Listen to the podcast: 3 Common Questions about Bankruptcy
Doug H: Welcome to Debt Free in 30, the show where every week we take 30 minutes and talk to industry experts about debt, money and personal finance. I'm Doug Hoyes.
Normally the last Debt Free in 30 is a Frequently Asked Questions show but we found that we have so many questions that our listeners wanted answered that I've decided for the month of July all we'll do is 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 first time guest on the show. So, let's get started who are you? Where do you work and what do you do?
Joel S: Hi Doug, thanks for coming to London. My name is Joel Sandwith. I am bankruptcy trustee and an administrator of consumer proposals in our London and Sarnia offices.
Doug H: Well, thanks for agreeing to be here Joel. And yes you are right we are recording this in our office in beautiful downtown London, Ontario. Before we get to the questions, you've got a bit of a unique background amongst the trustees here at the firm. So, give us the quick overview of how you got into the business of helping people deal with their debt.
Joel S: Well, for many years I was a credit counsellor with a local service agency Family Service Thames Valley. I did that for about six years and found that many of the clients that I was meeting with I was referring to bankruptcy trustees, most especially at Hoyes Michalos, and became very interested in the work. So, the background isn’t as much as accounting as might be more normal in the business, but more on the credit counselling side.
Doug H: So, and I remember when we first brought you on. I believe I was at a credit counselling conference, a conference organized by some credit counsellors. And you and I met and I said hey this is a guy who could probably help the people we're dealing with. And so, you've been with us now since 2009. Is that right?
Joel S: That's right, yep, February of 2009.
Doug H: And during that time of course you've gone through the education program, qualified and now you're a fully licensed trustee and consumer proposal administrator.
So, during those many years of experience working both as a not-for-profit credit counsellor and as a client service specialist, and now a licensed bankruptcy trustee and consumer proposal administrator, tell me when you meet with someone for the first time, what's the most pressing issue that people ask you about? What's the one thing that's most often an issue for people who've got a lot of debt?
Joel S: Excellent question, Doug. The questions tend to be fairly similar from person-to-person about house and cars and so forth. But the thing that has become more prevalent among many of the people who are coming in these days is questions about affect to their credit and the ability to rebuild their credit once the process has begun or been completed.
Doug H: So, even before someone has dealt with their debts, they're already thinking about getting back into debt then.
Joel S: Yeah, it's an interesting change in sort of the mindset that we're seeing. That in the past, people were most concerned about being rid of the debt, whereas today people are most concerned about being able to re-access credit down the line.
Doug H: So, how do you feel about that? Obviously it's a bit of a two edge sword here. On the one hand, if you have to come see us a file a bankruptcy or file a consumer proposal, you've got too much debt. It's pretty much that simple. But on the other hand, we all understand how society works; I can't book a hotel room unless I have a credit card and most people at some point want to finance a car, buy a house, all of those things you require credit for. So, what's your thought process on that? How do you balance the need to get out of debt and stay out of debt with the obvious desire for people to rebuild your credit?
Joel S: Well, I agree with you wholeheartedly that our society has become one where access to credit has become almost necessary, I won't say completely necessary but you can certainly as you pointed out find some very good examples. I do struggle with it in the sense that I'm seeing an increasing number of people who have been through a bankruptcy or proposal in the past before coming to see us with new debt issues.
So, from my perspective it's trying to find a balance in allowing people to have some information about rebuilding their credit, but encouraging them to find a new way to be responsible with that credit, to take the fresh start of being rid of the current debt and not taking on new debt while rebuilding credit.
Doug H: So, it is truly a balancing act. So, okay so someone is sitting down with you and either they're about to start their bankruptcy or their consumer proposal or it's winding to a close and they ask you that question, okay so what can I do to rebuild my credit? How does it work? When can I do? What's the thought process that you walk them through?
Joel S: A couple of things and it starts even before the rebuilding of credit. I would say that one step is certainly to teach yourself to set some money aside. Put yourself in a position where you have your own emergency fund and you're not relying on credit for emergencies.
I would also suggest monitoring your credit report to determine if the things that were included in your bankruptcy or proposal have been cleared up. There are ways to correct errors and you want to make sure that there aren't any.
Then the next step is to find a safe (relatively) and secure (relatively) way of actually obtaining some credit, which typically is a simple as what we would call a secured credit card.
Doug H: Yeah and we've talked about that on the show. And in fact for people that are listening today you can go back and listen to show number 42 which we aired on June the 20th where I interviewed a guy by the name of Jim Dunbar who works for Affirm Financial Services.
They have a credit card that is actually an unsecured credit card but it carries a relatively hefty fee with it and obviously a very high interest rate, but that would be another option for somebody who wants to start the process of rebuilding credit. So, is that a good idea to either get a secured credit card or an unsecured credit card? And the ones we talked about on show number 42, they've got like $1,000 credit limit. So, it's not like you're going to be able to go out and borrow eight million dollars on them. But is that something that you do suggest, don’t suggest, think it's a good idea? You have to take it with a grain of salt. What's your thought process?
Joel S: I think the care and use of the card is more important than the features of the card itself. And what I mean by that is that if you have a high interest rate on a credit card, I don’t think that that should be a concern cause my advice is don’t carry a balance. The typical advice that I would give to a client in terms of using that card for the purposes of rebuilding credit, is find something in your budget that you're going to be paying for anyway, put that particular charge - I'm going to use the example of cell phone bill or a car insurance bill - onto the credit card and simply pay that credit card bill the moment it arrives because you should already have the money that would have been part of your budget if we're rebuilding already.
Doug H: Well, it's like I said on the show many times, a credit card should be a substitute for cash not a way to borrow. So, if you - so, what you're saying as well, instead of going and buying that thing for cash or on my debit card, I'll buy it on my credit card but then I'll go home and at the end of the day, the end of the week, the end of the month, whatever, I'm going to pay it off so I'm never carrying a balance.
Joel S: I might even suggest for those that I - I fully agree, but I might even suggest for those that are more concerned about their ability to manage credit, don’t even carry the card in your wallet. Keep the card at home in a safe place. Have a couple of bills attached to that card and pay them. And what you're doing in that case is you're not as concerned about the interest rate or even necessarily the fee structure, but what you're getting is some positive reporting on your credit bureau which can help to offset the negative that has been done by the overuse of credit in the past and the bankruptcy or proposal that you're entering or have completed.
Doug H: So, you're not recommending people get a credit card, if you can live without one great. But, if you think you're going to need one, and like we say in today's society that's kind of the way it is, then there are some options and obviously that's the kind of thing when you meet with someone you're going to walk them through in detail. Obviously this is a radio show and a podcast so we're not going into specific details cause we don’t know your specific situation. But you'd go through those things in detail with someone and then it's up to them to decide whether or not that makes sense for them.
So, when is it that I should start this whole credit rebuilding process, then? That's a common process that you get asked. When, what's the timing?
Joel S: I would hope that people would find a way to wait as long as possible before beginning. And all I mean by that is, I really would prefer that people don’t attempt to rebuild their credit to any great extend during a bankruptcy. I think it entirely defeats the purpose of being protected from creditors and moving along. It's not necessarily as damaging in my opinion to begin rebuilding credit during a proposal but if you can, wait for a while.
You need to learn to trust yourself with the budget that you have. You have to put yourself in a position. I would suggest for at least a year where you're living on the money that you have coming in. So, that you're learning what your inflows and outflows are and that you're managing them and that you feel confident that when you have credit that you won't abuse it.
Doug H: Because ultimately you have to have more coming in then going out. And the reason you have more debt, or the reason you have any kind of debt is you spent more than came in. You're saying really the first step then is to turn around 180 degrees. You've got to be living on cash, actually saving money rather than constantly going into debt. And that's why your advice is delay getting a credit card or any other kinds of debt as long as you can, get used to living with cash and then the credit card becomes a supplement as opposed to the way you actually live.
Joel S: Absolutely. So, what you want to find yourself is in the position where the credit card isn’t necessary, it's simply helpful in the ability to rebuild your credit. And ultimately, the purpose of rebuilding credit here is so that you can obtain more competitive interest rates, if necessary, on things like vehicles and mortgages if those are part of your future.
Doug H: Makes sense, excellent.
Well, were going to take a break and come back. There's a bunch of other questions that people have asked. I think we only got to one of them in that first segment so we'll pick up the speed as we come back. You're listening to Debt Free in 30.
Doug H: We're back on Debt Free in 30. My name is Doug Hoyes, my guest today is Joel Sandwith who is a trustee and consumer proposal administer with us here at Hoyes Michalos and Associates. He is responsible for our Sarnia and London offices. And today we are here in London recording this, and we're going through common questions that Joel is asked.
So, I asked Joel give me a list of the top five questions people ask you. The most common question he gets is well you know how am I going to be able to rebuild my credit? How am I going to be able to get back on track? That's what we talked about in the first segment. The next most common question you get asked, Joel, is how will this affect my credit? So, if I file bankruptcy or if I file a consumer proposal, how is this going to affect my credit? So, what's the answer you give people?
Joel S: The answer tends to depend on how in depth we want to go in the answer. So, the simple answer is that if your credit is in excellent shape today when you come and see me filing a bankruptcy or proposal will be damaging, not deadly, you will be able to recover from it. Many of the people that we're meeting with are either so far overextended on their debt or are already in collections with the effect to their credit of filing a bankruptcy or proposal might actually be positive in the sense that the negative reporting can stop finally.
Doug H: So, that's an interesting comment that you just made, that filing a bankruptcy or a consumer proposal can actually improve your credit. And I guess what you're saying is if I'm sitting there today and I have so much debt that I can't borrow, I can't get a car loan, I can't get a mortgage, I can't even get a credit card, then my credit is as bad as it could possibly be. If I can't borrow then it doesn’t matter what's on my credit report, it's as bad as it is. It's not going to be made any worse by filing a bankruptcy or consumer proposal. But what you're saying is, by doing that I'm dealing the debt and as a result then that begins the recovery process.
Joel S: Yeah, exactly. You're not starting entirely from scratch. There is going to be negative information reported because of the filing, but it likely already exists. And the filing then stops the negative reporting, it helps to eliminate the debt over time and it puts you in a position where you can rebuild from a better position.
Doug H: So, throw some numbers at me, then. So, if I go bankrupt, how long is the bankruptcy going to stay on my credit report?
Joel S: The credit report is going to reflect your bankruptcy for six to seven years after you've been discharged from the bankruptcy, which can take varying amounts of time, but generally let's say about nine months to be discharged.
Doug H: So, first time bankruptcy if you have no surplus income, no issues, you get discharged in nine months, there's another six years with Equifax (could be seven years with a different credit bureau), that the note that says you went bankrupt stays on your credit report. If it's a second time bankruptcy then I believe it's 14 years cause in affect the first one comes back, what about a consumer proposal? How is that different?
Joel S: A consumer will stay on your credit report for as long as it takes you to complete the payments that you've agreed to, plus three years afterwards. So, it's often possible for people to pay their consumer proposals in a shorter period of time than they've agreed to, thereby reducing the amount of time that the negative information stays on their report.
Doug H: So, I could file a consumer proposal where I agree to make payments over four years let's say. But if I make the payments really quickly I get some overtime I pay it off quicker, I get it paid off in two years, then the total that's on my credit report is going to be -
Joel S: It's going to be five years.
Doug H: Five years, two plus the three. And the key point I guess - now you did say you still can recover. So, okay I've finished my bankruptcy, I've got this six year period where it's going to be on my credit report, am I ever going to be able to borrow again?
Joel S: Yeah, absolutely. So, we talked in the first segment about the idea of slowly rebuilding credit by taking care of your finances by using something like a secured or a small credit card. That's something that you can begin once you've been discharged from bankruptcy, even potentially during a consumer proposal if it's really necessary for you to do so. And those things, and some other steps that we would talk to the individual about, would put you in a position where your credit rating may actually in part recover, potentially substantially, even during the time that these things are on your credit report.
Doug H: So, it's not like okay for six years I can't do anything; it's like you've got to have plan, here's what you got to do, you got to get started on that plan.
Okay, so well, I think we've talked quite a bit about what the different aspects are to how rebuilding credit and how it affects your credit report. Another question you tell me people ask you all the time is: what will happen to my mortgage? So, I assume these are people who own a house and have a mortgage, but they've got a whole bunch of other debts and so they're deciding whether or not to file a bankruptcy or consumer proposal. So, what's the answer that you give them? How will filing a bankruptcy or consumer proposal affect my mortgage?
Joel S: That's an excellent question. And so, many of the people that we meet with do have houses and certainly you can imagine that the question they'll ask us right before that is what happens to my house? Well, it's extraordinarily rare that anyone loses a house in bankruptcy or proposal unless it's part of their plan.
Doug H: So, let me just butt in then. Why do you say it's extremely rare that someone loses their house if they go bankrupt? Cause I would assume, oh I'm going bankrupt I'm losing everything.
Joel S: So, the issue with the bankruptcy is that if you are able to afford the payments on the mortgage, and if it's possible to establish very little to no equity in the property that you own, the house will not be seized as part of the bankruptcy process. Many people who file bankruptcy are able to stay in their homes.
Now having said that, if you do actually have an appreciable amount of equity in your property then we're going to suggest that we consider filing a consumer proposal; making an offer to the creditors to pay back part of what you owe but protecting the property as part of the deal.
Doug H: So, equity is what you would get if you sold the house. So, explain that then.
Joel S: Exactly. So, what we would look at is what is a fair market value for your property? How much is left owing on your mortgage? What would the costs be to actually sell your property in terms of real estate and legal fees, maybe penalties to break your mortgage? And determine the difference between all those numbers. And that is your equity. That equity is negligible. A bankruptcy will not interfere with your home. If there is some equity as I say, making a deal through a consumer proposal can often be quite helpful.
Doug H: Yeah so if you bought your house, you know, last year with virtually no down payment, well there's probably no equity in it so the reason you don’t lost your house in a bankruptcy is your house isn’t worth anything. So, if you sold it you wouldn’t get anything for it.
If there is significant equity in it, or some equity, then you're right a consumer proposal makes sense if you've got 10 or $20,000 worth of equity let's say in a bankruptcy it's going to be kind of hard to come up with $20,000 in the next nine months. Whereas we can do a consumer proposal, go to the creditors and say hey I will pay you that $20,000, maybe a little bit more, but I'm going to do it over three, four, five years. They're happy cause they're getting more than what they would have got in a bankruptcy, you're happy cause you get to keep your house.
Joel S: Absolutely. And we do these types of proposals here in London and Sarnia all the time because there are people who have some positives in their finances and some negatives and there are ways to work around those things at the time same time.
Doug H: And so it's a case of the individual case let's figure out what will happen. So, the bottom line though is, if you go bankrupt or if you file a consumer proposal, it's very possible to keep your house and in fact that would be the common scenario is what you're describing based on the people you've dealt with.
Joel S: Absolutely, Doug. I would say that is overwhelmingly is the result.
Doug H: So, okay, so that's what will happen to a mortgage in a bankruptcy.
Joel S: Yeah just to answer that question cause I think we want to address this. It's a common concern, you've just, you've had your house for three years or one year or five years, you're going to have the mortgage renew at some stage as we all know.
The experience that we have had is that as long as you have been consistent and up-to-date with your mortgage payments, and if you have a provable income, when your mortgage comes up for renewal, the mortgage renewing bank will simply send you the renew card, give you a couple of options, you check the one that suits you the best, send it back and your mortgage is renewed. The question that people are asking is, am I going to have a hard time renewing my mortgage and the answer in my experience, never.
Doug H: And the reason for that is common sense. The bank has already lent you the money on the mortgage, they aren’t lending you more money and in fact if you bought your house a year ago, two years ago, five years ago, you have now paid down the mortgage. The mortgage is less than when you started. And so when it comes up for renewal the bank is going well okay if five years ago we were willing to lend you $180,000 and today your mortgage is down to $160,000, why wouldn’t we just continue? Because we're a bank, we make money by loaning people money and charging interest; we want to keep charging you that interest.
So, there's no reason for the bank not to renew your mortgage. It's common sense, they want to make money, and in fact it's now the law that a bank cannot cancel a secured loan (like a mortgage), just because you went bankrupt. Now they're under no legal obligation to renew it when it comes due, you know, three years from now, but common sense is no we want to make money we'll keep doing it and what you're saying in your experience that's just the way it works.
Joel S: In every single time. And like I say if you're in a position where you've been making your mortgage payments, which that would have been your plan when we helped you get rid of the rest of your debt, then renewing the mortgage is just par for the course.
Doug H: So, keep the payments up to date and then you should be good.
Joel S: Yes.
Doug H: Excellent. Well, I appreciate that. That's some good answers on how bankruptcy and consumer proposals affect your credit and affects your mortgage, thanks for joining me, Joel.
Joel S: Thank you, Doug.
Doug H: Thank you. We'll be back to continue and wrap it up right here on Debt Free in 30.
Let's Get Started Segment
Doug H: It's time for the Let's Get Started segment here on Debt Free in 30. My name is Doug Hoyes and I'm joined by Joel Sandwith who is a trustee and consumer proposal administrator with Hoyes Michalos in Sarnia and London. And we've been going through common questions that Joel gets asked from pretty much everybody he meets with.
And Joel you told me one of the questions you get asked all the time is what makes you guys different from everyone else? And I guess the reason people ask you that question is, if you listen to the radio, you go on the internet, there's all sort of different trustees out there. I mean I'll let the listeners in on a secret here guess what? We're all licensed by the Federal government and as a result we have the same basic qualifications. We have the same license, the fees that we are allowed to charge in a bankruptcy are exactly the same. Everyone is required to, you know, we all get paid the same depending on how much money is in the pot. In a consumer proposal same thing, our fees are set by the government. What we get paid is a set percentage of the pot.
So, if we're all legislated the same way, if we all get paid the same is there really any difference? I mean isn’t this kind of like buying gas? I can go to gas station A or gas station B but guess what? It call came out of the same tank at the depot, is there really any difference? So, what is the answer you give people when they say, hey what makes you guys different from anybody else?
Joel S: Doug, the first thing I always say is exactly what you've just said, is what you're dealing with here is a situation that is legislated. We're all working with the same book. I use your example of gas from the gas station with almost everyone who asks that question, which is true.
Doug H: That's copyrighted by the way so you have to give me a fee every time you use it. But yes, and it is true, it is a similar process.
Joel S: So fundamentally then, the difference from trustee to trustee is who do you feel comfortable working with? Who do you believe is providing you the information that you need to make the decision that's going to help you? Are you meeting directly with the trustee? Is the trustee the person who's going to be answering your questions as we're setting up your file? Do you understand the information that you're being given? Do you feel that the person has the time to actually sit down with you and learn enough about you to give you feedback that actually pertains to your situation?
So, one of the things that I tend to hear from people, and there are many who will the very wise thing of shopping, looking at different trustees, meeting with different people. I wouldn’t dispute that as a good plan. Many of the people who I meet with, who have done that, have said that they felt like they were meeting with someone who didn’t care about their situation, who was not listening to their wants or needs and who wasn’t even the person that they were ultimately be dealing with. So, I think the difference isn’t that we tackle the law differently, the law should be handled the same by everyone, the difference is how do you handle the situation, what's your relationship with the person that you're meeting with?
Doug H: Well, you kind of made the same point two different times there. And that is about the trustee and who you're dealing with. So, you made the comment who are you meeting with? Are you meeting with the trustee or are you meeting with someone else? Well l would assume you're always meeting with the trustee, I mean isn’t that who's doing the work here?
Joel S: In this office you will always meet with the trustee, at least a few times, if not for every single meeting that you have. We do find in some offices that are competitors of ours, that the only time that you meet the trustee is for them to sign a couple of legal documents. Which isn't necessarily a bad thing if everything else works smoothly, but again my point being, you want to be comfortable with who you're meeting with and understand who is actually going to be in charge of the process with you.
Doug H: Yeah, because we said that we're all governed by the same law and the law says that before you can go bankrupt or file a consumer proposal you must be assessed personally by a licensed trustee. And there is government legislation, a directive, that says here's what an assessment means.
But you're right. That can mean what you just said that, hey as the trustee my name's Joel, I'm going to meet with you when you first come in, I'm going to talk to you on the phone, I'm going to meet with you for a follow-up meeting if you want, I'm going to meet with you when you sign the paperwork. But it could also mean yeah I've got a clerk here, an administrator, they're going to do all the work and I'm going to come in at the very end and say hi my name's Joel, everything good? Great, so I'm going to sign the piece of paper. And what you're saying is no that's not the way it works here. You are going to personally meet with the person and give them essentially as much time as they want. That's what it comes down to, right?
Joel S: Absolutely and so we'll find that some people are happy to meet for a short period of time, understand their options quickly and are able to make a decision nearly right away. Other people are going to require many meetings; there are complications that need to be worked with. And what we're not going to do is set that time frame. We're going to ensure that we're going to get you to the solution in the time frame that suits you and it's going to be me that you're doing that with.
Doug H: And does it cost more if I want to meet with you three times before I sign the paperwork?
Joel S: Absolutely not in any way shape or form. The cost, the fees as you pointed out, are structured through the legislation and so the work that we're doing with you is irregardless of the amount of time we spend with you.
Doug H: So, am I paying each time I come to see you?
Joel S: Absolutely not.
Doug H: So, what am I paying for each of those meeting when I come to see you before I sign all the paperwork?
Joel S: Nothing.
Doug H: So, there's no up-front fee and that's because well we want to make sure we've come up with the right answer, but it's also the law. We're not allowed to charge an up-front fee. It's quite simple, that's the law.
So, the answer to the question then what makes a Hoyes Michalos trustee such as yourself different from someone else is, you are going to take the time to review their situation, explain their options, take as much time as needed so that they're comfortable with their decision.
Joel S: Absolutely. And I'll tell you there's more than one reason for that, one being that we want to provide that service level to our clients. The other being that as a trustee I want to have confidence that I understand your situation well enough to help with anything that might come up in the future that could be an issue.
Doug H: Excellent. I appreciate you joining me here, Joel. Thanks for those answers. This is the Let's Get Started segment on Debt Free in 30.
Announcer: You're listening to Debt Free in 30. Here's your host, Doug Hoyes.
Doug H: Welcome back, it's time for the 30 second recap of what we discussed today. On today's show bankruptcy trustee and consumer proposal administrator, Joel Sandwith, answered the questions he is most frequently asked, including how a bankruptcy trustee or consumer proposal will affect your credit and how you and build your credit after filing. That's the 30 second recap of what we discussed today.
I'm not surprised but I find it interesting that people who had more debt than they could handle, are interested in how to get more debt which is what happens when you rebuild your credit so you can borrow again.
Here's my advice: as we discussed on the show your priority when you eliminate your debt through a proposal or bankruptcy should be, first and foremost, to stay out of debt. Don’t worry about how to rebuild your credit until you have your budget under control and some savings in the bank. I realize that good credit is important if you want to finance a car or buy a house, but focus first on living frugally and building up some savings, and then rebuilding up your credit will be much easier and less risky.
That's our show for today. Full show notes are available on our website. So, please go to our website at hoyes.com, that's h-o-y-e-s.com for more information. Thanks for listening. Until next week, I'm Doug Hoyes. That was Debt Free in 30.
Announcer: Thanks for listening. This was Debt Free in 30.