An interesting debate has emerged in the pages of the Financial Post over the last two weeks regarding the need for senior citizens to file bankruptcy in Canada. The debate started with an article by Jonathan Chevreau published on August 11, 2010 titled No Immunity to Bankruptcy. That day Mr. Chevreau also published a blog post titled Freedom 60? 33,516 Canadians 60 or older filed for bankruptcy from 2008 to 2010. I was interviewed for both the newspaper column and the blog post; here’s a quote from the newspaper:
In the two and a half years between January 2008 and May 2010, 33,516 Canadians age 60 or over filed for bankruptcy, according to Industry Canada.
That quote is accurate. In fact, after holding steady in the 7% range between 2006 and 2009, in the first seven months of 2010 the percentage of people aged 60 or over who have filed a consumer proposal or a personal bankruptcy has increased to 9%. That statistic clearly indicates that more seniors are experiencing financial difficulty, and are making the decision to formally deal with their debt.
Of course, the problem with carrying debt into retirement is that it must be serviced with less income than when working full-time. Some adapt by making only the minimum monthly payments on credit cards, which leads to a downward debt spiral, a journey that often ends with a trip to offices like Hoyes.
In the past, most seniors were able to retire with no debt. The fortunate ones owned their own house with no mortgage, so when they retired they were able to live comfortably from their savings and pensions. Unfortunately today an increasing number of seniors are retiring with debt, so when their income drops at retirement it often becomes impossible to both service debt and pay normal day to day living expenses. I’ve met with a number of seniors who retired in good financial shape, but as the recession worsened they ended up helping their grown children deal with their money problems, and that often depletes their retirement nest egg, and can even lead to new debt.
But there’s more to the story than that; here’s another excerpt from the Financial Post article:
Hoyes guesses half the seniors he sees choose bankruptcy, although he lays out four less extreme options. He points out that most retirees don’t need to file for bankruptcy because the main reason for considering it is to ward off creditors that threaten to garnishee wages or seize assets. Retirees have no full-time wages, so don’t have significant wages that can be seized. Also, “it is very difficult, if not impossible, for a creditor to garnishee a pension,” Mr. Hoyes says.
This is where it gets interesting. On the day the article was published, Mr. Chevreau was contacted by a reader who said that he was 70 years old, and he owed a significant amount of back taxes, and CRA was taking all of his Canada Pension Plan income each month. As any good journalist would do, Mr. Chevreau contacted me to ask for my side of the story, since Revenue Canada’s actions to seize pension plans would appear to contradict my statement that “it’s very difficult for a creditor to garnishee a pension.”
My response to Mr. Chevreau was that yes, it is very difficult for a typical creditor, like a bank or credit card company, to garnishee a pension. However, Canada Revenue Agency is not a “typical” creditor. CRA has more power than your typical credit card company or other creditor.
On August 18 Mr. Chevreau reported on this continuing story in an article in the Financial Post titled Government gives with one hand, garnishees with other, where he tells the story of “Sam” (not his real name), the 70 year old who is not getting any CPP or OAS benefits because CRA is taking all of it, and applying it against his tax debt. Here’s an excerpt from the story:
Generally, if you owe money on credit cards or other unsecured debt, there’s no mechanism for creditors to garnishee a pension, says Doug Hoyes, a principal with Toronto based bankruptcy trustee Hoyes Michalos & Associates Inc.
According to Hoyes, the Ontario Wages Act only permits creditors to garnishee up to 20% of a person’s wages or 50% for child support. However, he says, “standard garnishment rules don’t apply to the CRA. They can do whatever they want.”
Hoyes regards the legal definition of garnisheeing wages as a court order to take some of your paycheque. But the rules are different when the government is itself the creditor. “It doesn’t go to court. They can just decide to take CPP and OAS until they get what they want.”
He has seen cases similar to Sam’s in the past, but they were “rare circumstances, generally where the tax debt was large and often where the taxpayer was delinquent in filing tax returns on time.”
CRA spokeswoman Caitlin Workman confirms the tax agency can garnishee “all types of pensions,” both government and private. This is permitted under Section 224.1 of the Income Tax Act, with similar provisions in five other acts. However, she says it’s rare to garnishee more than 20% of such benefits. “It’s very much a last resort after the taxpayer’s ability to pay has been determined.”
So there you have it. If you owe taxes to CRA, and if you get Canada Pension Plan or Old Age Security payments, Canada Revenue Agency can withhold some or all of your monthly pension payments in satisfaction of your tax debt.
As I said in the article, while I have seen cases like Sam’s, it is generally very rare that CRA would take all of someone’s pension. They will typically only take everything if you owe a significant amount in taxes, and if you were delinquent in filing your taxes on time. As the CRA spokeswoman stated, it is rare that they will garnishee more than 20% of pension benefits, but it is possible.
What Can You Do if CRA is Taking Your CPP Pension For Taxes Owing?
If you owe back taxes and CRA is taking your pension, you have a number of options.
First, you can contact CRA and work out a re-payment plan. If you have other assets that you can sell to raise cash, you may be able to pay your taxes with that money, at which point CRA will stop taking your pension. You may also be able to negotiate a monthly payment plan to free up some of your pension.
If you can’t make a plan directly with Canada Revenue Agency, you could try to get a debt consolidation loan; you borrow from a bank, and use the money to repay CRA. If you pay your taxes in full, CRA will release the flag on your pension payments.
If you don’t qualify for a loan, which is often the case once you retire because your income has dropped, your next option is a consumer proposal. In a consumer proposal a settlement is reached with all of your creditors, including CRA. In many cases you may end up paying less than the full amount owing. If your largest debt is taxes, CRA must agree to your proposal, so a consumer proposal is not always an option where tax debts are involved.
If a consumer proposal isn’t possible, your final option for dealing with tax debt is personal bankruptcy. Upon your discharge from bankruptcy in Canada your tax debts are discharged.
Owing money to the tax man isn’t fun at any age, but it can be even more stressful if you are a senior citizen on a pension, so if you have tax debts, contact a licensed bankruptcy trustee for a no charge initial consultation to review your options.
Finally, my thanks to Mr. Chevreau and the Finanicial Post for bringing this issue, and possible solutions, to the attention of senior Canadians.
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 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.
In June 2010, the Office of the Superintendent of Bankruptcy (OSB) initiated a In June 2010, the Office of the Superintendent of Bankruptcy (OSB) initiated a Review of the Trustee Licensing Regulatory Framework . First a little bit of background: the OSB is a division of the Federal Government who has been charged with the administration of all estates and matters to which the Bankruptcy and Insolvency Act. Their main role is “to maintain investor and lender confidence in the Canadian marketplace by protecting the integrity of the bankruptcy and insolvency system.” As a result they play a crucial role in many areas, including the review of Trustees’ and debtors’ actions in all aspects of bankruptcy, reviewing the performances of official receivers and senior bankruptcy analysts, and the issuing or renewal of Trustee licenses.
Barton Goth, Bankruptcy Trustee
While most of this review is pretty bland, there is one item being considered that could have some dramatic ramifications on the Canadian Insolvency industry as we know it. That is the issue of whether non-trustees should be able to serve as administrators of consumer proposals. For those of you who are not aware, a consumer proposal is mechanism within the Bankruptcy and Insolvency Act that provides a legally binding way for debtors to negotiate a settlement with their creditors and avoid a bankruptcy. It is a win-win as the debtor is permitted a mechanism where they can avoid a bankruptcy and the creditors in turn receive a greater recovery than that would under bankruptcy. Currently all consumer proposal administrators in Canada are licensed bankruptcy trustees.
The question that has been raised is whether or not the OSB should appoint or designate administrators of consumer proposals who are not licensed trustees.
As you can imagine, being a licensed trustee here in Edmonton, Alberta , I have some strong opinions on this issue. To be clear I don’t think it is a good idea and I see this as a very dangerous path.
One vital requirement of administering a consumer proposal is that it requires a thorough assessment of each individual debtor, and to be able to conduct a proper assessment you must be well versed in all aspects of the Bankruptcy & Insolvency Act, the Income Tax Act and other relevant provincial legislation. This is no small task and one that takes a significant amount of training to be able to do appropriately, training that is largely what the Trustee licensing process is designed to do.
There are other reasons that I am nervous about this potential change in policy, but what I want to specifically address were 3 issues identified in the OSB’s consultation paper. Although, I did find it interesting that unlike the other changes being considered there was no real background or justification in this paper as to why the administration of consumer proposals was becoming an issue. The only section that addressed this potential change referenced an argument made by In February 2008 by the Ontario Association of Credit Counselling Services (OACCS) when they appeared before the Standing Senate Committee on Banking Trade and Commerce.
The three of the main reasons advanced by the OACCS to be appointed as administrators were:
1. Availability
By expanding the ability to administer consumer proposals outside the trustee community it would allow for the availability of a credible alternative to Canadians for unbiased advice and consumer choice related to consumer proposals;
2. Diminishing Revenues
It would help to create an additional revenue stream, a revenue stream that was adversely impacted by the OSB’s issuance of a position paper issued by the OSB entitled “Referral Agreements between Trustees and a Third Party.” For reference, this position paper was put forward as there were many of largest of the credit counseling who were regularly preparing files for consumer proposals and acting as agents for certain trustees in a manner that contravened the intent of the Bankruptcy and Insolvency Act.
3. Serve to correct the current monopolistic approach taken by the OSB that that limits access to the consumer proposal option for those in need. Here are my comments:
1. Availability
Regarding their first point, that of availability of a credible alternative for unbiased advice. I see three components of this issue: knowledge, access and any potential biases. The first question I have is are people aware of what a consumer proposal is? Is the knowledge out there among the various stakeholders? Well clearly the trustee community and most reputable credit counselors are familiar with the general concepts behind a consumer proposal. There is nothing that prevents a credit counselor from discussing the existence of this option with a consumer debtor, just as there is nothing preventing me from discussing the presence of debt management plans or the like with people who walk in my office. Now do these discussions happen? Are the credit counselors accurately informing those they meet with? While I live in Alberta and can’t speak to what happens in Ontario or other areas of the province, I know where I practice, they are. The trustees and credit counselors here in Alberta have a good working relationship, and it is not uncommon for us to refer clients back and forth depending on their needs. So from my stand point, knowledge isn’t the issue.
The second component of this discussion is access. Is access an issue? Are consumers having difficulty meeting with a licensed trustee to discuss the filing of a consumer proposal ? Currently, I would say no, access is a non-issue. I have never run into someone who was unable to arrange a time discuss the filing of a consumer proposal with a licensed trustee or even suggested anything similar. Now, over the long term, I can see this as a potential argument. Just like society in general, we are all facing a mass baby boom retirement. This mass retirement has the potential to bring a host of economic and social difficulties that we will all be forced to deal with. The key is that this is a societal challenge, not simply a challenge that the trustee community is going to have to address. Arguably, this same phenomenon will impact accounts, lawyers, doctors, teachers and, I would assume, credit counselors. The result is that the average professional, including trustee’s and credit counselors, are going to have to take a close look at how we manage our practice’s, take greater advantage of the areas we are able to delegate and investigate ways that technology may be able to help us realize efficiencies that weren’t available historically. But this is not unique to our demographic. So I agree there is a challenge, but watering down the requirements to administer will potentially result in making it more difficult to find a qualified credit counselor, assuming there are fewer of them to manage the existing pool of debtors and the credit counselor is in turn have less time to do so, as they would now have to worry about all the issues associated with administering consumer proposalss and managing the related trust accounts.
The third point was that of a potential bias. Clearly there is a potential bias among the trustee community: we can administer proposals so it can very easily be suggested that the advice we give may be colored as a result of what services we can offer. Unfortunately, this potential bias is very difficult to overcome. However, one of the best ways to deal with this potential bias is to ensure that there is a lengthy and rigorous training requirement with an emphasis on professionalism and ethics. In addition, it is important that all efforts are made throughout this training requirement to look into the character of the potential candidate, whether this be through reference checks, an interview requirement, or, even better, a mandated experience requirement that involves being directly mentored by a licensed professional who is committed to the integrity of the profession. This does two things, first it helps to ensure that the potential candidates will be of the highest quality. Second, because people have sacrificed a large amount of time and energy in obtaining the certification the threat of losing that certification has significant weight. Interestingly enough, this is exactly model that trustee licensing process follows and while I am not going to argue that this process is perfect, it goes a long way to ensuring that the people administering proposals are capable, committed and willing to uphold the same principles and values that insolvency system is based.
In reality, this potential bias is going to exist regardless of who is administering proposals. If the ability to administer a consumer proposal is extended to include people outside the trustee community, these new designates are immediately going to be inherently at risk of holding that very same bias. Furthermore, this new group of designates has not been put through as rigorous of a training process and may not have as much respect for the insolvency system. The threat of losing their license may not have as much weight. As a result, I see a very slippery slope that may result in a much less consistent administration of proposals.
2. Diminishing Revenues
I was surprised this was used as an argument. Let me give you a little background so you can appreciate where I am coming from. As a licensed trustee what we do is directed by the legislation, directives issued by the Office of the Superintendent of Bankruptcy and how the courts have interpreted the both of these. If we look at the rules laid out by the above sources, we see there has been very clear direction given about referral agreements between Trustees and third parties. It is very clear that only Trustees are licensed to administer Consumer Proposals, and that this function cannot be delegated or outsourced.
There are four distinct sections of the Bankruptcy & Insolvency Act that are identified by the Office of the Superintendent of Bankruptcy.
Rule 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.
Rule 44. Trustees who are acting with respect to any professional engagement shall avoid any influence, interest or relationship that impairs, or appears in the opinion of an informed person to impair, their professional judgment.
Rule 47. Trustees shall not engage in any business or occupation that would compromise their ability to perform any professional engagement or that would jeopardize their integrity, independence or competence.
Rule 50. Trustees shall not obtain, solicit or conduct any engagement that would discredit their profession or jeopardize the integrity of the bankruptcy and insolvency process.
OACCS is saying that their revenue is being diminished as a results of no longer being able to participate in consumer proposals, but they have never had the power to do so. As I read these three rules, I must agree with the Office of the Superintendent that referral agreements entered into by trustees in bankruptcy and other parties are contrary to the BIA and its rules. In cases where such agreements existed, neither the trustees nor the credit counselors involved were acting in an acceptable manner, as was clarified in a position paper by the OSB. So whether or not the enforcement of these principles had a detrimental impact on the revenues of the credit counseling agents is immaterial – it should never have been done. Arguing that revenue is being lost because they can’t do what they never had the right to do in the first place is not a logical reason to extend the right to be involved to a group who already has a record of crossing the line of what is considered acceptable.
3. Monopolistic Approach
The third argument presented is that of a monopolistic approach that limits access to consumer proposals. Now I have already commented on the limited access argument, but the monopolistic approach I find somewhat intriguing. I must admit, I don’t see a monopoly. The definition of a monopoly is when one company has exclusive rights to offer s specific service, and from the statistics presented by the OSB in their position paper in 2008 there were 253 firms operating under a corporate license and 28 practicing without a corporate license – hardly a monopoly. This is like saying that doctors or lawyers have a monopoly, and again just doesn’t make sense. There are no restrictions on the number of trustees able to operate, the number of firms allowed per region – the emphasis is on being qualified.
Conclusion
As you can see, I don’t agree with the arguments supporting change to the administration of consumer proposals. To be involved in any insolvency related engagement, you need to be properly trained and properly qualified, and I am not in support of any sort of streamlining or watering-down of our industry. While I can appreciate that many files are straight forward, whether or not it is a bankruptcy, a consumer proposal or a receivership, the problem is that the potential exists for significant complication in every file, and these complications are not always obvious at the outset. Whether this is a significant change in financial circumstances, an undisclosed asset or allegations of fraudulent misrepresentation or the need to have a specific claim adjudicated on by the court, the possibilities for complexities are immense, and a firm grasp of the legislation and procedures is necessary to be involved in any level of these administrations.
Having said that, I am sympathetic to the plight of our credit counseling colleagues and the efforts they are making to expand their industry. Credit counselors play a crucial role and add value to our industry as a whole, as they serve a growing segment of the market place that needs their help.
The challenge is really how credit counselors can expand their revenue stream. While I have heard of a number of models (i.e. the expanding of the credit counseling component required in any consumer proposal or bankruptcy) and many of those alternative models have merit, I think that OACCS may want to look to what is being done in Alberta. In Alberta, as a province, we have chosen to opt into Part X of the BIA. For those unaware of what is contained in this section of the Act, it discusses the Http://www.bankruptcy-edmonton.com/orderly-payment-of-debts-in-alberta.htm program (OPD).
The OPD program is much like a debt management plan, a familiar concept in the credit counseling community. But there is one big difference – the OPD program is court-sanctioned. The credit counselor makes an application through the court system for a consolation order, and with this consolidation order there is an automatic stay of proceedings that puts an immediate stop to any collection activity that creditors are currently taking. This is the same type of court protection that is in place with a consumer proposal or an bankruptcy. The advantage of this is that credit counselors in other provinces would be given one more tool in their arsenal, a tool that gives them a very significant ability to stop garnishment, creditor harassment and the like. More importantly I believe this serves the public good as it provides another option for the consumer.
This is an approach that has been successfully taken by the credit counselors who practice in Alberta, and not only has it proved to be a successful way for the credit counselors to expand their product offering and derive additional revenues, it is an option that is very beneficial to consumers. I am pleased that this is the approach that has been taken here in Alberta, and I regularly refer debtors to credit counselors who provide this service. I find it is a unique product offering that fits in between consolidation loans and consumer proposals and more importantly it is a way that we can address some of the issues identified by OACCS but at the same time serves the public good by benefitting all the stakeholders involved.
The Office of the Superintendent of Bankruptcy (“OSB”) is currently conducting a policy review. One topic they are considering is whether or not they should implement specialized licenses for bankruptcy trustees. Currently all bankruptcy trustees in Canada must go through a very rigorous educational program. Most trustees have a university degree, many have an accounting background, and all are required to pass five levels of courses (with each level taking approximately one year to complete), culminating with a final one and a half hour oral exam. All trustees must have a breadth of knowledge, and must understand both personal and commercial insolvency issues. The OSB is now considering graduated licenses: consumer insolvency only, commercial only, and proposal administrators. Frankly, I’m concerned that these potential changes are being actively considered.
We operate a consumer bankruptcy practice in central and southwestern Ontario. You might think that we would be pleased to see consumer licenses and proposal administrator licenses issued as these would cover 90% of our practice. We’re not – our concern focuses on the fact that there are very few sections of the Bankruptcy and Insolvency Act (“Act”) that persons operating our type of practice do not need to “know”.
I will concede that there are not many personal bankruptcy estates that have to deal with complicated commercial issues like commercial leases, or 30 day goods, or the Wage Earner Protection Program. Having made that concession, these issues do arise and the trustee on the file needs to be knowledgeable and experienced enough to deal with the “unexpected”. If the OSB intends to issue limited scope licenses then a policy needs to be developed to deal with estates that develop into types that the specialized trustee has not been licensed to handle. It is not difficult to imagine an estate that starts out quite simple and straightforward that somehow transforms itself into a highly technical, highly complicated file. A self employed person, or someone involved in a legal dispute prior to filing are two possible candidates for this type of transition.
Further, the assessment requirements currently set out in the Act require the trustee performing the assessment to present a debtor with all of their alternatives. If a person with a specialized license doesn’t’t have a good working knowledge of all aspects of the Act they will not be able to comply with this requirement. If they cannot comply with the assessment requirement debtors may be counseled into the “wrong” solution for them.
My concerns thus far seem to deal with personal insolvencies – what about issuing limited commercial licenses? In my experience the level of general knowledge about the Act is higher for those trustees working in the personal insolvency area. This is based on my experience hiring and training trustees and students with commercial and consumer backgrounds. The consumer practice requires a much broader understanding of the Act. The law is the same for both types of files – the difference seems to be on the volume of estates. A consumer practice is often a volume business – it is therefore more likely you will encounter more unusual situations. A commercial file is almost always larger and more complicated, but in the most complicated commercial files a trustee is not working alone – they have other professionals, including other trustees and lawyers, that they can call on for assistance.
I would not object to specializations once a trustee license has been granted. In other words, if after someone has demonstrated the knowledge and skills to be licensed as a trustee and they decide to limit their practice to certain types of insolvencies, they may do so. Of course they may already do so simply be restricting the types of files they accept.
If the purpose of these specialized licenses is to make it easier to obtain a trustee license then I have to question the wisdom of such a course. At a time when the world is becoming more complicated, why would you simplify the requirements to deal with complicated financial situations? If the OSB is anticipating a shortage of trustees then the correct solution is not to make it easier to become a trustee, the correct solution is to make it more attractive to obtain a license. The market will then correct for any shortfall.
In short, I don’t support the idea of specialized licenses, in particular if the goal is simply to create more trustees. There are better ways to achieve that goal, if that is the true objective of this policy.
If simplified, specialized licenses were to be created, my top ten predictions for what will happen if specialized consumer proposal licenses are issued by the OSB are as follows:
1) The number of persons applying for these specialized licenses will exceed the number of persons pursuing a full trustee in bankruptcy licence (why pursue a full licence when you can obtain a licence to provide the most lucrative services that trustees provide).
2) Over time the number of fully licensed trustees will diminish to the point that there will be serious access to service issues for anyone requiring the services of a full trustee.
3) Dollars spent on advertising “debt relief without filing bankruptcy” will increase dramatically. The total number of insolvency filings will increase. Initially the number of consumer proposal filings will increase, but within a few years bankruptcy filings (assuming people can find a full trustee) will also increase as proposals fail.
4) Credit losses will increase – persons that might not previously have considered a proposal will be enticed by the less emotionally charged services of a proposal administrator as opposed to a trustee (there are in fact trustees now advertising themselves as proposal administrators for this very reason).
5) Abuses currently in evidence from non-regulated “debt consultants” will now become muddied with these non-trustee proposal providers.
6) Many debt consultants may attempt to obtain these specialized licenses not fully a appreciating (or intending to provide) the level of service and control that holding funds in trust requires.
7) Failures of these new limited service providers will erode the publics’ trust in the system – currently the insolvency industry is not well known or understood; in the future these failures will display the industry in a less than favorable light.
The not for profits currently providing debt management solutions will either fold or become proposal administrators, effectively removing one form of debt relief from the market.
9) Unless specifically prohibited, law firms may move into this service area just as they have moved into collection activities, further confusing the public.
10) OSB resources will not be sufficient to properly monitor and control the persons and firms providing these proposal only services.
In summary, I strongly believe that debtors experiencing debt problems should have access to advice from well educated and highly experienced professionals. Would you rather see a doctor that went to medical school for one year, or a doctor with five years of additional training and many more years of practical experience? Personally, I would prefer to deal with the most knowledgeable professional possible, and so I believe that granting fully qualified licenses to trustees is the best interests of the public.
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.
I am a bankruptcy trustee in Canada, so every week I meet with many people in financial trouble. This past week was an interesting week, because I met with many people who had obviously spent too much time in the sun. Literally.
Doug Hoyes, Bankruptcy Trustee, Sunburn Sufferer
In Ontario, and in many parts of Canada, we have had a run of unusually warm weather. Many people spent a lot of time outdoors for the first time since last fall. The sun was shining, and many people have arrived in my office with sunburn. I’m not being critical of these people; I’ve spent the last week nursing my own sunburn as well. What’s most amazing to me is that we all know better. We have all had sunburn before. We know that we should wear sunscreen, and wear a hat, and avoid the sun, but we forget our sunscreen, don’t wear a hat, and then go outside in the sun, and we are amazed that we get sunburn!
My theory is that if we haven’t experienced the consequences of our actions recently, we forget the result. We’ve all heard the expression that “if a mother remembered the pain of childbirth, no woman would ever have more than one child.” Not being a woman I don’t know if that’s true or not, but it does illustrate the point.
Sunburn is the same. If we haven’t had sunburn for six months, we forget the pain of sunburn. We assume it won’t happen to us. We go outside, and are so happy to be out in the sun, we ignore the consequences.
So why am I talking about sunburn on a web site about bankruptcy in Canada? Because debt is like the sun. In small amounts, debt won’t hurt. But excessive exposure to debt, like excessive exposure to the sun, is very painful.
Over the last few years, while the Canadian economy was booming, many of us took on a lot of debt. We borrowed to buy a bigger house, a new car, and then we kept borrowing to furnish our home, to go on vacations, and to keep on spending. If your income continues to increase, that’s not a problem, but when your income drops, or when you forget to wear a hat in the sun, you get burned.
So what’s the solution? To avoid sunburn, stay out of the sun. To avoid excessive debt, only borrow when absolutely necessary. A mortgage on a small house may be fine if you can make the payments; a mortgage on a huge house, and two car loans, and carrying balances on credit cards is probably a recipe for disaster.
If you already have sunburn, drink lots of fluids, and talk to your pharmacist or doctor about what to put on it.
If you already have more debt than you can handle, talk to a bankruptcy trustee. There are many possible solutions, including filing bankruptcy in Canada. or a consumer proposal; your specific circumstances will determine the correct solution.
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.
That quote is accurate. In fact, after holding steady in the 7% range between 2006 and 2009, in the first seven months of 2010 the percentage of people aged 60 or over who have filed a consumer proposal or a personal bankruptcy has increased to 9%. That statistic clearly indicates that more seniors are experiencing financial difficulty, and are making the decision to formally deal with their debt.
posted by Doug Hoyes @ 
The not for profits currently providing debt management solutions will either fold or become proposal administrators, effectively removing one form of debt relief from the market.
