Search

Consumer Proposal — Page 2

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

by Doug Hoyes

Doug Hoyes, Bankruptcy Trustee

Doug Hoyes, Bankruptcy Trustee

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

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

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

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

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

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

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

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

What does this mean?

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

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

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

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

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

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

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

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

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

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

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

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

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

by Doug Hoyes

Debt consultants and for profit credit counsellors have become very aggressive over the last few years. In some cases they may be able to help you get out of debt, but in most cases they can’t do anything for you that you can’t do for yourself. Here’s how they work:

Douglas Hoyes, Canada Bankruptcy Trustee

Douglas Hoyes, Bankruptcy Trustee

They run big advertisements in the newspaper promising to reduce your credit card and other debt by up to 70%. Debt relief sounds great, so you start making monthly payments to them, and they promise to use that money to negotiate a debt settlement with our creditors. I’ve met with many people over the years who assumed that the money they were paying each month was being distributed to the creditors, but that’s not how it works. What’s actually happening is your money is building up in the debt consultant’s bank account, and when they have enough money to propose a settlement, they make the deal with your creditors. Here’s an example:

Joe and Mary owe $30,000 on five credit cards. The debt settlement company promises to settle all of their debts for $20,000, with no further interest. Joe and Mary think that’s a great deal, because if they were to pay off their debts on their own, with interest, it would cost much more than $30,000. They agree to pay $400 per month for 50 months to the debt consultant.

The debt consultant can negotiate a lump sum settlement with the credit card companies, but they can only do it once they have a lump sum of money. The first ten payments Joe and Mary make go directly to the debt consultant for their fees. Once their fees are paid, the money builds up in the consultant’s bank account until they have approximately 40 cents on the dollar to make the settlement. If Joe and Mary owe $10,000 on one of their credit cards, the consultant will wait until they have $4,000, and then approach the credit card company with the settlement offer.

What’s wrong with this strategy? Why are these deals in most cases nothing more than a scam?

First, if the debt consultant wants the first 10 monthly payments for their fee, and then wants another 10 payments for the settlement offer to the first credit card company, it will be 20 months before the first credit card company gets any money. It is unlikely that a lender will sit around and wait for 20 months to get their money. In most cases they will continue to call you, and perhaps even sue you, to get their money.

Second, debt settlements will not work on all types of debts. The government will not accept 40 cents on the dollar, paid 20 months from now, to discharge your tax debt. Credit card companies may accept a plan, but governments won’t.

Third, the debt consultant has no way to force all creditors to agree. He may get one or two of your credit card companies to agree to a deal, but if the others don’t agree and sue you, the deal will fall apart. You need relief for all of your debts, not just some of them.

Fourth, in many cases the debt consultant is not doing anything that you couldn’t do on your own. Accumulating money in a bank account for two years, and then sending it to the credit card company does not take a lot of professional expertise. If you want to wait two years and then make settlements on your debts, you can do it on your own.

Fifth, many debt consultants will meet with you, review your situation, charge you a fee, and then refer you to a bankruptcy trustee or consumer proposal administrator! They don’t actually do anything for you, other than provide an opinion that you need to see a trustee. I’m a big believer in getting a second opinion, but since a trustee or consumer proposal administrator will NOT charge you for an initial consultation, you should start with a free initial consultation, and then get a second opinion if you are not satisfied.

Finally, in most cases debt consultants do all of their work over the phone. That keeps their costs down, but it also means you never get to meet them. Do you really want to turn over your hard earned money to someone you will never meet in person?

Many of you who are reading this will probably be thinking that I am exaggerating the pitfalls of debt settlement. After all, I’m a trustee in bankruptcy, so I’m biased. It’s natural to assume that I think bankruptcy in Canada is the solution to your problems, not debt settlement, because that’s what I do for a living. Fair enough, but let me give you two actual examples. Here are the stories of two people I met with on one day last week. These are not unusual stories. I did not need to go looking through my files to find examples. I personally met with both of these people last week, and I have met with hundreds of other people with the same story. (I have changed the names of the people to protect their privacy).

Case #1: John Smith entered into a debt management plan with a well know debt management company eleven months ago to deal with $27,000 worth of debt, because he wanted to avoid bankruptcy. He has been paying $300 per month for the last eleven months, to deal with his three credit card debts. Two of the credit cards have not bothered him, but one of credit cards, from Bank X, took him to court three months ago and obtained a garnishment order against him. Starting next week they will be in a position to garnishee his wages. When he met with me last week I reviewed his situation, and based on his income he has decided to file a consumer proposal. With the consumer proposal he will be paying $300 per month, and he will be paying for a shorter time period than was proposed under his debt management plan.

Key Message: The lesson here is that a debt management plan is not binding on all creditors, so even though he has paid $300 per month for a year, he has nothing to show for it. If one creditor doesn’t agree, they can garnishee his wages, making it impossible for him to continue with the plan. He will file a proposal, for $300 per month, and had he done that originally he would already have paid for a year, instead of starting over.

A consumer proposal, once accepted by a majority of the creditors, is legally binding on all unsecured creditors. A debt management plan isn’t.

Here’s the second story:

Case #2: Joyce and her husband Fred started a debt management plan with a company for $2,000 per month for 42 months, or $84,000 in total. Their total debts are $70,000, so they are paying $14,000 in fees and interest, since one of their creditors did not agree to a reduced rate of interest during the plan. When I met with them I calculated that based on their income a consumer proposal would cost approximately $800 per month for 50 months, or about half the cost of the debt management plan. The consultant did not explain to them how much they were paying in fees, and they did not realize that one of the creditors, a large bank, is still charging them interest, so they are not getting a deal; they could have negotiated to pay the full amount owing with interest on their own. They have paid for three months in the debt management plan, but they will now stop it and file a consumer proposal.

Key Message: The lesson here is don’t agree to anything unless you fully understand what you are agreeing to.

If all the consultant is doing is charging a fee and then sending the money to your creditors, they aren’t really providing much of a service. You can do that on your own.

Does this mean that all debt settlement companies are bad? Are they all scams?

I have not researched every company in Canada, so I will not make any general statements about all companies. I will tell you this: do your own research. Ask questions. Here are some good questions to ask:

  • Do I get to meet with anyone in person? If not, where are you located? Are you in my city?
  • Are you licensed by the federal government? What professional qualifications do you have?
  • What is the total cost of the service?
  • When will creditors start receiving money? Does the consultant get paid before the creditors get paid?
  • Will all creditors agree to the deal? What can I do if one of them doesn’t agree? Can they still sue me?
  • What will this do to my credit report?

If you are comfortable with the answers you receive, then you can make the decision to hire a debt settlement firm to deal with your debts.

There are cases where debt settlement is the correct solution, such as when you have a small amount of debts, or you have access to a lump sum of money for the settlement, or you are not insolvent. There are lawyers, that are regulated by the government, that can act on your behalf.

However, in most cases if you want to avoid bankruptcy, and you have the ability to make payments each month, a better option is a consumer proposal. In a consumer proposal all unsecured creditors vote on your proposal, and if a majority of the dollar value of your creditors accept it, it is legally binding on everyone. That means you won’t have the same problem that John Smith had, where two creditors agreed and one didn’t, and that one dissenting creditor sued him.

All consumer proposal administrators are licensed by the federal government, and they will all meet with you in person. The cost of a consumer proposal is set by the federal government, so all fees are standard regardless of which consumer proposal administrator you use, and all fees will be explained to you in advance. (All fees are included in your monthly payment; there are no extra charges). Unlike with some debt settlement companies, a consumer proposal administrator receives most of their fees when the creditors get paid, so everyone is working to make the proposal work. A consumer proposal, credit counselling and debt settlement all appear as negotiated settlements on your credit report.

You have options. You can avoid bankruptcy, but you must do your research, understand your options, and make an informed decision.

Posted on Monday, February 22nd, 2010
Filed under: Consumer Proposal
posted by Doug Hoyes @ 4:40 am 1 Comment

Do You Play to Win, or Do You Play Not to Lose?

by Doug Hoyes

Doug Hoyes, Bankruptcy Trustee

Douglas Hoyes, Bankruptcy Trustee

In the 2010 Super Bowl, the Indianapolis Colts played not to lose. They didn’t take any unnecessary chances. In contrast, the New Orleans Saints played to win. In the first half, with two yards to go on fourth down, they tried to score, and were stopped, turning the ball over to the Colts. At the start of the second half they attempted an on-side kick, a very risky play, but it was successful, they recovered the ball, and went on to win the game.

The 2010 Vancouver Olympics had many examples of “playing to win”: skiers going so fast that a crash is inevitable, and speed skaters pushing it to the limit. Some of them win gold; others don’t finish and don’t win.

So why am I talking about sports on this Bankruptcy Canada Trustees Talk blog? Because there are two approaches to dealing with debt problems: you can avoid the problem and hope it won’t get worse, or you can deal with it head on. You can play not to lose, or you can play to win.

I’ve met hundreds of people over the years who play not to lose. They assume that if they ignore the phone calls they get from collection agents and bill collectors, the problems will go away. Sometimes they are right. If they keep switching jobs, and if they move from town to town it’s quite possible that bill collectors will lose track of them, and no further collection activity will result. Their credit report won’t look great, but if no-one can find them, they feel that the problem is under control. Playing not to lose means you never win; you just avoid your debts; you don’t actually eliminate them, and you never get a fresh start.

I’ve also met with thousands of people who play to win. They know that they incurred the debt, but they are sick and tired of putting up with calls from collection agents. They want to deal with their debt problems. They realize that there are risks to filing a consumer proposal or personal bankruptcy in Canada. One risk in a consumer proposal is that the creditors will vote against the proposal. In both a proposal and bankruptcy your credit score is negatively impacted, and there will be a note on your credit report for many years.

Why were the New Orleans Saints willing to risk losing the game by attempting an on-side kick at the start of the second half? Wasn’t that a crazy, risky, strategy? Not really. By taking the safe route, by doing nothing, it was likely that the Saints would have lost the game. If they were going to lose anyway, what did they have to lose?

Why does a skier go so fast that they risk crashing? Because if they go slowly, they are guaranteed not to win. They really have nothing to lose, so the correct strategy is to play to win.

What will you gain by ignoring your debts? Is it worth the risk to do nothing, or is the correct strategy to get some professional advice and deal with your debts once and for all?

If you know that you will never be able to repay your debts on your own, you have nothing (but your debts) to lose, so play to win. Yes, there are risks. You risk being embarrassed admitting to yourself that you have more debt than you can handle. You risk having to confront your spending habits, and making changes to stay out of debt in the future. You won’t be able to borrow for a period of time.

But you will deal with your debts, and get a fresh start.

You will win.

Many people believe that bankruptcy is the only way out.  It’s not.  A consumer proposal may be a better strategy.  You decide what you can afford to pay to settle your debts, and offer that to your creditors.  They may agree.  They may not.  It’s risky.  But if you are committed to making a fair settlement and offer your creditors a fair deal, they will most likely accept it.  Do your research, offer a fair deal, and play to win.

Only you can decide to play to win. Only you can decide that you want a fresh start. What’s your decision? To start, contact a professional today for a no charge initial consultation to review your options, and find out if a consumer proposal or personal bankruptcy in Canada is the solution for your debt problems.

Play to win.

Posted on Monday, February 15th, 2010
Filed under: Bankruptcy Alternatives andConsumer Proposal
posted by Doug Hoyes @ 6:00 am No Comments

If a Consumer Proposal is Better Than Bankruptcy, Why Would a Creditor Ever Say No?

by Ted Michalos

Ted Michalos, Bankruptcy Trustee

Ted Michalos, Bankruptcy Trustee

As readers of this weekly Trustees Talk feature are well aware, in September of 2009 the federal government decided to implement changes that had been approved by Parliament (quite literally years ago) that had the affect of increasing the length and cost of filing bankruptcy in Canada. One of the effects of these changes was to make the filing of a consumer proposal a more attractive solution than it may have been previously.

The changes worked – the number of persons filing consumer proposals now, as opposed to filing for bankruptcy, has seen a marked increase. Unfortunately, it is unclear if the government consulted with the major lenders in Canada before making these changes. Many of the lenders take a decidedly different view (and by that I mean more negative) to proposals than the government.

This may be a little difficult to accept, but the banks and other lenders in Canada know that a certain portion of their customers won’t be able to repay their debts. To the lenders this is a cost of doing business and it is factored in to the fees and interest rates that all of us pay when we borrow.

So, if you are a bank and you know some of your customers won’t pay, your attitude to those accounts is “how do we get rid of them as quickly as possible”. In their minds, a bankruptcy provides that quick relief.

Looked at from another angle, if they agree to a multi-year repayment plan via a consumer proposal then they have to keep the account active and open, and they have the added cost of administering the bad debt over a longer period of time. In the lender’s eyes, in order for this to make sense financially, they need to be recovering enough money to justify the added cost of keeping the account open.

What does this mean to you? If you are thinking about offering your creditors a consumer proposal then you need to pass two tests. The first is simple: the proposal must offer your creditors a greater benefit than they would receive in bankruptcy. The second test is a little less precise: you need to offer your creditors enough of a repayment that they think it is worth their while.

Being “worth their while” is a tricky proposition. That means you have to be offering to repay them enough money to justify keeping the account open.

Let’s try an example or two.

Let’s say you’ve met with a trustee and determined that if you file for bankruptcy you will have to pay about $1,500 – this is the basic cost for filing in most areas of Canada, although the cost of bankruptcy in Canada will vary based on your circumstances. Instead of filing for bankruptcy, you would prefer to offer your creditors a consumer proposal to repay $6,000 of the $30,000 that you owe.

You certainly pass the first test as $6,000 is greater than the $1,500 that would be available in a bankruptcy, but do you pass the second? I am sorry to say, probably not. After fees and other costs the creditors might receive half of the money you are offering in your proposal, $3,000. In a lender’s mind, it is not worth keeping the file open in order to recover $0.10 for every dollar they were owed.

Let’s change the example by lowering the amount of your debt to $12,000. It appears you are offering to repay 50% of the debt, but again, after costs the creditors will receive $3,000 and that probably is not enough of an incentive for them to keep their files open.

When you are selecting a trustee to administer your proposal, ask enough questions to be certain that they are familiar with the various lender’s criteria for voting in favour of a proposal. The last thing you want to do is offer a number that is obviously too low simply because the administrator you decided to deal with doesn’t handle enough proposals to know how the creditors will react to your offer.

Posted on Monday, February 8th, 2010
Filed under: bankruptcy Canada andConsumer Proposal
posted by Ted Michalos @ 4:09 am No Comments

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

by Barton Goth

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

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

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

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

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

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

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

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

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

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

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

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

Posted on Monday, January 11th, 2010
Filed under: bankruptcy Canada andbankruptcy reform andConsumer Proposal andDebt Options
posted by Barton Goth @ 4:18 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

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

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

Thanksgiving Day in Canada

by Doug Hoyes

Doug Hoyes, Bankruptcy Trustee

Doug Hoyes, Bankruptcy Trustee

Today is Thanksgiving Day in Canada, and there are many stories in the media about how we should all give thanks. I agree. We are lucky to live in Canada. But what does Thanksgiving have to do with bankruptcy in Canada?

I have written a number of articles over the last two months criticizing some of the new bankruptcy rules. I have offered the opinion that some of the rules are unnecessarily harsh towards Canadians in financial trouble. That’s true, but there is another side to the story.

Every week I meet with many Canadians who are at the end of their financial rope. They usually tell me that their money problems got worse when they lost their job, or had their hours cut back, or they got separated or divorced, or they had a medical condition that impaired their ability to earn a living. When they visit me for the first time they are embarrassed and depressed. They don’t know what to do or where to turn.

The most rewarding part of my job is when I can show them that there are options for dealing with financial problems. Some people can re-finance or sell their home to generate the cash necessary to deal with their debts. Others can offer a debt settlement or a debt management plan. For many, a consumer proposal is the perfect solution. For a growing number of Canadians, personal bankruptcy is the only answer.

As Canadians, we can be thankful that we have so many options for dealing with debt. Gone are the days of Charles Dickens’ England where people who couldn’t pay were put in debtor’s prison. At least one each week I talk to someone who is afraid that if they don’t pay their debts they will go to jail. Not paying your debts is not a criminal offence in Canada. A creditor can take you to court and get a wage garnishment, but jail is not the result of not paying debts.

As the recession in Canada continues, we worry about our future. But today, as Canadians, we can be thankful that there are options for dealing with debt. I may not agree with all bankruptcy rules, but I do strongly support the basic principal behind bankruptcy legislation in Canada: the rehabilitation of the honest but unfortunate debtor.

You too can be thankful for your options, so contact a trustee today to review your options, and work out a plan to deal with your debts. You will be thankful that you did.

Posted on Monday, October 12th, 2009
Filed under: Bankruptcy Alternatives
posted by Doug Hoyes @ 5:36 am No Comments

Consumer Proposals Will Increase Under the New Bankruptcy Rules in Canada

by Doug Hoyes

Doug Hoyes, Bankruptcy Trustee

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

← Previous Entries

Next Entries →