Archive for the ‘Personal Bankruptcy’ Category

If you have too much debt, there are five options for eliminating debt.  Here’s my short video explaining your debt management options:

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.

November 14 to 18 is Credit Education Week in Canada, and I must admit I have mixed feelings. I strongly agree that Canadians need more education about credit, and debt, so anything we can do to help educate Canadians is good. However, I also wonder who should educate Canadians about credit.

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.

Since publishing my last post about The Problem with Debt Consultants I’ve been inundated with stories about debt consultants.

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.

Ian Martin

In the work I do, income taxes are a very popular topic of conversation.  Maybe “popular” is a poor choice of words.  People typically aren’t very happy to talk about taxes.  However, it’s an important part of the conversation if taxes are the reason for your financial difficulty.

Last week, I wrote about the powers of the Canada Revenue Agency (CRA) to collect income tax debts.  I also wrote about some of the special considerations with regard to income taxes and personal bankruptcy.  This week, I want to talk about a different aspect of income taxes.

If you’ve made the difficult decision to file for personal bankruptcy to deal with your debts, what comes next?  This is not an article about how bankruptcy works.  This is an article about not falling into the same tax traps that caused your financial difficulty in the first place.  I’ve completed a non-scientific study and want to review the three most common scenarios for causing income tax debt.  In no particular order…

#1 – Withdrawing Funds from RRSP

When you take money out of an RRSP, the bank is required to withhold a certain percentage for income tax.  For amounts up to and including $5,000, that amount is 10%.  The tricky part is that the actual amount of tax you should pay is probably much higher.  For many people, their actual tax rate is between 30% and 45%. 

Consider a simple scenario.  You take $5,000 out of your RRSP and the bank withholds $500 for income tax.  You do your tax return the next spring and your actual tax rate is 45%, meaning you are required to pay $2,250 of tax on that $5,000 you withdrew.  Since only $500 has been paid, you owe another $1,750.  However, the money is gone because you used it to pay bills.  Suppose you’ve done this for two or three years.  With penalties and interest from the CRA, you could have a tax bill close to $10,000.

What this means is that using RRSP’s to get caught up on debts is potentially very costly.  If you’ve filed for bankruptcy and still have RRSP’s, try to keep in mind the real cost of using those funds.  You can have the bank withhold a higher portion than the minimum required by law.  Here’s some information from the CRA website about minimum withholding rates.

#2 – Part Time Job

The amount of tax that you are required to pay for any particular year is a complicated formula based on your total income for the year.  The more money you make, the more tax you pay. 

Your employer is required to withhold amounts for your estimated taxes.  People can get into trouble when they have more than one job because each employer is estimating without knowing about the other job.  If you have a part-time job, that employer may withhold little or no income tax because they are not required to. 

It’s really the same issue as taking money out of your RRSP.  You receive funds without having enough tax taken off.  By the time you figure out how much tax should be paid, the money is gone and all you’re left with is a tax bill and hard feelings.  If you are concerned about this kind of scenario, you can request that one or both employers take off more tax.  It might feel like a difficult decision is money is tight.  With income taxes, it’s pay now or pay later.  It’s easier to a little bit each pay cheque instead of coming up with a large payment at the end of the year. 

#3 – Self Employed

There are many reasons why it can be great to be your own boss.  However, things haven’t gone as planned if you’ve had to meet with me.  Maybe you’ve lost a major contract.  Maybe you’ve had a significant injury or illness and have no benefits.  Maybe you need some help with bookkeeping.  The volume of government paperwork can be overwhelming.  Once you fall behind, it can feel as though it’s impossible to get caught up.

Legally, you are permitted to operate as a self-employed sole proprietor after you have filed for bankruptcy.  If you are going to do so, finding a bookkeeper to assist you with your paperwork is money well spent.  For others, it is easier to work as an employee.  It’s hard to fall behind on taxes if you are on somebody else’s payroll. 

*****

The biggest complication after filing for bankruptcy is that life will continue to throw you curveballs.  Filing for personal bankruptcy is about dealing with the past.  However, it is also an OPPORTUNITY FOR A FRESH START.  Filing for bankruptcy is a big decision.  Take advantage of that opportunity.

The mandate of the Canada Revenue Agency (CRA) is to assess and collect the correct amount of tax for individuals and businesses in Canada.  My colleague Bill Kilner blogged last week about how it’s easy to ignore your taxes after you start to fall behind.  I want to expand a little bit on why it’s important to deal with your tax debts.

I like to think of the CRA as a big sleepy bear.  When he’s hibernating for a long time, it’s easy to forget that he is there.  When he wakes up and flashes those razor sharp claws, you start to appreciate just how dangerous he can be.  Furthermore, he’s not going to give up chasing you once he gets your scent. 

Compared to an average creditor, the tax man has super powers to help collect money owing to him.  The CRA can freeze your bank account or garnishee your wages with just the signature from the director of your local tax office.  A bank or credit card company has to go through a lengthy court process to able to do the same thing.  I’m not here to argue whether it’s fair or right.  It is what it is.

What else can the tax man do?  If you have a business and the CRA knows who your major customers are, they can send a notice to those customers directing them to pay to them (to CRA, not you) the money your customers were to pay to you for the work you have done.  Again, no court order required.

There’s more.  If you have a house, the CRA can register a lien against the property.  No consent required by you.  No court order required.  Think of it as a second mortgage where the tax man is dictating the repayment terms.

Obviously, the best way to avoid these nasty consequences is to pay the debt.  Just like any creditor, the CRA has collectors with whom you can negotiate a payment plan.  However, the CRA is typically unwilling to accept less than the full amount owing. 

So, what do you do if a repayment plan just isn’t realistic?  There’s a common misconception that tax debts are not included in personal bankruptcy.   There are some special considerations that I will discuss in a moment, but the general rule is that the tax man gets treated the same as any other creditor if you file for personal bankruptcy.

I want to make something absolutely clear.  In no way do I advocate bankruptcy as a way of “getting out of paying” your tax debts, or any other debt.  Bankruptcy is a legal process available to Canadians to get a fresh start from their debts (tax and non-tax) when there is no reasonable expectation of being able to pay those debts in full.

The goal in bankruptcy is not to file for bankruptcy, the goal is to be discharged from bankruptcy.  It is not until you are discharged, that the debts are legally released.  In most situations, as long as you fulfill various financial and non-financial duties, you are eligible to receive your discharge without a requirement to go to court.  This is called an automatic order of discharge and is granted by the trustee. 

One of the “special considerations” is that you are not eligible for an automatic discharge if your personal tax debts are greater than $200,000 and represents more than 75% of your total unsecured debts.  This is one of the many changes to bankruptcy law in September 2009.  That means going to court and having a judge (called a registrar in bankruptcy court) deciding what conditions you have to meet to be discharged.  It could involve paying back a portion of the debt.  It could mean a time delay before you can be discharged.  It could mean that the refuses to grant a discharge altogether, but that would be in extraordinary circumstances.

Another “special consideration” is if the CRA has registered a lien against your house.  Bankruptcy deals with the unsecured debts.  Registering a lien makes the taxes a secured debt.  If this has happened and you want to keep your house, you should be talking to the CRA about payment arrangements.  Filing for personal bankruptcy will not remove the lien. 

If you have a business, your debts with the CRA might not be limited to income taxes.  You might also have debts for unremitted GST/HST or payroll deductions.  These are debts that are included in bankruptcy, but there are considerations that go behind the scope of an article like this.  My advice is to contact us so that we can go over your circumstances in detail.

Don’t let this bear chase you up a tree, or worse.  If you want to get started on a plan to deal with your debts, please feel free to contact us for more information or a free consultation.

“It can’t be true. I never made that much money. How can I owe that much to the Canada Revenue Agency? There must be a problem with the computer program. I can’t afford to pay this kind of money now, if I don’t file the tax return, they will never know.” If any of this sounds familiar, you may have a case of the Tax Time Blues.

When you owe money to Revenue Canada, the temptation is to simply not file your tax return, but that’s the wrong approach. Why? Once you are late there is an automatic five per cent late filing penalty the first time and each additional time the penalty escalates. Surely you can make better use of the money than send it to our government. Also, the government does not charge interest on the arrears until after April 30th. So any payment prior goes to the taxes. They will never turn down money so send it in. Finally if you can pay the taxes in six months or less, send in the cheques with the tax return. You can even set up preauthorized payments with them either in person or online.

If the debt will take more time, it is time to analyze the situation. Is this going to be an annual situation? How long will I need to pay off the taxes? Do I need to make a change to my budget or my lifestyle? If you cannot afford to pay the taxes within one year, you may be living beyond your income.

If it will be an annual problem you need to be aware of a certain fact, and that is that if you intend to retire, the first year after you retire, you will owe taxes from the last year of your business (or employment) but will not have the same income to pay them. In other words you may find yourself insolvent, looking for help out of a financial crisis. To avoid that now, pay your 2011 income tax when you make the money in 2011. Then when you retire your taxes are paid up to date. If you have last year’s taxes to pay, you are already fifteen months behind. You need to look at your budget and see how you can attempt to get up to date in twenty-four months (pay three years of taxes in two years). If you can pay within this time frame, call the Canada Revenue Agency and make an arrangement for your tax payments. If you cannot make payments within these guidelines, call us and make an appointment for a free consultation.

You may find a cure for the Tax Time Blues. A consumer proposal or possibly a bankruptcy in Ontario will allow you to take care of this problem and prevent it from happening again. Taxes owing to Revenue Canada (Canada Revenue Agency or CRA) are included when you file a consumer proposal or bankruptcy, so read our report on How to Deal with CRA for more information, or contact us for a free initial consultation, and let’s get started.

When considering your options to deal with the debts you have, many people will first explore the idea of a debt consolidation loan.

A debt consolidation loan is a loan that a financial institution will give you that allows you to group together other debts by paying them off with the loan.  For example, if you have three different debts that total $15,000 a loan company may give you a loan for $15,000 and you would use the loan to pay off the three debts with.  You’re replacing three old debts with one new debt.

Debt consolidation loans have some advantages:

• Because you now only have one payment to make, it should be easier to budget
• If the interest rate on your loan is lower than the interest rates on your credit cards, then it should save you money in interest payments
• By combining three interest rates into one, your overall monthly payment could be lower 

However, they also have some disadvantages:

• A debt consolidation loans are becoming increasingly difficult to obtain.
• You may need a co-signor. If you do, you’re now bringing someone else into the responsibility of your debt problems
• You may need to put something up as security such as your house. If consolidating debts through a second mortgage, your house will now be at risk if you don’t keep up with the payments
• The lender will want to see you have a steady income, employment and a good credit rating before considering whether or not to qualify you for the loan.
• Some financial institutions may qualify you for a loan, but at a high rate of interest.
• Debt consolidation loans require discipline. If you qualify for the loan and then you continue to incur new debts again on the credit cards, you’re essentially increasing your debt load leading to further problems.
• Your credit score will drop. Instead of having three accounts with a good payment history, you now only have one.

Sometimes debt consolidation loans won’t work for you. 

Howard Hayes - Client Services

Don’t forget, a lenders primary motivation for wanting to qualify you for a debt consolidation loan is because they believe they can money from you.

If the debt load you have is just too overwhelming and the monthly payments on a debt consolidation loan will be too high or you simply don’t qualify then you’ll need to start looking at other options.  Bankruptcy is an option, but it may not be the only other answer.

The advantages of filing a bankruptcy would be that you’d be clearing yourself of all the debts as opposed to re-financing them.  You don’t need to qualify to file for bankruptcy; it’s a choice you make.  It’s the quickest and cheapest way to clear yourself of debt problems and it legally protects you when accounts get behind and you face collection problems and the threats of legal action against you.

Many people will search for help in consolidating debts as a way to avoid filing bankruptcy and often fall into the trap of committing to a higher interest rate debt consolidation loan because the only financial institutions that will qualify you will typically charge you a higher rate of interest for doing so.  The fear of bankruptcy and the fear of losing assets will often lead people to the clutches of lenders that care more for their profits than they do about you as a customer.

The good news is that there is another way.  Consumer Proposals are becoming more and more the number one alternative to bankruptcy and the number one way to consolidate debts.

A Consumer Proposal is a legally binding settlement of debts.  Proposals can be filed with the help of a trustee.  It allows you to offer payment terms to the people that you owe money to that you can realistically afford.  You’re allowed a maximum of five years in which to complete a proposal and there is no interest charged on what you repay.   In the same way a debt consolidation loan groups all your debts into one payment, a Consumer Proposal does too except this time, instead of paying the principal debts plus interest, you’re only paying back what you offer to pay back.

Sounds too good to be true? Well consider the position of the people you owe money too.  If you don’t qualify for a debt consolidation loan, and as much as you may want to still avoid a bankruptcy, they want to avoid it too.  They’d rather accept a Consumer Proposal that is offered on the premise that they’d rather get something back that nothing.

Finding ways to solve a debt problem is never easy.  Here at Hoyes Michalos & Associates Inc we recognize that no two people’s debts problems are exactly the same and therefore the best solutions for a debt problem will depend entirely on your specific circumstances.   As such, we always recommend that you contact us right away and speak to one of our professionals about your situation and we’ll go over all the options you have.  Whether you just want to talk on the phone or book an appointment to come in to one of our offices for a chat, it’s a free service we offer and there’s no obligation.  Contact us by email or call today at 310-PLAN and let’s get started.

Each and every day I meet with or talk to people on the phone who are struggling with debt. The Blahs of Debt really are very similar to the Blahs of Winter.

I don’t know about you, but the after Christmas let-down can be pretty hard. I love the anticipation of Christmas – decorating the tree, seeing the children in my family shudder with excitement and scream with delight as the day grows nearer, getting together with family and laughing so hard that our jaws hurt the next day. Then, in a seeming instant, it is all over. Everybody goes home, the tree is tucked away for another year, work routines normalize and all that is left is dealing with winter.

Some people love winter – I don’t so much. I drive a lot for work, so I am always worried about the weather. I am not much for outdoor sports; aside from walking my dog, I pretty much avoid the outdoors. It is too cold, and just simply too much work. I hate shoveling the drive. Well, I think you are getting the picture. For some of us, winter is just not that much fun. It is easy to cocoon ourselves until Spring and that can leave us feeling pretty blah.

Just like winter, finances can leave us feeling a little cold, blue and blah. Just like winter, when dealing with debt, it sometimes just seems easier to pull the covers over our heads and wait for Spring. This is one strategy, but it is probably not the most healthy approach. Here are some alternatives to consider:

1.) Find the strength to take stock of your debt: how much do you owe? Are you behind in any payments? What would you have to do in order to get back on track? Use a debt options calculator to see what it would cost to get out of debt. Here is a credit card calculator that is a great tool to help you figure out what it would take to become debt free on your own

2.) If after taking stock, you determine that managing on your own is not a realistic option, make an appointment with your financial advisor or your bank manager – is there something that they can suggest that can help you to get your finances under control? Would you qualify for a debt consolidation loan?

3.) In some cases, banks and financial advisors can help, in other cases they can’t – if they can’t, there is another professional that I would encourage you to see – a Credit Counsellor – credit counsellors can be a very helpful and objective set of eyes – they may be able to suggest some changes that you can make to your monthly budget that can be effective in helping you deal more effectively with the debt. In other cases, they may be able to negotiate with your creditors – this is called a Debt Management Plan.

4.) Sometimes there is really only one professional who can give you the help you need to get rid of the blahs of debt – this is a Trustee in Bankruptcy – for many people, the realization that they may need to file bankruptcy in Ontario makes them feel even more blah, but this is most often because they don’t really understand how Trustees help. Lots of people make assumptions that they will lose everything and that bankruptcy is the only alternative. While talking to a Trustee can certainly be a difficult thing to do, in most cases the clients who do, are glad they did. Why? Because a Trustee can help them beat the Blahs of Debt. Whether through filing bankruptcy or a consumer proposal, the debt gets effectively dealt with. Most people tell us that by simply talking to us, they feel a weight lifted from their shoulders and their blahs turn into hope for the future.

Although dealing with the Blahs of Debt is similar to dealing with the Blahs of Winter, there is one very big difference. We can’t do anything about Winter – it’s here. But you can do something about your debt. We’d be pleased to help you understand what all of your options are. Give us a call at 310-PLAN, or send us an e-mail – let us help you put the blahs of debt behind you.

The answer is no, you will not lose everything if you file for bankruptcy in Ontario.

My name is Janette Martin and I am an estate manager working with Trustee Benny Mendlowitz here in the Hoyes Michalos & Associates Inc. North York office.

There are many misconceptions about what happens to a person when they file for bankruptcy in Ontario.  Some people think they are not allowed to work (not true), some people think that their family will become responsible for their debts (not true, unless they have co-signed for you), and some people think that either their creditors or the trustee will come to their house to take away their belongings and sell them to pay their debts.

When you file for bankruptcy, as your trustee, we have many responsibilities.  One of our responsibilities is to determine what assets you own and what their value is.  There are several  laws that protect your assets from seizure.  If an asset is not protected by law, then we must sell that asset and we will eventually distribute the money received from the sale to your creditors.

The rules regarding exempt assets change periodically, so it is best to consult with a Hoyes Michalos team member to discuss your specific situation, but here’s a simple overview:

The Execution Act of Ontario exempts a person’s basic belongings. These Ontario bankruptcy exemptions mean that if you go bankrupt in Ontario, the following assets are exempt from seizure by your trustee.

• $5,650 worth of personal possessions (clothing, jewelry, sports equipment, etc.);
• A motor vehicle (cars, trucks, etc.) worth up to $5,650, provided there are no liens against it;
• $11,300 worth of furnishings;
• $11,300 worth of tools of the trade (equipment that you use to earn a living).

So, if you go bankrupt in Ontario, you won’t lose your basic personal possessions, and inexpensive car, and your household furnishings, up to the “garage sale value” limits noted above.

While this list covers the basics, there are other assets that we commonly see, such as life insurance, RRSP’s, automobiles and real estate.

If your life insurance is term insurance, there is no cash value to it, therefore your trustee will not take it.  If your life insurance is whole life, it will at some point have a cash surrender value.  Depending on whom the beneficiary of the policy is, the Insurance Act of Ontario may protect the cash surrender value.  Also, if you have an RRSP with a life insurance company it may be protected depending on who the beneficiary is.

If your RRSP is with an institution other than a life insurance company and you have not made any contributions to it within the 12 months  before you file bankruptcy, the RRSP would be exempt.  Your trustee will only take the contributions made within the 12 months before your date of bankruptcy.

If you own a car or a house, your trustee will calculate the equity in that asset by first determining it’s fair market value and then subtracting the amount of the loan secured against the asset.  In Ontario, the equity in your car is exempt to an amount set under The Executions Act of Ontario, but unfortunately there is no exemption for equity in a home in Ontario.

You will also lose your tax refund if you file bankruptcy.

If you have avoided seeking help because you are worried about what you will lose, you can see that filing for bankruptcy has very little impact on most people.   If you have an asset that you want to keep that you would otherwise lose in a bankruptcy there are other options you can consider. A consumer proposal is a good alternative to bankruptcy, and you don’t have to worry about losing your assets.

Filing a consumer proposal is equivalent to making a deal with your creditors.  You can offer your creditors a monthly payment over a period of years in exchange for being able to keep your assets.  You are in a way “buying back” your assets from your creditors, so the amount that you offer them in your proposal must be equivalent to the realizable value of the asset.

Sound complicated? Not sure if a consumer proposal or bankruptcy is the right solution for you? If you are having a difficult time keeping up with your payments to your creditors, you can visit our website for a free on-line review of your situation, or call Hoyes Michalos at 310-PLAN (that’s 310-7526, no area code required, and that number works for all of our Ontario offices), or e-mail us today to arrange for a free initial consultation.

Ian Martin

The concept behind student loans is that everybody wins.

Student loans are an investment by the government in you.  They lend you money so that you can further your education.  You further your education so that you can get a new or better paying job.  You have a steady job, you repay your student loans, you pay your taxes, you are not relying on social benefits that are funded by the government.  You are living the Canadian dream.  Everybody is happy.

What if it doesn’t turn out that way?  What if you graduate and can’t find steady work in your field of study?  What if you became ill and weren’t able to finish your studies?

One way or another, what happens if you are unable to repay your student loans?

WHAT IS A STUDENT LOAN?

Let’s first clarify what a student loan is and what it is not.  A student loan is a loan directly from the federal or provincial government to provide financial assistance to students.  You can read more about the Canada Student Loans Program here.

A student line of credit through a bank is not the same as a student loan.  Many banks offer these lines of credit and will normally require a co-signer.  They are an alternative if you are not eligible for government student loans.  If you are unable to pay a student line of credit, the bank has the right to collect from you or the co-signer.  It is a joint debt.  It is the same as any other debt with a bank.

GOVERNMENT ASSISTANCE

The government is able to work with you to some extent if you are having difficulty paying your student loans.  Many people refer to “interest relief.”  That system has been replaced by the Repayment Assistance Plan (RAP).  This new program was started for federal student loans in August 2009.  A similar program was started by the Ontario government in November 2010.

Here’s how it works.  Essentially, you apply to have your financial circumstances assessed.  The government decides, based on factors like your income and size of family, how much your “affordable payment” is.  Your loan has to be in good standing to apply under the RAP.  Keep in mind that you are required to make an application for the RAP.  The government does not automatically do the assessment of the “affordable payment.”

WHAT IF I AM STILL UNABLE TO PAY?

Even with assistance from the government, many people are unable to pay their student loans.  There could be any combination of reasons.  What then?

If you are not able to pay your debts by selling or refinancing assets, it might be a good time to talk to a bankruptcy trustee.

The role of a bankruptcy trustee is to assess a person’s financial circumstances.  The trustee provides information about the merits and consequences of the different options for resolving a person’s debts, when that person is unable to pay their debts in full.  Those options include filing a consumer proposal or personal bankruptcy.

Filing a bankruptcy or consumer proposal is asking for legal permission to be released from your debts when there is no reasonable expectation of being able to pay them in full.  However, there are certain limitations in terms of which debts are released by a bankruptcy or consumer proposal.  These limitations are specified by the Bankruptcy and Insolvency Act and one of them is with respect to student loans.  Here it is in a nutshell:

If you have not been out of school for more than 7 years when your personal bankruptcy or consumer proposal is filed, you will still be responsible for repaying your student loans.

What does that mean?  That depends on your particular circumstances.  Even if the limitation does apply to you, there may still be reasons to file a consumer proposal or personal bankruptcy.  Maybe there are other debts.  Maybe there is a garnishee on your wages.

AFTER BANKRUPTCY OR CONSUMER PROPOSAL

Consider this: even if your student loans will not be taken care of by the consumer proposal or personal bankruptcy, you cannot be legally compelled to make payments on the student loans until the consumer proposal or bankruptcy is done.

One of the benefits of a consumer proposal or personal bankruptcy is to help you to stabilize your budget.  If that budget contained monthly payments to a proposal or bankruptcy, continuing those payments toward the student loans (after the proposal or bankruptcy is done) can be an effective plan to deal with the student loans.

What if that kind of plan does not work?  You are done a consumer proposal or personal bankruptcy and your student loans were less than 7 years old, but you are still unable to repay the student loans.  What options do you have?

One choice would be to file a second bankruptcy.  This is probably not a great choice if the only debt is the student loans.  Here are some of the implications of a second bankruptcy:

• The shortest period of time to be discharged from a second bankruptcy is 24 months.  For a first time, it is only 9 months;
• If you have surplus income, the discharge period is 36 months;
• A second bankruptcy will show on your credit report for 14 years after you are discharged;
• There is an increased chance that there will be an opposition to your discharge.

Another choice would be to file a consumer proposal.  This is definitely a possibility, but it depends on your ability to offer a proposal that your creditors find attractive.  A consumer proposal will likely involve a monthly payment plan over 3 to 5 years.  If you have been unable to negotiate a reasonable repayment of your student loans on your own, it may be difficult to find a monthly payment in a consumer proposal that your creditors will accept and that you can afford.

The final choice that I will mention is to make an application to the courts to have your student loans discharged.  The idea is that the court reviews your circumstances to determine if your debts should be discharged because of your ongoing financial hardship.  The primary criteria are that you have been out of school for 5 years and that you have been bankrupt or filed a consumer proposal.  A trustee can talk to you about how this process works, but you should speak to a lawyer to assess the likelihood of such an application being successful.

Clearly, there is a wide variety of considerations and issues with student loans.  If you need some further help sorting it all out, feel free to call us at 310-PLAN (310-7526 with no area code) or to send us your questions by e-mail.