the Government is committed to taking action when necessary to support the long-term stability of a sector that is so vital to our economy and the financial well-being of Canadian families.”

These adjustments to the mortgage insurance guarantee framework are intended to come into force on April 19, 2010.

In October of 2008 the government tightened the rules, requiring all borrowers to have at least a 5% down payment, and for mortgage terms to be no longer than 35 years. These rules apply to all borrowers who required CHMC insurance.

What does this mean?

It means that it is no longer as easy to qualify for a mortgage as it was three years ago. Back during the housing boom (say in 2005, 2006, and 2007) you could get a mortgage with no money down, and you could stretch out the amortization for 40 years to reduce your monthly payment, meaning you could qualify for an even bigger home. You could continually refinance your home as house values increased.

So what’s the problem? Why should we care what the government is doing with mortgage insurance?

For most people a mortgage is the single largest amount they will ever borrow. The more you borrow, the greater the chances are that you will experience financial trouble (see my previous article on Debt in Canada: The Ticking Time Bomb). (Of course the greater your debt, the more likely you are to get scammed trying to deal with your debt, as discussed in Debt Management and Debt Settlement Plans: Scams, or a Good Alternative to Bankruptcy in Canada?). It would be logical to conclude that the less we borrow, the less likely we are to experience financial problems.

As a bankruptcy trustee in Canada, I have personally met with hundreds of people who have, over the good years, used their home as their personal ATM machine. They had credit card debt, but since their home had increased in value, they were able to refinance their home and use the money to pay off their credit cards. I have met with many people who did this many times. Every two years, when they needed money, they refinanced their home. They would increase their mortgage and use the money to pay off their credit cards, and also get a reduced interest rate.

That strategy works when house prices are increasing, but over the last two years house prices in many areas of Canada have stabilized or fallen, so that when you apply to refinance the bank may say “sorry, you don’t have enough equity.” That’s the problem many Canadians are now facing: high debts, but no ability to refinance.

Should we blame the federal government for tightening up the mortgage rules at precisely the time more Canadians are dependant on debt?

The cynic would argue that the government should have tightened the rules a few years ago, to prevent the problems we are now facing. I personally don’t spend time worrying about what the government is doing. I prefer to focus on what I can do; I’m a big believer in taking personal responsibility for my own situation, regardless of what the government may or may not do. The new rules are a wake up call for all of us. Here’s my approach:

Start by assuming that your house will not continually increase in value forever, and may even decrease in value over the short or medium term. Knowing that, don’t expect that you will be able to refinance to solve your credit card debt problems.

Then, take steps to reduce your debt. That may mean selling your house and using the proceeds to repay your debts, and buying a smaller house, or renting. I know it’s a shock to most people, but a house is NOT an investment. There are periods of time when a house may increase in value, but there are also times, like the last two years, or during the late 1980′s and early 1990′s, when houses decrease in value. You must be prepared for both the good times and bad. You can’t rely on your house to save the day, so start reducing your debt now.

If you already have too much debt, make a budget and repay your debt on your own, or file a consumer proposal, or even consider bankruptcy. If you plan to buy a house in the future, save for as large a down payment as possible. With a large down payment, your monthly payments are lower, you can probably negotiate a lower interest rate, and you don’t have to worry about whatever new rules the government might propose for mortgage insurance.

The world is different today than it was a few years ago, so take stock of your situation, and take action to protect your future by keeping your debt as low as possible.

Posted on Monday, March 22nd, 2010
Filed under: Debt Options andbankruptcy Canada
posted by Doug Hoyes @ 5:19 am No Comments

Will The Bankruptcy Rate in Canada Plummet in 2010? A sign of economic recovery or something else completely?

Barton Goth, Canadian Bankruptcy TrusteeThe media has recently carried stories that that the Consumer Bankruptcy Rate in Canada is Starting to Ease, which sounds like good news. In October, 2009, bankruptcy filings across Canada fell a whopping 27.7 percent in October when compared to the previous month, which is the largest monthly drop on record. This figure softens when you include proposals filed in the same months to 19%, but it is still the largest monthly decrease in the last two years.

On the surface this could be taken as a great indication of where our economy is headed, as the total insolvency rate is an excellent indicator of a nation’s fiscal health. But we all must be cautious in the way we interpret statistics. Before we draw any conclusions it is important to examine a few more details:

  • Based on a 12 month year to year comparison as of October 31, 2009 there has been a 31.9% increase in the total number of insolvency filings in Canada
    •
  • Of the 156,255 total filings in Canada 149,350 of these are consumer filings (i.e. individuals) and the remaining 6,905 are business filings over the same period. So the consumer filings represent 95% of the total filings in Canada
  • The total consumer filings are up 34.5% from the previous year
  • The total business filings are down 7.7% from the previous year.

As we look at these statistics there are a few things that jump out at me.

First, it is very clear that the brunt of the recession has been born on the backs Canadian consumer as the business community has actually seen a reduction in the number of total insolvencies year to date.

Second, there are a great number of people who are having significant difficulties and likely will continue to struggle with their finances for some time.

Third, if we consider this in light of Statistics Canada’s most recent statistics on Canadian household debt, which put the Canadian debt-to-income level at 145%, the highest level since quarterly reporting started in 1990. For those of you who are not familiar with this economic indicator, 145% means that for every $100 of disposable income we carry $145 of debt. Clearly, while we have to question the current state of our economy, this still doesn’t explain the drastic decrease in total insolvency filings.
So how can we account for this dramatic decrease? Realistically this is a question that the statistics can’t adequately explain. So we have to look beyond the number and appreciate the context of these statistics.

For those of you who are unaware, September 18, 2009 was a very significant day for those who are currently struggling with their finances. On September 18, 2009 major amendments to the Bankruptcy and Insolvency Act became law, and this legislation had some very dramatic changes. Some of the more significant changes were as follows:

  • Consumer proposal debt limit has been increased
  • RRSPs are now exempt from seizure in most cases
  • Secured loans and leases cannot be terminated due to bankruptcy
  • Bankruptcies involving surplus income will last longer
  • Large tax debts may cause a longer bankruptcy
  • Student loans will be discharged after seven years

The implementation of these changes was first announced to the insolvency community early in August 2009, and while it took a little time for the changes to be digested and communicated to the rest of the country, the net effect was a dramatic increase of people rushing to file a bankruptcy in an effort to file prior to these changes coming into effect. Again, I can’t prove that the reason for this rush was these changes, but I can tell you that not only was there was a dramatic increase in the volume of my calls, emails and blog postings during that period, but a vast number of those inquiries expressed a need to proceed prior to the implementing of those changes.

Now that the changes are implemented, we have definitely seen a decrease across the insolvency community of total filings in each month, but on average the overall trend of the number of people suffering from economic instability has continued to increase steadily over the course of the last few months. For now this is something that appears to be continuing, but we anticipate that as the economy stabilizes the pace of insolvency filings should also settle in line with historical norms.

Regardless of the economy, people always have trouble with their finances. Whether these troubles are due to our dependence on credit, the aggressive lending practices employed by the lending community, health and employment issues, the lack of financial education provided or for reasons that are completely different, it is important is to recognize that there are governmental programs that are designed to assist people when finances get out of control and whether we are looking at the filing of a consumer proposal, a bankruptcy, or one of the other available options, there are many ways that can allow you to regain control of your finances. Contact a bankruptcy trustee for further information.

Posted on Monday, January 11th, 2010
Filed under: Consumer Proposal andDebt Options andbankruptcy Canada andbankruptcy reform
posted by Barton Goth @ 4:18 am No Comments

Retirement, Pensions and Bankruptcy in Canada: The Future Is Up To You

Doug Hoyes, Bankruptcy Trustee

Doug Hoyes, Bankruptcy Trustee

There were three interesting stories in the press this week about pensions and bankruptcy in Canada.

On Wednesday the CBC ran a story on how the Liberals vow to change bankruptcy laws. Here’s a quote from the story:

The Liberal Party says it is committed to changing Canadian bankruptcy laws so former employees of failed companies like Nortel don’t lose their pensions and disability benefits when their employer goes bust.

“You gotta know that I’m hearing you loud and clear — the Bankruptcy Act must be changed,” Liberal Leader Michael Ignatieff told Nortel pensioners at a rally on Parliament Hill Wednesday.

Ignatieff said his party will be meeting Monday to discuss new proposals for the pension system. Liberals are committed to changing bankruptcy laws “so that you are not left at the back of queue in insolvency and bankruptcy,” Ignatieff said. “It’s not right; we agree with you.”

The basic point being made by Mr. Ignatieff is that it’s possible for a company to go bankrupt, and as a result workers can lose their pensions. He uses Nortel as an example, a once proud Canadian company that is now bankrupt.

The second story was written by David Olive, in the Toronto Star, and he took the opposite view: Pension Crisis: Not So Fast. He makes the point that Canadians have many sources of retirement income, including company pensions, and the Canada Pension Plan, and RRSPs. Outside experts have determined, in fact, that Canadians have pension protection as good or better than anyone else in the world.

In the third story the Globe and Mail discusses the Illusion of Pension Security in Canada, and makes the point that only 30% of Canadians have employer sponsored defined benefit pensions, so the “pension crisis” is nothing new.

So which view is correct? Should Canada’s bankruptcy laws be changed, or are we on the right track?

Unfortunately for Mr. Ignatieff, changing Canada’s bankruptcy laws is not a practical solution. First, as readers of this weekly column are very well aware, Canada’s bankruptcy laws were amended back in 2005, and 2007, but the final changes did not come into force until September 18, 2009. You can read all about the new rules in our posts on the new bankruptcy rules in Canada. Given the speed the government has worked in the past, if he wanted to make changes, it would be years before any changes were implemented.

Second, changing the bankruptcy laws misses the point. First, if only 30% of Canadians have a pension plan through work, that means most of us don’t have one, so changing rules to protect something we don’t have serves no purpose. In addition, the employee’s pension plan is not an asset of the company. It is a separate fund, entirely for the benefit of the employees. When a company goes bankrupt it’s assets are liquidated, and the proceeds go to the creditors. The pension is not liquidated; it’s not part of the company’s assets.

In simple terms, each pay period the company contributes money to a separate fund, and it is that fund used to fund the employees retirement. The best way to protect an employee’s pension is to protect the fund. The government should enforce rules to ensure that pension plans are adequately funded. If they are, even if the company goes bankrupt, the money will be in a separate fund to continue to pay retirement benefits to the employees.

The answer, then, is not to change bankruptcy laws, but instead to ensure pensions are properly funded. That can be done by enforcing the existing rules.

I’m not opposed to changing bankruptcy rules. Unfortunately, when a company goes bankrupt, there is usually very little money to distribute, so even if the pension plan got whatever money was available, it may not be enough. So, changing the bankruptcy rules would offer little protection to workers. Enforcing existing rules to ensure that pensions are fully funded is a more logical solution.

Even more important, however, is that you must look out for yourself. Every day I meet with people in financial trouble, and I give all of them the same advice: I can show you how a consumer proposal or a personal bankruptcy will deal with your debts, but only you can adjust your spending or increase your income so that you don’t have debt problems in the future.

The same advice applies to your pension. You can rely entirely on your employer, or the government, to take care of you when you retire. Or, you can take some of the responsibility yourself. If you were to start at the age of 35 and put $200 per month in a savings account, you would contribute $72,000 to your savings account by age 65. If you contributed that money to an RRSP, and re-invested your tax refund each year, and if you earned interest on your savings, you could easily have a quarter of a million dollars, or more, by the time you retire. But that’s up to you. You have to decide to save $200 per month; no-one else will do it for you.

I realize that some people simply cannot save $200 per month. Some can save more, some can save less. But when you calculate how much you spend on coffee, or fast food, or smokes, most people can find a few dollars each month to save. (There are lots of great money saving tips on the internet to give you ideas).

But what about you? Should you rely on the government to fund your retirement? No, you should rely on yourself.

The maximum benefit paid by the Canada Pension Plan at age 65 is $908.75 per month. If CPP will be your only source of income when you retire, and if your living expenses are more than $908 per month, you will have a problem.

My advice? Make a decision, right now, to plan for your retirement. Here’s what you should do:

1 Start by making a personal budget. Make a list of what you spend each month, and decide what expenses you can cut to increase your savings.

2 Eliminate your debts. There is no point in putting money in a savings account earning 1% interest if you are paying 20% interest on your outstanding credit card balance. Review your debt management options, and make a plan to start dealing with them. You may be able to deal with your debts on your own, or you may need to file a consumer proposal or personal bankruptcy to get a fresh start. Regardless of the solution, the sooner you start, the sooner you will have a solution to your money problems.

3 Start saving. Once you know what you spend, and you have eliminated your debts, you can start a savings plan. The sooner you start, the more you will save. Set up two bank accounts: one for purchases you need to make within the next year (such as for Christmas, or car repairs), and the other will be long term savings for the future (for your children’s education, or to buy a house, or to fund your retirement).

If you decide that your future is up to you, you can start making positive changes now, and you won’t have to rely on the government changing bankruptcy laws in the future to protect your retirement.

Posted on Monday, October 26th, 2009
Filed under: Bankruptcy Alternatives
posted by Doug Hoyes @ 4:48 am 6 Comments

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