How Are Certain Debts Affected In A Bankruptcy?

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Posted in Personal Bankruptcy
Posted by J. Douglas Hoyes, CA, CPA, LIT, CIRP, CBV

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On today's show I talk with Adam Rauf, a trustee in bankruptcy and consumer proposal administrator at the Hoyes Michalos St. Catharines and Niagara Falls offices. Adam receives many questions from his clients and came in with a list of 20 concerns that people have when they come in to see him to get out of debt. We narrowed down his list to some questions about what type of debts can be eliminated in a bankruptcy:

  1. Can I give back my financed vehicle and get out of my car lease if I file bankruptcy?
  2. Will my 407 debts be eliminated in a bankruptcy?
  3. If I pay off my consumer proposal early, will there be a penalty?
  4. Can a bankruptcy or consumer proposal stop a law suit or wage garnishment due to unpaid debts?

How are financed vehicles affected in a bankruptcy?

To start, Adam explains that in most cases you do not lose your lease or financed car just by filing bankruptcy. If you can keep up with your lease or loan payments you can keep your vehicle (this applies to other secured assets like your home mortgage as well).

However, if you owe more on your car than it is worth (perhaps you've refinanced and rolled-over an existing car loan into your new car purchase) and you find the payments too expensive, (for example, the interest rate is too high), you have an option to get out of the secured financing - the bank loan or lease - through a consumer proposal or bankruptcy. Adam explains how this works:

If you file a proposal or bankruptcy and you stop paying for [and return] that vehicle before you file, then you can include the debt as a regular credit card debt in your filing.

Can 407 debts be discharged in a bankruptcy or consumer proposal?

The Bankruptcy and Insolvency Act (BIA) specifically describes which types of debts cannot be included in a bankruptcy or consumer proposal. Unpaid 407 tolls are, according to the BIA, unsecured debts just like a credit card debt or line of credit, and as such, should be discharged through bankruptcy or a consumer proposal.

Unfortunately, the 407 ETR has powers through the Ministry of Transportation (MTO) to withhold the renewal of license plates until the debt is paid, regardless of whether or not the individual has filed a bankruptcy or consumer proposal.

This power is in conflict with the Bankruptcy and Insolvency Act and this matter is currently before the Supreme Court of Canada.

Unfortunately for debtors, (today at least) that means:

if you need to renew that plate and you have filed a proposal or a bankruptcy or you have successfully completed a proposal or a bankruptcy and the 407 debt was part of it, ... you have to pay that debt

Since the court is reviewing the matter, Adam advises clients to make the payment under protest.

I spoke with a lawyer who is handling the 407 class action lawsuit and he said you make the payment under protest, where you actually say - you write on the receipt, it's under protest, I'm only making this because the 407 teaming up with the Ministry of Transportation of Ontario (MTO), is forcing me to do it.

We do not know what the outcome of the court hearing will be, or whether or not this will work; however, it is a way of keeping your options open if it becomes possible to recover the money down the road.

Can I pay off my consumer proposal obligations early?

A consumer proposal eliminates unsecured debts just like in a bankruptcy. However, there are benefits to filing a consumer proposal as a way to deal with your debt, and many (about 50% in Ontario) choose this route to get debt relief.

Although a consumer proposal can last up to 5 years (60 months), it is possible to pay off your proposal early with no penalty, so that you can begin the process of rebuilding your credit sooner.

If you are able to accelerate your payments and pay it off sooner, the sooner you pay it off, the sooner you're debts are legally discharged, the sooner you get what is called your certificate of full performance to rebuild your credit, and that proposal (that R7 rating) comes off [3 years after] the proposal is paid in full.

Will bankruptcy stop a law suit or wage garnishment?

While a law suit or wage garnishment are both legal proceedings, Adam explains that it is not necessary to appear in court to stop either of these actions if you file bankruptcy or a consumer proposal. By their very nature, either debt relief option provides a 'stay of proceedings,' which immediately stops all legal action.

if you've been served with what's called a Statement of Claim or Plaintiff's Claim, basically if you've ever been served with any court paperwork where it's been stamped with a court seal on it and whether it's small claims court or superior court depending on the debt you owe, filing a proposal or bankruptcy will stop those legal actions. It will protect your wages; it will protect your assets.

This protection extends to all unsecured debts, including tax debts owing to the Canada Revenue Agency (CRA). Since the CRA is part of the federal government, and the BIA is federal legislation, wage garnishments and other actions started by CRA can be stopped if you file a procedure under the Bankruptcy and Insolvency Act (either a bankruptcy of consumer proposal).

Listen to the podcast or read the full transcript below.

Additional Resources:

FULL TRANSCRIPT show #46 with Adam Rauf

certain-debts-in-bankruptcy-transcript

Doug Hoyes: Welcome to Debt Free in 30, the show where every week we take 30 minutes to talk to industry experts about debt, money and personal finance. I'm Doug Hoyes.

Normally the last Debt Free in 30 every month is a frequently asked questions show, but we found that we have so many questions that our listeners want answered that during the first weeks of July we're going to take the time to answer your most frequently asked questions. To help me to do that I've asked my Hoyes Michalos trustees to join me on the show. And today I'm joined by a first time guest on the show. So, let's get started. How are you? Where do you work? And what do you do?

Adam Rauf: Hi Doug, thanks for having me on here. My name is Adam Rauf; I've been working with Hoyes Michalos for six years. I'm a trustee out of the St. Catharines, Niagara region.

Doug Hoyes: Excellent, well thanks for being here today, Adam. Before we get into the specific questions, you've got a bit of a unique background amongst the trustees here at the firm. So, can you give us the quick overview of how you got into the whole debt help business?

Adam Rauf: Oh sure. When I graduated university I was actually chemistry, math teacher for a couple of years. I also worked in special education; I was working with a population that was coming from a bit of a difficult or disadvantaged background. As my time progressed through education, I really enjoyed what I was doing, but I also wanted something that was a bit more consistent. There's a lot of new teachers listening and they can appreciate how difficult it is to find that full-time job.

So, I always wanted to work in finance and I sent my resume to your partner, Ted Michalos, he hired me, he offered me a job on a Friday, you offered me a heart attack on a Monday and here we are.

Doug Hoyes: Excellent. Well, we like people to know what they're getting into when they join this business. So, what I asked you to do before the show was to write down the five most common questions that you get asked when people come in to see you. And you came up with a list of about 20 of them cause obviously there's a lot of questions people ask.

So, what I'm going to do is kind of pick from your list and we'll go through them in no specific order. So, this should be interesting for people who are listening to get an idea of the kind of questions people are asking cause they're probably the kind of questions that people who are listening would also ask.

A couple of the questions related to cars. And obviously you said that you work in the Niagara region, everybody drives a car there I assume, or most people, there's no subway as far as I know from Niagara Falls to St. Catharines or anything like that.

So, here's one of the questions that someone asked you and this is a very common question. I have been asked a variant of this question many times myself. So the question is, I made the mistake of financing a car at 18% and I owe like $40,000 on a car that it's now only worth like $6,000. And probably what happened in that case was they had a car, they refinanced, bought another car, there was a short fall, it got rolled into the next car and so now you've got a car with significant negative equity. So, how do you help someone in that situation?

Adam Rauf: That's an excellent summary of what we see, Doug. So often times, the first worry that a lot of individuals have is am I going to lose my car if I file for a proposal or bankruptcy? The short answer is no, as long as you keep payments on it you get to keep the vehicle and other secured assets. But the biggest option that a lot of individuals don’t realize is, hey can I actually get out of this secured financing contract through a proposal or a bankruptcy? And thankfully the answer is, yes.

If you think you're in financial problems and it's more than just credit card debt and lines of credit and things of that nature, and you have a vehicle, you know it's going to breakdown and you're going to end up owing like 30 or $40,000 on it. If you file a proposal or bankruptcy and you stop paying for that vehicle before you file, then you can include the debt as like a regular credit card debt in your filing.

Doug Hoyes: So, let's kind of break this down. Cause you've hit on a number of different points there. So, proposals and bankruptcies deal with unsecured debt. So, that's things like credit cards, bank loans and so on. A car loan is a secured debt; it's secured by the car. What you're saying is, yeah but if you stop making payments on the car and return the car, surrender the car to the lender, then the security is no longer there, therefore it's an unsecured debt, and therefore it's included in the proposal or the bankruptcy.

Adam Rauf: That is correct.

Doug Hoyes: And is this a pretty common thing that you see?

Adam Rauf: It is. Unfortunately, the auto industry has really changed in the face of Canada over the last five or six years with a lot of lenders saying finance the car for seven, eight years. Individuals do, but the car will break down after three or four. Like you had mentioned earlier they get a new vehicle, they roll the debt from the old vehicle into the new vehicle and often times we see people that have to pay for one car three or four times over. And a lot of the times the interest rates are obscene. The question that we proposed was 18%, I've seen it as high as 30%.

Doug Hoyes: Yeah, if you're financing a used vehicle then the interest rate's going to be a lot higher.

Adam Rauf: Correct. So, a lot of times one of the great tools and aspects about a consumer proposal, or a personal bankruptcy, is that if you want to walk away from a vehicle you have that option. Of course that means you're probably not going to have a car cause in most instances the creditors are going to repossess the vehicle, sell it at auction and whatever the difference you owe is part of the proposal or bankruptcy.

So, what I tell individuals, the best thing, cash is king. Buy a used car for five or six grand, a nice little Corolla or Honda and see if that can help get you around town. Maybe you can work with family or friends to help you out in the meantime if you think you can't finance one. So, that's what I always try and encourage individuals.

Doug Hoyes: Yeah, look at your options. So, I always say to people, okay I understand that you need a car to get to work because there is no subway, there is no bus service, I work the nightshift, I get off at 2 A.M and the buses aren’t running then. So, I understand that you need a car but you don’t need this car. You don’t need this exact car that you have. So, what options do you have? So, the first option is how can I survive at least for a period of time without a vehicle?

Adam Rauf: Correct.

Doug Hoyes: Can I car pool? Can I take taxis? Can I ride my bike? If it's the summer riding a bike maybe makes sense. If it's the middle of winter, maybe not so much.

And I agree with you, cash is king. You give up the car, now you're not making the car payments, you're not paying insurance, you're not paying for gas, well you can probably save up a chunk of money to buy that old junker, something just to get you back and forth to work. And even if's a thousand or two thousand dollars, well that's a lot better than the alternative, paying this huge loan.

Now what about the case of someone who has a car, that let's say it's a relatively new car, it's got very low interest financing on it. It doesn’t have whole lot of mileage on it, so it kind of makes sense to keep it. Am I able to keep it?

Adam Rauf: That's an excellent question as well, too. And yes this, the common question we have for a lot of individuals is that they're filing a proposal or bankruptcy, they have a lot of debt with credit cards, lines of credit, things of that nature but they really want to keep the vehicle. Are they allowed to? And the answer is, yes. They can keep the car by filing a proposal or a bankruptcy. It will not affect your renewals or your interest rates or any of that nature as long as you keep paying for it. The lender is more than welcome to have you keep that car so they can get paid as well, too.

Doug Hoyes: Yeah, they're in business, you can keep paying, great.

So to summarize then, if you've got a car that's financed, you've got two choices when you're facing a proposal or a bankruptcy. You can stop paying and give the car back and whatever's owing gets included in the proposal or bankruptcy. Or, you can continue to make the payments on the car if it's a secured loan. So long as you're up to date on the payments, you can continue making those payments and keep the car.

Ultimately this is a math question. Does it make sense, in your original example, if you've got a $40,000 loan outstanding on a car that's only worth six? Does it make sense to keep making the loan payments? No, it doesn’t, that's kind of ridiculous. But if it's the car that's worth about what's owing on the loan, the interest rate is reasonable it probably does make sense.  So, excellent, well, we got to one question in the first segment.

I know a lot of people ask you about the 407 and how that relates to cars and everything. So, what I'd like to do is take a quick break and then we're going to come back and talk about what happens to your 407 debt if you file a bankruptcy or a consumer proposal. So, we're going to take a quick break and we'll be right back here on Debt Free in 30.

Doug Hoyes: We're back. I'm joined today by Adam Rauf and we're talking about questions that Adam gets asked quite frequently by people who come in to get this assistance. Before the break we were talking about what happens to a car, and that kind of leads to the question about the 407. The 407 ETR, the express toll route where you have a transponder you have to pay every time you get on it.

So, Adam what happens if I owe a bunch of money to the 407 and I go bankruptcy or file a proposal? What's the deal there?

Adam Rauf: Well, that's a great question. Unfortunately it's not an easy answer. So, according to the Bankruptcy and Insolvency Act, when you go bankrupt or file a proposal there are only a certain amount of debts that cannot be included. The 407 is definitely a debt like a credit card debt or a line of credit that is included in a proposal or a bankruptcy.

Doug Hoyes: Okay, so that's the first key point. In the Bankruptcy Act there are a specific list of debts that don’t go away when you go bankrupt; things like child support for example, court fines, restitution orders and things like that, but the 407 is not a court fine.

Adam Rauf: That is correct.

Doug Hoyes: Therefore in your interpretation, and I agree with you, that is not one of the debts that is automatically excluded from a bankruptcy, therefore it should go away. But obviously there's more to the story than that.

Adam Rauf: That's right, the 407 was a government owned business and it was recently, about five, ten years ago I believe, it was transferred to a private corporation. When it was transferred that private corporation wanted to say well we want to protect ourselves. So, we are going to team up with The Ministry of Transportation (MTO), and we're going to not allow anybody to renew their license plates until the debt is paid, regardless of whether they file proposal or bankruptcy, that's actually in the highway traffic act.

That's actually against the Bankruptcy and Insolvency Act. So, right now there's a very large court battle that is going on. And it's actually the Supreme Court of Canada; the matter has been heard and we're hoping that a judgment will be passed, obviously in favour of the Bankruptcy and Insolvency Act.

Doug Hoyes: So, and as we're recording this in July of 2015, we're telling you what we know as of today. If you're listening to this podcast at some point in the future cause you've downloaded it from ITunes or whatever, then what we're saying may already be out of date.  So, if you have 407 debts the best thing to do is give us a shout, go to our website at hoyes.com, h-o-y-e-s.com, and look us up and we can tell you what's happening. So, the current state of the rules is, 407 is still - I mean whether they can or they can't, whether it's legal or not - it is still currently not possible to renew your license if you have money owing to 407.

Adam Rauf: Well, that's right. Now it's not your license that they will deny, it's actually your license plates on your vehicle.

Doug Hoyes: License plates, what attaches to your car. So, that's a key point. You can still renew your license. So, what we've seen a lot of people do, like what we talked about in the first segment, I'm giving my car up anyway cause I'm going bankrupt, well fine then I guess I can't renew that particular plate, but if I finance a different car, if my spouse buys a car, well I guess it's not an issue. Otherwise if you need to renew that plate, what's your advice to that person?

Adam Rauf: Well, if you need to renew that plate and you have filed a proposal or a bankruptcy or you have successfully completed a proposal or a bankruptcy and the 407 debt was part of it, and you're really stuck and you have to pay that debt, whatever it is. I spoke with a lawyer who is handling the 407 class action lawsuit and he said you make the payment under protest, where you actually say - you write on the receipt, it's under protest, I'm only making this because the 407 teaming up with the Ministry of Transportation of Ontario (MTO), is forcing me to do it. And hopefully in will be ruled in favour of the bankruptcy insolvency act, you should actually get that money reimbursed to you.

Doug Hoyes: Yeah and we have no idea what's going to happen in the future. We don’t know what's going to happen with court cases. So, you might as well assume the money's gone cause we don’t know any different at this point. But, I think what Adam's giving is a very practical answer. Well, if I have to get that plate renewed, the only way to do it is to make the payment, make it under protest, maybe in the future you'll be able to have that overturned, maybe not, we don’t know.

But it is a complicated area and it's one of those things where it's difficult for us to give a coherent answer because there have been numerous court challenges on this issue and probably the law will continue to evolve. So, it's a bit of a tricky one.

Adam Rauf: It is difficult. What I have told some individuals that are very desperate, they can't pay the debt, I've said well one way you can do to circumvent it is try and see if you can get a new license plate. Unfortunately, that sometimes does not work, cause again MTO will say well no, no we can't give you a new plate cause you still have this debt with the 407. So, then what we sometimes tell individuals as well, well maybe what you need to do is put your vehicle under your spouse or partner's name and that way you put the plates under their name so you can get the license plate so you can continue driving safety and legally.

Doug Hoyes: Yeah, so it's not really a license plate renewal, it's a brand new plate, for a brand new situation.

Adam Rauf: Correct.

Doug Hoyes: So, it is a complicated situation, but there's kind of an overview of what's happening with the 407.

So, let's go to a couple of these other questions that people asked you. One of them you get a lot is what happens if I pay my proposal early? Is there some kind of penalty? So, a typical proposal is going to be set up where you're going to be making monthly payments over a period of time. Maybe you're paying 3 or $400 a month for four or five years, and one of the advantages of a proposal is if you're situations improves - I get a raise at work, I get a bonus, I get a tax refund - you can use that money to pay your proposal quicker. So, are you able to do that and if so what's the penalty for doing that?

Adam Rauf: Yeah and that's a great question we see a lot. So, the longest a proposal can be is five years which is 60 months. And individuals, like well, I don’t want to be in a five year payment plan I would really like to rebuild my credit quicker.

So I say, well, not a problem. If you are able to accelerate your payments and pay it off sooner, the sooner you pay it off, the sooner you're debts are legally discharged, the sooner you get what is called your certificate of full performance to rebuild your credit, and that proposal (that R7 rating comes off when the proposal is paid in full). There is no penalty for paying it off. Creditors don’t ask well how were they able to pay it off early? Because a lot of times individuals may get help from family or friends, sometimes like as you mentioned they get a bonus at work. Maybe there's some sort of inheritance received, you win 50 million dollars, just pay off your proposal and you're good to go.

Doug Hoyes: And that's one of the biggest advantages of a proposal. You can get it done quicker. So, how does that contrast then with a bankruptcy? So, how long does a bankruptcy last? Cause that's again another question people ask you. They ask you well is a bankruptcy nine months or is it 21 months? People keep telling me different things. What's the answer to that question?

Adam Rauf: Yeah and there's a lot of misinformation that's out there. Cause I see people in my office, they say well my friend went bankruptcy five years ago, it was only nine months or 12 months, why are you telling me it's going to be nine months or 21 months? Almost two years for a first time bankruptcy.

Well, the laws changed in 2009. Depending on your household income and your household size, bankruptcy will either be a quick, clean easy nine month process. But if you are making more than what the federal courts allow for your family size, then the courts say if you go bankrupt, we're going to extend it by an extra year. So, it goes from nine months to 21 months in duration.

So, let's say you go bankrupt and let's say you're within the government guidelines, no problems, your bankruptcy is done, quick, clean, easy, nine month process. If you pay the trustee the fees that the trustee requires, let's say on day one, you are still in the legal state of bankruptcy for that nine months. Unfortunately, you do not get out of it any sooner. You can pay the fees off so you don’t have to worry about the payments, but whatever length of time as dictated by the federal law, regardless of how soon or how quickly you pay off the bankruptcy, you're still in it for that period of time.

Doug Hoyes: And just to clarity some of the terms here. So, in most cases if you go bankrupt, there is a contribution, it's not really a fee cause fees are set by the government. Whatever you're paying to the trustee does not go directly into the trustee's pocket. There is a contribution you pay every month.

So, let's say for example that based on your situation you agree yeah I'm going to contribute a couple of hundred dollars a month for the nine months that I'm bankrupt, and that goes towards the cost of the administration, filing the bankruptcy, some of that money comes to the trustee, some of it goes to the costs and so on. So, what you're saying is in a nine month bankruptcy, if the total you're going to end up having to pay is going to be let's say $1,800, you could pay that all one day one if your mother writes you a cheque, great here's the money it's done. But you are still in the state of bankruptcy for nine months.

Adam Rauf: That's correct, yes.

Doug Hoyes: I mean that's just the way it is. The only way that could ever possibly end earlier would be if the court says it can end earlier and unfortunately, it takes about a year to get to court. So, it's almost impossible to have a bankruptcy done any quicker than nine months.

Adam Rauf: That's right.

Doug Hoyes: Now, the 21 months then kicks in when your income is over the limit. So, what you're talking about there is surplus income. If you're over the limit it's a first time bankruptcy, you're going to be bankrupt for an extra year, that's where the 21 months comes from.

Adam Rauf: That's right. And a lot of individuals we see, they, most individuals will try and avoid a bankruptcy at all costs. Especially their first time bankruptcy is going to be 21 months. That's almost two years. And then when you're discharged for that 21 months, it still stays on your credit report for six months afterwards. So, in the Niagara region, I would say about 70 to 80% of the people I see will file a consumer proposal as a way of avoiding bankruptcy.

Doug Hoyes: And with a consumer proposal it stays on your credit record for how long after you make your last payment?

Adam Rauf: Well, from your last - it's an R7 while the proposal is active. As I mentioned earlier, you pay it off sooner the R7 comes off sooner. Then once the proposal is paid in full, there is a footnote on your credit report for three years. You can get mortgages and car loans, things of that nature once the proposal is completed.

Doug Hoyes: Yeah and obviously the fact that you filed a proposal is a negative as compared to having paid off all your debts in full, so it will have an impact on whether you can, you know, get a mortgage, borrow money, but it doesn’t exclude you from doing so. The mortgage broker or the bank might say well we need a slightly higher deposit, we might need - there might be a higher interest rate, but the point you're making is the time period is greatly shortened, three years roughly in a proposal, six years after you're finished paying in a bankruptcy. So, if you know that you're going to be bankrupt for 21 months because of what your income is, a proposal is a way to potentially shorten that period if you can pay the proposal off in a quick period of time.

Adam Rauf: Exactly, and that's even a more powerful and more advantageous aspect of a proposal is if you, let's say, you had a previous bankruptcy from a previous life, whether it's a relationship breakdown, loss of work, medical issues, what have you.

If you are in financial dire straits again and you need to think of whether you need to file a proposal or a bankruptcy, a second bankruptcy is more punitive. Basically, if you were to go bankrupt a second time, it's minimum two years in length or potentially extended to three years if you are above the government's guide for surplus income. And once you complete a second bankruptcy, it's on your record for 14 years afterwards. So, you're looking at either two years plus 14 years, 16 years total or three years plus 14 years which is 17 years total. So, a lot of individuals, I'd say over 95% of the people who I see who have previous bankruptcies, file a consumer proposal to avoid the second bankruptcy.

Doug Hoyes: Yeah, if at all possible it's going to be way better on your credit report.

Well, excellent that's some very practical advice, that's a great way to end the segment. Thanks very much, Adam, we'll be back to continue and wrap it up right after this. You're listening to Debt Free in 30.

Let's Get Started Segment

Doug Hoyes:  It's time for the Let's Get Started segment here on Debt Free in 30. My name's Doug Hoyes and I'm joined by Adam Rauf. Did I say it right there?

Adam Rauf: Yes, that's correct.

Doug Hoyes: I was pretty close on it there. So, we've been making a list of all the questions people ask you and one of the questions you get all the time is, what if people are suing me or I'm in collections, is it possible to make that stop?

Adam Rauf: And that's a great question we have all the time. So, a lot of individuals assume that if there's something filed with the courts that they have to hire a lawyer and that it's too late at that point and no matter what they just have to deal with the problem themselves. That's not true. Filing a consumer proposal or a personal bankruptcy, offers you great legal protection. And it's actually the trustee's job to send what's called a "stay of proceedings".

So, if you've been served with what's called a Statement of Claim or Plaintiff's Claim, basically if you've ever been served with any court paperwork where it's been stamped with a court seal on it and whether it's small claims court or superior court depending on the debt you owe, filing a proposal or bankruptcy will stop those legal actions. It will protect your wages; it will protect your assets.

Doug Hoyes: And in fact that's kind of the whole point.

Adam Rauf: Correct.

Doug Hoyes: That's why you're doing it so that you have protection from your creditors. They use that term in the U.S all the time, protection from the creditors, but that's really what it is. So, even if the court proceedings have already started, in fact, even if the court proceedings have already finished and somebody got a judgement against you and is garnisheeing your wages the "stay of proceedings" that you talked about, still applies.

Adam Rauf: Correct. And that's just a legal term we use to say we're going to send these documents to tell this creditors, you know what, back off. This individual has filed something, they're legally protected. And the other thing that a lot of individuals don’t realize is, well what if I'm being garnisheed from the government for taxes, will the proposal or bankruptcy stop that? The answer is yes it will.

Doug Hoyes: And that's because bankruptcy law is federal law. Canada Revenue Agency is part of the federal government. They don’t really have any choice; they have to follow the federal law because they are the federal government. So, those types of garnishments all stop as a result of a filing of a bankruptcy or consumer proposal.

So, here's another question that you've told me people ask you all the time. So, even though I'm on ODSP or social assistance or EI, I've got these people calling and yelling at me; maybe actually taking me to court and suing me. I want the headaches to stop. So, does a bankruptcy or consumer proposal work in those cases? And I guess the reason they're asking that question is, we just talked about it, if you go bankrupt you can stop wage garnishments. Well, we stop them. Well, if I'm on ODSP or social assistance or EI I don’t have any wages, so there really are no wages that can be garnisheed. So, does it still make sense to file a bankruptcy or a consumer proposal in that situation?

Adam Rauf: Right and that's the question I hear quite a bit. The study that Hoyes Michalos released about Joe Debtor, we're noticing a lot more seniors that are in financial problems. And as seniors they're on Canada Pension Plan, Old Age Security, Unemployment, ODSP, those are all sort of defined as the same thing. Those aren’t really wages.

So, a proposal or a bankruptcy will stop the headaches, it will stop the phone calls. But the better question is, do I really need to actually file a proposal or bankruptcy when I'm on those types of programs? The answer is no you don’t. You are what's called creditor proof. You are judgment proof, meaning they can call and call, they can sue you, they can get even a garnishment against you. But when they try and garnishee your income, which are not wages, and they sort of try and send the garnishment to the different agency, whether it's ODSP, CPP, Old Age Security, whatever you're income is, the agency will disregard it saying no, we will not honour a garnishment because of the wages of this individual.

Doug H:           Yeah I mean the Ontario Wages Act is what allows wages to be garnisheed. If you don’t have wages then there is no mechanism for garnisheeing them. If you read the Pensions Act there's nothing about garnishees.

There's I guess a few caveats to that. One is that if you owe a lot of money to Canada Revenue Agency and you're getting CPP for example, I have seen very rare cases where they take some of your CPP and apply it against your taxes. Whether they're allowed to do that or not we can debate, but I have seen it done. But a typical creditor like a bank or a credit card company doesn’t have that power to do it.  They do still have the power to do things like freeze bank accounts, though.

Adam Rauf:    That's right, and the unfortunate part is let's say you're on social assistance or let's say you're a single parent and your sole source of income is child tax benefits. They can't attack those sole sources of income at the actual source, but if they know who you bank with and you've banked with that same bank for years. Let's say you owe money on a TD Visa card and it goes into collections and they end up suing you. And if you continue baking with TD, as soon as those funds go into your bank account it's considered cash at hand which means it's attackable. They can actually take those funds and freeze it against the debt that you owe them. So, we always tell individuals you don’t have to file a proposal or a bankruptcy, but bank with somebody you have no debts with and don’t tell any of your creditors who you bank with.

Doug Hoyes: Yeah it's your information; you can disclose it to whomever you want. That's just the way it works. So, I guess the wrap up point here is that there are some wrinkles to the law here, legally if you don’t have wages your wages can't be garnisheed but you can still receive phone calls, creditors still have the ability to do things like freezing a bank account, so if you're in a situation like that it's probably best to sit down with a professional, get some help and we can advise you through all your options.

Hoyes.com is the place to go, h-o-y-e-s-dot-com to get in contact with Adam or any of our other professionals to find out what needs to be done. Adam, thanks of being here.

Adam Rauf: Thanks, Doug.

Doug Hoyes: We'll be back to wrap it up. This is the Let's Get Started segment on Debt Free in 30.

Doug Hoyes: Welcome back. It's time for the 30 second recap of what we discussed today. On today's show Adam answered lots of questions about cars, the 407 and paying off a bankruptcy or consumer proposal early. That's the 30 second of recap of what we discussed today.

We covered a lot of ground on today's show and as you can see even simple sounding questions have answers with many wrinkles depending on your situation. So, if you have debt problems talk to a professional who can give you specific answers based on your unique situation.

More information is available on our website at hoyes.com, that's h-o-y-e-s-dot-com. Thanks for listening, until next week, I'm Doug Hoyes, that was Debt Free in 30.

About J. Douglas Hoyes

Doug is our co-founder and is a Licensed Insolvency Trustee, Consumer Proposal Administrator, certified Insolvency Counsellor and Chartered Professional Accountant.

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