The idea behind a debt management program is simple – your debts are pooled together (they are not paid off like with a loan) by a not for profit agency so that you only have to make one monthly payment. In most cases, there will be no new interest charged to the debts included in a debt management plan. Instead your payments go directly towards reducing the debt.
Debt management plans are an excellent solution for people that can afford to repay their debt in full, but need relief from the interest they are being charged. They are not really an alternative to bankruptcy, but rather it is an option to consider while you still have the ability to make payments.
If you compare a debt management program to a consolidation loan what you will find is that the consolidation loan costs you more (since you will still be paying some sort of interest on the debt), but the consolidation loan is also better for your credit report. If you file a debt management plan your debts will be reported as an R7 – this designation simply means you have entered into a plan to repay your debts at less than the full amount of your original contracts (i.e. less or no interest). With a consolidation loan your credit might be rated an R1 – the highest possible rating, assuming you make all of the loan payments on time as required.
Interestingly, a consumer proposal receives the same credit rating as a debt management program, an R7. A consumer proposal is a legal procedure (administered by licensed trustees in bankruptcy) where you repay a portion of your debts. Like the debt management program there are no interest charges, but unlike the debt management program, in a consumer proposal you usually only repay 30 to 50% of the debt. Also unlike the debt management plan, consumer proposals are a direct alternative to bankruptcy.
So which should solution should you be considering?
Well, if you can afford to repay your debt in full and you qualify for a consolidation loan then this is probably the correct solution for you to use.
If you can afford to repay the debt, but the interest charges are killing you, or if you have applied for a consolidation loan and been rejected then a debt management program might be the place to start.
If repaying the debt in full will be difficult, or you know that you cannot afford to repay the debt in full, then a consumer proposal is likely the best route for you to consider.
The trick with all of these solutions is to consider each option carefully and then make a decision based on what you can realistically afford to repay. If after you “run the numbers” none of these options make any sense then you may have to consider personal bankruptcy, which is discussed in detail on this site.
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.
Last week I discussed what sunburn can teach us about bankruptcy in Canada. I made the comment that I had met with numerous Canadians in financial trouble who had commented to me about sunburn, and what to do about it. Over the last few weeks I’ve had a lot of people comment about a news event that’s far more serious: the oil rig explosion and resulting “oil volcano” in the Gulf of Mexico in the United States. In my daily work I often find that seemingly unrelated news events play on people’s minds, and it impacts on how they think about their debts.
Sometimes it’s good news, such as my comments on Bankruptcy Lessons from the Stanley Cup Champions from last year. When Pittsburgh won the Stanley Cup in 2009 it was a good news story: a team that was bankrupt came bank and became champions. I had a lot of people comment to me that if a hockey team can recover, so can I. It gave people hope.
The Gulf oil spill is obviously a huge tragedy, but it’s also an event many people can relate to on a subconscious level. When you have more debt than you can handle, it feels like a gushing oil well. It appears to be an impossible situation, with no way to stop it. Obviously trying to stop a gushing oil well more than a mile under water is a very daunting task. But that’s the feeling many people have trying to deal with their debts.
At least once every week someone arrives in my office, and they are overwhelmed by their debts. How can I tell? Because they bring in a stack of unopened mail. Deal with their debts is so scary they can’t even open their mail. They have letters from bill collectors and even from lawyers, but they can’t even face opening the letters to see what’s inside. Like a gushing oil well, opening the mail is hopeless, because they see no way to solve the debt problem.
Here’s the good news: there are solutions. Yes, it may look hopeless, but there are ways to deal with debts.
Many people have debts simply because they don’t have a plan. They don’t keep track of their expenses, and they have no idea where their money goes. The solution is relatively simple. Start by writing down every dollar you spend, and then armed with this information you can make a plan to reduce your expenses and use the extra cash flow to pay off your debts. Make a household budget, and get started.
Of course personal bankruptcy in Canada may be a possible solution. Your debts are eliminated, and you get a fresh start. In my experience bankruptcy is the correct solution for some people, but not for everyone. Many people are afraid that bankruptcy is an admission of failure, and so they would rather put up with the collection calls and wage garnishments than go bankrupt.
Fortunately, there is another option. There is a legal procedure that deals with your creditors, but you don’t have to declare bankruptcy. It’s called a consumer proposal. In a consumer proposal we negotiate a fair settlement with your creditors, and your unsecured debts (like credit cards, lines of credit, and even tax debts) are eliminated.
How do you stop debt that’s gushing like a broken oil well? For many people, a consumer proposal is the answer.
If you feel that your debt is more than you can handle, but you no longer want to ignore the problem, contact a consumer proposal administrator, or a bankruptcy trustee, to arrange a no charge initial consultation, and find a way to permanently deal with your debt problems.
We may have a mini boom during the Olympics, as all of our hotels and restaurants will be full with visitors from around the world. But after that, incomes won’t be rising, and house prices won’t be rising, so debtors won’t be able to rely on overtime or a rising real estate market to deal with their debts.
As predicted, Vancouver residents were very busy in the months leading up to and including the Olympics. I live in Vancouver, and I work from my Vancouver bankruptcy office, and I can tell you from first hand experience that the Olympics were fantastic. Like many other Vancouver residents, I had the pleasure of experiencing the Olympics first hand. I went up to Whistler the week before the Olympics to see the preparations for skiing. I attended the opening ceremonies, and they were unbelievable. I watched the speed skating on the big oval in Richmond (my firm also has a bankruptcy office in Richmond), and I saw short track and hockey games in Vancouver.
Are we suffering a “hangover” from the Olympics? I’m happy to report that no, we Vancouver residents are not suffering a large let down. The Olympics were great, and we were happy to be a part of it.
However, there is no doubt that the Olympic jobs are now gone, and we are no longer living in the boom times created by the Olympics. Obviously the end of the job boom can reduce income, and increase the risk of personal bankruptcy in Canada.
I’m not an economist, but I do meet with regular, hard-working Canadians every day, and based on what they tell me I worry that many are living in a “false economy.” The Olympics certainly helped us here in Vancouver, but all across Canada, and the world, government stimulus money has also helped bolster the economy, and keep our economy from sliding into an economic depression.
Government economic stimulus is somewhat like credit card debt. I use the credit card today to buy what I want, and I feel great. But, at some point in the future, I will need to repay what I borrowed, and that’s the “time of reckoning” that is not yet here. I hope the economy continues to recover, but as a trustee in bankruptcy I’m also a realist. We hope for the best, but prepare for the worst.
There is some great news when it comes to dealing with debt. Over the last eight months I have personally witnessed an increasing number of Vancouver residents choosing to avoid filing bankruptcy in Canada to deal with their debts; instead, they are choosing to file a consumer proposal. Recent changes in the rules make filing a consumer proposal a more attractive option for many Canadians. In a proposal I help you negotiate a settlement with your creditors, where you pay perhaps a third or a half of the total amount you owe over a three to five year period, and your creditors agree to write off the rest. If the creditors accept your proposal, you avoid filing bankruptcy in Canada. I tell people they need three things going for them to file a proposal:
Age
Health
Income
First, you need to be old enough to understand a proposal, and young enough to have the time to make the payments over the next three to five years.
Second, your health should be sufficient so that you know you will be working for the next three to five years so that you can make your proposal payments.
Finally, to make payments you need a stable source of income. If you expect to get laid off next month, a proposal may not be your best option.
As my fellow residents of Vancouver look back fondly on our Olympic experience, I encourage everyone to look ahead to their future, and if you find you have more debt than you can handle, consider a consumer proposal as an option to deal with your debts. We will meet with all debtors initially without cost to assist you in the assessment of your options. Please contact a trustee today for your free initial consultation, and find out what options will work best to help you deal with your debt.
Would your financial well-being be noticeably affected if your paycheque dropped by 10%? For most of us, the answer is “yes”. We tend to live paycheque to paycheque, so any drop in income can lead us down a slippery slope that often ends with a person filing bankruptcy in Canada.
Think about it: if you get a paycheque of $500 per week, what would happen if your paycheque was cut to $450 per week? Would you still be able to pay your living expenses, and service your debts? Obviously for many Canadians a 10% cut in pay would severely impact on their ability to pay their bills every month.
As a bankruptcy trustee in Ontario, I meet with many people each week who have experienced a reduction in their income since the recession started two years ago. For some, the income reduction is relatively minor. They went from averaging two or three hours of overtime a week, to no overtime. It hurts, but they still have a full 40 hour paycheque. For others, a long term or permanent layoff drastically reduces their income.
In a perfect world, we would all have no debts, and lots of money saved in our RRSPs and bank accounts. If we did, a job loss would be a minor inconvenience. With no debt to service and with cash in the bank, we could take our time looking for a new job. We might even take a vacation before we start our job search.
Unfortunately very few of us live in a “perfect world” of no debt, and lots of cash in the bank. As I reported two months ago in my article on Personal Debt in Canada: The Ticking Time Bomb:
Despite the recession, or perhaps because of it, Canadians continue to borrow at record levels. By the end of the third quarter of 2009 the average Canadian adult had over $40,000 in household credit, a record level. Household credit includes credit cards, bank loans, and mortgages, so $40,000 may not appear to be a large number. After all, many people have mortgages of greater than $40,000. That’s true, but many other Canadians don’t have any mortgages or debt, so to average $40,000 over all adult Canadians, many of us are obviously carrying a significant amount of debt. As the chart shows, back in the year 2000 we each had approximately $20,000 in debt, so in less than a decade the debt we are carrying has doubled.
That’s a staggering statistic. If you are the average Canadian, your debt has doubled. Has your income doubled? Are you making twice as much today as you were earning in the year 2000? Probably not. If you still have a job you may have received “cost of living” increases of 2% per year for the last decade, but that obviously does not add up to a doubling of your income.
And that’s the problem: In Canada our personal debt continues to increase, but our incomes are not increasing nearly as fast, so we are spending an ever increasing amount of each paycheque servicing our debts.
It is very common for me to meet with people who are spending a third, or even a half, of their total income just making payments on their debts! One hundred years ago there was virtually no debt. Fifty years ago the only common type of debt was a mortgage on a house, or perhaps a small amount of credit at the local department store. Today, most of us have a mortgage, car loan, line of credit, student loan, and one or more credit cards where we carry balances.
That’s a lot of debt, and it makes us very vulnerable to any shock to our income. Missing a day of work can literally, for many Canadians, put them over the edge and make them unable to pay their bills.
What’s the solution?
Obviously we must all start taking responsibility for ourselves. There are those that will argue that our high debt levels are the fault of the banks and finance companies that lent more money than we could ever hope to repay, all so they could earn huge profits. Others will argue that it’s the government’s fault: they should pass rules to protect us. Those are valid arguments, but I choose another explanation: I choose to believe that I am responsible for myself, and my family.
I believe we should all stop worrying about the banks and the government, and look out for Number One. Ourselves. We should each decide what we need to borrow, and we should not respond to high pressure sales tactics from banks, car dealers, real estate agents, or anyone else who is trying to get us to borrow to buy something we can’t afford.
I remember meeting a man about six months ago who was in way over his head in debt. He had a very nice house, two leased cars, and a very comfortable lifestyle. About a year ago he lost his job due to the recession. While he was working he could afford to pay the mortgage, car loans, and all of his living expenses, and he borrowed to take vacations and buy various luxury items. But when he lost his job, with no savings, he immediately started using credit to survive. By the time I met him he was deeply in debt.
After much soul-searching, he made two very difficult decisions: He sold his house and moved into a smaller rental unit, and he returned his two leased cars, and replaced them with a much less expensive used car. He cut back on eating out and other expenses he couldn’t afford.
He found a new job, that paid well, but not nearly as well as his old job. To deal with his debts he filed a consumer proposal, and expects to have it paid in full in under two years.
He told me that even though he no longer lives in a huge house, and no longer drives a new car, he is actually much happier. He knows that even if he was to lose his job, he could survive while be found another job, because his expenses are now much lower.
And that’s the key to dealing with debt and surviving during these difficult times: Reduce your living expenses so that they are as low as possible, so that if you suffer a 10% reduction in income, you are still earning enough to pay your bills. It’s not easy, and you won’t be “keeping up with the Joneses”, but you will have cash in your pocket at the end of the month, and that’s a great feeling. If you have more debt than you can handle, consider your options, and begin the process towards a debt free life.
Why do Canadians read over a quarter of a million pages on this Bankruptcy Canada website every month? Why are you reading this article? Simple: you want information about filing bankruptcy in Canada. Today, to make your research easier, we present a list of the top bankruptcy resources in Canada. Click on the links, do your own research, and then decide for yourself whether or not filing bankruptcy is the correct decision for you.
The most popular pages on our main site are also the best information pages.
The most popular page is the Bankruptcy Canada Frequently Asked Questions page, which isn’t surprising, since if you are looking for information, this is the place to go. We even mark the questions so you can see which questions are the most asked. If you have a question, it’s quite likely someone else has already asked that same question, so this is a great resource to get all of your questions answered.
If you can’t find your question, you can post a question on our anonymous bankruptcy Canada question and answer blog. This is the most widely read question and answer blog on bankruptcy in Canada, with well over 4,000 questions and expert answers.
Another great resource is the Bankruptcy Canada on-line Support Group. It’s free, it’s anonymous, and it allows you to talk to other Canadians struggling with debt. Here’s a sample of a discussion with various people considering bankruptcy. This is a real discussion, with real people, telling both the good and the bad about the process. Reading these comments you can see that you are not alone.
One of our most popular features is our debt options calculator. It’s free, only takes five seconds to use, and it estimates the costs for you of your various debt management alternatives.
Trustees Talk
This year we added a new feature, the Trustees Talk blog, where Canadian bankruptcy trustees give their views on current topics.
Here are the most popular posts from the Trustees Talk blog in the last twelve months, starting with the most read posts:
Surplus Income and Bankruptcy in Canada: How the New Rules Could Extend the Cost of your Bankruptcy in Canada (the most popular post in the last year, read by almost three times as many people as the second most popular article; obviously the surplus income rules are of great concern to most people considering bankruptcy in Canada).
Why a House is NOT an investment This was another controversial post, but as an increasing number of Canadians deal with the high cost of home ownership, and an increasing rate of foreclosures, more people are beginning to see this perspective .
There are other great sites with information for people in financial trouble.
Moneyproblems.ca is one of the oldest and most established web sites in Canada, devoted exclusively to people with money problems. In addition to lots of great content, they also publish a Tip of the Day, a short, practical tip to help you save money and deal with your money problems.
Bankruptcy law is federal legislation, so the basic rules are identical everywhere in Canada. However, there are minor differences in each province, so provincial websites can help you understand issues specific to your province. You can get information on:
There are also sites for the major cities in Canada, so that you can read the thoughts and perspectives of trustees in various cities; the best of the sites include:
The point? There are lots of places you can go for information to research your alternatives, and to help you make a decision. If you don’t want to do a lot of research, contact a trustee today, to arrange for a free initial consultation. With or without prior research, they will walk you through your options, and help you make an informed decision.
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.
Every day we talk to people who are worried about filing bankruptcy. They are nervous about the process; they don’t know what will happen. Many of them are afraid, so to help you deal with those fears about bankruptcy I would like to discuss the five most common fears people have about filing bankruptcy. After meeting with us many people say things like “I should have come to see you sooner, this was not as scary as I thought it would be.” Your trip to see a bankruptcy trustee should not be scary. We want to help you to find the best solution for you and your debts. It may be declaring bankruptcy, but it could also be a consumer proposal; bankruptcy may not even be necessary.
The first fear we hear is that when you go bankrupt someone will come to your home and take all of your personal possessions. That’s not true. Each province in Canada has a list of personal possessions that are exempt from seizure, meaning you can keep them if you go bankrupt. For example, Ontario law states that your household items such as your television and furniture are exempt up to a value of $11,300 and your personal items, such as clothing and shoes are exempt up to a limit of $5,650. You may also keep one vehicle if it is worth less than $5,650 (this exemption is not for cars that are financed or leased – those vehicles you may keep if you continue to honor your contract). It’s even possible to keep your house in bankruptcy under certain circumstances.
The second fear is that after bankruptcy you will never get credit again. Again, that is not the case. Obviously filing bankrupt will damage your credit, but if you are filing bankruptcy in Canada your credit is already less than perfect. Once your debts are eliminated you should be able to start saving money, and if you have a job and a security deposit it is definitely possible to repair and rebuild your credit after bankruptcy and borrow again, should you choose to do so.
The third fear is that my bankruptcy will affect my spouse. If your debts are in your name, your bankruptcy will not affect your spouse‘s credit report. Your spouse is only responsible for debts that they have signed or co-signed. Just because you are married does not automatically make your spouse responsible for your debts.
The fourth fear is that you will go to jail if you don’t repay your debts, or that you will be unable to leave the country. I think this fear starts with overly aggressive collection agents. Borrowing money is not a crime, unless you committed fraud to get the money. In most cases you borrowed the money expecting to be able to repay it, but were unable to do so due to a change in your circumstances. Many times I have had a person in my office asking me if they will lose their passport or citizenship and not be permitted to exit or re-enter the country. Unfortunately, many people put off calling our office because they are afraid that being proactive about their debts will result in losing their status to live as a free Canadian citizen. Not paying your debts or filing for bankruptcy will not stop you from traveling to visit friends or family abroad – there is no notation on your passport or citizenship that you have filed for bankruptcy. So you should be able to travel outside of Canada and within Canada without any issues.
Finally, I think the biggest and most common fear for many people is the idea that they will have to wait seven years for the bankruptcy “damage” to clear. Yes, there will be a note on your credit report for at least six years after you are discharged from bankruptcy. But again, I have dealt with hundreds of people over the years who have completed their bankruptcy and gone on to purchase a car, a house, and even to start a new business. The key is that they live within their means and save money, which combined with a good income will allow you to rebuild your credit. I strongly recommend that everyone create a budget, and watch what you spend. By saving money, you can get repair your credit after bankruptcy.
No-one wants to file bankruptcy, so it’s natural that most people have some fear about going bankrupt. Those fears are normal. By researching your options and addressing those fears, you can overcome your fears. If you have more debt than you can handle, you need a solution, so contact a trustee today for a free initial consultation, and find the answer to your fears, and get a fresh start.
March 1, 2010 was a big day for pay day loans in Alberta as new legislation is now in place that governs how payday loans are provided, administered and what fees can be charged. These rules will drastically alter what type of fees these payday loan companies are allowed to charge. Similar rules are in force or pending in other provinces, including the Ontario Payday Loans Act of 2008.
For those of you unfamiliar with payday loans, they are a fairly young component of the Canadian financial market place. At their root they are short-term loans that are designed to give you some temporary cash between pay periods, kind of like a cash advance. Typically all that is required to obtain a payday loan is that you must prove you are employed, have regular income, a permanent address, an active bank account and are willing to directly authorize a withdrawal of the balance of the loan and any associated interest or penalties from your account at your next pay day. Unfortunately, the problems associated with these types of loans are significant, the biggest of which is the amount of fees and penalties that are associated with them.
For example many payday loan companies historically have included a set up fee, a broker fee, an administration fee, a processing fee, convenience charges, verification fees, early repayment fees, cheque-cashing fees, NSF fees, roll-over fees, and renewal charges. Of course you rarely run into all of these types of fees, but regularly you will see a combination of these items, and when they are factored in, it is not at all surprising that the payday loan is regularly one of the most expensive ways to borrow money. It is not uncommon for a person to borrow $400 today, and then be required to pay back $500 on their pay day at the end of next week. That’s $100 in charges on a $400 loan, or 25%. However, if that’s a two week loan, the annual interest rate would be over 600%. In the past, payday loan companies avoided the usury laws by not charging “interest”; they simply charged service charges and processing fees.
The good news is that these legislative amendments will limit the type of fees that can be charged and the associated amounts. Under the new laws the payday loan companies are now limited to only being able to charge $23 for every $100.00 on each two week loan. This is a drastic improvement from the $40 to $45 that many of these companies were charging, and brings Alberta companies in line with many of the other provinces (Ontario’s limit is $21, Manitoba’s is $17, and BC’s is $23).
Along with the new regulated limit, this legislation also implemented a two-day cooling off period which allows consumers to return loans within that time period without incurring costs. As well, the fees are now to be paid directly by the consumer and not taken from the loan itself. In addition, all costs of borrowing must be posted , and the use of “plain-language” contracts has been mandated.
While I don’t disagree that this is an improvement, my real question is whether or not these changes are enough? For example, if I walked into a payday loan company today and borrowed $1,500 for two weeks, I would pay $345.00. That’s for 2 weeks — almost double the cost of your typical credit card. And the scary part is that it is completely legal.
If that isn’t bad enough, the biggest problem with payday loans is that while they are intended to be temporary, a dependency often results. I regularly see people who were forced to get a payday loan to overcome a temporary hurdle, but at the end of the loan period were no better off and now are forced to take out another payday loan just to cover the first. The high cost and the easy approval leads too many people to be trapped by one of the most expensive forms of credit and this just isn’t right.
If you find yourself feeling trapped by payday loans, and if you are finding the cost of maintaining these loans is causing problems keeping up with your other bills, the best advice we can give is to discuss things with a qualified professional. There are many ways to deal with these types of situations and it is best to sit down with someone who can explain how a consolidation loan, debt management plan, or a consumer proposal can help you to put a stop to this revolving door of high interest. Whoever you see, make sure they discuss all of the available options and compare each to your own situation. This way you can make an informed decision as to which solution makes the most sense for you and your family.
In the 2010 Super Bowl, the Indianapolis Colts played not to lose. They didn’t take any unnecessary chances. In contrast, the New Orleans Saints played to win. In the first half, with two yards to go on fourth down, they tried to score, and were stopped, turning the ball over to the Colts. At the start of the second half they attempted an on-side kick, a very risky play, but it was successful, they recovered the ball, and went on to win the game.
The 2010 Vancouver Olympics had many examples of “playing to win”: skiers going so fast that a crash is inevitable, and speed skaters pushing it to the limit. Some of them win gold; others don’t finish and don’t win.
So why am I talking about sports on this Bankruptcy CanadaTrustees Talk blog? Because there are two approaches to dealing with debt problems: you can avoid the problem and hope it won’t get worse, or you can deal with it head on. You can play not to lose, or you can play to win.
I’ve met hundreds of people over the years who play not to lose. They assume that if they ignore the phone calls they get from collection agents and bill collectors, the problems will go away. Sometimes they are right. If they keep switching jobs, and if they move from town to town it’s quite possible that bill collectors will lose track of them, and no further collection activity will result. Their credit report won’t look great, but if no-one can find them, they feel that the problem is under control. Playing not to lose means you never win; you just avoid your debts; you don’t actually eliminate them, and you never get a fresh start.
I’ve also met with thousands of people who play to win. They know that they incurred the debt, but they are sick and tired of putting up with calls from collection agents. They want to deal with their debt problems. They realize that there are risks to filing a consumer proposal or personal bankruptcy in Canada. One risk in a consumer proposal is that the creditors will vote against the proposal. In both a proposal and bankruptcy your credit score is negatively impacted, and there will be a note on your credit report for many years.
Why were the New Orleans Saints willing to risk losing the game by attempting an on-side kick at the start of the second half? Wasn’t that a crazy, risky, strategy? Not really. By taking the safe route, by doing nothing, it was likely that the Saints would have lost the game. If they were going to lose anyway, what did they have to lose?
Why does a skier go so fast that they risk crashing? Because if they go slowly, they are guaranteed not to win. They really have nothing to lose, so the correct strategy is to play to win.
What will you gain by ignoring your debts? Is it worth the risk to do nothing, or is the correct strategy to get some professional advice and deal with your debts once and for all?
If you know that you will never be able to repay your debts on your own, you have nothing (but your debts) to lose, so play to win. Yes, there are risks. You risk being embarrassed admitting to yourself that you have more debt than you can handle. You risk having to confront your spending habits, and making changes to stay out of debt in the future. You won’t be able to borrow for a period of time.
But you will deal with your debts, and get a fresh start.
You will win.
Many people believe that bankruptcy is the only way out. It’s not. A consumer proposal may be a better strategy. You decide what you can afford to pay to settle your debts, and offer that to your creditors. They may agree. They may not. It’s risky. But if you are committed to making a fair settlement and offer your creditors a fair deal, they will most likely accept it. Do your research, offer a fair deal, and play to win.
Only you can decide to play to win. Only you can decide that you want a fresh start. What’s your decision? To start, contact a professional today for a no charge initial consultation to review your options, and find out if a consumer proposal or personal bankruptcy in Canada is the solution for your debt problems.
posted by Ted Michalos @ 
