As a licensed trustee in bankruptcy, I deal with individuals that need help dealing with their debt. Often by the time people come see me they have been struggling for months and sometimes years. Many have burned up all their assets -- RRSPs, RESPs, and property -- and end up in my office as a “last resort” to file a bankruptcy.
When I finally do meet with people and give them the help they need many of them comment, “I should have come in to see you sooner”. Sadly, this is often the case. A visit earlier in the process probably could have resulted in many of their assets being saved, and preserved for the future rather than being squandered to service interest on overwhelming debt.
How Advisors Can Work As A Debt Management Team
There are warning signs of debt problems, and early recognition means the possibility for earlier action. Not surprisingly, the sooner the intervention, the less invasive the solution. The problem is people have a real reluctance to contact a bankruptcy trustee. Most wait until their finances have reached a critical breaking point.
This is where other trusted advisors can come into the picture and have a real impact in preserving and repairing people’s financial foundations. Financial planners, accountants, mortgage brokers, real estate agents, even bankers have a role to play in dealing with people’s debt. All of these professionals are operating within the framework of the overall finances of an individual. But how can they help? Simple, be the early warning system for your client’s financial health.
Warning Signs For The Financial Planner
For example, as a financial planner, if you have a client that is constantly redeeming RRSPs in $5000 chunks, that is a very clear signal of a cash-flow shortfall. Often in these situations there has been a reduction in income in the household and a ballooning of debt to make up for that reduction. This is followed by a liquidation of assets to make up for a cash flow shortfall. Often all this money is pouring into the gaping maw of high interest credit card debt, and solving nothing.
As their financial planner, you owe it to your clients to help them preserve their hard earned investments. There is no good reason to burn up retirement savings to deal with debt today. The government has put in place regulations in the Bankruptcy and Insolvency Act that protect most RRSPs from creditors. A referral to a trustee could result in a consumer proposal to creditors providing relief from the debt, protecting non-registered or RESP savings and can stop the need to cash in further investments.
Mortgage Brokers Shouldn’t Fear Consumer Proposals
Mortgage brokers can have a huge impact on helping people make the right debt consolidation decision, one that ensures their long term financial recovery. Looking at the overall financial position of a client who asks about a second mortgage to refinance credit card debt can be a good early opportunity to help the client save their home. It’s better to have a client for the long term, than a client who is going to inevitably default on their mortgage.
Refinancing and consolidation is a symptom of cash-flow problems. Many times I meet with people shortly after they have refinanced through a second mortgage only to discover that they were unable consolidate all their debt. Now they have increased mortgage payments but still have other debts they can’t pay off. You can imagine how shattered they are to find out that if they had come to see me first we could have put in place a plan to deal with all of their debt, and saved them thousands of dollars.
As trustees we frequently advise people to consider a second mortgage if they have enough equity in their home to safely consolidate credit card debt. However if your client can’t afford the new mortgage payments, or isn’t dealing with all of their debt, your client may be taking on the unnecessary risk of losing their home. It is possible to use the equity value in the home to settle the debts through a consumer proposal. While this may seem like losing on a potential mortgage, in truth you are preserving a client for the long term. A mortgage broker can be a key partner with a trustee to help people deal with all their debts at once. These plans only work if the mortgage broker knows how proposals work and understands their role in a successful overall restructuring plan.
Accountants Can Help Save A Small Business
Accountants generally, are more involved in small business operations. Many sole proprietors engage accountants and bookkeepers to maintain their business records and keep their tax filings up to date. Being intimately familiar with the ins and outs of a small business places these advisors in the position of being an excellent early warning system. Small businesses often fund a short term cash flow problem by making poor credit choices. If during your review or audit you see significant credit cards debts, either in the business or with the proprietor, or missed tax payments it’s time to intervene. Early intervention can result in debt, including tax debt, being brought under control and can be the difference between a business surviving (and a client retained) or a business going under. At the first sign of trouble, a free consultation with a bankruptcy trustee could provide clear insight as to how to get through to the other side of a debt problem, while keeping the business going.
Real Estate Agents Play A Role When Buying Or Selling
Real estate agents can also be a key player in a restructuring plan. In many cases the decision to sell a home could be as a result of having to downsize due to a reduction in income or because they can no longer afford to keep up with their mortgage payments due to other debts. If the sale of the home will not clear up all their debt then a lump sum proposal could be negotiated that will see all the debt retired with the proceeds from the sale of the home. Savvy real estate agents, who know what a trustee can do to help, can be a significant asset to people dealing with too much debt and forced to sell their home.
If a potential sale is threatened because a client can’t be approved for a mortgage because they already carry too much debt, again good advice can help. A referral to a bankruptcy trustee to help them deal with their existing debt can preserve a potential sale down the road. Yes, bankruptcy or a consumer proposal does affect a client’s credit report but they don’t have good credit today. Helping them on the road to repairing their credit can be the best way to gain a more positive reputation among overburdened consumers who still want to enter the housing market at some point.
Bankers Can Initiate A Restructuring
Finally, even bankers need to consider the benefits of referring their clients to a bankruptcy trustee. Most of the time banks don’t like seeing or hearing trustees. They consider them a “necessary evil” in the consumer debt recovery landscape. Smart bankers are more open minded regarding financial restructuring and can see the merits of sending their clients to see a trustee early. Constant defaults, endless phone calls to defaulted debtors are a significant drain on the resources of the bank. Often, bringing things to a head and resolving them is better than long drawn out collections actions. Timely action can result in a more favourable recovery for the bank. Letting the financial situations of their clients completely collapse is simply not good business. Facilitating a fair and reasonable settlement of all of their client’s debt through a consumer proposal, results in a win-win situation for everyone. The bank recovers more money, the client regains control of their finances, and potentially a future client is placed into a stable position. Rather than a “victim” of the debt problems of their clients, banks can be a key player in helping recover the financial health of their clients.
All of the professionals mentioned above are stakeholders in the financial well-being of their clients. They are also positioned to recognize the warning signs of debt problems at the earliest stages. Timely intervention will provide better outcomes for everyone involved, in some cases it could result in the preservation of assets, the protection of a home or the continuation of a good business. People suffering under debt need to have solutions presented at the earliest stages of financial hardship. Sadly the trustee is often the professional of last resort, only sought out when all other options have been tried and failed. Bankers, real estate agents, mortgage brokers, and financial planners can benefit by talking with a local trustee in bankruptcy about what they can do for your clients and for you. You will be surprised at the possibilities to really enhance the service to your clients.