Full transcript from our FAQ podcast Bankruptcy: It's A Matter of Timing
Doug H: Welcome to Debt Free in 30, the show where every week we talk to industry experts about debt, money and personal finance. I’m Doug Hoyes.
Today we’ve got a bit of a different show for you. Our typical show I have a guest on, we explore one or two topic areas in a lot of detail.
Today we’re going to do something a little bit different and go through a number of different questions. It’s going to be our first Frequently Asked Questions show. I’ve picked out a lot of the questions that we are typically asked, and we’re going to go through them one by one. And this will probably become a regular feature on the show. We will probably do it around the last show of every month.
So, here’s the first show. And my guest today, to help me through it, is Ian Martin who is a Chartered Accountant and a Trustee in Bankruptcy here at Hoyes Michalos. Ian, how are you doing today?
Ian M: Very well Doug. How are you?
Does The Time Of Year I File Bankruptcy Matter?
Doug H: I’m doing great. Thanks for being with me. Let’s get started with the first question, which is a bit of a question people – I think this is a question people don’t grasp until they come in to meet with us - so, my question is, does the time of year matter when you’re considering filing either a consumer proposal or a bankruptcy? In other words, does it matter if I file in January or the summer or the end of the year? What say you?
Ian: Well, the honest answer is yes. For many people it does make a difference. And when you’re first meeting with a trustee that’s maybe not the foremost concern on your mind but usually the trustee will, in talking about the situation, help you to understand those considerations. If it is a consideration, usually it ties back to the expectations for your income taxes and whether or not you expect to have a refund or a balance owing. So, if you – what I like to do is just kind of walk you through the considerations.
Doug H: Okay, so let’s break it down piece by piece here. So, let’s talk about filing bankruptcy and you said taxes are a big issue. So, why is that? Give us the real quick overview. How do taxes work in a personal bankruptcy?
Ian: Okay, so if you've met with the trustee and you decided that bankruptcy is the right answer, then you would have been told that in filing bankruptcy for that particular calendar year, the year in which the bankruptcy is filed, you will not receive your tax refund if there is one. However that will also apply if when the bankruptcy is filed, let’s say there is a prior calendar year or maybe more than that, that the tax return isn’t filed when the bankruptcy is filed. So, in that situation you would lose the refund for all those years.
Doug H: Okay, so let’s pretend that today is January the 30th and I haven’t – let’s say it’s January 30th 2015, just to have a number in our heads. I haven’t filed my taxes yet for 2014, last year -
Ian: Like most people, right.
Doug H: Beause I haven’t – I don’t even have my T4 slip. My boss doesn’t give me my T4 slip till the end of February. So, I haven’t filed them for 2014 yet.
Ian: So, in that scenario if you proceeded to file bankruptcy in January 2015, without having done your 2014 taxes, you would lose those two years of refunds because it’s the 15 is the year of bankruptcy and then there is a prior year outstanding when the bankruptcy is filed.
So, for most people that would be a common consideration. And if that is the case what people would normally chose to do is get their 2014 taxes filed before bankruptcy is filed, understanding there’s still the one year that is at risk. But they want to limit it to one year.
Doug H: Okay, so if you go bankrupt you are going to lose your tax refund for the year you file bankruptcy. That’s the rule, that’s how it works.
Ian: Black and white, that’s the way it is.
Doug H: It’s real simple. So, if I go bankrupt in 2015, I lose my 2015 tax refund (sic). And this is where people get confused I think because your 2015 tax return, you’re not actually going to file until 2016.
Ian: That is correct. And you’re right that’s a lot of confusion for people and I make sure it’s very crystal clear when I’m going through this consideration with people.
Doug H: That you explain what years we’re talking about.
Doug H: Okay, so if I go bankrupt, I lose my tax return for the year I’m in and for any years I haven’t yet filed. So, if I didn’t do my taxes last year or the year before I’m going to lose those as well.
So, from a planning point, back to my original question, does it matter when you file bankruptcy in terms of the time of the year? Pull it all together for us then. So, a guy comes in, it’s let’s say the end of January or it’s in February. He hasn’t filed last year’s taxes. So, your advice to him is what?
Ian: Well, the common choice that people would make would be to delay in filing bankruptcy, get the prior year taxes for the 2014 taxes filed, have the refund in hand. And at that point then proceed to file bankruptcy so that they’re limiting the lost refunds to the one year, the year the bankruptcy’s filed.
Doug H: So, that’s a pretty key point then, that if I wait a few weeks when you’re at the beginning of the year, get last year’s taxes filed, and it’s not just having it filed obviously, you actually have to have the refund in hand. So, you sign up for direct deposit, that’s how most people get their refund and it pops into your bank.
Ian: And if you’re one of the go-getters who’s getting your return filed early in the new year, then it’s usually processed very, very quickly by Canada Revenue.
Doug H: Because they’re not doing anything else, the boom hasn’t hit yet.
Doug H: So, now I think this is again a key point because what we haven’t talked about, is the way trustees get paid. A trustee gets paid a percentage of the money that’s in the pot at the end of the bankruptcy. The more that’s there, they more the trustees is getting paid.
Ian: That’s correct.
Doug H: So, as a trustee, it is in my own interest for you not to file your taxes for last year. I would like there to be two years worth of tax refunds, not one, because that will give me more money at the end of the day.
Ian: Like let’s say it’s late in the calendar year. Let’s say you’re meeting with a trustee in December instead of January. So, that you don’t find yourself in that situation where you might delay until February or March to file, it might make sense to make sure the bankruptcy is filed before the end of the calendar year so that that’s the year that’s at risk. So, you would have already filed the old year back in March or April. So, in that situation your still limiting it to one year of tax refunds without delaying the process of getting the bankruptcy started by a couple of months, potentially.
Doug H: So, you file bankruptcy in November/December. So, you’re only losing that year or you wait until let’s say till March of the following year and that way again your only losing one year. Well, obviously if your wages are being garnisheed you have to do that math. Does it make sense to wait two months, have my wages garnisheed two months so I can get my $100 tax refund? You’re going to want to figure out how big is my tax refund. I assume if you owe money to the government, well -
Ian: That’s exactly what I was going to say. If you normally have a small refund or even a balance owing then these time considerations aren’t really applicable if you’re focusing on bankruptcy.
Doug H: Okay, so we talked about bankruptcy. Now what about a consumer proposal? Is it the same answer with a consumer proposal or is it different?
Ian: It’s tax related but not exactly the same. And the reason for that is one of the key distinctions with a bankruptcy and a proposal is that in a proposal, you keep your tax refunds. The only exception to that would be if there was maybe taxes from a prior year where the government has a right of offset. But fundamentally, if you do a proposal, the refund money is not paid into the proposal like we just talked about where it is a bankruptcy.
Doug H: Because the whole concept of a proposal is I keep all my stuff.
Ian: Precisely, precisely. So, with a proposal, it’s really – it’s still tax driven, but it’s more considering if you normally have a balance owing on your taxes.
So, let’s change the scenario. Let’s say I’m meeting with somebody relatively late in a particular calendar year and taxes are at least a significant part of the issue and furthermore they’re expecting to have more tax debts that are part of that calendar year. In doing a proposal, the taxes from the year in which the proposal is filed are not automatically included in the proposal. There are ways to include special provisions within the terms of the proposal to have that included as well; but you need to have the explicit agreement of Canada Revenue and they don’t always give that.
So, the risk there is that you file a proposal and say October/November of a particular year, it deals with taxes from all the prior calendar years but within a few months when you do the taxes from that year in which the proposal is filed, like bam you’re whacked with another tax debt that isn’t part of the proposal. And then it doesn’t really feel like much of a fresh start because you still have your proposal payment to deal with the old debts but still struggling with this new tax debt that isn’t captured by the proposal.
Doug H: So, very key point there, then. A proposal will automatically include your tax debt up to the end of whatever the last tax year was.
Ian: That is complete.
Doug H: Correct. And tax years in Canada, if you’re a normal working guy, end on December 31st.
Ian: Right, calendar year.
Doug H: Calendar year, it’s based on the calendar year. So, if I do a proposal on January the 2nd, 2015, my 2014 taxes owing are automatically included.
Ian: Right and that’s precisely the point I was going to make. That if possible, if there’s not a wage garnishee or like really hard collection activity that’s going to happen, it makes sense to delay the filing of the proposal to the new calendar year so that any tax debts from the prior year are automatically dealt with through the proposal.
Doug H: Got you. So, if I file my proposal on December the 29th, any taxes I end up owing for that year are not going to be automatically included. If I wait a few days and file my proposal on January the 5th, then all the taxes from last year are automatically included, whether or not I filed my taxes yet obviously. By January 5th, I probably haven’t.
Okay, so the answer to the question then if we can sum it up. In a proposal if you owe money, you want to file early in the year. In a bankruptcy if you owe money it doesn’t really matter, file anytime. In a bankruptcy if you’re getting a refund you want to file either towards the end of a year so you’re only losing one year or you want to file after you filed your taxes for the year, which means you’re probably filing March, April or later.
Ian: I think that’s an apt summary Doug.
Who Will Find Out If I Go Bankrupt?
Doug H: Perfect, okay. So, that was our first question. We went into a bit more detail on that but that’s good, I think that’s a key question. We’ve got about a minute and a half here to do one more question. This is one we get asked all the time. Who will find out if I go bankrupt?
Ian: That’s – it is a very common question. It’s an emotional process to file bankruptcy. It’s normal that people will be concerned about that. So, I’ll give you kind of my text book answer and then some practical considerations.
So, the textbook answer is that, filing bankruptcy means that you’ve met with a trustee. There’s different government forms that outline your statement of affairs that are filed with the government. So, the government obviously knows through the filing process. But then the trustee also has to tell your creditors that you filed bankruptcy as well. And that’s also positive cause that means they update their records and stop any collection activity. So, that’s the textbook answer Doug, that the government needs to know to get the process started and your creditors need to know but that’s all positive.
Doug H: Okay. And I think a real quick summary of that is, your bankruptcy filing or your consumer proposal filing will appear on your credit report. It will stay there for a period of time. A consumer proposal generally stays for three years after the proposal's finished. A first time bankruptcy generally stays for six years, could be seven years after the bankruptcy's finished.
So, anybody who has the ability to check your credit report is going to find out about your bankruptcy; but otherwise in a normal bankruptcy or proposal we’re not putting an ad in the paper, we’re not telling anyone else other than the people who need to know, the people who you owe money to, the government and anyone who’s going to check your credit report.
I appreciate that Ian. Thanks for being here on Frequently Asked Questions show number one. Thanks for being with me.
Segment 2 - Howard Hayes - Immigration and Bankruptcy
We’re back on our Frequently Asked Questions episode and I’m joined again by Howard Hayes. Howard happens to be our firm’s expert on immigration issues and bankruptcy. So, that’s what we’re going to talk about in this final segment.
So, Howard I’m guessing based on your accent you weren’t born in Canada. Is that right?
Howard: That’s right, yeah. I’m from Lincolnshire in the U.K.
Doug H: Oh yes Lincolnshire. I have no idea where that is.
Howard: Well, if you’re looking at a map of England you’re probably about a three hour drive north of London.
Doug H: So in the middle of nowhere I guess.
Howard: In the middle of nowhere, yes.
Doug H: So, you are now a Canadian citizen, is that correct?
Howard: That’s correct.
Doug H: Okay. So, you’ve gone through the whole citizenship process. You know what’s involved, which is probably why you’re our expert on citizenship here, so -
Howard: That’s right actually. When I went through the immigration, citizenship process, I remember one day I was filling out an application form and there was a question on there about have you been bankrupt? Now obviously because I work in the bankruptcy industry, that perked my interest and I started to question why would that be on the application form? So, everything stemmed from there really in terms of my interest in looking into what these rules are with how a financial can potentially impact your ability to be able to move to Canada and sponsor someone to move to Canada.
Doug H: And you’ve done some writing on that and I’ll put a link in the show notes to both the government’s resources and some of the stuff you’ve written. You can see that at hoyes.com on our website.
So, tell me the story then. The common question we would get asked is I’m a Canadian and I want to sponsor my mother, my father, my brother, my spouse or some other family member, my spouse to come to Canada. So, what happens if I have debt? Does it matter? Do debts prevent me from sponsoring someone? How does that all work?
Howard: I think first of all the first thing to look at is, there is a difference between the immigration process and the citizenship process. As far as I’m aware and by the way I would also say that before you make any decisions always refer to the citizenship and immigration website for up to date information.
Doug H: That’s a good piece of advice cause we’re not immigration lawyers. We’re not telling you how to do any of that and the rules could change by the minute so make sure you know what you’re talking about.
Howard: As of today, my best understanding is we’re looking at this difference between immigration and citizenship. Immigration is the right to be able to come and live in Canada. Citizenship is that you become a citizen of this country. So, you’re entitled to a passport, you can vote in the country. As far as I’m aware there’s no restriction on a citizenship application. So, whether you’ve got debts or not, if you’re applying to be a citizen, that’s not taken into account. It’s the immigration aspect of being a permanent resident, sponsoring someone to be a permanent resident, that’s where these issues of debt potentially come into it.
Doug H: And that’s really the key. It’s if I’m sponsoring someone. So, as far as we know and again we’re not immigration lawyers. So, if you’re listening to this from outside of the country and you want to immigrate to Canada, we’re not the guys to talk to about how that process works. We’re not experts in it.
What you’re saying is, well if I owe some money to Visa in the U.S, Visa’s a bad example cause that means two different things. So, I got a bank loan in the U.S and I want to come to Canada, fine, that’s not going to be the big issue. The issue is if I am a Canadian and I want to sponsor someone to come in, then there are a bunch of things that I can’t have showing up on my record in order to have someone come to the country.
Howard: That’s right. When you’re sponsoring someone you’re essentially taking on a financial responsibility and commitment to the person that you’re trying to sponsor to come into Canada. Part of the reason for that is because if the government is going to allow this person to come into Canada, they don’t want that person to be burden to the existing tax payers of Canada. They don’t want someone to just walk into the country and immediately be claiming benefits and social assistance because they have no job, no prospects, no support network of family and friends that’s going to help provide for that person’s needs when they arrive in the country.
Doug H: So, run me down the list then. Let’s assume that I’m the person who is sponsoring someone to come into Canada. What types of financial issues can I not have? What’s going to disqualify them?
Howard: So, there’s a couple of restrictions then. So, if you – one for example is support. Let’s say you owe child support and you’re in arrears with the support. You cannot sponsor someone whilst you’ve got those arrears. A second would be if you’ve had – let’s say you’ve previously sponsored someone and that person had to claim benefits because they couldn’t find a job. Then, until those benefits are repaid back to the government, again, you cannot sponsor a second person.
If you borrowed money previously on an immigration loan, now this is very rare, immigration loans are very rare. What an immigration loan would be is, let’s say again if you’re sponsoring someone and you need help with the cost of actually physically getting that person from Europe or Africa or wherever they’re coming from, Asia, you need the cost of a plane ticket. Well the government will help you with those costs sometimes. They will say well here’s a bunch of money you can use for the airfare to get that person here. If you haven’t repaid that loan, again you can’t sponsor someone else to come until that loan has been repaid.
Doug H: And what about bankruptcy?
Howard: So bankruptcy, if you’ve declared a bankruptcy and you haven’t been discharged from the bankruptcy, again you cannot sponsor someone until you’ve completed the process of being bankrupt.
Doug H: So, that’s really the key point then. If you are bankrupt right now you cannot sponsor someone to come into the country.
Howard: Correct. As soon as the bankruptcy is finished, you can continue with your application to sponsor someone.
Doug H: Once you’re discharged then you can. So, I guess the message, to answer the question for everyone listening today is if you have a bunch of debts now, and you also in the future want to be sponsoring someone to be coming into the country, then you’ve either got to deal with your debts now and then you can sponsor them. But you don’t want to sponsor them and then declare bankruptcy in the middle of that process cause that could certainly muck up the whole process. So, if you think you’re going to have to go bankrupt, I guess you’re going to want to do that bankruptcy, get it finished before the sponsorship process starts.
Howard: I guess the third option there would be that you go through the whole sponsorship process and then deal with the debt. But that’s probably a much riskier strategy because the whole sponsorship process from my experience is going to take at least a couple of years and that’s a long time to not be dealing with your debt.
Doug H: Yeah, it’s not a quick process so -
Howard: A question we often get is well, what if I do have the debts though and I really do need to sponsor my mom or my brother or my aunt to come to this country and for some reason I need to get that done right away. What are my options? What can I do? Rather than going bankrupt you can look at offering the creditors a proposal.
Doug H: Because in the rules, as we read them, it does not say have you declared a consumer proposal? It just says have you declared bankruptcy?
Doug H: So, that’s a key point. So, I guess the message for everyone listening is if you are going to be sponsoring someone and if you have debts, you better come in and talk to us or someone like us up front because there are a bunch of different options. You can deal with your debts, you can do the bankruptcy and then start the process, you can do a consumer proposal, but you don’t want to get caught in the middle of it cause that can really mess things up.
Howard: That’s right.
Doug H: Great. Thanks very much Howard. You’re listening to Debt Free in 30.
30 Second Recap
Doug Hoyes: Welcome back. It’s time for the 30 second recap of what we discussed today.
Today was our first Frequently Asked Questions show, and my first guest was Ian Martin, a chartered accountant and bankruptcy trustee, who told us that timing matters if you are considering a consumer proposal or personal bankruptcy.
Ian also walked us through who will find out if you go bankrupt.
In the second segment my guest was Howard Hayes, also a bankruptcy trustee, who gave us some great practical advice on how to sponsor someone to immigrate to Canada even if you are having debt problems.
That’s the 30 second recap of what we discussed today.
So what’s my take on what Ian and Howard had to say?
Obviously I’m biased, but I think there is an obvious message here, and that’s that you want to deal with a reputable trustee.
Trustees get paid based on the money in the pot at the end of the bankruptcy, so a trustee gets paid more if they get two years’ worth of your tax refunds, instead of just one. A trustee is happy if you go bankrupt in January or February before you receive last year’s tax refund, because they get two year’s worth of refunds. They get paid less if you have already filed last year’s taxes.
So if your trustee didn’t mention to you that timing matters, you may not be dealing with someone who is looking out for your best interests.
That’s our show for today.
We’ll be doing a Frequently Asked Questions show every month, so if you have a question you want answered on the show, email us at DFI30@hoyes.com
Full show notes with links to everything we talked about are available on our website at hoyes.com, that’s h-o-y-e-s.com.
Thanks for listening.
Until next week, I’m Doug Hoyes, that was Debt Free in 30.
Bonus Segment: Let's Get Started -
Emotional Considerations of Bankruptcy
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 Ian Martin and the question we’re going to discuss today is, is it morally wrong to go bankrupt?
Ian, I’m sure you’ve seen this many times. People come in to see you and they know they owe the money, they want to pay it back and they’re feeling some stress, some angst over it that oh boy I want to pay my creditors. I don’t want to go bankrupt. I’m kind of taking the easy way out. I don’t want to do that. I think it’s morally wrong to be going bankrupt. What do you say to people in that situation?
Ian: Well, I usually start by acknowledging the kinds of emotional considerations that you were just describing and I try to reassure people that despite that kind of conflict that they might feel this is a regulated process, it’s set by law and the idea of taking the “easy way out”. I hear that on a regular basis; but I think that’s more from people who really haven’t gone through this kind of process themselves.
And like I said a moment ago, it’s important to know that this is not something that Doug and Ian have thought up. This is a regulated process set by Parliament, very structured. It’s something that you only do when you truly cannot pay back the full amount of the debts.
Doug H: I think that’s kind of the key to it. It’s not a choice between well, okay I’ve got $50,000 worth of debts but I was off work for two years cause I was sick and I got laid off and now I’m back to work but there’s no way I can ever pay it back. It’s not a choice of do I pay it back or not. I can’t.
Doug H: Mathematically, there is no way I can pay back that level of debt. So, my decision is not do I pay it back or not, it’s how do I deal with it?
Doug H: And okay do you qualify for a debt consolidation loan? Can you do credit counselling? Do you have the money to make some kind of settlement offer? We will go through all the options with you obviously. But ultimately, if the answer’s no, this is the only option that I’ve got, then well I guess it’s something I have to do. I look it as a business transaction. The bank, the credit card companies lent you the money.
Ian: I see where you’re going, yes.
Doug H: They knew what your income was. They knew what your situation was. They took risk lending you the money; but that’s why the interest they charge you on your credit card is 19%. They realize that there might be a chance that you will not be able to pay them back in full. And that’s how it works in business. Sometimes they win, sometimes they lose. I never lose a whole lot of sleep worrying about the bank, boy you know the bank, which makes a billion dollars every three months, is this going to hurt them that I’m not able to pay back my credit card.
Ian: Sometimes they’re concerned if it’s only 1.1 billion instead of 1.2 billion, right?
Doug H: [laughter] Yeah, but it’s not something that I’m concerned with. Now I think where it is morally wrong, is if I use my credit card, if I borrowed money knowing full well I could not pay it back.
Ian: Right and that’s taking us into a different realm of discussion.
Doug H: And I would say if someone comes into me and says well, okay I’m in financial trouble but I’ve still got $5,000 worth of room left on my credit card, should I just rack it up and then go bankrupt? I would say no, that is morally wrong but it’s also legally wrong.
Ian: Yeah, with that kind of - I mean when I’m asked that kind of question I make sure that it’s very clear that if you were to do that this doesn’t mean that you can’t file bankruptcy, but what you’re doing is running the risk that people are going to review those records and use words like fraud and saying you never had any intention, which really could cause a lot of I’ll say complications I’ll say about getting your bankruptcy complete.
Doug H: Absolutely and that is fraud. Taking money that you know you can’t pay back, that’s theft. And in most cases you’re not going to get away with it anyway. All of these transactions are in the computer. When you file bankruptcy the bank, the credit card company, is required to review every transaction that you’ve made in at least the last three months and they can go back a lot farther than that. So, if they see that you took a big $5,000 cash advance yesterday and you’re going bankruptcy today, they’re going to notice and you’re either going to have to either pay it back or your bankruptcy won’t end.
Ian: Right. That would also be a red flag. Fundamentally filing bankruptcy, it’s about allowing what we call the honest, but unfortunate debtor a fresh start from his or her debts when he or she simply can’t pay it back. So, that’s the bulk of the situations, but there are the exceptions to that where people are not always truly the honest, but unfortunate debtor.
Doug H: And I think that’s a very important concept and that’s something that’s enshrined in Canadian law, the honest, but unfortunate debtor. And so if you’ve been honest all the way throughout, I got the credit card, I fully expected to be able to pay it back but then something happened, job loss, marriage break up, illness whatever, I’m now in a position where I can’t pay it back, I’m unfortunate. I’m honest and unfortunate and that’s where the bankruptcy process exists.
And so, my answer to the question is no it is not morally wrong to go bankrupt if you are that honest, but unfortunate debtor. If you’re the guy who just racked up these credit cards without ever having an opportunity or without a thought to paying them back, okay not quite so honest.
The final comment I guess I would make on that is if bankruptcy really does bother you we do have another option called a consumer proposal, which is a negotiated settlement. That’s another way to deal with the debts and we’ve got lots of information on our website at hoyes.com that talks about that.
Ian thanks very much for being here with me today to answer the question is it morally wrong to go bankrupt? Thanks very much.
Ian: Thank you Doug.
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