I have interviewed Mr. Silverthorn (see the video in the upper right hand corner of this page), and he interviewed me for the chapters on Consumer Proposals and Personal Bankruptcy, so I am familiar with Mr. Silverthorn’s work. In our conversations he did make one comment that surprised me: He said that borrowers in Canada are often victimized three times.
First, borrowers often get caught in predatory lending practices, paying excessive rates of interest, or signing contracts they don’t understand. Interest rates in Canada are at historic lows, but interest rates on credit cards and finance company loans are as high as ever.
Second, if a borrower can’t pay, they are often victimized by abusive collection agency practices, such as the Draft Statement of Claim issue we discussed last week. In addition, collectors call at all hours of the day and night, and often make threats, and if you don’t know the rules, they can intimidate you, which is often unsettling.
Finally, borrowers are often victimized by “consultants”; people who earn their living by “helping” people, even though they really aren’t helping them at all. You have probably seen their advertisements: “We will reduce your debts by 70% without bankruptcy; call us today!” Unfortunately most of these ads are nothing more than Debt Management Scams. These unlicensed “helpers” take your money, but they have no legal ability to actually reduce your debt. They might be able to convince your creditors to accept a deal, but more often than not the only person who profits is the helper.
Mr. Silverthorn believes that an informed consumer has the knowledge to understand all options, and that’s the point of his book: education. He covers many topics, including:
how to stop, avoid, or discourage collection calls
why you might not even have to pay your debt
options to deal with your debts that might save you thousands of dollars
your legal rights and how to handle collection agency misconduct
the truth about credit counselling and debt settlement firms
As a bankruptcy trustee in Canada I am familiar with the various methods for dealing with debts, and I have heard every collection agency story imaginable. However, even I was able to learn many things from this book, and that’s why I recommend it for anyone looking to more fully understand how collection agents operate.
Some final advice from Mr. Silverthorn : if you meet with a debt management professional, ask them to explain all of your options, not just the option they are selling. I agree fully with that approach.
Why do Canadians have problems with money? Why do we have too much debt, and no savings? Obviously the prolonged recession has not helped, but I believe one of the reasons we get into financial trouble is that we simply don’t fully understand money, credit and debt. In Canada, financial education is not a priority in our schools, or for adults once they are out of school.
That’s why I think that Credit Education Week in Canada is a great idea. It’s one week in the year when we can take the time to focus on money, and educating ourselves about credit.
Credit Education Week Canada 2010 starts today, November 15, and runs for the week, until November 19, 2010. This year’s edition is Canada’s fourth annual Credit Education Week, and the focus this year is on newcomers, and the theme is The Language of Money.
That’s an interesting concept: The Language of Money. As a bankruptcy trustee in Canada, I am very aware of how we use language to describe money, and our financial situation.
Some words are complicated; people get confused with words like “creditor” and “debtor”, and there’s little doubt that that confusion makes it difficult for people to talk about money. We don’t want to admit that we don’t know what the big words mean, so we just don’t talk about it.
(For the record, a “creditor” is someone you owe money to, like a bank or credit card company. A “debtor” is you, the person who owes the money).
Some words are easy, but they have hidden meanings. For example, what is a credit card? That’s easy, you say. A credit card is something that we use to buy things; it gives us access to credit. We all know that credit is a good thing. We all know that you should “give credit where credit is due”. When someone does something good, we should give them credit for a job well done. Credit is good.
Of course a credit card is neither good nor bad. It’s an inanimate object; it’s just a hunk of plastic. It’s how you use it that makes it good or bad.
But that’s the hidden meaning: we use the word credit card to convince ourselves that credit is good.
What would happen if we called it a debt card. Calling it a debt card makes sense; when you buy something with plastic you are incurring debt. You now have a debt that you have to pay at the end of the month, and if you don’t you will pay interest.
See the difference words can make? Calling something a debt card educates us on what it really is, and what it really does.
So, this week, as you read about Credit Education Week in Canada, pay attention to the language you use to describe money. It may give you a new perspective on how money works, and it may make it easier for you to spend less, save more, and deal with your debt.
If you can’t attend any Credit Education Week events, then educate yourself on the various methods for dealing with debt, including:
Pay off your debts on your own. Make a budget, cut your expenses, and pay off your debts yourself. This works well if you owe a manageable amount.
If you can afford to pay off your debts in full, but just need a break on the interest, credit counselling is an option.
If you can’t afford to pay off your debts in full, but you can afford to pay back something, a consumer proposal is a logical option. Most credit card companies will accept a reasonable consumer proposal.
Use our free debt options calculator to educate yourself on the various options for dealing with debt.
You have the power to educate yourself, so use Credit Education Week as your opportunity to educate yourself about credit and debt. It will be time well spent.
TD Economics released a report on Wednesday October 20, 2010 titled Canadian Household Debt a Cause for Concern that tried to answer many questions currently plaguing the Canadian consumer and the economy in general, including whether or not Canada is headed for a U.S.-style household debt crisis.
Barton Goth, Bankruptcy Trustee
Some of the key findings that were outlined were as follows:
1. Since the mid-1980s, total household debt as a share of personal disposable income in Canada has almost tripled – from 50% to 146%
2. Statistics demonstrate a rapid convergence in the Canadian household debt-to-income ratio similar to that of the United States.
3. At 146% of after-tax income, Canadian personal indebtedness has become excessive.
4. Economic and financial fundamentals suggest that the personal debt-to-income ratio should be in the range of 138% to 140%.
5. The past rapid growth in household indebtedness has been fuelled by both many factors, including lower borrowing costs, greater household confidence, stable inflation, relatively stable growth in the economy and labor market, increasing demand for credit, increased labor market participation by women, and a greater desire to consumer larger quantities of discretionary items.
6. Some Canadian households have become too leveraged and estimated that perhaps 10-11% of households could experience financial stress when interest rates rise in the future.
While the report’s findings appear somewhat bleak, the good news is that overall they concluded that “The Canadian debt imbalance is currently not as great as that experienced in the U.S.” They continue to say that at some point, when our current interest rates return to historically normal levels, the interest rate change will create financial stress on some Canadian households, but definitely not the majority. But this “relentless” rise of household debt in Canada is a growing cause for concern.
Is this new information? Absolutely not, one of the most cited risks to the Canadian economy is the indebtedness of the average Canadian. Is this the full story? Likely not. It is important to remember that statistics are often subjective and these statistics were designed to emphasize the negative, and I find the situation is typically not quite as bleak as is reported by the media.
However, the recent TD study identified a few positive things. For example, TD predicts that we are not on the verge of a collapse similar to what the US has suffered and demonstrated that the level of personal disposable income is still less than where the US was when everything collapsed. The key is that the average Canadian consumer has to recognize that the biggest threats to our finances, and in turn to the economy at large, are continued reliance on credit and the likelihood of future interest rate increases. The good news is we still have a time to insulate ourselves from these threats. As Canadians what we all need to take 3 steps.
1. Take Stock
2. Reduce our reliance on credit
3. Develop a plan to pay down our debt.
If you don’t already know where you sit financially it is time to find out. Begin by taking stock of your current financial circumstances. Compile a list of who you owe, approximately how much, the interest you are paying and your minimum monthly payment. Once you have done this, make note of your monthly net income and all your monthly expenses. How are you doing? Do you have enough to pay more than the minimum on each of your debts? If so, great! You are well on your way. If not, examine your expenses, establish priorities, and find a way to make things work. If your debts are too high you may have to consider the filing of a consumer proposal, a debt management plan , or potentially even a bankruptcy, depending on how severe things are. But you first need to find a way to make things work on paper.
Second, it is time to realize that credit costs. Remember, every time you use somebody else’s money, there is a cost. Sure it is nice to be able to buy anything at any time without worrying about how much cash we have in the bank. But is a sale really as good as it appears when we know we are going to have to pay 20% interest on that purchase? How many of the items that we buy on credit are truly essential? If you are going to reduce your family’s exposure to the looming interest rate increases that are inevitable, you need to move away from a credit-based lifestyle and focus on a cash-based one. After all, cash is always the cheapest way to manage your finances. It reduces the interest we pay, often forces us to consider our purchases a little more, and ultimately leads to a much healthier balance sheet. This is really a matter of discipline. Never allow yourself to purchase unnecessary items on credit. Try to only use debt to finance things that will have value at the end of the loan (i.e. car, house etc.). If this sounds difficult, then do yourself a favor by reducing the temptation. Try not carrying credit cards, detaching your line of credit from your bank card, or canceling your overdraft. Put hurdles between you and the access to credit on a daily basis. By making it more difficult to access credit, you will find that you will automatically use less credit.
Finally, it is not just enough to reduce your reliance on credit, you need a plan to pay down your debt. You will need to look at your budget and develop a strategy to reduce your debt. This may begin by consolidating your high interest debt so you can pay less interest and be out of debt quicker, or you may be able to simply by making larger payments to your debts with higher interest rates, and as each debt is paid, reallocate those debt payments to your next most expensive debt. For some you may need to consider formal avenues such as consumer proposal, a debt management plan, or a bankruptcy. Regardless of the method, your quickest way back to financial health and reduced exposure to the risk of interest rate changes, is to make a concentrated effort to pay down your existing debt.
By taking stock, reducing your reliance on credit and developing a plan to pay down your debts, you will be surprised how quickly you are able to improve the state of your finances and insulate your family from any potential difficulties down the road, whether this is increased interest rates, lapses in employment, or temporary health issues. The best advice is always to reduce your reliance on debt.
About the Author: This article has been written by Barton K. Goth of Goth & Company Inc., a licensed Edmonton bankruptcy trustee, member of the Canadian Association of Insolvency and Restructuring Professionals, and a managing editor of the Trustee Talks blog.
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.
This is a website devoted to discussing all aspects of bankruptcy in Canada, but today we will discuss the opposite of bankruptcy. Today I present my Top Three Ways to Avoid Bankruptcy in Canada.
Why would I, a bankruptcy trustee, want you to avoid bankruptcy? Because I strongly believe that bankruptcy should be a last resort, a strategy to be used only after all all other options have been evaluated and eliminated. I take every opportunity to encourage all Canadians to explore all financial options before making a decision. This week I was interviewed by the Globe and Mail for a story on How to Avoid Filing for Bankruptcy, and again I made the comment that bankruptcy is a last resort.
So what are my Top Three Strategies for Avoiding Bankruptcy in Canada?
3 Get help from family or friends. This is perhaps the most over-looked strategy. I have had hundreds of people over the years tell me that they are so embarrassed about their financial situation that they are afraid to discuss it with their family or friends. I’m not suggesting you should tell everyone you know that you are having financial trouble, but reaching out to your family or closest friends is often a good solution. Many times I have encouraged people, particularly younger people, to talk to their parents. While their parents may be disappointed that they are in financial trouble, they will often also try to work with them to solve their problems.
I’m not suggesting that you should borrow money from family or friends. Borrowing money is a good way to lose friends, and an even better way to make Christmas dinner very uncomfortable. What I am suggesting is that you should ask for advice from your family and close friends.
If you don’t ask, you don’t know how people can help. Perhaps a relative can help you find a better job, and with more income you may be able to repay your debts on your own. Perhaps a friend has an extra room at their house; you could rent a room and reduce your living expenses, which will free up cash to help you deal with your debts. Moving back in with your parents may not be fun, but as a temporary measure while you get back on your feet it may not be a bad solution.
Even if they can’t help you directly, getting some advice and empathy from a trusted family member may help you decide on your next steps.
2 My second best strategy for avoiding bankruptcy is to fix it yourself. In fact, this is the strategy used by the vast majority of Canadians who experience money problems. If friends and family can’t help, and if you don’t want to file bankruptcy, you need to take matters into your own hands, and attempt to fix the problems on your own. Here’s how:
Start by making a personal budget. Your budget should list all of your expenses each month. Some will be easy, like your rent and car insurance, because they are the same each month. To ensure that you don’t forget any, review your bank statements and credit card bills for the last few months to see where you spend your money. That should give you an accurate picture of your monthly spending. There are lots of on-line budget tools that can help, like Calendar Budget, an on-line tool where you enter your purchases each day, on a calendar. There are lots of budgeting tips on line as well.
Once you have a list of your expenses, review it. What can you cut? Can you reduce or eliminate your cable bill? Car pool to work? Make your own coffee? Once you see your expenses on a list, you can take steps to cut your expenses. That will tell you how much money you can free up to repay your debts faster.
Your debts are the final piece of the puzzle: Make a list of all of your debts, and arrange them from highest interest rate to lowest, so that the top of the list has your most expensive debts. Those are the debts you want to repay first.
Now, fix it yourself by making a plan to take whatever cash you can free up each month and apply that to your highest interest rate debts first. As one debt gets paid off, use that extra money to attack the principal on the next highest debt, and so on until all of your debts are repaid. If you can keep your expenses as low as possible, you may be able to repay all of your debts on your own.
1 But what if, even with drastically reducing your expenses, you still have more debts than you can repay on your own? You need outside help, and that brings me to my top strategy for avoiding bankruptcy in Canada: filing a consumer proposal. A consumer proposal is a legally binding deal that a consumer proposal administrator negotiates with your creditors. If it’s accepted, you make one monthly payment, your debts are dealt with, and you avoid bankruptcy.
A proposal will work best if you have a job, or a stable source of income, so that you can commit to monthly payments. The good news is that, in most cases, a consumer proposal can be negotiated for less that the full amount owing on your debts, and you avoid bankruptcy.
Which option is best for you? Or do you have no choice but to file bankruptcy? Start with some research: Read our articles on consumer proposals, or read questions posted on our anonymous question and answer blog about consumer proposals. You can even join our on-line support group that allows you to discuss consumer proposals and other options. These posts are real, and people just like you post both the pros and cons about proposals, so you can hear both sides of the story to help you make a decision.
My advice: talk to your family and friends, but also talk to an expert. A consumer proposal administrator and bankruptcy trustee will give you a free, no obligation initial consultation to help you make an informed decision, so do your research, contact a trustee today, and make an informed decision.
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, 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 by Doug Hoyes @ 
