On July 14, 2011 the Supreme Court of Canada released its decision in the case of Schreyer v. Schreyer. Why are we discussing a Supreme Court of Canada decision in a blog about bankruptcy in Canada? Because this case confirms a long held principle of bankruptcy law, but it also forces us to consider whether changes to bankruptcy law are required.
Mr. and Mrs. Schreyer divorced in 1999, and as is standard procedure, their assets were to be divided amongst them. Mr. Schreyer was to make an equalization payment to Mrs. Schreyer of about $41,000.
Where both parties own assets, and one of the parties will be retaining one of the assets, that party pays the other their share.
For example, if the wife’s only asset are shares in a business worth $100,000, and the husband has no assets, upon divorce the wife may be required to make an equalization payment of $50,000 to the husband. By doing so, after the divorce, they both end up with $50,000 in assets, so they each have half of the total assets they had while married.
In the case of Schreyer v. Schreyer the asset was a family farm, and Mr. Schreyer was ordered to pay $41,000 as an equalization payment to his wife.
However, before that payment was made, Mr. Schreyer declared bankruptcy. Mrs. Schreyer therefore became a creditor of his in his bankruptcy. Under Manitoba’s The Judgments Act, the family farm was exempt from execution by creditors. That meant that Mr. Schreyer kept the farm when he went bankrupt, and his wife got nothing.
(It should be noted that the law is different in each province. For example, in Ontario there is no exemption for real estate, so in Ontario if the bankrupt owned a farm worth $80,000, the trustee may sell the farm and distribute the proceeds to the creditors, so had this happened in Ontario, Mr. Schreyer would have lost the farm when he went bankrupt, or he would have been required to pay into his estate the value of the farm).
Is this fair?
According to bankruptcy law, your debts are extinguished when you go bankrupt, so on that basis yes, it’s fair.
However, the Bankruptcy & Insolvency Act does give special treatment for child support, in section 178 (1) (c), which states that the following debt or obligation is not discharged in a bankruptcy:
any debt or liability arising under a judicial decision establishing affiliation or respecting support or maintenance, or under an agreement for maintenance and support of a spouse, former spouse, former common-law partner or child living apart from the bankrupt;
In other words, if you go bankrupt, you are still required to pay child and spousal support.
So, why, if you file bankruptcy in Canada, are you not required to make equalization payments to your former spouse? That’s a good question, and I suspect that the law will be changed to close this loophole; it’s certainly received a lot of press since the decision was released, including these articles:
Parliament moves slowly, so we shall see how long it takes for the government to act. Regardless of their speed, I believe that it is time for the government to change the rules regarding divorce and bankruptcy.
The bankruptcy rate in Canada dropped in 2010, according to statistics recently released by the Office of the Superintendent of Bankruptcy. That’s good news, right? Yes and no.
First, let’s review the numbers. In 2010 a total of 135,008 Canadians filed a consumer proposal or personal bankruptcy. That’s an 11% drop from the 151,712 who filed in 2009. That’s a drop of 16,704 people, and yes, that’s good news. Fewer Canadians declared themselves insolvent in 2010. Now let’s take a look behind the numbers.
Personal Bankruptcy Rate Falls, By Consumer Proposals Increase Dramatically
Personal bankruptcies dropped from 116,381 to 92,694, a drop of over 20%. But consumer proposal filings increased by almost 20%, increasing from 35,331 to 42,314.
So why did personal bankruptcy filings drop, while consumer proposal filings increased? Two reasons:
First, the economy in Canada was somewhat better in 2010 than it was in early 2009, as we were still in “recovery mode” after the credit crisis and stock market correction in late 2008. A better economy generally means lower unemployment, higher consumer spending, and generally fewer personal bankruptcies. So it’s not surprising that the total number of insolvencies (bankruptcies and proposals) dropped, and that the number of personal bankruptcies also decreased significantly.
It’s also not surprising that, in a good economy, Canadians in debt are more likely to choose a proposal over bankruptcy if they can’t pay their bills. In a proposal you make a payment each month, and that money is distributed to your creditors. If you don’t have a job or a source of income, a proposal probably isn’t possible. If you are working and do have an income (just not enough to pay your bills in full), then a consumer proposal is a great solution. Clearly there is a greater chance of Canadians having jobs during good economic periods, so during recessions proposal filings are likely to drop, while in good times they may proportionately increase.
Second, the government changed the bankruptcy rules in 2009, making bankruptcy more expensive for Canadians with surplus income. As a result, in 2010 more Canadians chose to file a consumer proposal as a way to avoid bankruptcy.
So yes, it’s good news that bankruptcy numbers are down, but you have to take the numbers with “a grain of salt”, since part of the decrease in bankruptcy filings was due to a change in the rules.
If you are experiencing financial problems and think bankruptcy might be the answer, use our free debt options calculator to review your options, and then contact a licensed bankruptcy trustee today for a free initial consultation, and be sure to ask about a consumer proposal, the number one alternative to bankruptcy.
Earlier this month Canadian bankruptcy trustee Ted Michalos published an article titled Draft Statements of Claim are a Common Collection Agency Trick, where he discussed the collection agency practice of sending a “Draft” Statement of Claim to debtors. A draft statement of claim looks like an authentic court document commencing a lawsuit against a consumer. Many Canadians who receive a draft statement of claim will think that they have been sued, when in fact, they have not. A draft statement of claim is simply a clever intimidation tactic used by collection agencies to bully Canadians, particularly individuals unfamiliar with seeing court documents.
Draft Statement of Claim
Laws regulating debt collection practices vary from province to province, and enforcement of these laws is not consistent across the country. In both Ontario and in British Columbia, provincial law prohibits anyone from using a draft statement of claim in the collection of a debt.
Unfortunately, in 2010 many collection agencies hire collection lawyers to send out draft statement of clams to the residents of these provinces despite the fact it is illegal to do so. If you have received a draft statement of claim from a lawyer’s office I would encourage you to contact a trustee to determine your options.
He has described the draft statement of claim as “a collection letter on steroids”, and in his book he gives an insider’s view of many collection agency tactics.
Last week I interviewed Mark Silverthorn, a former collection agency lawyer, who now works exclusively on behalf of debtors.
You can watch the interview here:
As you will see in the interview, I couldn’t resist asking the obvious question: since Mark Silverthorn, many years ago, was a collection agency lawyer, and since he himself sent out tens of thousands of draft statements of claim on behalf of his clients, why is he so upset that the draft statement of claim continues to be used today when a few years ago his law firm was sending out thousands of these draft statement of claims to Canadians? I’ll let you watch the video to see his answer.
You can read Mr. Silverthorn’s side of the story on his website, or in the media.
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.
This week the Office of the Superintendent of Bankruptcy released statistics stating that an increasing number of senior citizens are filing for bankruptcy in Canada. Here’s a quote from the report:
From 1989 to 2009, the proportion of insolvent consumers between 18 and 34 years of age has fallen steadily (from 12.9 percent to 4.4 percent among those 18 to 24 years of age and 43.0 percent to 22.3 percent among those 25 to 34 years of age). Over the same period, the proportion of insolvent consumers among older age groups has increased (from 11.3 percent to 24.7 percent among those 45 to 54 years of age and among those 55 years of age and above the proportion has more than quadrupled from 4.6 percent to 20.6 percent).
First, as every resident of Canada is aware, we are in a recession. A recession hurts everyone. It’s possible that in the current economic downturn more seniors have lost their jobs, or had their incomes reduced, leading to serious financial problems. Often when a company needs to cut back, they cut their highest paid workers, which often are their older workers.
Second, a growing number of Canadians in their 40′s, 50′s and 60′s are carrying mortgages and other debts into retirement. Twenty or thirty years ago Canadians typically retired with little or no debt; they paid off their mortgage before they retired. That was possible because by the age of 65 most Canadians were able to pay off their debts.
However, today, it’s not uncommon to be laid off while you are still in your 40′s or 50′s, and if you are unable to find a similarly well paying job, you may be forced into early retirement before you are able to pay off your debts. That’s why it’s increasingly important to keep your debts as low as possible, in the event your job situation unexpectedly changes.
Third, many seniors assumed that their house or other real estate would be their “retirement fund.” They assumed that when their children were grown and they themselves retired they would sell their house and move to a smaller house, pocketing the difference. Unfortunately with the weak real estate market over the last two years house prices in many areas of Canada have declined, so seniors cannot sell their house for as much as they had hoped.
Finally, I meet with a significant number of seniors who were good money managers, and had little or no debt for most of their lives, but then they go into debt to help their adult children. If you are 60 years old with no debt and a paid off house, and your 30 year old son or daughter loses their job, and they have a young family to support, what do you do? Many parents help their children, and often they help them by re-mortgaging their house, or getting a line of credit. If your child is not able to pay you back, the senior, on a reduced income, is left with more debt than they can handle.
Does this mean you shouldn’t help your children or other friends and family when they have financial problems? No, if you want to help, you should, but it’s important to help with cash, and not to incur excessive debt to help others.
What’s the solution?
First, we should all strive to have little or no debt. You may not have a lot of savings when you retire, but if you retire with no debt you will probably be able to survive with your company and government pensions.
Second, seniors should be careful to only help others within their means; don’t risk bankruptcy for yourself by borrowing excessively to help others.
If you have more debt than you can handle, check out our free, interactive debt options calculator that calculates your different debt management options. It may be possible to work through your debts on your own, or perhaps file a consumer proposal to avoid bankruptcy, but professional advice is wise to fully explore your options.
On this Trustees Talk site we attempt to comment on items in the news, and items of interest to Canadians. As we have discussed previously, in June 2010, the Office of the Superintendent of Bankruptcy (OSB) initiated a Review of the Trustee Licensing Regulatory Framework . One of the items up for discussion was whether or not credit counsellors should be permitted to act as consumer proposal administrators.
On June 28 we published the thoughts of a trustee from Edmonton, Barton Goth, who asked the question: Consumer Proposals: A need for more administrators or a slippery slope? He concluded that the expertise of a licensed trustee is very valuable to anyone in financial trouble. While credit counsellors offer debt management plans, a consumer proposal is a legally binding, court approved procedure, so a higher standard of care is required.
We have reported on Debt Management Plans, and we encourage everyone to “run the numbers” to determine if you are using the proper solution to deal with your debt problems.
CACCS mistakenly refers to the trustee community operating as a monopoly; with 1,017 practicing trustees in Canada competing for work, nothing could be further from the truth. In essence the position of CACCS is analogous to a position that dentists have a monopoly over fixing teeth and surgeons have a monopoly over performing surgery, again these are not monopolies, but regulated (or self-regulated) professions, with a goal to have the most qualified professional provide the service to achieve the most desirable and predictable result. The dentist, surgeon and trustee all fit into this category;
CACCS mistakenly believes there is an access constraint within the consumer debtor market that fundamentally must be addressed by adding capacity. The issue, however, is not capacity, but quality; currently only trustees embody the depth of knowledge, breadth of experience and professional standards to meet the needs of consumer debtors within a Court-supervised restructuring process. As for capacity, we are dumbfounded by this CACCS assertion given that the economy has just experienced the worst economic downturn since the Depression and yet no consumer debtor went without access to a trustee to meet their needs through the provision of quality services;
CACCS asserts that its members are uniquely qualified to service the consumer debtor market. The very principle of a profession is that the individuals within it maintain a distinct expertise that allows them to perform a service to benefit an individual or entity—a service that is superior to that offered by all other providers. In the case of consumer debtors, it is trustees who have proven their ability based on depth of knowledge, breadth of experience, adherence to strict standards and oversight and ability to deliver a complete suite of services that differentiates them as the market leader in servicing the needs of financially distressed Canadians;
CACCS asserts that Debt Management Plans (DMP) and consumer proposals have many of the same characteristics. The truth is that DMP and consumer proposals are more dissimilar than similar. DMP are not Court-supervised restructuring proceedings; they do not require an administrator to balance the competing interests of the stakeholders; they do not require the administrator to opine on the reasonability of the Plan; they do not require an assessment of realization under alternative proceedings; they do not require consideration of all aspects of the Bankruptcy and Insolvency Act, provincial legislation, jurisprudence and, most importantly, professional judgment; and they are not subject to regulatory oversight by the OSB and supervision of the Court; nor are the administrators subject to the strict standards of professional practice, code of conduct and by-laws of CAIRP. Are they the same – not really!
CACCS believes that the consumer debtor is a client for the purpose of a consumer proposal, in which CACCS articulates a role for negotiation with creditors based on a client’s ability to repay their debt, according to their situation and the best of their ability. Unfortunately, CACCS fundamentally misunderstands the role of an Officer of the Court, a trustee, and the conceptual requirements of the BIA, that while preserving the principles of rehabilitation and a fresh start for the consumer debtor, must also respect the responsibility of the consumer debtor to his or her creditors. The role of the trustee is complex, as it requires a balancing of the competing interests to achieve equity through the facilitation of an arrangement between a consumer debtor and his or her creditors, having regard to the personal circumstances of the consumer debtor. Is the fundamental mindshift easy? No. Is it a requirement? Absolutely.
CACCS asserts that, by granting credit counsellors status as administrators of consumer proposals, the current referral system between credit counsellors and trustees will be unnecessary in the future. CACCS asserts that such a referral stream is “problematic and very inefficient while presenting a major disservice to the Client. Specifically, once the Client’s trust has been gained and the clinical relationship has formed”. CAIRP asserts that the referral system remains a necessary and important aspect of the insolvency process, irrespective of the status of creditor counsellors to provide consumer proposal services. The assertion lacks situational recognition that consumer proposals are not the answer for all financially distressed individuals; it fails to recognize that the seeds of success are not embedded within every consumer proposal filed; it fails to recognize that client referrals from trustees to credit counsellors should be equally common based on an assessment of an individual’s personal circumstances; it fails to recognize that specialized counselling may be required to meet a consumer debtor’s needs, counselling beyond the ability of a trustee or a credit counsellor. CAIRP is concerned, based on the assertion of CACCS, that its members will see the consumer proposal legislation as the sole alternative to a DMP. Is the real risk referrals? No, it is practitioner perception; and
CACCS presents survey results that are at best self-serving, at worst libelous. The survey makes bold statements pertaining to trustees failing to meet their statutory duties in performing adequate assessments (in accordance with Directive 6R3). The survey presents a tainted picture, but lacks transparency and substantive and objective correlation between the methodology and results; it lacks any source reference or verifiable basis on which to conclude whether any comments are substantively supportable. It is the position of CAIRP that the entirety of the survey results is inappropriate for a public consultation by the OSB as to the Licensing framework. CAIRP will in the coming weeks hold CACCS to account.
Wow. Sounds like a war of words between CAIRP (the trustees) and CACCS (the credit counsellors).
I have already provided my thoughts on this issue, so I will not belabor the point further here, other than to say this: if you are experiencing financial trouble, who do you want to assist you? If you want a credit counsellor working for a not for profit credit counselling agency, then see a credit counsellor. If you want a consumer proposal administrator or a bankruptcy trustee, go see them. You have the choice.
I work with many excellent credit counsellors, and I regularly refer people to credit counsellors when I believe they are best able to provide a solution. In many cases a credit counsellor can provide a solution; in other cases a bankruptcy trustee’s services are required. I pride myself on always looking out for the best interests of the people who seek my help. If all advisors (trustees, credit counsellors, lawyers, accountants) focus on providing advice that is in the best interests of the person in debt, everyone will get the professional assistance they deserve.
I have written quite a few pieces were I am critical of the “debt consulting” industry and persons presenting themselves as credit counsellors when they have little or no formal education or credentials. It’s not that I begrudge any of these people a livelihood – I just wish they’d pick a career that doesn’t involve gouging an already desperate portion of the population.
Ted Michalos, Bankruptcy Trustee
If you are unfamiliar with the term debt settlement it generally means some sort of negotiated deal to repay a portion of your debt. The service is real – most creditors will accept a partial repayment, particularly in a lump sum, once your debt has gone into collections. The trick here is one of timing. The debt settlement companies charge an upfront fee plus a percentage of the settled debt. They pay themselves first before they actually settle with your creditors and they can’t settle with your creditors until they have “saved up” enough of your payments to offer a deal.
That’s a bit confusing, so an example might help. Let’s say you owe $50,000 on your credit cards. The debt settlement company tells you they can settle with your creditors for $25,000. The upfront fee is $2,000 and they’ll charge another 20% of the settled amount – $5,000. Let’s say you agree to $1,000 a month. So the first 7 months will go to pay them and then your payments will go into a savings account until they accumulate enough to offer one of your creditors the 50% deal. During this time you have no legal protection and in many cases the creditors simply proceed to collections and then take legal action against you. To stop the legal action you end up filing a consumer proposal or perhaps bankruptcy (of course you won’t get any of the money back from the debt settlement company).
An alternative might be a consumer proposal whereby you offer the same settlement (50%), but it would play out quite differently. A consumer proposal can be spread over five years which would give you a much lower payment. Just to keep the comparison similar though, we’ll say you can pay the $1,000 per month. Your proposal will run for 25 months (the debt settlement plan would run for 32 assuming the creditors don’t cut it short). By law, the fees for the trustee are taken directly from the settlement; they are not added on top. In addition, after the preparation fee has been paid, $1,500, a trustee only receives payment when the creditors are paid – not in advance. Further, all of the creditors receive payments at the same time – you don’t settle with one, then save up and settle with the next. Most importantly, if you file a proposal you have legal protection from wage garnishees, collection agents and other legal actions.
If you’ve responded to a debt settlement ad and/or are actively considering this solution for your financial difficulties please make certain you understand the process that the company you will be dealing with is going to follow. As long as you understand the risks and the pitfalls of a debt settlement plan then you can add itn to the list of options to deal with your debts. Most people don’t take the time to “read the fine print” and as such go into these plans with high expectations only to have their creditors continue to pursue them, including collection actions and wage garnishees.
Be careful and consider all of your options before you sign.
The consumer proposal is probably the least known of the processes to deal with overwhelming debt, but it is the mechanism that has the greatest capacity for good given our current economic environment. Let’s face it, right now the number one biggest risk to the Canadian economy isn’t the high dollar, it isn’t our level of productivity, it isn’t the strength of our largest trading partner – it is the state of our personal finances.
Barton Goth, Bankruptcy Trustee
After that bold statement I must insert my disclosure. My name is Barton Goth, I am a licensed Trustee in Bankruptcy and Consumer Proposal Administrator here in Edmonton. So I definitely have a bias. However, this statement is not made based solely on observations made in my daily practice, but based on the current state of our overall economy. Let us review:
• During the 2000s, the average Canadian’s asset growth was less than half the pace of the 1990’s and the growth in debt was twice as rapid (Roger Suave, The Current State of Family Finances 2009)
• In recent years household debt has surged three time faster than income and now stands at a record high of more than $1-trillion (Canada’s Brewing Debt Storm, The Globe and Mail Apr. 16, 2010, by Paul Waldie and Steve Ladurantaye)
• The average Canadian owes about $1.47 for every dollar of disposable income (Certified General Accountants Association of Canada, CIBC Economics, National Bank economics and Statistics Canada)
• For many years, debt was rising about 2.5 percentage points faster per year than income, this gap had widened to 4 to 5 percentage points by 2005 and rising by approximately 9 per cent in 2008. (Defusing Canada’s debt bomb, Globe and Mail Apr. 17, 2010, by Don Drummond, Chief economist, TD Bank Financial Group)
As a result of these alarming trends I think the traditional focus of our finances is going to have to move away from the saving and investment side of things, and toward dealing with the debt that more and more people are becoming burdened by. This is why a consumer proposal currently is one of the most important financial tools available to Canadian families. It is a tool that gives Canadians the ability to regain control of their finances before they are forced to consider a bankruptcy. As a result, I predict that we will continue to see a major increase in the number of proposals filed as people begin to realize the gravity of their financial position and begin to investigate what can been done to resolve these difficulties.
For those of you unfamiliar with consumer proposals, you are not alone. The idea of a consumer proposal is relatively new (first introduced into the Canadian insolvency legislation in 1992), but has provided a way for many Canadians over the years with a middle of the road option that contains many of the advantages associated with a bankruptcy, while avoiding some of the more significant disadvantages. A consumer proposal is especially advantageous for those people who cannot afford to pay their debts in full but have enough money coming in each month that realistically they should not be forced into the filing of a bankruptcy, a reality that an increasing number of Canadians are faced with each day.
The consumer proposal is one of the options available through the Bankruptcy and Insolvency Act that provides a court sanctioned way to negotiate a settlement with your unsecured creditors (i.e. credit cards, personal loans, taxes etc.). There are many advantages to filing a consumer proposal. For instance, in a proposal you do not automatically lose any of your assets as you would in a bankruptcy. You are able to have a reduced impact on your credit over the long term than filing bankruptcy, and most importantly, you are able to bring the payments on your existing debt to a manageable level that will fit in your budget. At the same time, because the consumer proposal is a court sanctioned settlement, you only need a majority of your creditors to cooperate with the proposal and you benefit from court protection which mandates that all your unsecured creditors must participate in the proposal and can no longer collect on or charge any interest on these debts.
At a time when the average family is faced with waning savings, growing debt, aggressive lending practices and an uncertain economy, the consumer proposal may prove to be one of the most needed of all financial tools, and one that will assist many families in an effort to regain control of their finances and truly put their house in order.
If your one of the many Canadians who are currently struggling with your finances I have one word of advice, act now and schedule a time to review your finances with a consumer proposal administrator . If you are proactive, rather than reactive, you will be able to catch things early. The earlier you recognize the difficulties you face and the earlier you act, the more likely you will be able to qualify to file a consumer proposals and the quicker you will be able to regain control of your finances.
The Office of Superintendent of Bankruptcy is a special operating agency associated with Industry Canada, part of the federal government. The “OSB” regulates bankruptcy trustees (the people who administer bankruptcies and proposals, and ensure they comply with all aspects of the Bankruptcy and Insolvency Act). As the regulator, the OSB will often seek the input of various stakeholders to determine if changes to their regulations of trustees are required, and they have just announced a “Trustee Licensing Consultation” to review various aspects of insolvency regulation in Canada.
One of the items being considered is whether or not to allow non-trustees to serve as administrators of consumer proposals. As our regular readers will be aware, a consumer proposal is a legally binding settlement negotiated between a debtor and their creditors, with the assistance of a consumer proposal administrator. With the exception of the province of Nova Scotia, where provincial representatives may administer consumer proposals, all consumer proposal administrators in Canada are licensed bankruptcy trustees.
The issue being considered is this: should the OSB allow non-trustees to serve as administrators of consumer proposals?
Ms. Ross presented the argument that accredited credit counsellors (in addition to licensed trustees) should also be permitted to administer consumer proposals. She gave three main reasons:
To eliminate the “monopolistic approach that limits access to the consumer proposal”, since only licensed trustees can act as administrators;
To “provide Canadians with equality of access”; and
To increase OACCS member agencies revenue to allow them to provide their other services.
What’s my opinion?
First, let me start by stating my bias: I am a licensed bankruptcy trustee, and my firm files many thousands of bankruptcies and consumer proposals each year, so obviously I have a vested interest in maintaining the status quo; it’s what I do for a living.
Second, let me also say that I have personally met Ms. Ross on a number of occasions, and I have a great deal of respect and admiration for her, and for her organization. On a daily basis I interact with many credit counsellors who work at OACCS member agencies. I refer debtors to credit counsellors when I believe a credit counsellor can best solve their problems, and I refer debtors to OACCS member agencies for the counselling required when they file a bankruptcy or a consumer proposal.
In my twenty plus years in the insolvency business, I can honestly state that the accredited, not for profit credit counsellors I have worked with have all worked very hard in the best interests of their clients, and I would never question their competence or integrity.
I agree that these are difficult times to be a not for profit credit counsellor. As Ms. Ross correctly points out, many years ago the government provided funding directly to not for profit credit counselling agencies. When that funding stopped, as Ms. Ross eloquently stated:
Some agencies were forced to close, others narrowed their service operation and the larger agencies continued to operate by finding alternative revenue streams. Revenue came from voluntary fair-share contributions from creditors, educational seminars for employee groups, the sale of educational material and the bankruptcy counselling that we do.
Over the years not for profit credit counsellors began to offer Debt Management Plans, or DMPs, where creditors (like the banks and credit card companies) would agree to make a “fair share” contribution to the work of the counselling agency to fund their efforts. In a DMP the creditors are paid in full, without interest, so a successful DMP is good for the banks, because they get back all of their money, and it’s good for the debtor, since they don’t have to pay interest, and they are given time to pay.
Unfortunately a DMP is generally not as good a solution for most people as is a consumer proposal. Again, to quote Ms. Ross:
The debt management plans, DMPs, available through credit counselling provide consumers with a workable option to repay debt. Most people who undertake DMPs are technically insolvent, or close to it, but are determined to honour their credit obligations and repay their debt. DMPs are negotiated with creditors to provide full debt repayment over an extended time frame. Upon acceptance by the creditors, member agencies manage and administer these DMPs and are authorized to operate trust accounts to facilitate payments to creditors.
Voluntary DMPs do not provide court protection for consumers, nor mandate creditors to stop charging interest on the debt, nor mandate a specified time frame for creditors to respond to debt repayment proposals. They do not mandate that creditors accept a pro-rated share of the debtor’s ability to repay, nor do they address complex entitlement issues that may require a more formal plan.
On the other hand, consumer proposals are a court-supervised option to repay debt. A consumer proposal is an offer made by a debtor to their creditors to modify their payments in an effort to settle the debt. Under a proposal, a debtor may offer to pay a lower amount each month over a longer period of time or to pay a percentage of what they owe. A significant benefit to consumers of a consumer proposal is protection by the courts from unsecured creditors. This is important because it prevents creditors from taking legal steps, such as seizing property or garnishing wages, to recover debts.
I agree with Ms. Ross. A DMP is not binding on the creditors. If you have five creditors, and only three of them accept the DMP, the other two can still attempt to sue you and garnishee your wages. In a consumer proposal, if the majority of the dollar value of creditors agree, all creditors must accept the proposal. It is legally binding.
It is easy to see the problem faced by not for profit credit counsellors. The government withdrew their financial support many years ago, forcing the closure of many agencies. Debtors who need the services of not for profit credit counsellors generally don’t have the money to pay for those services, so it is difficult for agencies to cover their operating costs. DMPs were a great way for not for profit credit counselling agencies to generate revenue to cover their costs (through the “fair share” contributions made by creditors), but as debtors realize that a consumer proposal is often a superior alternative, the percentage of debtors filing a DMP has fallen, resulting in reduced revenue for credit counselling agencies.
Realizing that consumer proposals are the superior alternative, many not for profit credit counselling agencies began working with trustees to offer consumer proposals to their clients. They would meet the debtor, asses their situation, gather the necessary financial information, determine their debt load, and then prepare the files for the trustee. The trustee then only had to “show up” at the credit counsellors office to witness the debtor signing the paperwork. The trustee would pay the credit counsellor for their work, and it was a “win-win” for everyone. The credit counselling agency earned some revenue, and the trustee had access to a steady stream of clients without having to do very much work.
Unfortunately, the OSB has rules against this approach. Federal law requires a licensed trustee to personally assess the debtor before they file a bankruptcy or proposal. Directive No. 6R3 Assessment of an Individual Debtor, requires the trustee to personally meet with the debtor and review their assets, liabilities and income, and to review all of the options available for dealing with their debt problems.
Section 49 of the Bankruptcy and Insolvency Rules states that:
49. Trustees shall not, directly or indirectly, pay to a third party a commission, compensation or other benefit in order to obtain a professional engagement or accept, directly or indirectly from a third party, a commission, compensation or other benefit for referring work relating to a professional engagement.
Trustees therefore cannot pay a referral fee to a credit counsellor for assessing a debtor, or helping to prepare the file, as described in more detail in the OSB position paper on Referral Agreements between Trustees and a Third Party.
Unfortunately once the OSB realized what was happening, they had no choice but to enforce the rules and stop these practices, as noted by Ms. Ross:
For some time, the larger of the credit counselling services had prepared files for consumer proposals on behalf of certain trustees. This included statutory counselling, interviewing and assessing the debtor, and confirming the debt load. The Superintendent of Bankruptcy has recently determined that it is incompatible with the trustee’s responsibility to outsource this work. This decision has affected our agency’s revenue to the detriment of its ability to provide broader services as well as BIA proposals.
I both sympathize and empathize with the plight of accredited not for profit credit counselling agencies. They are trying to help people deal with their debts. Who else is there to fight for the little guy (which is the reason Ted Michalos and me, Doug Hoyes, went to Ottawa to testify in the first place, as I noted in my opening remarks):
Mr. Michalos and I and our bankruptcy trustees spend each day meeting with people in financial distress. These are real people who, in many cases, have lost their jobs, gone through a marriage breakup or suffered through an illness; and after these personal tragedies, they are faced with insurmountable debt.
These are not bad people. We believe it is important that when parliamentarians draft bankruptcy legislation, they remember that real people are affected.
About 100,000 Canadians file bankruptcy or a proposal each year.
Unfortunately, that group is not organized and so probably will not have anyone to speak on their behalf before this committee. We hope that our testimony will highlight some of the concerns of the average bankrupt.
Banks want you to borrow money on their high interest rate credit cards. Finance companies want you to get a high interest rate loan. Payday loan companies want you to get a very high interest payday loan. They all spend millions of dollars in advertising each year to encourage you to borrow and consume.
Not for profit credit counsellors fight against this onslaught of debt. They spend many hours each day helping people work out a budget. They provide education programs to help the average Canadian understand the world of debt, and how to avoid it. They are the only voice in the wilderness telling you to spend less, not more.
But they can’t pay the rent in their offices, and pay their staff salaries, and pay for the supplies to help you make a budget if they have no revenue.
And that’s one of the reasons why, as Ms. Ross freely admitted, that not for profit credit counsellors want to be given permission to administer consumer proposals. It would give them a source of revenue so that they can continue their good work. Who could argue with that?
I certainly don’t argue with doing good work. I agree that someone has to tell Canadians to spend within their means, and to stop borrowing to consume.
Unfortunately I can’t agree with the notion that credit counsellors should be permitted to act as consumer proposal administrators as a way to increase their revenue.
My main objection to allowing non-licensed trustees to administer consumer proposals is that it is a government requirement that the trustee, as stated in Directive No. 6R3 Assessment of an Individual Debtor, must advise the debtor of all of their options, and the implications of all of their options. That means that as a trustee I must explain to all debtors the ramifications of doing nothing, do a debt settlement, getting a debt consolidation loan, doing a debt management plan through a not for profit or for profit credit counsellor, and doing a consumer proposal or personal bankruptcy. I can explain the implications of a bankruptcy, because I am a licensed bankruptcy trustee. I fully understand the process, so I can explain it. How can a non-trustee have the same level of knowledge as a trustee?
The Directive requires me to explain: “transfers, preferences and settlements of real or personal property of the debtor.” Is that something all credit counsellors understand? Do all credit counsellors understand the new surplus income rules, and how they are calculated in practice? Do credit counsellors understand the discharge process, and the court process, in a consumer proposal or a bankruptcy?
Credit counsellors would argue that they can learn all of those things, and I agree. The best way to become knowledgeable about the entire process is to become a trustee. Currently the average trustee has a university degree, many years of practical experience, and they have passed a series of very complicated courses that take on average five or more years to complete. It takes a long time to become a trustee. But, if a credit counsellor wants to become a trustee, they can find a sponsor, enroll in the program, and become a trustee, and then they can administer consumer proposals.
I believe this discussion is missing the real issue. As Ms. Ross correctly stated, not for profit credit counselling agencies are suffering from declining revenue, which is why they want to administer consumer proposals. The solution is not to make credit counsellors into consumer proposal administrators; the solution is to find a way to increase their revenue, doing what they do best.
What credit counsellors do best is credit counselling. They are highly skilled in providing advice on budgeting and money management. They are excellent educators. They should concentrate on what they do best. But how do they generate the revenue to cover their costs to provide this un-biased money management education?
The most obvious answer is through the revenue they receive from the credit counselling that they provide to individuals that have filed a bankruptcy or consumer proposal in Canada. Every individual that files bankruptcy or a consumer proposal is required to attend two credit counselling sessions, as described in Directive No. 1R2, Counselling in Insolvency Matters. Many trustees in Canada, including my firm, Hoyes, Michalos & Associates, outsource the majority of our credit counselling sessions to external counsellors. We do this because we want our debtors to get the best possible counselling so that they learn proper money management skills, so that they don’t have any future money problems.
Rule 131 of the Bankruptcy & Insolvency Act Rules prescribes the rate that is to be paid for the two required counselling sessions: $85 for each individual session, or $25 per person if the counselling is provided in a group session. In other words, a trustee may “outsource” the counselling requirement to a licensed credit counsellor, and the trustee may pay the credit counsellor, from the funds in the estate, $85 for each individual credit counselling session.
While $85 may sound like a lot of money, it isn’t. Many counselling sessions can take an hour or more, and that $85 must cover the counsellor’s wages, and all other overheads (like rent, administrative costs to book the appointment, training costs, etc.). Even worse, that $85 amount has remained unchanged for many years. $85 in 1994 is the equivalent of more than $115 in equivalent dollars today.
So the first, and most obvious solution, is to increase the amount that is paid for credit counselling sessions. Increasing the rate to $115 per session would bring the tariff back to where it was in 1994. I would go one step further: I would increase the rate to $125, or even $150 per session. Those increased resources would provide greater revenue to not for profit credit counselling agencies, since trustees would have more resources to pay them.
In addition to increasing the rate, I would increase the number of credit counselling sessions required.
Currently the first session must be done in the first 60 days of the bankruptcy or proposal, with the second session completed before the 210th day. That timing makes sense for a bankruptcy that lasts for nine months, but it may not be sufficient for a bankruptcy that lasts for 21, 24, or 36 months, as they often now do under the new bankruptcy rules. It’s also not sufficient for a consumer proposal that can last for up to five years.
So, my second suggestion is that for all bankruptcies that are automatically extended past nine months, a third counselling session should be added, to occur at some point in the second year. In addition, for all consumer proposals that last for greater than twelve months, a third counselling session should be added.
This new third session could focus on a review of the techniques learned in the first two sessions, and could include a review of the budget the debtor should be keeping during their insolvency process. This extra counselling session could be used to review different methods of saving (like the new Tax Free Savings Account), and could cover more advanced budgeting techniques. Perhaps this new counselling session could include an interactive web based component, allowing debtors to track their budget information on line. There are many tools that already do this, such as Calendar Budget, so it would not be that difficult to develop the content for the new third credit counselling session. Credit Canada, a not for profit credit counselling agency, has created a Financial Coaching Series that costs $120 per session for six sessions, so the expertise and content already exists for this extra counselling session. In fact, I would seek the input of the not for profit credit counsellors, including the OACCS, to help design this third session.
By raising the counselling rate from $85 to $125, and by adding a third session, the revenue generated by each personal bankruptcy or consumer proposal would increase from $170 to up to $375. That increase in revenue would go a long way towards helping not for profit credit counsellors help the people they want to help.
Is this the perfect solution? Probably not. I’m sure with further consultation even better strategies can be developed. But with this approach the real problem of reduced revenue for not for profit credit counsellors can be solved, without creating a new problem of having non trustees administering consumer proposals.
posted by Doug Hoyes @ 
