This week the Office of the Superintendent of Bankruptcy released statistics stating that an increasing number of senior citizens are filing for bankruptcy in Canada. Here’s a quote from the report:
From 1989 to 2009, the proportion of insolvent consumers between 18 and 34 years of age has fallen steadily (from 12.9 percent to 4.4 percent among those 18 to 24 years of age and 43.0 percent to 22.3 percent among those 25 to 34 years of age). Over the same period, the proportion of insolvent consumers among older age groups has increased (from 11.3 percent to 24.7 percent among those 45 to 54 years of age and among those 55 years of age and above the proportion has more than quadrupled from 4.6 percent to 20.6 percent).
First, as every resident of Canada is aware, we are in a recession. A recession hurts everyone. It’s possible that in the current economic downturn more seniors have lost their jobs, or had their incomes reduced, leading to serious financial problems. Often when a company needs to cut back, they cut their highest paid workers, which often are their older workers.
Second, a growing number of Canadians in their 40′s, 50′s and 60′s are carrying mortgages and other debts into retirement. Twenty or thirty years ago Canadians typically retired with little or no debt; they paid off their mortgage before they retired. That was possible because by the age of 65 most Canadians were able to pay off their debts.
However, today, it’s not uncommon to be laid off while you are still in your 40′s or 50′s, and if you are unable to find a similarly well paying job, you may be forced into early retirement before you are able to pay off your debts. That’s why it’s increasingly important to keep your debts as low as possible, in the event your job situation unexpectedly changes.
Third, many seniors assumed that their house or other real estate would be their “retirement fund.” They assumed that when their children were grown and they themselves retired they would sell their house and move to a smaller house, pocketing the difference. Unfortunately with the weak real estate market over the last two years house prices in many areas of Canada have declined, so seniors cannot sell their house for as much as they had hoped.
Finally, I meet with a significant number of seniors who were good money managers, and had little or no debt for most of their lives, but then they go into debt to help their adult children. If you are 60 years old with no debt and a paid off house, and your 30 year old son or daughter loses their job, and they have a young family to support, what do you do? Many parents help their children, and often they help them by re-mortgaging their house, or getting a line of credit. If your child is not able to pay you back, the senior, on a reduced income, is left with more debt than they can handle.
Does this mean you shouldn’t help your children or other friends and family when they have financial problems? No, if you want to help, you should, but it’s important to help with cash, and not to incur excessive debt to help others.
What’s the solution?
First, we should all strive to have little or no debt. You may not have a lot of savings when you retire, but if you retire with no debt you will probably be able to survive with your company and government pensions.
Second, seniors should be careful to only help others within their means; don’t risk bankruptcy for yourself by borrowing excessively to help others.
If you have more debt than you can handle, check out our free, interactive debt options calculator that calculates your different debt management options. It may be possible to work through your debts on your own, or perhaps file a consumer proposal to avoid bankruptcy, but professional advice is wise to fully explore your options.
What’s the fastest way to accumulate so much debt that you have no option but to file bankruptcy in Canada? As a bankruptcy trustee I have handled thousands of personal bankruptcy filings over the last two decades, and the answer to that question, based on my experience, is easy:
Douglas Hoyes, Bankruptcy Trustee
Credit cards.
If you want to get into serious financial trouble, excessive credit card debt is a sure fire way to invite financial disaster.
Two years ago my firm did a study of “Joe Debtor”, the average person who declares bankruptcy in Canada. Our study showed that 93% of Canadians that file personal bankruptcy or a consumer proposal have credit card debt, and the average they owed on their credit cards at the time of filing was just under $20,000. (With other debts, like taxes and lines of credit, the total unsecured debt was just over $50,000).
The facts are clear: it’s unlikely that someone with no credit card debt will have a need to file bankruptcy. The more credit card debt you have, the more likely it is that bankruptcy may be in your future. Why is that?
First, in the past, credit cards were easy to get. We all remember the “boom times” up to 2008, when many of us received numerous credit card offers in the mail each week. We were all “pre-approved” for a $10,000 gold, or platinum, credit card with a “low introductory” rate. Remember? You said “great, I can transfer my balance from my high interest rate card to the low rate card, and save money!” And you did.
But then your car broke down and you needed money for repairs, or you were off sick from work, or some other problem occurred and you needed money. You had unused credit on the credit card you just paid off, so you used it. But now, of course, you have a problem: instead of just owing money on one credit card, you are now carrying a balance on two cards. That puts you in a cash flow squeeze every month.
Then you realized that the “low introductory rate” was only temporary, and after six months your interest rate went way up, so now you are paying even more each month.
High interest rates are a problem, but for most people who declare bankruptcy their financial problems became critical when something happened in their lives: job loss, a marriage break up, or perhaps a health issue that caused them to miss work and led to reduced income.
It’s now 2010, and ever since the “credit crisis” of 2008 the flow of credit card offers in our mailboxes has slowed to a trickle, or disappeared entirely. The days of easy access to credit are over, at least for now.
Even more challenging for Canadians with credit card debts is the reality that credit card issuers are tightening up their credit requirements. Based on the stories I have heard over the last few weeks from the dozens of people in debt I meet with each week, it appears that the credit card issuers are in the process of “culling” their credit card portfolios. They are identifying higher risk clients, and raising their interest rates to encourage them to go elsewhere. Here’s a typical story from a lady I met with this week, with her name changed to protect her privacy:
Jane is single, and has carried a large balance on her ABC Credit Card for many years. Over the years ABC has gradually increased her credit limit, and for many years they offered her what she believed was an attractive interest rate of 9.9%. Her minimum payment was about $430 per month, which was manageable based on her income. Last week she got her monthly statement, and the minimum required payment was increased to $750 per month.
She assumed that it was a mistake, so she called ABC Credit Card Company, and they advised her that no, it was not a mistake. Due to changes by the “regulatory board” her interest rate was now much higher, resulting in a higher minimum monthly payment.
When I met with her I explained that I had never heard of the “regulatory board” (although I am familiar with the new credit card regulations), but it’s easy to see what the credit card company is doing. The balance owing on her credit card was over $20,000; it is by far her largest debt. On her current income it is unlikely that she will ever be able to repay the debt. The credit card company realizes this, so they are attempting to get rid of her as a client before she defaults on the amount owing. Their hope is that her credit is still good enough to allow her to borrow from someone else, and repay them.
Unfortunately for Jane, she has no assets to pledge as collateral for a loan, and she has no family members that are able to co-sign for a loan. Based on a review of her situation, she decided that her best option is to file a consumer proposal, where she will offer her creditors approximately a third of the full amount owing, to be paid over the next four years (the amount offered varies based on your income and financial situation). With a consumer proposal Jane will no longer have any credit cards, and her credit score is damaged, but she will have a manageable monthly payment, and in four years (or less) she will be out of debt. For Jane, it’s the correct solution.
Is it the correct solution for the credit card company? It could be argued that they would be better off had they not raised her interest rate; she would have continued to muddle along, and they make have collected more money over the next few years. However, they decided that they wanted to reduce their risk, so Jane responded by filing a consumer proposal.
If you want to be proactive and deal with your credit card debt before your credit card company raises your rates, check out our free, interactive debt options calculator that tells you what it will cost to deal with your debts. The sooner you take action, the sooner you will be free of high credit card interest rates.
On this Trustees Talk site we attempt to comment on items in the news, and items of interest to Canadians. As we have discussed previously, in June 2010, the Office of the Superintendent of Bankruptcy (OSB) initiated a Review of the Trustee Licensing Regulatory Framework . One of the items up for discussion was whether or not credit counsellors should be permitted to act as consumer proposal administrators.
On June 28 we published the thoughts of a trustee from Edmonton, Barton Goth, who asked the question: Consumer Proposals: A need for more administrators or a slippery slope? He concluded that the expertise of a licensed trustee is very valuable to anyone in financial trouble. While credit counsellors offer debt management plans, a consumer proposal is a legally binding, court approved procedure, so a higher standard of care is required.
We have reported on Debt Management Plans, and we encourage everyone to “run the numbers” to determine if you are using the proper solution to deal with your debt problems.
CACCS mistakenly refers to the trustee community operating as a monopoly; with 1,017 practicing trustees in Canada competing for work, nothing could be further from the truth. In essence the position of CACCS is analogous to a position that dentists have a monopoly over fixing teeth and surgeons have a monopoly over performing surgery, again these are not monopolies, but regulated (or self-regulated) professions, with a goal to have the most qualified professional provide the service to achieve the most desirable and predictable result. The dentist, surgeon and trustee all fit into this category;
CACCS mistakenly believes there is an access constraint within the consumer debtor market that fundamentally must be addressed by adding capacity. The issue, however, is not capacity, but quality; currently only trustees embody the depth of knowledge, breadth of experience and professional standards to meet the needs of consumer debtors within a Court-supervised restructuring process. As for capacity, we are dumbfounded by this CACCS assertion given that the economy has just experienced the worst economic downturn since the Depression and yet no consumer debtor went without access to a trustee to meet their needs through the provision of quality services;
CACCS asserts that its members are uniquely qualified to service the consumer debtor market. The very principle of a profession is that the individuals within it maintain a distinct expertise that allows them to perform a service to benefit an individual or entity—a service that is superior to that offered by all other providers. In the case of consumer debtors, it is trustees who have proven their ability based on depth of knowledge, breadth of experience, adherence to strict standards and oversight and ability to deliver a complete suite of services that differentiates them as the market leader in servicing the needs of financially distressed Canadians;
CACCS asserts that Debt Management Plans (DMP) and consumer proposals have many of the same characteristics. The truth is that DMP and consumer proposals are more dissimilar than similar. DMP are not Court-supervised restructuring proceedings; they do not require an administrator to balance the competing interests of the stakeholders; they do not require the administrator to opine on the reasonability of the Plan; they do not require an assessment of realization under alternative proceedings; they do not require consideration of all aspects of the Bankruptcy and Insolvency Act, provincial legislation, jurisprudence and, most importantly, professional judgment; and they are not subject to regulatory oversight by the OSB and supervision of the Court; nor are the administrators subject to the strict standards of professional practice, code of conduct and by-laws of CAIRP. Are they the same – not really!
CACCS believes that the consumer debtor is a client for the purpose of a consumer proposal, in which CACCS articulates a role for negotiation with creditors based on a client’s ability to repay their debt, according to their situation and the best of their ability. Unfortunately, CACCS fundamentally misunderstands the role of an Officer of the Court, a trustee, and the conceptual requirements of the BIA, that while preserving the principles of rehabilitation and a fresh start for the consumer debtor, must also respect the responsibility of the consumer debtor to his or her creditors. The role of the trustee is complex, as it requires a balancing of the competing interests to achieve equity through the facilitation of an arrangement between a consumer debtor and his or her creditors, having regard to the personal circumstances of the consumer debtor. Is the fundamental mindshift easy? No. Is it a requirement? Absolutely.
CACCS asserts that, by granting credit counsellors status as administrators of consumer proposals, the current referral system between credit counsellors and trustees will be unnecessary in the future. CACCS asserts that such a referral stream is “problematic and very inefficient while presenting a major disservice to the Client. Specifically, once the Client’s trust has been gained and the clinical relationship has formed”. CAIRP asserts that the referral system remains a necessary and important aspect of the insolvency process, irrespective of the status of creditor counsellors to provide consumer proposal services. The assertion lacks situational recognition that consumer proposals are not the answer for all financially distressed individuals; it fails to recognize that the seeds of success are not embedded within every consumer proposal filed; it fails to recognize that client referrals from trustees to credit counsellors should be equally common based on an assessment of an individual’s personal circumstances; it fails to recognize that specialized counselling may be required to meet a consumer debtor’s needs, counselling beyond the ability of a trustee or a credit counsellor. CAIRP is concerned, based on the assertion of CACCS, that its members will see the consumer proposal legislation as the sole alternative to a DMP. Is the real risk referrals? No, it is practitioner perception; and
CACCS presents survey results that are at best self-serving, at worst libelous. The survey makes bold statements pertaining to trustees failing to meet their statutory duties in performing adequate assessments (in accordance with Directive 6R3). The survey presents a tainted picture, but lacks transparency and substantive and objective correlation between the methodology and results; it lacks any source reference or verifiable basis on which to conclude whether any comments are substantively supportable. It is the position of CAIRP that the entirety of the survey results is inappropriate for a public consultation by the OSB as to the Licensing framework. CAIRP will in the coming weeks hold CACCS to account.
Wow. Sounds like a war of words between CAIRP (the trustees) and CACCS (the credit counsellors).
I have already provided my thoughts on this issue, so I will not belabor the point further here, other than to say this: if you are experiencing financial trouble, who do you want to assist you? If you want a credit counsellor working for a not for profit credit counselling agency, then see a credit counsellor. If you want a consumer proposal administrator or a bankruptcy trustee, go see them. You have the choice.
I work with many excellent credit counsellors, and I regularly refer people to credit counsellors when I believe they are best able to provide a solution. In many cases a credit counsellor can provide a solution; in other cases a bankruptcy trustee’s services are required. I pride myself on always looking out for the best interests of the people who seek my help. If all advisors (trustees, credit counsellors, lawyers, accountants) focus on providing advice that is in the best interests of the person in debt, everyone will get the professional assistance they deserve.
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.
An interesting debate has emerged in the pages of the Financial Post over the last two weeks regarding the need for senior citizens to file bankruptcy in Canada. The debate started with an article by Jonathan Chevreau published on August 11, 2010 titled No Immunity to Bankruptcy. That day Mr. Chevreau also published a blog post titled Freedom 60? 33,516 Canadians 60 or older filed for bankruptcy from 2008 to 2010. I was interviewed for both the newspaper column and the blog post; here’s a quote from the newspaper:
In the two and a half years between January 2008 and May 2010, 33,516 Canadians age 60 or over filed for bankruptcy, according to Industry Canada.
That quote is accurate. In fact, after holding steady in the 7% range between 2006 and 2009, in the first seven months of 2010 the percentage of people aged 60 or over who have filed a consumer proposal or a personal bankruptcy has increased to 9%. That statistic clearly indicates that more seniors are experiencing financial difficulty, and are making the decision to formally deal with their debt.
Of course, the problem with carrying debt into retirement is that it must be serviced with less income than when working full-time. Some adapt by making only the minimum monthly payments on credit cards, which leads to a downward debt spiral, a journey that often ends with a trip to offices like Hoyes.
In the past, most seniors were able to retire with no debt. The fortunate ones owned their own house with no mortgage, so when they retired they were able to live comfortably from their savings and pensions. Unfortunately today an increasing number of seniors are retiring with debt, so when their income drops at retirement it often becomes impossible to both service debt and pay normal day to day living expenses. I’ve met with a number of seniors who retired in good financial shape, but as the recession worsened they ended up helping their grown children deal with their money problems, and that often depletes their retirement nest egg, and can even lead to new debt.
But there’s more to the story than that; here’s another excerpt from the Financial Post article:
Hoyes guesses half the seniors he sees choose bankruptcy, although he lays out four less extreme options. He points out that most retirees don’t need to file for bankruptcy because the main reason for considering it is to ward off creditors that threaten to garnishee wages or seize assets. Retirees have no full-time wages, so don’t have significant wages that can be seized. Also, “it is very difficult, if not impossible, for a creditor to garnishee a pension,” Mr. Hoyes says.
This is where it gets interesting. On the day the article was published, Mr. Chevreau was contacted by a reader who said that he was 70 years old, and he owed a significant amount of back taxes, and CRA was taking all of his Canada Pension Plan income each month. As any good journalist would do, Mr. Chevreau contacted me to ask for my side of the story, since Revenue Canada’s actions to seize pension plans would appear to contradict my statement that “it’s very difficult for a creditor to garnishee a pension.”
My response to Mr. Chevreau was that yes, it is very difficult for a typical creditor, like a bank or credit card company, to garnishee a pension. However, Canada Revenue Agency is not a “typical” creditor. CRA has more power than your typical credit card company or other creditor.
On August 18 Mr. Chevreau reported on this continuing story in an article in the Financial Post titled Government gives with one hand, garnishees with other, where he tells the story of “Sam” (not his real name), the 70 year old who is not getting any CPP or OAS benefits because CRA is taking all of it, and applying it against his tax debt. Here’s an excerpt from the story:
Generally, if you owe money on credit cards or other unsecured debt, there’s no mechanism for creditors to garnishee a pension, says Doug Hoyes, a principal with Toronto based bankruptcy trustee Hoyes Michalos & Associates Inc.
According to Hoyes, the Ontario Wages Act only permits creditors to garnishee up to 20% of a person’s wages or 50% for child support. However, he says, “standard garnishment rules don’t apply to the CRA. They can do whatever they want.”
Hoyes regards the legal definition of garnisheeing wages as a court order to take some of your paycheque. But the rules are different when the government is itself the creditor. “It doesn’t go to court. They can just decide to take CPP and OAS until they get what they want.”
He has seen cases similar to Sam’s in the past, but they were “rare circumstances, generally where the tax debt was large and often where the taxpayer was delinquent in filing tax returns on time.”
CRA spokeswoman Caitlin Workman confirms the tax agency can garnishee “all types of pensions,” both government and private. This is permitted under Section 224.1 of the Income Tax Act, with similar provisions in five other acts. However, she says it’s rare to garnishee more than 20% of such benefits. “It’s very much a last resort after the taxpayer’s ability to pay has been determined.”
So there you have it. If you owe taxes to CRA, and if you get Canada Pension Plan or Old Age Security payments, Canada Revenue Agency can withhold some or all of your monthly pension payments in satisfaction of your tax debt.
As I said in the article, while I have seen cases like Sam’s, it is generally very rare that CRA would take all of someone’s pension. They will typically only take everything if you owe a significant amount in taxes, and if you were delinquent in filing your taxes on time. As the CRA spokeswoman stated, it is rare that they will garnishee more than 20% of pension benefits, but it is possible.
What Can You Do if CRA is Taking Your CPP Pension For Taxes Owing?
If you owe back taxes and CRA is taking your pension, you have a number of options.
First, you can contact CRA and work out a re-payment plan. If you have other assets that you can sell to raise cash, you may be able to pay your taxes with that money, at which point CRA will stop taking your pension. You may also be able to negotiate a monthly payment plan to free up some of your pension.
If you can’t make a plan directly with Canada Revenue Agency, you could try to get a debt consolidation loan; you borrow from a bank, and use the money to repay CRA. If you pay your taxes in full, CRA will release the flag on your pension payments.
If you don’t qualify for a loan, which is often the case once you retire because your income has dropped, your next option is a consumer proposal. In a consumer proposal a settlement is reached with all of your creditors, including CRA. In many cases you may end up paying less than the full amount owing. If your largest debt is taxes, CRA must agree to your proposal, so a consumer proposal is not always an option where tax debts are involved.
If a consumer proposal isn’t possible, your final option for dealing with tax debt is personal bankruptcy. Upon your discharge from bankruptcy in Canada your tax debts are discharged.
Owing money to the tax man isn’t fun at any age, but it can be even more stressful if you are a senior citizen on a pension, so if you have tax debts, contact a licensed bankruptcy trustee for a no charge initial consultation to review your options.
Finally, my thanks to Mr. Chevreau and the Finanicial Post for bringing this issue, and possible solutions, to the attention of senior Canadians.
I have written quite a few pieces were I am critical of the “debt consulting” industry and persons presenting themselves as credit counsellors when they have little or no formal education or credentials. It’s not that I begrudge any of these people a livelihood – I just wish they’d pick a career that doesn’t involve gouging an already desperate portion of the population.
Ted Michalos, Bankruptcy Trustee
If you are unfamiliar with the term debt settlement it generally means some sort of negotiated deal to repay a portion of your debt. The service is real – most creditors will accept a partial repayment, particularly in a lump sum, once your debt has gone into collections. The trick here is one of timing. The debt settlement companies charge an upfront fee plus a percentage of the settled debt. They pay themselves first before they actually settle with your creditors and they can’t settle with your creditors until they have “saved up” enough of your payments to offer a deal.
That’s a bit confusing, so an example might help. Let’s say you owe $50,000 on your credit cards. The debt settlement company tells you they can settle with your creditors for $25,000. The upfront fee is $2,000 and they’ll charge another 20% of the settled amount – $5,000. Let’s say you agree to $1,000 a month. So the first 7 months will go to pay them and then your payments will go into a savings account until they accumulate enough to offer one of your creditors the 50% deal. During this time you have no legal protection and in many cases the creditors simply proceed to collections and then take legal action against you. To stop the legal action you end up filing a consumer proposal or perhaps bankruptcy (of course you won’t get any of the money back from the debt settlement company).
An alternative might be a consumer proposal whereby you offer the same settlement (50%), but it would play out quite differently. A consumer proposal can be spread over five years which would give you a much lower payment. Just to keep the comparison similar though, we’ll say you can pay the $1,000 per month. Your proposal will run for 25 months (the debt settlement plan would run for 32 assuming the creditors don’t cut it short). By law, the fees for the trustee are taken directly from the settlement; they are not added on top. In addition, after the preparation fee has been paid, $1,500, a trustee only receives payment when the creditors are paid – not in advance. Further, all of the creditors receive payments at the same time – you don’t settle with one, then save up and settle with the next. Most importantly, if you file a proposal you have legal protection from wage garnishees, collection agents and other legal actions.
If you’ve responded to a debt settlement ad and/or are actively considering this solution for your financial difficulties please make certain you understand the process that the company you will be dealing with is going to follow. As long as you understand the risks and the pitfalls of a debt settlement plan then you can add itn to the list of options to deal with your debts. Most people don’t take the time to “read the fine print” and as such go into these plans with high expectations only to have their creditors continue to pursue them, including collection actions and wage garnishees.
Be careful and consider all of your options before you sign.
In addition to our usual commentary on bankruptcy in Canada, we occasionally review books that may be of interest to our readers. You can see all book reviews in our book review section.
Gail Vaz-Oxlade's Debt Free Forever: Take Control Of Your Money And Your Life
I must confess that I am biased, because I have appeared twice on Till Debt Do Us Part as an “expert”. My first appearance was back on Episode #36, that first aired in 2007, called Single Mom Shake Up. My job was to explain the bankruptcy option to Tammy, the person featured on that episode. She was able to cut her expenses, and with the support of her family she avoided bankruptcy.
I also appeared in Season 8, on episode number 103; you can watch the entire episode on the Till Debt Do Us Part section of the Slice web site. (Warning: This is a very emotional episode; I had to give some difficult advice, as did Ms. Vaz-Oxlade; sometimes our advice is not taken, and that’s a difficult reality when you are a professional advisor).
As anyone who was watched Till Debt Do Us Part will know, Gail Vaz-Oxlade has a very “no nonsense” approach to money problems. She strongly believes that ultimately you are responsible for your behavior, so only you can change your behavior to eliminate money problems. I like that approach.
That no-nonsense approach is easy to see in Debt Free Forever: Take Control Of Your Money And Your Life as Gail Vaz-Oxlade starts at the same place I start in every meeting I have with someone in financial trouble: Figure Out Where You Stand. She gives practical tips on how to analyze your spending, and, most importantly, how to face up to your debt.
In my experience facing up to your debt is the hardest step to take in your journey to financial freedom. It’s hard to make a list of all of the money you owe, but it’s absolutely essential if you want to go on the next step, which is Part Two of the book: Make a Plan.
Doug Hoyes, Bankruptcy Trustee, Appearing on 'Til Debt Do Us Part
Her advice is always practical; you don’t need a math degree to follow her advice. She keeps it simple, using her trademark “jar” method of saving, where you put cash in your food jar, gas money jar, and so on to keep budgeting simple.
Speaking of budgeting, that’s Chapter 4, Create a Budget That Balances. Again, Gail gives practical advice on how to create a household budget, and how to cut expenses to make your budget balance. She illustrates the concept with what she calls the “Life Pie”, where money is allocated to life’s expenses, and you have to learn to divide the pie up to keep your spending in check.
While Debt Free Forever: Take Control Of Your Money And Your Life focuses on budgeting, spending control, and setting goals, Chapter 11 does deal with subject matter near and dear to my heart: Cope When the Caca Hits the Fan. She starts the chapter off by telling it like it is:
One of life’s hard truths is that it doesn’t matter how carefully you plan, how hard you work, or how diligent you are in taking care of the details, crap happens!….It’s nice to think that life is predictable, but it’s not ………Having made a budget, made a debt repayment plan, made up your mind to live your life consciously and take care of your money, you may dream that it’ll be smooth sailing from here on in, but it is only a dream. Sometimes life sucks.
Yes, I couldn’t agree more. Every day I meet with Canadians who were doing well, but then they got sick, lost their job, got divorced, or had some other tragedy derail their dream of financial independence. Sometimes, stuff happens. Fortunately, Gail Vaz-Oxlade carries her “no-nonsense” approach to the discussion of bankruptcy in Canada as well. Here’s what she has to say:
Bankruptcy isn’t the worst thing in the world. Living in the hell you’ve created is….
For many people, the decision to go bankrupt isn’t an easy one to make. It’s a thorny path. But if that’s what it’ll take to get you out of hell, then do it.
Wow. No-one will ever accuse Ms. Vaz-Oxlade of “sugar coating” her opinions. She’s right: in my experience it takes the average person six months of soul-searching before deciding to file bankruptcy. Bankruptcy is a last resort for dealing with your debts, but sometimes it is necessary.
If you are looking for a book that contains practical, easy to understand advice, Debt Free Forever: Take Control Of Your Money And Your Life is just what you are looking for. The advice is easy to understand, but it’s not easy to implement. Making change is hard, and it takes sacrifice, but if you are up the challenge, this book can help.
The consumer proposal is probably the least known of the processes to deal with overwhelming debt, but it is the mechanism that has the greatest capacity for good given our current economic environment. Let’s face it, right now the number one biggest risk to the Canadian economy isn’t the high dollar, it isn’t our level of productivity, it isn’t the strength of our largest trading partner – it is the state of our personal finances.
Barton Goth, Bankruptcy Trustee
After that bold statement I must insert my disclosure. My name is Barton Goth, I am a licensed Trustee in Bankruptcy and Consumer Proposal Administrator here in Edmonton. So I definitely have a bias. However, this statement is not made based solely on observations made in my daily practice, but based on the current state of our overall economy. Let us review:
• During the 2000s, the average Canadian’s asset growth was less than half the pace of the 1990’s and the growth in debt was twice as rapid (Roger Suave, The Current State of Family Finances 2009)
• In recent years household debt has surged three time faster than income and now stands at a record high of more than $1-trillion (Canada’s Brewing Debt Storm, The Globe and Mail Apr. 16, 2010, by Paul Waldie and Steve Ladurantaye)
• The average Canadian owes about $1.47 for every dollar of disposable income (Certified General Accountants Association of Canada, CIBC Economics, National Bank economics and Statistics Canada)
• For many years, debt was rising about 2.5 percentage points faster per year than income, this gap had widened to 4 to 5 percentage points by 2005 and rising by approximately 9 per cent in 2008. (Defusing Canada’s debt bomb, Globe and Mail Apr. 17, 2010, by Don Drummond, Chief economist, TD Bank Financial Group)
As a result of these alarming trends I think the traditional focus of our finances is going to have to move away from the saving and investment side of things, and toward dealing with the debt that more and more people are becoming burdened by. This is why a consumer proposal currently is one of the most important financial tools available to Canadian families. It is a tool that gives Canadians the ability to regain control of their finances before they are forced to consider a bankruptcy. As a result, I predict that we will continue to see a major increase in the number of proposals filed as people begin to realize the gravity of their financial position and begin to investigate what can been done to resolve these difficulties.
For those of you unfamiliar with consumer proposals, you are not alone. The idea of a consumer proposal is relatively new (first introduced into the Canadian insolvency legislation in 1992), but has provided a way for many Canadians over the years with a middle of the road option that contains many of the advantages associated with a bankruptcy, while avoiding some of the more significant disadvantages. A consumer proposal is especially advantageous for those people who cannot afford to pay their debts in full but have enough money coming in each month that realistically they should not be forced into the filing of a bankruptcy, a reality that an increasing number of Canadians are faced with each day.
The consumer proposal is one of the options available through the Bankruptcy and Insolvency Act that provides a court sanctioned way to negotiate a settlement with your unsecured creditors (i.e. credit cards, personal loans, taxes etc.). There are many advantages to filing a consumer proposal. For instance, in a proposal you do not automatically lose any of your assets as you would in a bankruptcy. You are able to have a reduced impact on your credit over the long term than filing bankruptcy, and most importantly, you are able to bring the payments on your existing debt to a manageable level that will fit in your budget. At the same time, because the consumer proposal is a court sanctioned settlement, you only need a majority of your creditors to cooperate with the proposal and you benefit from court protection which mandates that all your unsecured creditors must participate in the proposal and can no longer collect on or charge any interest on these debts.
At a time when the average family is faced with waning savings, growing debt, aggressive lending practices and an uncertain economy, the consumer proposal may prove to be one of the most needed of all financial tools, and one that will assist many families in an effort to regain control of their finances and truly put their house in order.
If your one of the many Canadians who are currently struggling with your finances I have one word of advice, act now and schedule a time to review your finances with a consumer proposal administrator . If you are proactive, rather than reactive, you will be able to catch things early. The earlier you recognize the difficulties you face and the earlier you act, the more likely you will be able to qualify to file a consumer proposals and the quicker you will be able to regain control of your finances.
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.
The Office of Superintendent of Bankruptcy is a special operating agency associated with Industry Canada, part of the federal government. The “OSB” regulates bankruptcy trustees (the people who administer bankruptcies and proposals, and ensure they comply with all aspects of the Bankruptcy and Insolvency Act). As the regulator, the OSB will often seek the input of various stakeholders to determine if changes to their regulations of trustees are required, and they have just announced a “Trustee Licensing Consultation” to review various aspects of insolvency regulation in Canada.
One of the items being considered is whether or not to allow non-trustees to serve as administrators of consumer proposals. As our regular readers will be aware, a consumer proposal is a legally binding settlement negotiated between a debtor and their creditors, with the assistance of a consumer proposal administrator. With the exception of the province of Nova Scotia, where provincial representatives may administer consumer proposals, all consumer proposal administrators in Canada are licensed bankruptcy trustees.
The issue being considered is this: should the OSB allow non-trustees to serve as administrators of consumer proposals?
Ms. Ross presented the argument that accredited credit counsellors (in addition to licensed trustees) should also be permitted to administer consumer proposals. She gave three main reasons:
To eliminate the “monopolistic approach that limits access to the consumer proposal”, since only licensed trustees can act as administrators;
To “provide Canadians with equality of access”; and
To increase OACCS member agencies revenue to allow them to provide their other services.
What’s my opinion?
First, let me start by stating my bias: I am a licensed bankruptcy trustee, and my firm files many thousands of bankruptcies and consumer proposals each year, so obviously I have a vested interest in maintaining the status quo; it’s what I do for a living.
Second, let me also say that I have personally met Ms. Ross on a number of occasions, and I have a great deal of respect and admiration for her, and for her organization. On a daily basis I interact with many credit counsellors who work at OACCS member agencies. I refer debtors to credit counsellors when I believe a credit counsellor can best solve their problems, and I refer debtors to OACCS member agencies for the counselling required when they file a bankruptcy or a consumer proposal.
In my twenty plus years in the insolvency business, I can honestly state that the accredited, not for profit credit counsellors I have worked with have all worked very hard in the best interests of their clients, and I would never question their competence or integrity.
I agree that these are difficult times to be a not for profit credit counsellor. As Ms. Ross correctly points out, many years ago the government provided funding directly to not for profit credit counselling agencies. When that funding stopped, as Ms. Ross eloquently stated:
Some agencies were forced to close, others narrowed their service operation and the larger agencies continued to operate by finding alternative revenue streams. Revenue came from voluntary fair-share contributions from creditors, educational seminars for employee groups, the sale of educational material and the bankruptcy counselling that we do.
Over the years not for profit credit counsellors began to offer Debt Management Plans, or DMPs, where creditors (like the banks and credit card companies) would agree to make a “fair share” contribution to the work of the counselling agency to fund their efforts. In a DMP the creditors are paid in full, without interest, so a successful DMP is good for the banks, because they get back all of their money, and it’s good for the debtor, since they don’t have to pay interest, and they are given time to pay.
Unfortunately a DMP is generally not as good a solution for most people as is a consumer proposal. Again, to quote Ms. Ross:
The debt management plans, DMPs, available through credit counselling provide consumers with a workable option to repay debt. Most people who undertake DMPs are technically insolvent, or close to it, but are determined to honour their credit obligations and repay their debt. DMPs are negotiated with creditors to provide full debt repayment over an extended time frame. Upon acceptance by the creditors, member agencies manage and administer these DMPs and are authorized to operate trust accounts to facilitate payments to creditors.
Voluntary DMPs do not provide court protection for consumers, nor mandate creditors to stop charging interest on the debt, nor mandate a specified time frame for creditors to respond to debt repayment proposals. They do not mandate that creditors accept a pro-rated share of the debtor’s ability to repay, nor do they address complex entitlement issues that may require a more formal plan.
On the other hand, consumer proposals are a court-supervised option to repay debt. A consumer proposal is an offer made by a debtor to their creditors to modify their payments in an effort to settle the debt. Under a proposal, a debtor may offer to pay a lower amount each month over a longer period of time or to pay a percentage of what they owe. A significant benefit to consumers of a consumer proposal is protection by the courts from unsecured creditors. This is important because it prevents creditors from taking legal steps, such as seizing property or garnishing wages, to recover debts.
I agree with Ms. Ross. A DMP is not binding on the creditors. If you have five creditors, and only three of them accept the DMP, the other two can still attempt to sue you and garnishee your wages. In a consumer proposal, if the majority of the dollar value of creditors agree, all creditors must accept the proposal. It is legally binding.
It is easy to see the problem faced by not for profit credit counsellors. The government withdrew their financial support many years ago, forcing the closure of many agencies. Debtors who need the services of not for profit credit counsellors generally don’t have the money to pay for those services, so it is difficult for agencies to cover their operating costs. DMPs were a great way for not for profit credit counselling agencies to generate revenue to cover their costs (through the “fair share” contributions made by creditors), but as debtors realize that a consumer proposal is often a superior alternative, the percentage of debtors filing a DMP has fallen, resulting in reduced revenue for credit counselling agencies.
Realizing that consumer proposals are the superior alternative, many not for profit credit counselling agencies began working with trustees to offer consumer proposals to their clients. They would meet the debtor, asses their situation, gather the necessary financial information, determine their debt load, and then prepare the files for the trustee. The trustee then only had to “show up” at the credit counsellors office to witness the debtor signing the paperwork. The trustee would pay the credit counsellor for their work, and it was a “win-win” for everyone. The credit counselling agency earned some revenue, and the trustee had access to a steady stream of clients without having to do very much work.
Unfortunately, the OSB has rules against this approach. Federal law requires a licensed trustee to personally assess the debtor before they file a bankruptcy or proposal. Directive No. 6R3 Assessment of an Individual Debtor, requires the trustee to personally meet with the debtor and review their assets, liabilities and income, and to review all of the options available for dealing with their debt problems.
Section 49 of the Bankruptcy and Insolvency Rules states that:
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.
Trustees therefore cannot pay a referral fee to a credit counsellor for assessing a debtor, or helping to prepare the file, as described in more detail in the OSB position paper on Referral Agreements between Trustees and a Third Party.
Unfortunately once the OSB realized what was happening, they had no choice but to enforce the rules and stop these practices, as noted by Ms. Ross:
For some time, the larger of the credit counselling services had prepared files for consumer proposals on behalf of certain trustees. This included statutory counselling, interviewing and assessing the debtor, and confirming the debt load. The Superintendent of Bankruptcy has recently determined that it is incompatible with the trustee’s responsibility to outsource this work. This decision has affected our agency’s revenue to the detriment of its ability to provide broader services as well as BIA proposals.
I both sympathize and empathize with the plight of accredited not for profit credit counselling agencies. They are trying to help people deal with their debts. Who else is there to fight for the little guy (which is the reason Ted Michalos and me, Doug Hoyes, went to Ottawa to testify in the first place, as I noted in my opening remarks):
Mr. Michalos and I and our bankruptcy trustees spend each day meeting with people in financial distress. These are real people who, in many cases, have lost their jobs, gone through a marriage breakup or suffered through an illness; and after these personal tragedies, they are faced with insurmountable debt.
These are not bad people. We believe it is important that when parliamentarians draft bankruptcy legislation, they remember that real people are affected.
About 100,000 Canadians file bankruptcy or a proposal each year.
Unfortunately, that group is not organized and so probably will not have anyone to speak on their behalf before this committee. We hope that our testimony will highlight some of the concerns of the average bankrupt.
Banks want you to borrow money on their high interest rate credit cards. Finance companies want you to get a high interest rate loan. Payday loan companies want you to get a very high interest payday loan. They all spend millions of dollars in advertising each year to encourage you to borrow and consume.
Not for profit credit counsellors fight against this onslaught of debt. They spend many hours each day helping people work out a budget. They provide education programs to help the average Canadian understand the world of debt, and how to avoid it. They are the only voice in the wilderness telling you to spend less, not more.
But they can’t pay the rent in their offices, and pay their staff salaries, and pay for the supplies to help you make a budget if they have no revenue.
And that’s one of the reasons why, as Ms. Ross freely admitted, that not for profit credit counsellors want to be given permission to administer consumer proposals. It would give them a source of revenue so that they can continue their good work. Who could argue with that?
I certainly don’t argue with doing good work. I agree that someone has to tell Canadians to spend within their means, and to stop borrowing to consume.
Unfortunately I can’t agree with the notion that credit counsellors should be permitted to act as consumer proposal administrators as a way to increase their revenue.
My main objection to allowing non-licensed trustees to administer consumer proposals is that it is a government requirement that the trustee, as stated in Directive No. 6R3 Assessment of an Individual Debtor, must advise the debtor of all of their options, and the implications of all of their options. That means that as a trustee I must explain to all debtors the ramifications of doing nothing, do a debt settlement, getting a debt consolidation loan, doing a debt management plan through a not for profit or for profit credit counsellor, and doing a consumer proposal or personal bankruptcy. I can explain the implications of a bankruptcy, because I am a licensed bankruptcy trustee. I fully understand the process, so I can explain it. How can a non-trustee have the same level of knowledge as a trustee?
The Directive requires me to explain: “transfers, preferences and settlements of real or personal property of the debtor.” Is that something all credit counsellors understand? Do all credit counsellors understand the new surplus income rules, and how they are calculated in practice? Do credit counsellors understand the discharge process, and the court process, in a consumer proposal or a bankruptcy?
Credit counsellors would argue that they can learn all of those things, and I agree. The best way to become knowledgeable about the entire process is to become a trustee. Currently the average trustee has a university degree, many years of practical experience, and they have passed a series of very complicated courses that take on average five or more years to complete. It takes a long time to become a trustee. But, if a credit counsellor wants to become a trustee, they can find a sponsor, enroll in the program, and become a trustee, and then they can administer consumer proposals.
I believe this discussion is missing the real issue. As Ms. Ross correctly stated, not for profit credit counselling agencies are suffering from declining revenue, which is why they want to administer consumer proposals. The solution is not to make credit counsellors into consumer proposal administrators; the solution is to find a way to increase their revenue, doing what they do best.
What credit counsellors do best is credit counselling. They are highly skilled in providing advice on budgeting and money management. They are excellent educators. They should concentrate on what they do best. But how do they generate the revenue to cover their costs to provide this un-biased money management education?
The most obvious answer is through the revenue they receive from the credit counselling that they provide to individuals that have filed a bankruptcy or consumer proposal in Canada. Every individual that files bankruptcy or a consumer proposal is required to attend two credit counselling sessions, as described in Directive No. 1R2, Counselling in Insolvency Matters. Many trustees in Canada, including my firm, Hoyes, Michalos & Associates, outsource the majority of our credit counselling sessions to external counsellors. We do this because we want our debtors to get the best possible counselling so that they learn proper money management skills, so that they don’t have any future money problems.
Rule 131 of the Bankruptcy & Insolvency Act Rules prescribes the rate that is to be paid for the two required counselling sessions: $85 for each individual session, or $25 per person if the counselling is provided in a group session. In other words, a trustee may “outsource” the counselling requirement to a licensed credit counsellor, and the trustee may pay the credit counsellor, from the funds in the estate, $85 for each individual credit counselling session.
While $85 may sound like a lot of money, it isn’t. Many counselling sessions can take an hour or more, and that $85 must cover the counsellor’s wages, and all other overheads (like rent, administrative costs to book the appointment, training costs, etc.). Even worse, that $85 amount has remained unchanged for many years. $85 in 1994 is the equivalent of more than $115 in equivalent dollars today.
So the first, and most obvious solution, is to increase the amount that is paid for credit counselling sessions. Increasing the rate to $115 per session would bring the tariff back to where it was in 1994. I would go one step further: I would increase the rate to $125, or even $150 per session. Those increased resources would provide greater revenue to not for profit credit counselling agencies, since trustees would have more resources to pay them.
In addition to increasing the rate, I would increase the number of credit counselling sessions required.
Currently the first session must be done in the first 60 days of the bankruptcy or proposal, with the second session completed before the 210th day. That timing makes sense for a bankruptcy that lasts for nine months, but it may not be sufficient for a bankruptcy that lasts for 21, 24, or 36 months, as they often now do under the new bankruptcy rules. It’s also not sufficient for a consumer proposal that can last for up to five years.
So, my second suggestion is that for all bankruptcies that are automatically extended past nine months, a third counselling session should be added, to occur at some point in the second year. In addition, for all consumer proposals that last for greater than twelve months, a third counselling session should be added.
This new third session could focus on a review of the techniques learned in the first two sessions, and could include a review of the budget the debtor should be keeping during their insolvency process. This extra counselling session could be used to review different methods of saving (like the new Tax Free Savings Account), and could cover more advanced budgeting techniques. Perhaps this new counselling session could include an interactive web based component, allowing debtors to track their budget information on line. There are many tools that already do this, such as Calendar Budget, so it would not be that difficult to develop the content for the new third credit counselling session. Credit Canada, a not for profit credit counselling agency, has created a Financial Coaching Series that costs $120 per session for six sessions, so the expertise and content already exists for this extra counselling session. In fact, I would seek the input of the not for profit credit counsellors, including the OACCS, to help design this third session.
By raising the counselling rate from $85 to $125, and by adding a third session, the revenue generated by each personal bankruptcy or consumer proposal would increase from $170 to up to $375. That increase in revenue would go a long way towards helping not for profit credit counsellors help the people they want to help.
Is this the perfect solution? Probably not. I’m sure with further consultation even better strategies can be developed. But with this approach the real problem of reduced revenue for not for profit credit counsellors can be solved, without creating a new problem of having non trustees administering consumer proposals.
posted by Doug Hoyes @ 
as Gail Vaz-Oxlade starts at the same place I start in every meeting I have with someone in financial trouble: Figure Out Where You Stand. She gives practical tips on how to analyze your spending, and, most importantly, how to face up to your debt.
