Today I sit down with Joel Sandwith, trustee in bankruptcy and consumer proposal administrator at Hoyes Michalos working out of our London and Sarnia offices. Normally we broadcast an FAQ show on the last Saturday of the month, but we receive so many questions that are worth taking the time to answer that we decided to run an extended FAQ series; starting with this one.
Individuals who are struggling with overwhelming debt are stressed not only with their inability to keep up with their debt payments, but with what the consequences might be if they choose to file bankruptcy or a consumer proposal as a way to get some relief from their debts. This leads to the three most common concerns that arise during most bankruptcy consultations:
- What will happen to my credit score if I file bankruptcy and more importantly when will I be able to access credit again?
- What happens to my home and mortgage?
- Why choose any trustee over any other?
Rebuilding and Using Debt Wisely
Joel explains that it's common for a new client to ask about how they can begin to rebuild their credit, before they even file. Generally it's hard to survive without some form of credit today. Even after bankruptcy you may want to purchase a car, a home or need access to a credit card to make reservations and all of this is difficult to do if you can't access new credit.
Joel warns however that it's important to avoid actions that can cause you to fall back into the same routines and to rack up new debt while trying to eliminate old debts. Joel points out that
from my perspective, it's trying to find a balance in allowing people to have some information about rebuilding their credit, but encouraging them to find a new way to be responsible with that credit; to take the first start of being rid of current debt and not taking on new debt while rebuilding credit.
It's important to create positive habits that will help your score and not hinder it. Joel explains this process stating that when using a credit card for the purposes of rebuilding credit, you need to
find something in your budget that you're going to be paying for anyway, put that particular charge - I'm going to use the example of a cell phone bill or a car insurance bill - onto the credit card and simply pay that credit card bill the moment it arrives because you should already have the money that would have been part of your budget if [you're] rebuilding already.
Steps to rebuilding credit after a bankruptcy or consumer proposal:
- Teach yourself to set some money aside. This begins even before your bankruptcy is finished and before you start to rebuild credit. Build up an emergency fund so that you won't be reliant on credit to pay for unexpected expenses.
- Monitor your credit report. Make sure your bankruptcy and debt information is accurate. Check both credit bureaus in Canada and dispute any errors that you find.
- Find a safe and secure way to obtain new credit. Wait for as long as possible to rebuild your credit (preferably one year while you learn how to budget and manage money better). But if you must get a card, find a relatively safe and secure way to obtain one. Options could include a secured credit card or the unsecured card mentioned in Show 42.
- Be wise about how you use your new credit card. Don't keep the card in your wallet unless you have to and never carry a balance. If you're looking to rebuild credit, use the credit card to pay for bills that you've already budgeted for and pay off the amount as soon as the bill arrives.
Keeping Your Home and Maintaining A Mortgage
The biggest fear that clients have when they talk with a bankruptcy trustee is that they will lose their home if they file bankruptcy. However, as Joel points out it is extremely rare that someone would lose their house in a bankruptcy or consumer proposal.
If you're able to continue your mortgage payments throughout the bankruptcy and if it's determined that your house holds little to no equity, your house will not be seized. If there is some residual equity in your home (based on the selling price less the mortgage debt outstanding and all possible selling costs including any penalties to break the mortgage) then a consumer proposal can offer a solution that allows you to pay off your debts and keep ownership of your home.
It's also almost always possible to renew an existing mortgage while bankrupt. In most cases it's in the banks best financial interest to renew your mortgage, as long as you have been making all of your existing mortgage payments on time. Joe also explains that:
it's now the law that a bank cannot cancel a secured loan (like a mortgage), just because you went bankrupt.
Choosing A Bankruptcy Trustee
A little secret that I let listeners in on during the show is that all bankruptcy trustees are licensed by the Federal government, hold the same qualifications and get paid the same amount of money (through the payments that you're already making) based on how much money is in the pot for your creditors.
So why choose Hoyes Michalos?
Joel explains that filing bankruptcy is a legal procedure that comes with many questions and concerns about how the process will affect aspects like your job, finances, credit rating and assets. You need to feel comfortable and have trust in the person that you're dealing with. Joel gave us 5 important questions you might want to ask yourself about the person you choose to file bankruptcy with:
- Who do you believe is providing you the information that you need to make the decision that's going to help you?
- Are you meeting directly with the bankruptcy trustee?
- Is the trustee the person who's going to be answering your questions as we're setting up your file?
- Do you understand the information that you're being given?
- Do you feel that the person has the time to actually sit down with you and learn enough about you to give you feedback that actually pertains to your situation?
Essentially it's important to know whether you'll be meeting directly with the trustee throughout the process, whether all of your questions are being answered, if the person you are dealing with will review all of your options and whether you understand the information that you're being given.
If you're not sure, Joel suggests there is nothing wrong with shopping around, something he has hear many of his clients tell him they've done.
At Hoyes Michalos, you meet with the trustee and they're there to guide you throughout the process. Joel sums this up stating that
we're going to ensure that we're going to get you to the solution in the time frame that suits you, and it's going to be me that you're dealing with...as a trustee, I want to have confidence that I understand your situation well enough to help with anything that might come up in the future that could be an issue.
Read the full transcript of our FAQ podcast with Joel Sandwith.