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The Insanity of the New Bankruptcy Rules in Canada

by Ted Michalos

Ted Michalos, Bankruptcy Trustee

Ted Michalos, Bankruptcy Trustee

On September 18, 2009 the government of Canada brought into force all of the remaining amendments to the Bankruptcy and Insolvency Act that were approved by Parliament back in 2005 and 2007.  At the time they were approved, the economy was booming and bankruptcy filings by individuals were stable.  One of the goals of the new law was to encourage people to consider filing a consumer proposal as an alternative to personal bankruptcy.  The law did this by dramatically increasing the cost of filing personal bankruptcy.

In 2005 the economy was booming. Today, the economy is in shambles.  Personal bankruptcy filings are at an all time high.  Unemployment is rising and people that in the past had no concerns about their jobs are now afraid that they may get “downsized” too.   So, at a time when a record number of Canadian families are experiencing financial difficulties, what does the government do?  They bring into force all the changes they passed when times were good.  Insanity.  There is no other word for it.

In a strong economy, the plan of increasing the cost of bankruptcy in Canada to encourage people to file more consumer proposals made a certain amount of sense.  If a person is working with a stable income, then you can argue that they should try to repay part of their debt.

In a weak economy, with unemployment on the rise, EI benefits running out, and no prospects of a “job rebound” in sight all these new rules do is force people that have no realistic ability to repay a portion of their debts (via a proposal) to remain in bankruptcy for a much longer period of time.

So that we’re clear, the new rules extend a first time bankruptcy for individuals from 9 months to 21 months, if their household income is $200 above the government standards.  For example, a family of 4 is allowed income of $3,474 per month.  If they have income in excess of $3,674 per month their bankruptcy will be automatically increased from 9 to 21 months.   Every month you remain bankrupt there is a cost (payment) that must be made.  Let’s say they were required to pay $250 per month.  Under the new rules they’d be required to pay $250 per month for 21 months, or $5,250.  Under the old rules the total payment required would be only $2,250 ($250 per month for nine months).  That’s quite a difference for a family struggling to pay the rent.

A single person has a surplus income threshold of $1,870.  So, if they earn $2,070 per month or more their bankruptcy will run 21 months.  The fellow on EI won’t get caught by this rule – their income will be below the $2,070 limit and their bankruptcy will run 9 months.  If, however, they find work during the bankruptcy, such that their income rises above the limit the law automatically kicks in and they are required to pay for 21 months.

A lot of people may read this and say, “ok, bad luck for them, but it is still less than what they owe”…  That is true, but what most people don’t realize is that more than 10% of all Canadians will file for bankruptcy at some point in their lives.  If one of the goals of the new law was to encourage people to file consumer proposals (instead of bankruptcy), it does not make any sense to bring those rules into place when the economy won’t allow people to file a proposal.  The income is simply not there.  Insanity is the politest word I could find for it…

Posted on Monday, October 19th, 2009
Filed under: bankruptcy Canada andbankruptcy reform andConsumer Proposal
posted by Ted Michalos @ 5:02 am 1 Comment

The New Bankruptcy Rules: Some Predictions

by Doug Hoyes

Doug Hoyes, Bankruptcy Trustee

Doug Hoyes, Bankruptcy Trustee

Since the federal government announced back on August 19 that new bankruptcy rules in Canada would come into force on September 18, 2009, I have posted three articles describing the new bankruptcy rules in Canada. For an overview of the new rules, please see the following articles:

As promised, the new rules came into effect on September 18; what happened? Here’s an insider’s view:

My firm, Hoyes, Michalos & Associates Inc., serves debtors from 20 offices in Ontario, so we have a large representative sample of people in financial trouble. As soon as the new rules were announced, we received a flood of calls from people in debt. Many of them wanted to file before the new bankruptcy rules were implemented, because under the new rules if you have surplus income of more than $200 per month, your bankruptcy is automatically extended for an extra year. For example, in a first bankruptcy under the old rules $300 per month in surplus income would still mean you were probably discharged in nine months. Under the new rules, you are now automatically bankrupt for 21 months, and that means you are now paying for 21 months. In short, your bankruptcy will cost twice as much as before, which is what caused the flood of calls to our offices.

As a result, on September 17 we filed three times as many personal bankruptcy filings as we would on a normal day. In fact, across Canada there were about 1,700 personal bankruptcies and consumer proposals filed, which is also about three times the normal number. Obviously Canadians wanted to get their bankruptcy filed under the old rules.

Here’s another interesting note: On September 18, the first day of the new rules, the government’s electronic bankruptcy filing system was down! As a result, there were no bankruptcies filed on Friday September 18. I’m amazed that the system would not work given the many years the government has had to implement the new rules, but that’s the way it goes sometimes.

What do I see for the future? I have two predictions.

First, I suspect that all bankruptcy trustees in Canada will be doing some very detailed math to explain the surplus income calculation to every debtor before they file bankruptcy. Seven months into each bankruptcy the trustee is required to determine the bankrupt’s average income over the first six months, and if their average income per month is more than $200 over the limit, the bankruptcy is extended. If a bankrupt is paid a salary twice a month, their income doesn’t change, so the calculation is easy.

But what happens if you are paid either weekly or bi-weekly? If you get paid weekly, there are four months each year where you get five paycheques per month, and that may cause your average surplus income to exceed the limit. The same is true for a person paid bi-weekly in a three paycheque month. I suspect that the result of these new rules will be that bankrupts may delay their filings until after their extra paycheque month.

For example, if you are paid weekly on a Friday, a quick check of the calendar will reveal that there are five Fridays in October. That may mean that weekly payees will want to wait until November to go bankrupt. When you meet with your trustee, be sure to ask them to explain the implications of these new rules in your specific situation.

Second, as I have already predicted, I believe the number of consumer proposals will increase. If you are expecting a Christmas bonus, or overtime, that may be enough to increase your income such that your bankruptcy will last for an extra year. In that case a consumer proposal may be the preferred solution. You can negotiate a set monthly payment that won’t increase, even if your pay goes up.

All trustees in Canada are quickly learning and adapting to the new rules, so it is imperative that you consult a Canadian bankruptcy trustee to review how these new rules will impact on your situation, so that you can make a fully informed decision to deal with your debts.

Posted on Monday, September 21st, 2009
Filed under: bankruptcy Canada andbankruptcy reform
posted by Doug Hoyes @ 1:49 am No Comments

Why a House is NOT an investment

by Doug Hoyes

Is owning a home in Canada a good investment? Conventional wisdom in Canada is that yes, owning your home is the best investment you can make.  Instead of paying rent to a landlord and having nothing to show for it, you may make mortgage payments, and over time you build up your equity.

doughoyestrusteeHere’s something that may shock you: A house is NOT an investment.  It is a consumer good, just like a toothbrush.  You use it, you throw it away, and then you replace it.

I know that many of you will strongly disagree with that statement, but think about it: if you own your home for the next forty years, it is likely that you have to:

  • Replace the roof
  • Replace the furnace and air conditioning system, and all appliances
  • Repair the plumbing
  • Paint the walls
  • Replace the carpet
  • And do whatever exterior painting and landscaping is required.

My point is that you may not “throw out” your house all at once like you do with your toothbrush, but you do replace, piece by piece, over many years.  An investment, like a savings bond, does not need repairs, maintenance and replacing, so a house is not an investment.

Here’s a challenge for you: do the math.  Add up what you have spent, or will spend over the next five years on your house (see the list above).  Then take that number and average it over the number of months between repairs.  If you need to replace the furnace and air conditioning system every 20 years (that’s every 240 months), and it will cost $12,000 to do it, that’s a replacement cost of $50 every month.  Add in the cost of every other item on the list, and you will quickly see that the replacement cost of a house is somewhere between $200 and $500 per month (and a lot more if you have an old house).

Now add to that replacement cost the monthly cost for your mortgage, property taxes, and routine maintenance each month.  That’s the true cost of owning a house.

Home owners often tell me that owning a home is cheaper than renting.  “My mortgage payment is only $1,200 per month” they tell me.  In truth, when you add in property taxes and repairs and maintenance and extra utilities due to the size of your house, the cost may be closer to $2,000 per month.  If rent would cost you $2,000 per month than you are correct; renting and owning cost the same.  But if you could rent a nice apartment or townhouse for $1,000 per month, it’s clear that in the short term renting is much cheaper than owning.

But wait, you say: “House prices go up, so even if I am paying more each month for my house, in the long run I’ll make money.”  Maybe, but only if, in my example, your house is increasing in value by over $1,000 per month.  A few years ago when the real estate market in Canada was booming, that was possible.  For the last two years the residential real estate market has declined in Canada, so your house has actually lost value each month, which increases its cost.

So what’s my point?  Am I saying you should never own a house?

No, that’s not what I’m saying.  I’m saying you should view your house as a place to live, not as an investment.  If your repair costs are low and you buy and sell at the right time the value of your house may increase.  But it is also possible that it will not go up in value, so do the math before blindly assuming that your house is an investment.

Over the last year I have filed a large number of bankruptcies for people who bought a house two years ago, at the peak of the market, with no money down, and now their incomes are reduced and they want to sell, but if they do they will lose a huge amount of money.  They can’t afford the loss, and combined with their other debts they have little choice but to file bankruptcy in Canada.

I want to spread the word that you don’t need to be house poor.  Ask your home owning friends what it really costs to own a home, look at your own numbers, determine what it costs to rent, and only then can you make an informed financial decision about whether or not you should own or rent your house.

Posted on Monday, July 13th, 2009
Filed under: bankruptcy Canada
posted by Doug Hoyes @ 5:53 am 4 Comments

Top Ten Tips for Starting a Business in Canada (and avoiding bankruptcy)

by Doug Hoyes

A common cause of bankruptcy in Canada are debts that resulted from a failed business. I meet many Canadians each month who started their own business, and for various reasons it wasn’t successful, and they were left with more debt than they could handle, so they had to file bankruptcy in Canada. During a recession when jobs are scarce, an increasing number of Canadians start their own business out of necessity: if you can’t find a job, make your own!

That’s a great idea, but you want to protect yourself and do it right. As a trustee in bankruptcy that has met with hundreds of Canadians over the years who have lived through failed businesses, here are my Top Ten Tips for Starting a Business in Canada.

1 Start a business doing something you enjoy. If you are not passionate about your new business, you won’t enjoy going to work, and your business will probably fail.

2 Start a business doing something you are good at. If you don’t have the skills necessary to run your business, you will fail. There would be no point in me trying to start a business as a carpenter, because I have no wood working skills. I’m not a handy man, and so even if there was a great demand for carpenters in my area, my business would fail.

3 Start a business that has a good chance to be profitable. I may be passionate about horseshoes. I may be really good at making and fitting horseshoes. But if I live downtown in a major city there may not be any customers for my service, and my business will fail.

4 Minimize risk. This step is critical. I have met with over 100 people in my career who had a product to sell, so they signed a ten year lease on a store in a plaza, bought lots of inventory, and hired staff. Unfortunately, they didn’t have enough customers, and the store failed. A better approach is to start small. Make the product yourself, and instead of renting a store, rent a booth at the local Farmer’s Market or Flea Market on the weekend. Test the product. If you can build up a customer base starting small, then expand.

5 Have a good idea. If you have created a recipe for a product you can sell, try it. If you have invented a new product, try to market it. If you have a unique product, customers can only buy from you.

6 Follow, don’t lead. This tip may appear to be the opposite of Tip #5, but it’s something to consider. Look around and find the successful businesses in your industry. Can you copy a successful business? Trying to duplicate an existing business is a silly idea; they got there first, so they have a head start. But if you can find a successful business, you may be able to modify what they do, and do it yourself. Do some research. If a business is successful in another city, you may be able to replicate it in your city. You get the benefit of their experience, without the competition.

7 Learn from other’s mistakes. Copying a successful business is a good idea. An even better idea is to learn from unsuccessful businesses. Talk to your friends that started businesses. Ask them what mistakes they made. Ask your lawyer or accountant or banker for advice. In my experience businesses that fail make the same mistakes over and over, so read these Top Ten Tips again to avoid those mistakes.

8 Have adequate capital. The number one mistake made by new businesses is not having enough money to operate. Do the math. How much will it cost you to buy inventory, set up shop, pay for advertising, and pay your monthly expenses before you start generating a positive cash flow? Whatever number you come up with, multiply it by four, because you have probably under-estimated your cash needs. If you don’t have the necessary cash, and if you can’t borrow it, either don’t start the business, or find a way to reduce your costs (see Tip #4).

9 Get expert advice. Before you start a business you should meet with an experienced accountant to help you set up an accounting system. At the very least you need to understand how to collect and remit GST, PST and all of the other “initials” that the government will want (like PST, HST, WSIB, and so on). I often meet with people who got audited by the government in the third year of their business, only to discover that they were supposed to be charging GST. They didn’t, and now they owe the government three years worth of GST, and they have no way to pay it, and bankruptcy is the result. Be smart; find out what you need to do before you start.

I also recommend having at least a one hour meeting with a lawyer before you start your business, so that you understand your legal obligations. Should you incorporate or not? Should you be a director of your corporation? These are simple questions for an accountant or lawyer to answer, but they can only answer them if you ask.

10 Protect yourself. Every business person expects to be a great success, and make lots of money. But what happens if you are not successful? You must protect yourself. Minimize risk and keep your expenses low to lessen the chance of failure. Don’t borrow money if possible; start your business with cash, not debt. The most common mistake I see involves a husband and wife starting a business. One spouse owns the family home, and only that spouse is actively involved in the business. The business fails, there’s a lot of money owing to CRA, so CRA puts a lien on the house. The couple is forced to sell their house to repay the debts.

A more sensible approach is to have the spouse involved in the business owning nothing! That’s right, if the husband is operating the business, the wife should own the house. That way, if the business fails, the creditors can’t take the husband’s house, because he doesn’t own it. Of course I’m giving an overly simplified example to make my point, so you should get legal advice (Tip #9) before changing ownership of assets. However, it’s generally easier to restructure your affairs before you start your business than it will be later when you are in trouble.

I am a strong believer in being an entrepreneur. I left the security of a job at a big company eleven years ago to co-found my own business. It was a challenge at the start. My income in our first year in business was almost nothing, and I had a family to support. But, I took my own advice, kept our costs low, minimized my risk, and in the end starting a business.was the best decision possible. Make a plan, think it through, get some good advice, and good luck!

Posted on Monday, July 6th, 2009
Filed under: bankruptcy Canada
posted by Doug Hoyes @ 7:12 am No Comments

Welcome to Trustees Talk

by Doug Hoyes

Doug Hoyes, Bankruptcy Trustee

Doug Hoyes, Bankruptcy Trustee

Welcome to Trustees Talk, an insider’s perspective on bankruptcy in Canada. My name is Douglas Hoyes, and I am the editor of Trustees Talk. I’m the co-founder of Hoyes, Michalos & Associates Inc., a personal bankruptcy and consumer proposal firm in Ontario.

There is lots of information on the internet about the technical aspects of bankruptcy in Canada. Trustees Talk will NOT spend a lot of time on technical questions. If you have questions, our main Bankruptcy Canada site has the answers to all of your bankruptcy questions. Start with the Frequently Asked Questions page, or visit the Bankruptcy Canada Blog that has thousands of answers to bankruptcy questions submitted by readers. If you want to hear from people considering bankruptcy, or Canadians who have been through the process, check out the Bankruptcy Canada Online Support Group. You can even contact a trustee, in your area, that will provide you with a free, no obligation initial consultation; simply take a minute and provide some basic information on our Online Bankruptcy Evaluation Form, and they will contact you to answer all of your questions.

Trustees Talk will focus not on technical questions, but on an insider’s view of bankruptcy in Canada. We will provide a unique perspective that will be of interest to people in financial trouble, but also to the media, credit counsellors, and financial professionals that are called on to help Canadians deal with financial problems.

You can post comments on our posts, so we welcome your participation. A new article will be posted every Monday morning, so bookmark this page, or subscribe using an RSS Reader to automatically receive notification of each article.

Thanks for reading, and welcome to Trustees Talks.

Posted on Monday, June 8th, 2009
Filed under: bankruptcy Canada andConsumer Proposal
posted by Doug Hoyes @ 8:40 am No Comments

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