I explain these five debt busting options in the video:

1. Personal budgeting: Make a budget, and pay off your debts on your own.  (I’m not a big fan of budgeting, since it’s hard, so you can read my post on why budgeting is a bad idea, and what you can do to manage your money without budgeting).
2. Debt Consolidation Loan: A debt consolidation loan is a loan used to pay off multiple smaller debts. It allows you to combine multiple payments into one smaller monthly payment, generally at a lower interest rate and spread over a longer period of time. Of course debt consolidation doesn’t reduce your debt, unless you can pay more towards the principal each month.
3. Credit Counselling: A credit counsellor can negotiate repayment plan where you pay your debts in full, but at a reduced interest rate. This is called a “Debt Management Plan” and works well if you can repay your debts in full.
4. Debt Settlement: A debt settlement is an arrangement negotiated with a creditor where you pay a portion of the amount owing. If you owe $20,000, you could offer to pay $8,000 as a lump sum to settle the debt, or you could offer to make payments over time. If the debt is old, and if you have a lump sum of money, this may be a viable solution. However, if you have many debts, you must reach an agreement with each creditor, which may not be possible.
5. Consumer Proposal: A consumer proposal is a legally binding settlement between a debtor and a creditor. It typical involves the debtor making one monthly payment, on an agreed upon settlement amount, over a period of no more then 5 years. At the end of the proposal period the debtor is then released of any remaining balances, which may be left from their original amount of debt.
6. Bankruptcy: In an Ontario bankruptcy an individual surrenders certain assets to a trustee, in order to be absolved of their debts. They are then legally declared bankrupt and required to adhere to the duties of a bankrupt, in order to obtain an absolute discharge, at the end of their bankruptcy term.

Doug Hoyes still smiling, and still not budgeting

Budgeting is hard. Most people who try to make a budget stick with it for a week or two, or a month, but then they get off track. (Here’s an article on the Top Five Reasons For Not Budgeting in Canada; are these your reasons as well?) There’s no point in devoting a lot of time and energy to something with limited chances of success.

However, I am a strong believer in learning to manage your money. If you don’t know where your money is going, you can’t pay your bills, or have a savings plan. So last week I shared my answer to the budgeting problem. I said:

Don’t budget. Just pay your bills every time you get paid.

Simple. Instead of trying to pay your rent on the 1st, your hydro bill on the 8th, car insurance on the 12th, and cable and phone on the 22nd, simply divide all of your bills by however often you get paid, and pay them on payday. If you get paid every week, and your phone bill is $100 per month, pay $25 every week, on-line, using internet banking.

Simple.

I even explained it in this video:

And for those who want more details on exactly how to do it, I recorded a second video, with the details:

Some people thought it was a great idea. Here’s an e-mail we received this week (slightly edited, to protect the identity of the sender):

Mr. Doug Hoyes, I heard your radio announcement this morning about budgeting. I read your budgeting report on your website, The Secret to Making a Budget: DON’T, and it all makes perfect sense! Thank you. My husband and I are both in our 50′s. Since I can no longer work due to medical issues, and we are still paying lawyers to deal with support issues, we thought it was the end for us. We did look into bankruptcy a few years ago, but we couldn’t do it. We have been keeping our heads above water for the last five years, but we were just looking into using quick books to help us with our spending.
I like your approach to not-budgeting, and maybe in conjunction with quick books, we can make things work out for us.
I just wanted to email you and say thank you.

Excellent! That’s exactly why I wrote the article, and recorded the videos: to show everyone simple methods to manage money.

Other people seem to think my approach is too easy. How can you just set up your bills to automatically get paid? My answer: try it; see if it works for you. If it doesn’t, you can use the conventional method of keeping a detailed budget on paper, or on-line, using a program like Calendar Budget. Need some help?

Here are some thoughts from Ted Michalos on budgeting for Christmas – his advice? Start now. As Wendy Young in our Hamilton office describes it, it’s time for a fresh start. Joel Sandwith also agrees that it’s time for a fresh start, and tracking spending is a good starting point, and then budgeting by making small changes is the next step. Benny Mendlowitz in our North York office agrees that budgeting often is a broken New Year’s resolution, so paying your bills when you get paid makes more sense. Scott Schaefer also offers his Top 6 Budget Tips. And for the person who asked, yes, in Toronto, or anywhere, there is an easier way to budget.

Jason Quinney in Barrie offers his 5 Tips to get your budget in control. Rebecca Martyn in Windsor asks the question How can I manage my money?, and she gives some straight-forward advice. Ross Stevenson in Vaughan (Woodbridge) talks about budgeting, and he tells an interesting story he overheard at the mall.

And yes, I’ve posted my thoughts in many places as well, including my comments on the Budgeting the Easy Way, and The Easy Way to Budget.

So why do some people get upset with the “B” word, budgeting? It’s not because they don’t want to budget, or don’t know how to budget. It’s because they have a lot of debt, so there is no way to make a budget that balances; there’s just too much going out each month.

If you can’t budget because you have too much debt, a consumer proposal might be the answer. Try our debt options calculator to see what might work for you, then let’s get started.

Doug Hoyes smiling, because he's NOT budgeting

One of the most common New Year’s resolutions is to make a budget and stick to it. This year, I have some advice for you:

Don’t bother.

Budgets are like diets: they are hard to do, and after a week, or a month, you give up, because it’s too difficult. Think about it: are you really going to carry a pencil and paper with you and write down every penny you spend? Will you write down each cup of coffee you buy at the coffee shop? Will you go home every night and punch the numbers into your computer, and then create graphs and spreadsheets to analyze everything?

Perhaps you will. But to successfully manage a budget you need to be very disciplined. You need to stick to it. If you are very disciplined, great. There are some great tools that you can use to help you make a successful budget. Calendar Budget is an on-line program that makes it simple to track your spending; they even offer a free trial. You can go to our personal budgeting page and download an Excel Spreadsheet Budget Planning Worksheet if you want to do it yourself.

But what if you are not highly disciplined? What if you don’t know how to work a spreadsheet, or if you don’t have time to record every penny you spend? I have a solution:

Instead of budgeting, pay your bills as often as you get paid.

That’s it. That’s the system. Here’s how it works:

If you get paid bi-weekly, pay your bills every two weeks, on payday. Here’s an example:

You get paid on January 13 and January 27, and your hydro bill is due on the 30th of every month. So this month your plan is to use $100 from your January 27 paycheque to pay your hydro bill. That makes sense, but your rent is due on February 1, and your car insurance is due on February 2, so you know your paycheque won’t last that long. Here’s a better plan:

Use internet banking to pre-program a $50 payment, every payday, to hydro. Do it now, for the next six months. Then, every payday, $50 gets automatically sent to hydro. If you send $50 on January 13 and $50 on January 27, by January 30 you hydro bill is paid. No worries.

Even better, in May you get three paycheques, on June 1, 15 and 29, so in June hydro will get three payments from you. By the end of June you will be $50 ahead with hydro.

Think about that: You will be ahead on your bills. Instead of always “playing catch up”, you can get ahead and stay ahead.

To find out more, read our special report on the Secret to Personal Budgeting. It’s easy. Don’t budget, just pay your bills as often as you get paid.

Back to our record levels of debt: The average Canadian owes $153 for every $100 they earn.

Think about that.

If you have a job where you take home $30,000 per year, and if you are the average Canadian, you owe about $46,000. In fact, according to Statistics Canada, household debt per person in Canada is $46,100, which is 1% higher than it was three months ago, and 5% higher than it was a year ago.

Think about that.

If you are average, you are carrying 5% more debt today than you were carrying a year ago.

Did your pay go up 5% this year? Probably not. According to Statistics Canada, average hourly wages were up 2.4% in the last year, but that’s just the average. If you work through a union your wages were only up 1.5%, and if you are a temporary worker your wages only increased by 1.0%.

Perhaps the news isn’t all bad? Perhaps we have more debt because we borrowed to invest, and our investments went up in value, so even with higher debt we are actually better off?

Nope.

Household net worth per person fell 2.5% in the last three months. That’s a big drop. Even worse, in 2010, when we released our study on Joe Debtor: The Profile of the Average Bankrupt, the average bankrupt owed 2.2 times his annual income in debt.  As of today, based on our own proprietary data, our debt is now 2.4 times our annual income.

Is there no good news? I suppose the fact that for the twelve months ended August 31, 2011 total personal insolvencies in Canada are down 9.7%, and personal bankruptcy filings are down 16.7%, is good news. However, the bankruptcy rate increased significantly in the past, peaking in 2009, so this year’s drop is just a drop to still very high levels. The unemployment rate in Canada has dropped since the peak in 2009, which is good news.

However, it’s no surprise that 2009 was both the peak in unemployment and bankruptcy filings in Canada, so those two statistics are related. The unemployment did rate did increase in November, so if that trend continues we could see higher bankruptcy rates in the future.

Here’s my point: We are carrying more debt than ever before, and debt is bad. If you want to know why, Ted Michalos and I discussed that on the radio as well (and this clip is under two minutes):

Debt reduces your cash flow each month, and if you are trying to pay interest on debt you don’t have money to save for your children’s education, or retirement, or anything else. If you have debt, your resolution for 2012 should be: get out of debt.

You can get out of debt by making a household budget and cutting expenses. If you have more debt than you can handle, credit counselling, a consumer proposal or even personal bankruptcy may be required. Try our debt options calculator to see which option may be right for you, but above all, make a plan and start today.

Debt problems do not go away on their own, so the sooner you start, the sooner you can be living debt free.

Credit Education Week, according to their website, is sponsored by many financial institutions, including Capital One (the Platinum Sponsor), and three of the big banks (RBC, TD, and BMO). Other sponsors include OLG (who operates our lotteries and casinos; I’m not sure what they have to do with credit), a large payday loan company, Credit Canada, and three bankruptcy firms.

There are what appear to be many good conferences to be held during the week. According to their schedule, there will be a Money Management and Budgeting Workshop Monday to Thursday at the Family Counselling and Support Services for Guelph offices. We have referred hundreds of people over the years to Family Counselling in Guelph for credit counselling. They are a great organization, and I’m glad they are involved.

I must admit, however, that I do get a bit of queasy feeling when I see big banks and credit card companies sponsoring Credit Education Week. Don’t banks and credit card companies want us to borrow? Yes, of course they do, that’s how they make their money, but I guess they would tell us that they want us to borrow responsibly, and that’s why they sponsor Credit Education Week.

I think my queasiness is really caused by the use of the word “Credit”. I don’t like that word. Credit is a positive word, like “giving someone credit for a job well done.”

I prefer the word “debt”, because that’s really what we are talking about. I think we should call it what it is: “Debt Education Week”, but I assume the banks would not want to sponsor something that negative.

I also worry that the advice might be somewhat one-sided. If you call us here at Hoyes Michalos and ask us to explain your options, we will explain all of your debt management options. We’ll talk to you about budgeting to cut your expenses to pay off your debt on your own. We’ll talk about debt consolidation loans, credit counselling, debt settlement, consumer proposals and bankruptcy. Do the banks that sponsor Credit Education Week want you to know about consumer proposals and bankruptcy? I doubt it. They would be much happier if you paid in full, or if you did a debt management plan.

Of course we only make money from you if you file a consumer proposal or bankruptcy, so why do we explain all of your options? Two reasons:

First, we want you to find the right solution, even if we don’t make any money from it. We’ve been in business since 1999, and a big portion of our work comes from satisfied people we have helped, so we know that by explaining all options we will continue to grow.

Second, it’s the law. We are licensed by the federal government, and Directive No. 6R3 requires us to “discuss the options available to debtor for resolving financial difficulties”, including “non-legislative debt settlement arrangements” which includes debt consolidation, credit counselling, debt settlements, and budgeting.

So, when you meet with us, we tell you everything, as I explained on the radio a few weeks ago:

So what’s my point? Am I against Credit Education Week?

No, I support Credit Education Week. But to answer the question “who should educate Canadians about debt?” the answer is NOT the banks, or bankruptcy trustees, or credit counsellors, because we all have our own biases. Credit counsellors make their money from debt management plans. Bankruptcy trustees make their money from consumer proposals and bankruptcies, so those are the options we will emphasize.

The answer, I believe, is that the best person to educate you, is you.

Do your own research. Go to some of the Credit Education Week sessions, but also do your own research. Read many points of view.

For example, Gail Vaz-Oxlade, host of TV’s Till Debt Do Us Part, and Princess, believes that during Credit Education Week we should all stop using our credit cards. That’s an interesting idea, and probably not an idea you will hear at a bank-sponsored event. I don’t agree with everything Gail says, but I do love her “no-nonsense” style, so when you are doing your research stop by her blog post where she suggests we should school, which means teach lenders not to lend to people who can’t afford it.

In an interview on CBC she tells the story of a young man, earning $21,000 per year, who got $15,000 in credit from a big bank. You can watch the interview on CBC. The only solution for this person was to, you guessed it, file a consumer proposal.

You won’t see Gail Vaz-Oxlade speaking at Credit Education Week, delivering her message of personal responsibility, and looking out for yourself.

Too bad, because looking out for ourselves is the best answer.

So here’s my challenge to you: assume this week is Debt Education Week, and make it your personal goal to learn as much as you can about the ways to deal with debt. Learn how banks make money, and research the role played by credit card companies, debt consultants, credit counsellors, and bankruptcy trustees. Review your debt options, and then decide what option is best for you.

So why are unlicensed, for profit debt consultants allowed to run radio and television ads promising to reduce your debt, when more than 99 times out of a hundred they can’t?  Why doesn’t the government stop them?

Great question.  I was asked that question recently, and here’s my answer:

In summary: I don’t know why the government doesn’t do anything.  If there is anyone from the government reading this and they can give me an answer, please do.  Call me at 310-PLAN and let me know.

For everyone else, do your research.  Read our real life debt consultant stories.  Before you part with your hard earned money, be sure you meet with your debt consultant in person.  Don’t just talk to them over the phone; meet with them face to face so you can get a full explanation of all of your options.

If they don’t explain all of your debt management options, you are not getting good advice.  It’s as simple as that.

Here are the problems: There are no formal qualifications to become a debt consultant, and they can’t offer any legal protection. Unfortunately they can spend a lot of money on advertising, and it sounds good: they promise to reduce your debt. Of course "promising" and "doing" are two different things.

Last week I met with a person who heard the ads for a debt consultant called Cambridge Life Solutions on the radio. It sounded like a good deal. All they had to do was fax them all of their credit card statements, and open a separate savings account, and send Cambridge Life Solutions a void cheque. The deal was simple: Cambridge Life Solutions would withdraw $800 per month from her new savings account, and they would deal with her debt.

It sounded good, but this person was suspicious when the Cambridge Life Solutions representative told them to "not talk to any of the creditors; ignore them." Apparently this was because the creditors would "tell her a bunch of lies."

After three months of paying $800 per month to Cambridge Life Solutions, the credit card companies started sending letters, so the person I met with finally decided to answer the phone when they called. Guess what? None of the creditors had heard a word from the debt consultant! They had charged $2,400, and had done nothing!

Sadly, I’m not surprised, because I know how this "game" works. They want to get their fee paid first, which is often many hundreds, or thousands, of dollars. Then they want you to start saving money in your new savings account. If you can survive the phone calls and letters for a year or two, they hope that you will have saved up enough money to allow them to make a deal with your creditors.

So, for example, if you have $50,000 in credit card debts and bank loans, and if you haven’t made any payments on them for 18 months, it’s possible that the creditors will be willing to accept a cash settlement of 20 cents on the dollar, or $10,000. Makes sense, but ask yourself these questions:

1. What are the chances that I can save up $10,000? I’m in financial trouble now, so saving money is very difficult.
2. Will I be able to handle the stress of constant phone calls and letters for 18 months? Will my family be able to handle the phone calls?
3. What will my employer think if I start getting phone calls at work?
4. What happens if the credit card company decides to take me to court and sue me and garnishee my wages?
5. What if the credit card company won’t accept the deal?

Those are very good questions, and they illustrate the problem with using a debt consultant. Unless you have access to a lump sum of cash, and you are not worried about legal action, paying a lot of money to a debt consultant is not the correct solution.

What is the correct solution? It depends on your situation. If you have $50,000 in debt, and you can afford to pay $800 per month, you might be able to simply keep making payments on your own. If you can afford to pay $400 per month, a consumer proposal might be the correct solution. Your situation is unique, so contact us and we’ll walk you through your options (and we won’t charge you an up front fee).

I started this post by saying I’ve heard an increasing number of stories about debt consultants. I’m not the only one; here are some stories and comments from the rest of the Hoyes Michalos team from the last two weeks:

• Wendy Young in Hamilton discusses whether or not debt consultants can really help;
• Ian Martin in Kitchener tells a Halloween Horror Story – Watch Your Money Vanish In to Debt Consultant’s Pocket. He also asks whether or not a debt consultant can provide legal protection from your creditors (and the answer is scary);
• Brian McIlmoyle in Mississauga asks Just What is a Debt Consultant? (and I like his answer: “But what exactly do they do? The simplest answer is “not much” other than separate you from your hard earned money.”
• Joel Sandwith in Sarnia also asked what is a debt consultant?, and his conclusions were similar to Brian’s;
• Susan Jung in St. Catharines was so incensed about debt consultants she told a three part story of "Tasha" in Debt Consultants Part 1, Debt Consultants Part 2 and Debt Consultants Part 3 (coming soon);
• Benny Mendlowitz in Toronto asks a very relevant question: Who offers real legal protection against garnishments? A consumer proposal administrator, bankruptcy trustee, or debt consultant? (I think you know the answer);
• Janette Martin in North York answers the question can a debt consultant protect you from your creditors? with a very simple answer: "no";
• Howard Hayes in Cambridge agrees, and he’s more blunt, when he says that debt consultants offer you no legal protection. On our Brantford site Howard talks about debt consultants and the scary side of debt.
• Jason Quinney offers the opinion that the problem with debt consultants in Barrie is that they can be misleading, and they charge huge fees;
• Rebecca Martyn in Windsor also objects to debt consultants charging huge fees, and not producing a legally binding settlement; she also thinks debt consultants are scary;
• Adam Rauf in Brampton thinks debt consultants are mostly smoke and mirrors, since they imply legal protection, but can’t offer it;
• Bill Kilner is Scarborough doesn’t think that debt consultants are the best option, and he explains why;
• Julie Wildman in Toronto addresses the issue of debt consultants and legal protection, but she takes it one step further and equates debt consultants to a Halloween fright!;
• Ross Stevenson in Vaughan has an interesting take on what debt consultants will not tell you.

So here’s my summary: before you hand over your hard earned cash to anyone, check them out. Ask to meet with them in person! You may not be a debt expert, but as a human being you have lots of experience deciding whether or not someone is trustworthy, so arrange a personal meeting, and then make your decision.

Before we start telling stories, what exactly is a debt consultant?  As Joel Sandwith explains it, a debt consultant is often someone who is suggesting a solution that is “too good to be true.”  In Rebecca Martyn‘s experience as a trustee, a debt consultant is often simply someone who charges a large up front fee, and then refers you to a trustee.  Danielle Ratford has even less respect for them: she calls debt consultants a wolf in sheep’s clothing.

Sadly, Joel, Rebecca and Danielle’s opinions are based in real life stories.

Ian Martin tells the story of Carl (not his real name), who talked on the phone for a while with a debt consultant, only to discover he was talking to someone in California!  Ian’s advice: “when it comes to debt consultants, know who you are getting into bed with.”

Susan Jung tells the story of “Tasha”, who met an apparently very kind and caring debt consultant, who promised to deal with her debts.  Unfortunately the plan was that Tasha would pay him $1,200, and then he would set up a meeting for her with the “Court Officer”.  I don’t want to steal Sue’s story, but here’s a hint: whenever anyone tries to impress you with a term like “Court Officer”, be suspicious.  If you file a consumer proposal or bankruptcy with Hoyes Michalos we are appointed by the Court to administer your file.  If a debt consultant tells you they are arranging a meeting with a “Court Officer”, they are really telling you that they are referring you to a trustee.  That’s fine, but don’t pay $1,200, or more, just to get referred to a trustee.

If you want to meet a trustee, contact Hoyes Michalos, and we’ll meet with you to discuss your options for free.

Benny Mendlowitz met with a woman in his Scarborough office who met a debt consultant who’s office is on the same floor as Benny’s office.  She said to the debt consultant “why would I pay you $500 to hook me up with a trustee when I can do that myself?” At that point, she got up and left, found Benny, and Benny filed her consumer proposal (and he didn’t charge her any up front fees).

So why do people go to debt consultants?  Because they advertise a lot, particularly in the Toronto area.  Julie Wildman in our Toronto office tells the story of the debt consultant ads “snaring” an unsuspecting couple who paid the debt consultant $1,000, and never heard from them again.  That’s sad, and that’s why I’m writing this article as a warning to others.  Ross Stevenson in Vaughan tells a similar story, and he advises that the truth about debt consultants is simple: they can’t offer legal protection from your creditors! Adam Rauf in Brampton is more aggressive, calling debt consultants a scam!

I won’t go so far as to say every debt consultant is a scam artist, but I will say this: if your wages are being garnisheed, there are only three ways to stop it:

1. get the creditor to stop the garnishment, which they will generally only do if you pay it off in full, plus interest and legal costs;
2. file a consumer proposal;
3. declare bankruptcy.

A debt consultant may be able to make a deal to stop a garnishment.  If they can, and it doesn’t cost you too much, great.  But a debt consultant is not licensed to file a proposal or a bankruptcy, so they can’t offer that form of legal protection.

All they can do is charge you a large up front fee, and then refer you to a licensed trustee.

So, for legal protection, bypass the middle man, and  don’t pay an up front fee.  Contact us, and arrange for your no charge initial consultation where we will explain all of your options.

Let’s get started.

Have you actually called one of those debt consultants, and had them say to you “you need to hire us, and pay us a lot of money, because we only work for you; a bankruptcy trustee works for your creditors! They don’t care about you!”

Is that true?

You have debts, and you want to solve your debts without filing bankruptcy, but you’ve heard that a consumer proposal is just as bad as bankruptcy?

Is that true?

There are a lot of debt myths out there, and whenever I meet with anyone who has questions about these myths, I take the time to explain what’s true, and what isn’t.

Doug Hoyes in the 570 News studios

Unfortunately I can only meet with one person at a time, so it’s hard to dispel all of these myths.

I need a wider audience, and this Saturday I’ll have one.

I’m pleased to announce something new: for the first time ever, we’ll be doing a one hour live radio show that will be broadcast on the radio, and on the internet on video!

That’s right, you can “see us on the radio”.

On Saturday September 24 from 1:05 pm to 2:00 pm Ted Michalos and Doug Hoyes will be appearing live on 570 News, and we’re going to spend the entire hour talking about Debt Myths.

You can participate in many ways. You can:

• Listen on the radio to 570 News;
• Listen on the internet, at 570News.com (just click the Listen Live button);
• Watch and listen to the video feed; go to 570News.com and click on the 570 News Webcast link;
• During the show you can e-mail us a question, and my office will relay it to the studio; or
• Send me a Tweet on Twitter @doughoyes and I’ll try to respond on air, time permitting.

If you want to learn more about how to deal with debt (or if you’re just curious to see what it looks like to “watch” a radio show), please join us this Saturday after the 1:00 pm news on 570 News for our inside look at Debts Myths.

I wrote a post back in September, 2009 on a Small Victory in the Fight for Fairness in Bankruptcy Rules, where I described a “dirty little trick” the government had pulled, forcing people who declare bankruptcy to disclose their educational background. I found it offensive that the government was forcing people to admit that they dropped out of high school, or admit that they had a university education but still experienced financial problems. I didn’t see the need to disclose any more information than necessary, and after writing letters and making phone calls, the government changed the rules.

I’m not saying my letters changed the rules. There were certainly lots of others who also made their opinions known, and together we changed the rules.

Another example of our efforts to bring fairness to the bankruptcy system occurred on February 7, 2008, when Ted Michalos and I became the only independent trustees to testify for a full hour before the Senate Standing Committee on Banking, Trade and Commerce in Ottawa. You can watch our entire testimony on our Hoyes Michalos Senate Video page; here’s a brief clip of my comments on student loans and bankruptcy in Canada.

In February 2008 I traveled to Ottawa to make the argument that forcing former students to wait ten years before being able to discharge their student loans in a bankruptcy was too long. I argued for a two year rule, and later that year the rule was changed to a seven year student loan rule, with a five year limit in cases of hardship.

Again, the rule wasn’t changed just because Ted Michalos and Doug Hoyes traveled to Ottawa, but I like to think that our voice was one of the many voices that helped change the rules.

So here we are again, faced with another bankruptcy rule that requires changing.

On July 14, 2011 the Supreme Court of Canada, released its decision in the case of Schreyer v. Schreyer, and they confirmed the principle that equalization payments after separation or divorce disappear in bankruptcy in Canada. Here are the facts: Mr. and Mrs. Schreyer divorced in 1999, and as is standard procedure, their assets were to be divided amongst them. Mr. Schreyer was to make an equalization payment to Mrs. Schreyer of about $41,000, for her share of the value of the family farm.

Before he made the payment, due to his other debts, he filed bankruptcy. As a result Mrs. Schreyer became a creditor in Mr. Schreyer’s bankruptcy, and as is the case with most debts, the amount he owed her was discharged in the bankruptcy.

Because the Schreyer’s live in Manitoba where family farms are exempt from seizure, Mr. Schreyer got to keep the family farm, even though he was bankrupt.

(Please note that if you declare bankruptcy in Ontario real estate is not exempt, so in Ontario if the bankrupt owned a farm worth $80,000, the trustee may sell the farm and distribute the proceeds to the creditors. If this had happened in Ontario, Mr. Schreyer would have lost the farm when he went bankrupt, or he would have been required to pay into his estate the value of the farm).

In summary, Mr. Schreyer went bankrupt and got to keep the family farm, and his wife, who would have received $40,000 if he hadn’t declared bankruptcy got nothing.

Are the Bankruptcy Rules Fair?

You could argue that the purpose of bankruptcy is to eliminate your debts, which is exactly what happened in this case, so on that basis yes, this rule is fair.

However, you could also argue that in a separation if the spouses should divide their assets equally, that’s exactly what should happen. Obviously that didn’t happen in this case.

As I stated earlier this case couldn’t happen here in Ontario, because the husband would lose the farm. However, it could happen with other exempt assets, such as an RRSP. Consider this scenario:

Mrs. Smith has a good job, and she contributes to her RRSP every month. Mr. Smith stays home with the children. They separate, and the only asset they have is Mrs. Smith’s RRSP. Under normal family law rules, Mr. Smith should receive half of the value of the RRSP.

If Mrs. Smith’s RRSP was worth $100,000, Mr. Smith would normally be entitled to an equalization payment of $50,000. However, if Mrs. Smith declared bankruptcy in Ontario before making the equalization payment, Mr. Smith would get nothing. Under bankruptcy law Mrs. Smith gets to keep her RRSP if she goes bankrupt, except for any contributions she made in the last year. That potentially means that Mrs. Smith gets to keep most or all of her $100,000 RRSP, and Mr. Smith gets nothing.

Most would argue that that’s not fair.

In fact, the Bankruptcy & Insolvency Act does give special treatment for child support, in section 178 (1) (c), which states that the following debt or obligation is not discharged in a bankruptcy:

any debt or liability arising under a judicial decision establishing affiliation or respecting support or maintenance, or under an agreement for maintenance and support of a spouse, former spouse, former common-law partner or child living apart from the bankrupt;

In other words, if you go bankrupt, you are still required to pay child and spousal support.

Clearly Canadian bankruptcy law is not fair. Spousal support and child support doesn’t go away if you go bankrupt, but equalization payments do.

So what should be done? Parliament should close the loophole. It would be a relatively simple change. In fact, all they would need to do is add a few words to the end of section 178 (1) (c) to make court ordered equalization payments non-dischargeable.

Will that happen? Probably, since that’s exactly what the Supreme Court said should happen. We will see.

And yes, I’ll probably write a letter or two……..