bankruptcy reform

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

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

Barton Goth, Bankruptcy Trustee

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

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

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

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

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

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

1. Availability

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

2. Diminishing Revenues

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

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

1. Availability

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

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

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

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

2. Diminishing Revenues

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

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

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

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

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

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

3. Monopolistic Approach

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

Conclusion

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

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

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

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

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

Posted on Monday, June 28th, 2010

Filed under: bankruptcy reform andConsumer Proposal

posted by Barton Goth @ 4:08 am No Comments

The Price of Progress: New Bankruptcy Rules Hurt Some People They Were Designed to Help

by Barton Goth

Barton Goth, Canadian Bankruptcy Trustee

Barton Goth, Bankruptcy Trustee

One of the longstanding and fundamental purposes of the Bankruptcy and Insolvency Act of Canada has been to allow honest but unfortunate debtors to deal with unmanageable debt so that they can make a fresh start and resume their places in the community. For those of you who are unaware, September 18, 2009 was a very significant day in the Canadian Insolvency community, as some major amendments to the Bankruptcy and Insolvency Act were implemented. Many of the changes greatly anticipated and long overdue, some examples include:

Increasing the limits for consumer proposal from $75,000 to $250,000 in non-mortgage debts;
Reducing the time limit that must elapse prior to Student loans being eligible to be discharged from 10 years to 7;
The creation of a federal exemption making RRSPs now exempt from seizure;
Implementing a clause that stipulates secured loans and leases cannot be terminated simply due to the filing of a bankruptcy;

As you can see, many of these new amendments are very positive and go a long way to enhancing our current insolvency system. However, as with any type of change often there are unanticipated consequences and it is these unanticipated consequences that cause me some concern. While the vast majority of these amendments were positive, I feel that there are a few that are not consistent with the original purpose of this legislation.

For example, earlier this week I met with a 56 year old gentleman who had recently suffered a very serious heart attack and as a result is awaiting surgery. This heart attack has dramatically changed his ability to function on a daily basis and left him unable to work in his field of expertise. As I met with this individual, I learned that he had been bankrupt before. In fact, he filed for bankruptcy in 1981. This bankruptcy was largely a result of conditions that were beyond his control. At the time he was operating a small proprietorship that was servicing the oil and gas industry and, by all accounts, was doing reasonable well for himself.

But unfortunately, as many people may remember, this was a very difficult time in the oil and gas sector due to a combination of political and market conditions. As a result, this gentleman was one of many who was left without work and no prospect of work for quite some time. Without going into too much detail, this first bankruptcy, which occurred approximately 28 years ago, proceeded smoothly and a discharge was successfully obtained without any difficulties, and from by all appearances this gentlemen seems to have spent the last 28 years working hard to raise a family and support 5 children.

Throughout this time he has remained steadily employed, made regular contributions to an RRSP, only once had to rely on Employment Insurance and overall appears to have done everything that could be expected. Having learned his lesson from the first bankruptcy, he didn’t regularly carry large amounts of debts, has always driven used vehicles and seems to have been fairly prudent. Unfortunately this all changed on July 15, 2007, the date of his first heart attack. This first heart attack wasn’t terribly serious in the grand scheme of things, but it was the first of three, and the third heart attack was very severe, so severe that he is now awaiting surgery and has been told that he will never be in a position where he will be able to resume his previous activities.

The net effect of all of this is that since July 15, 2007 he has only been able to work intermittently. At first they were able to rely on his wife’s income and some Employment Insurance benefits and this worked well until near the end of 2007, when his wife was laid off. As a result of this lay off they had to use most of their RRSP’s to survive, as the small disability pension simply wasn’t enough. This seemed to work until the RRSP’s ran out and being left with no other choice they began to supplement their deficit each month with credit cards and the like, all the while planning on paying things back as his health improved.

So now this man and his wife live very modestly and try their best to survive on total household income of $3400, of which he was bringing in an estimated $2360 net each month. As I visited with this couple, it was very clear that I was dealing with honest people who were in a very unfortunate position. The end result is that they can afford to live, but they cannot afford to pay back an estimated $58,000 of debt, when you factor in the shortfall from the truck that used to be required for work.

Here is the problem: based on the changes to the Bankruptcy and Insolvency Act this person the estimated cost of bankruptcy in this situation would be $409.88 a month, an amount that will be a struggle to pay. This payment will also last for a total of 36 months, which will result in a total cost of a bankruptcy of approximately $14,755.76. While this is obviously a fraction of the total debt, we have a two people on the verge of retirement who are supposed to be in some of their highest paid years in the job force, who now have to struggle for the rest of their lives just to get by.

Now the question I have been wrestling with is whether or not this is consistent with the overall goal of a system that permits an honest debtor, who has been unfortunate, to secure a discharge so that he or she can make a fresh start?

This is an example of one of the unanticipated consequences that unfortunately represent the price associated progress. Not to suggest that this is the only problem with the legislation, but it is simply an example that I use to demonstrate some of the difficulties that still remain. While I don’t believe this was intended by anyone involved in the process and credit many of the misgivings implicit in these amendments to the manner in which this legislation had to be rushed through the legislative process in an effort to gain approval prior to falling of a minority government.

I do believe that it is important for Insolvency Professional’s across Canada to do our part to identify the remaining issues in an effort to make sure that the Superintendent of Bankruptcy, our Federal Government and of the other stakeholders recognize that while improvements have been made, there is still work that needs to be done.

For those of you are curious about what can be done when if you are in a situation similar to the one above, the best advice is to talk to a local trustee. In the above situation, the debtor decided that the filing of consumer proposal was going to provide a way to avoid a bankruptcy and some of the more negative consequences of a second bankruptcy but still enable a way to deal with the debt in a manner that reduced the total amount he would have to pay and to do so in a fashion that would fit into his budget.

Posted on Monday, November 30th, 2009

Filed under: bankruptcy Canada andbankruptcy reform

posted by Barton Goth @ 9:53 am No Comments

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

by Doug Hoyes

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

The Insanity of the New Bankruptcy Rules in Canada

by Ted Michalos

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

Finally some good news for Canadians facing Bankruptcy

by Doug Hoyes

Doug Hoyes, Bankruptcy Trustee

Apparently it is possible to “Fight City Hall”. Let me explain.

Back on September 14, 2009, five days before the new bankruptcy rules came into force, I posted an article describing the Bad News and Good News from the new bankruptcy rules. One of my biggest complaints about the new rules was a new disclosure requirement; here’s my quote from that post:

I also worry that the government has introduced new disclosure requirements. Now, when you go bankrupt in Canada, you are required to disclose your highest level of education. You must now tell the creditors whether or not you graduated from high school or university. Personally, I find this new disclosure requirement offensive. I don’t think whether or not you are a high school graduate is relevant. The creditors need to know what you own and who you owe, but information about your educational background is not necessary for them to evaluate your situation. What’s next? Questions about your ethnic background? Religion? Where does this end?

Think about it: for most people, the decision to declare bankruptcy is very stressful. It’s difficult enough to pull together all of your financial information and make the decision to go bankrupt. It’s even more embarrassing if you have to declare on a sworn statement to your creditors that you didn’t graduate from high school, or that you are a university graduate and still have financial problems. Either way, your education level is completely irrelevant information.

My job as a bankruptcy trustee in Canada is to ensure that all bankruptcy rules are applied fairly. When I believe that bankruptcy rules are unfair, I speak up.

Back in February, 2008 my business partner, Ted Michalos and I appeared before the Senate Committee on Banking, Trade and Commerce in Ottawa to present the case for rules that would be more fair to the average bankrupt Canadian. We were the only trustee firm in Canada that appeared before the Senate Committee. (You can watch our testimony on our Senate Video page). In May I wrote letters to the Prime Minister and the Industry Minister asking them to eliminate the uncertainty and either pass or abandon the new rules. The Prime Minister and Industry Minister both responded, saying they were working on it.

When I first discovered that the government was going to require bankrupts to disclose whether or not they graduated from high school, I was offended, and I took action. As mentioned above I mentioned it on this blog, but I did more than that.

On September 10, after not getting an explanation from anyone at the government, I sent an e-mail to the Superintendent of Bankruptcy himself. Here’s what I said:

My apologies for bothering you with this matter, but I haven’t been able to find anyone else who can give me an answer.

One of the changes resulting from the new bankruptcy rules to be implemented on September 18 is that a bankrupt person must now disclose on their statement of affairs the highest level of education they have received (such as grade 8, attended high school, high school graduate, or university graduate).

We are finding that many bankrupts find this disclosure to be somewhat embarrassing. Either they are embarrassed by their lack of education, or embarrassed that they are educated and still got into financial trouble.

I can’t find anything in the legislation passed by Parliament requiring this disclosure, so I assume this is data that the Office of the Superintendent of Bankruptcy has chosen to gather.

Is that correct?

If so, can one of your staff provide us with the rationale for collecting and distributing this information, so that I can explain it to our bankrupts.

Thanks for your assistance.

About a week later I got an e-mail from a junior staff member saying “we’re working on it”. (That seems to be a typical response from the government, doesn’t it?).

Then, on Saturday morning, I received word that the government had changed their mind and would no longer require this disclosure! Although I’m sure I was the first trustee to raise this issue with the Superintendent’s office, I know that last week many other bankruptcy trustees in Canada also made phone calls to the government to complain about this invasion of privacy, so I can’t take the credit for ending this silly requirement. However, I am proud of my fellow trustees for lobbying the government to change this rule.

Most trustees in Canada are like me: we are obligated to follow the rules, even when we don’t fully agree with them, but we also are willing to speak up when the rules are unfair, and we work to change them.

The new rules are still new, so there will be a lot of learning happening over the next few months as we become familiar with all of the nuances in the new rules. Rest assured, however, if you are in financial trouble a bankruptcy trustee will take the time to explain the rules to you in detail, and help you understand which option is best for you.

Please consult a Canadian bankruptcy trustee to arrange for a no charge initial consultation so that you can understand the rules, and decide which option is best for you and your family.

Posted on Monday, September 28th, 2009

Filed under: bankruptcy Canada andbankruptcy reform

posted by Doug Hoyes @ 4:39 am 2 Comments

The New Bankruptcy Rules: Some Predictions

by Doug Hoyes

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

New Bankruptcy Rules in Canada: The Bad News, and the Good News

by Doug Hoyes

Doug Hoyes, Bankruptcy Trustee

After waiting for four years, the new bankruptcy rules finally come into force on September 18, 2009. The new rules will have a significant impact on many Canadians in financial trouble.

When the new rules were announced in August I posted a summary of what you need to know about the new bankruptcy rules in Canada. If you are not familiar with the new rules, this is a good summary.

I also posted an article on the most radical new change: the surplus income rules have changed, so bankruptcy will now last longer for many Canadians. Under the old rules most first time bankruptcies lasted for nine months. Now, if your monthly net income is more than $200 higher than the limit set by the government, your bankruptcy will last an extra year, and you will be required to make payments to your creditors for an extra year.

Here’s a simple example: Fred is single with no dependants, and he earns $2,470 per month in take home pay, after taxes. The surplus income threshold for a single person in 2009 is $1,870 per month, so Fred has $600 per month of surplus income. He is required to pay $300 per month in surplus income payments for the length of the bankruptcy.

Under the old rules if this was Fred’s first bankruptcy and there were no objections, Fred’s bankruptcy would probably last for nine months, so his surplus income payments of $300 per month would last for nine months.

Under the new rules Fred is automatically bankrupt for 21 months, so his surplus income payments of $300 per month will last for 21 months.

That’s the bad news. The good news is that it will now be easier to file a consumer proposal as I reported last week. Under the old rules you could only file a consumer proposal if your debts were $75,000 or less. Now you can file a consumer proposal if your total debts, not including the mortgage on your principal residence, are less than $250,000. That will make it easier for many Canadians to avoid bankruptcy and file a consumer proposal.

Unfortunately it was only on August 19, 2009 the government announced that these new rules were coming into force on September 18. That means that trustees across Canada have only had 30 days, in the middle of the summer vacation season, to prepare for the new rules. That means there will be lots of confusion surrounding the new rules, so we will all need to be patient as we work through the new calculations, rules and directives.

My biggest complaint is that these new rules were created back in 2005 when the Canadian economy was booming. The federal government decided that the bankruptcy process was too easy, and needed to be lengthened. That may have made sense in 2005, but it’s now 2009 and we are in the middle of the most serious recession in our lives. Now is not the time to make the bankruptcy process even more difficult for the average Canadian. In hindsight it would have been nice if the government had delayed lengthening the bankruptcy process until the recession was over.

I also worry that the government has introduced new disclosure requirements. Now, when you go bankrupt in Canada, you are required to disclose your highest level of education. You must now tell the creditors whether or not you graduated from high school or university. Personally, I find this new disclosure requirement offensive. I don’t think whether or not you are a high school graduate is relevant. The creditors need to know what you own and who you owe, but information about your educational background is not necessary for them to evaluate your situation. What’s next? Questions about your ethnic background? Religion? Where does this end?

However, regardless of my opinions on the new rules, they are here. Some people will benefit from the new rules, others will not. Regardless, you should deal with a trustee that fully understands the new rules, so please consult a Canadian bankruptcy trustee to arrange a no charge initial consultation to review your situation and determine which option is best for you to deal with your debts.

Posted on Monday, September 14th, 2009

Filed under: bankruptcy Canada andbankruptcy reform andConsumer Proposal

posted by Doug Hoyes @ 4:05 am 3 Comments

Consumer Proposals Will Increase Under the New Bankruptcy Rules in Canada

by Doug Hoyes

Doug Hoyes, Bankruptcy Trustee

Here’s a prediction: the new bankruptcy rules that will come into force in Canada on September 18, 2009 will lead to a significant increase in the number of consumer proposals filed by Canadians.

If you are in financial trouble, you have a number of options, including repaying your debt on your own, getting a debt consolidation loan, credit counselling, debt settlement, a consumer proposal, or bankruptcy. (You can investigate all of your options using our debt options calculator). With all of these options, why do I think consumer proposals will become more popular?

Under the new rules, for many Canadians personal bankruptcy will be a longer and more expensive process. The biggest change is that if you have surplus income of more than $200 per month, a first bankruptcy will last 21 months, as compared to 9 months under the old rules.

For example, the income threshold set by the government for a single person in Canada in 2009 is $1,870 per month in net income. If that person has net income of $2,270 per month they have surplus income of $400 per month, and they are required to pay half of that, $200 per month, to their trustee to be distributed to their creditors. Not only are they paying a “penalty” of $200 per month, but their bankruptcy will also be extended automatically to 21 months, and they will be required to pay that $200 surplus income payment each month, unless their circumstances change.

Even worse, if you are a second time bankrupt, your bankruptcy will automatically last for 24 months, or 36 months if you have surplus income.

Again, under the pre-September 18, 2009 rules a bankrupt with over $200 in surplus income per month might still have been discharged in 9 months. Under the new rules they are automatically bankrupt for 21 months, and they are paying that payment for the entire duration of the bankruptcy.

The other catch is that when you go bankrupt you don’t know how much you will be required to pay, since the payment amount is based on your monthly income. Each month you are required to submit to the trustee your paystubs, and the trustee will then calculate how much you owe. If you receive a raise, or work overtime, or get a bonus, you pay more. Of course if your income drops, you pay less.

So, what can you do if you are in financial trouble, and don’t want to go bankrupt? You can file a consumer proposal. Working with a trustee you can negotiate a settlement with your creditors to repay a portion of your debts, and therefore avoid personal bankruptcy.

For example, if due to your income you would be required to pay $600 per month for 21 months, or $12,600, it may be possible to negotiate a consumer proposal where you pay $250 per month for 5 years, or $15,000.

So why would you offer to pay $15,000 in a consumer proposal when a bankruptcy may only cost you $12,600? Three reasons:

First, a consumer proposal is not bankruptcy, and most people want to do what they can to avoid bankruptcy.

Second, while $15,000 is larger than $12,600 in my example, the monthly payment of $250 is much more manageable than the $600 monthly payment in a bankruptcy. While the proposal lasts longer, it’s a more manageable monthly payment.

Finally, once the proposal is accepted by the creditors, the payment is fixed. In a bankruptcy if your income goes up, your payment goes up. In a proposal if your income increases, your payments don’t change. You have the certainty of knowing exactly what you are required to pay each month. You have peace of mind.

That’s why I believe that the new bankruptcy rules, that make bankruptcy longer and more costly for higher income earners, will encourage a greater number of Canadians to file a consume proposal.

To find out more, consult a Canadian bankruptcy trustee to arrange a no charge initial consultation, and to determine whether a consumer proposal or a bankruptcy is the correct solution for you and your family.

Posted on Sunday, September 6th, 2009

Filed under: Bankruptcy Alternatives andbankruptcy Canada andbankruptcy reform andConsumer Proposal andDebt Options

posted by Doug Hoyes @ 4:21 am No Comments

A Dirty Little Secret about the Government and Bankruptcy in Canada

by Doug Hoyes

The purpose of Trustees Talk is to give you an inside look at the bankruptcy process in Canada, and to provide information you can’t find anywhere else. Today, I’ll let you in on a dirty little secret: the federal government is fast asleep.

In Canada, bankruptcy laws are created by the federal government. Their job is to make sure bankruptcy laws are fair to all parties (both debtors and creditors). As the economy grows and changes, it’s important that laws are modified to keep up with the changes.

Here’s an example: You can only file a consumer proposal if your total debts, not including the mortgage on your principal residence, are less than $75,000. When this rule was created in 1992, $75,000 was a lot of money, so the limit made sense. Today, thanks to inflation and the expansion of credit over the the last 17 years, it is not unusual to owe more than $75,000 on credit cards, bank loans, car loans, and other debts. Unfortunately, if you do, you can’t file a consumer proposal if you have more debt than you can handle. If you are insolvent your only options are either personal bankruptcy, or a proposal filed under Division 1 of the Bankruptcy & Insolvency Act, which is a costly and cumbersome procedure.

The logical solution, of course, is for the government to increase the limit on debt allowed in a consumer proposal, so that more people can avoid bankruptcy and file proposals. The government agreed, and passed new laws to increase the debt limit on consumer proposals to $250,000. This new rule was contained in two new bills: Bill C-55 that was given Royal Assent on November 25, 2005, and Bill C-12, that contains other changes, which was passed and received Royal Assent on December 14, 2007.

Great news, right? Not quite, and here’s the dirty little secret: Although these laws were passed and given Royal Assent, they have not yet been proclaimed into force!

You read that correctly: on two separate occasions Parliament passed new laws to help the average Canadian, but they have not set a date for the new rules to be implemented.

What are they waiting for?

I have no idea.

My theory is that with a minority government in Ottawa, the Prime Minister doesn’t want to announce any new laws with the word “bankruptcy” in them, even if the new laws actually help Canadians avoid bankruptcy. The Prime Minister wants everyone to believe that the economy is improving, and everything is getting better, and therefore we don’t need to worry about bankruptcy. Unfortunately that is a very naive view of the world. It’s silly to do nothing and assume everything will get better; a smarter strategy would be to help people now.

I’m just one person, so I have no power to influence the government. I’m not a highly paid lobbyist with some big corporation, I’m just a trustee with a bankruptcy firm in Ontario. But that won’t stop me from trying to get the government to listen. Back in February 2008 my business partner, Ted Michalos and I traveled to Ottawa to to testify before the Senate Banking Committee about the importance of consumer proposals. (You can watch our testimony by clicking on the video, or you can go to our Senate Video page to see our entire testimony).

If you want to read it, you can read the transcript of our appearance on the Senate of Canada web site. In my introductory remarks I specifically mentioned our support for the increased debt limit on consumer proposals, as that increase in the debt limit will allow even more people to take advantage of this bankruptcy alternative.

In addition to testifying before the Senate last year, in May, 2009 I sent e-mails to both Prime Minister Stephen Harper, and Industry Minister Tony Clement, asking that they bring the new consumer proposal rule into force. The Prime Minister’s office responded by saying that the statements I made “have been carefully reviewed.” A few weeks later the Industry Minister’s office responded in a letter saying “The government is committed to bringing the consumer proposal amendments … into force at the earliest possible opportunity.”

The new consumer proposal rule was first passed in November, 2005. It is now the summer of 2009, almost four years later, and we are still waiting for implementation. Does that really sound like the “earliest possible opportunity?”

I will keep sending letters, and I will travel again to Ottawa to speak before anyone who will listen if asked, because I believe this rule should be changed. There is nothing in this for me. As a trustee I actually charge a higher fee in a a complicated Division 1 proposal than I can charge in a simplified consumer proposal. But that’s exactly the reason this limit should be changed. I will charge less, so the creditors will receive more money, so they will be happy. And Canadians in financial difficulty are more likely to be able to negotiate a settlement through a consumer proposal, than a more complicated Division 1 proposal.

Creditors win. Debtors win. Taxes don’t increase. There is no cost to the government, or anyone else. That’s a win win, so I will continue to advocate that the federal government do their job and implement rules to help Canadians in financial difficulty. And if the rules do change, I’ll post something here on the Bankruptcy Canada web site, and on Twitter, so subscribe or check back often for the latest news and information.

Posted on Monday, June 22nd, 2009

Filed under: bankruptcy Canada andbankruptcy reform andConsumer Proposal

posted by Doug Hoyes @ 7:36 am No Comments

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