Listen to the podcast - What It Means To Go Bankrupt
Doug H: Welcome to Debt Free in 30, 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 show 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 month of July we're going to take the time to answer all of your most frequently asked questions. To help me 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?
Benny M: This is Benny Mendlowitz; I'm the trustee for the North York and Scarborough offices of Hoyes Michalos. I got into this business in the 70's. First I became a Chartered Accountant with a national accounting firm and realized I didn’t want to do that for the rest of my life. And then moved off into their insolvency branch where we specialize in bankruptcies and receivership. I've been doing this since the mid 80's. I went off on my own to start my own practice in the early 2000's and hooked up with you guys several years ago to co-ordinate the Toronto area offices, specifically North York and Scarborough.
Doug H: Excellent. Well, thanks for being with me today, Benny.
So, let's get right to it. When someone comes in to see you, they've got problems. What are the most common questions that people ask? What's sort of sticking in their mind right off the bat? If you had to pick sort of from that list of frequently asked questions, what's at the top of the list when someone comes to see you?
Benny M: Well, the big things they ask, what does it mean to go bankrupt? They also want to know what does it cost to go bankrupt? Those are the pressing issues that they have on their mind when they walk in my door.
Doug H: Okay, so let's start with that then? So, what does it mean to go bankrupt?
Benny M: Well, here we have an individual or couple who've got this debt load. They can't manage to pay their bills. They've got credit card bills, they've got loan payments, they've got car payments; they can't manage it. They need some help. And I'm there to try to help them come up with a plan to pay those creditors back as best we can and it may involve filing a bankruptcy, there are other options. And I try to explain to them how that process works. How do they get themselves out from underneath their debt load and still get on with their lives?
Doug H: And we'll get into a bit more detail as we go through as to the actual specifics of that. But I think the other question that people are asking you is, okay what does it cost? Cause that's really the gist of it, right, okay I've got all these debts, if I could just pay them off on my own I wouldn’t be talking to you. Presumably by going bankrupt, it will be a less costly alternative. So, what does it cost to go bankrupt?
Benny M: That's a great question. I get asked that all the time. Somebody walks in my door, I know nothing about them. So, I start asking them some questions. What type of assets do you own? How much income do you make? All of those items factor into how much it's going to cost them, if any, to file a bankruptcy.
Doug H: So, it's different for everybody then.
Benny M: Everybody's situation is different. I have to do my own analysis to help them understand what the cost will be.
Doug H: Okay, now you kind of hit on a few different points there. So, you said it's based on that their income is, so why does that matter?
Benny M: Well, our federal government says if you file for bankruptcy, there's certain thresholds, the amount of income you're allowed to take home on a monthly basis. And if you fall below those thresholds - it's basically trying to cover your basic cost of living - if you fall below those, there's nothing you have to pay to your creditors; the government doesn’t expect you to kick anything into the pot. But if you earn over those thresholds, the government expects you to pay some of that income to your creditors as part of the bankruptcy process.
Doug H: And we're not going to get into all the detailed math here, but you can go to our website at hoyes.com and do a search for the phrase surplus income, which is what you're talking about. And it explains in much more detail what you're referring to.
So, in simple terms a single person could make around a couple of thousand bucks a month, if you make more than that, you're paying a penalty, a surplus income penalty of half the amount you're over. But it's different for every size of family. It depends on whether you're married and have children and so on. So, we won't get into the details of that today but we're answering the question what does it cost to go bankrupt?
So, the first issue is it's based on your income, but then you also mentioned your assets, so explain to me what you're talking about there.
Benny M: So, a lot of people come in and everybody's got a different situation. The biggest question that people will ask if they have a large asset is about their home, if they have a family home and there is equity in the home. And what I mean by equity is if you take a look at the value of the home and you subtract from that what you owe against the mortgage, if there's equity in the home, think about this, you can't just walk away from your debts in a bankruptcy and keep all of this equity. The creditors will want to be paid. They don’t want you to sell your house; they don’t want to take your house from you. But if there's equity, they would like to be paid. And that factors into how much their creditors will be paid in a bankruptcy.
Doug H: Now back to this whole issue of cost. You kind of touched back on the first question, which is what does it mean to go bankrupt? And what you're really saying is it's a trade.
Benny M: It's a balancing process in our system whereby if you can't afford to pay your debts, there's a way to get out from underneath it. But, there are certain duties you have to perform. And one of those is to help your trustee realize whatever assets you might have, and that realization might involve paying your creditors some of the equity in your home.
Doug H: And so the trade is, when I go bankrupt I lose my debts, but I also lose some of the assets that I have.
Benny M: Correct.
Doug H: That's really the trade off. And so, the decision for somebody that has a lot of debts is well okay is the bankruptcy going to cost me more than what I owe? In which case it doesn’t make any sense, I should pay them off on my own. But if my debts are so huge that there's no way I can pay them back, even with all the stuff that I own, then the bankruptcy starts to become a logical option.
So, we're talking about assets, so the first one you mentioned was equity in a home. So, if I was to sell my home, would there be any money left over? If there is, that's something you lose in a bankruptcy. And for our listeners who are listening on this on the internet through our podcast version of this, we are talking about Ontario law here. The laws are different in different parts of Canada. So, you want to refer to wherever you are, but in Ontario, equity in a house is something that you lose. What are the other common kind of assets that people would lose if they went bankrupt?
Benny M: Well, pretty much everybody that walks in the door has got a car. And there are rules in Ontario that says you're allowed to keep a basic car. So, if you're driving a 2005 Pontiac Sunfire, there's a pretty good chance that you're going to be able to keep that in a bankruptcy. But I have many situations where people come in with a more valuable car and the government has certain rules that says yes you're allowed to keep a basic car. But if you're driving a 2014 Mercedes Benz, which you shouldn’t be in the first place, and don’t have any debt against it, you may have to pay your creditors some of the value of that vehicle if you want to keep it.
Doug H: So a car that's worth five or six thousand bucks, I guess as we record this in 2015, the exact number is $5,650, that's the magic number. So, if you have a car that's worth less than that amount, the trustee isn’t going to take it, you can keep it. If it's worth more than that amount and there are no loans against it, then you lose the portion above that. So, if you've got a car that's worth a thousand dollars more than that limit and you want to keep it, you kick in a thousand bucks during your bankruptcy and you get to keep it. What if there's a loan against it?
Benny M: Well, if there's a loan against it, usually there's no equity in a vehicle. The way the banks and the finance companies work is that, if you were to sell your car today, you probably would get much more than what your value of the vehicle is. And then we sit down and we look at the numbers. Pretty much the scenario you can look at, if you've got a loan against the vehicle, as long as you keep making those payments, you'll keep your car. There's no extra cost to be paid to your creditors.
Doug H: What if the lender says, no, no you're bankrupt, I want the car back. I don’t care if you're going to keep paying for it, I want the car back.
Benny M: Well, fortunately the rules, the bankruptcy rules, allow you to keep your vehicle as long as you're current with your payments. So, as long as you're not behind and you want to keep that car, the bank or the credit company cannot take it from you.
Doug H: So, really in most cases in a bankruptcy, if you want to keep your car you can. You're either going to pay something for it if it happens to be a valuable car with no loan against it or you're going to have to keep paying the loan, those are your two choices.
Benny M: That's right.
Doug H: So, okay what does it mean to go bankrupt? Well, you exchange your assets for your debt. In most cases, most people you meet with don’t have much in the way of assets, that's why they're in this situation.
Now back to the cost, then. So, number one, I've got to pay a portion of my income if I'm over the limit. Number two, I've got to - I potentially lose some of my assets, and we've talked about a house, we've talked about a car. What about my RRSP? Do I lose that?
Benny M: Well, those are - that's an important question. A lot of times people do have RRSP's; they have some way of saving outside of their pension at work. And as long as your RSP has been in existence for more than 12 months, and you haven’t made any contributions in the last 12 months, that asset will be protected. Those rules were put into place a few years ago to prevent people loading up their RSP's on the eve of filing for bankruptcy and thinking that that money or cash would be protected.
Doug H: So anything you've put in, in the last year, you're going to lose. Anything else you get to keep, even if you go bankrupt.
Benny M: Correct. A lot of people will come into my office and they've changed jobs and they've got a locked in retirement account, a LIRA, that's from a previous employer, it's been there for years, that's protected.
Doug H: Gotcha. So, in most cases there are not very many assets you're going to lose in a bankruptcy, that's kind of what it comes down to. So, okay so the cost of bankruptcy depends on your income. It depends on what you own and some other factors. And what it means to go bankrupt is well, you're exchanging your assets for your liabilities, which again in most cases isn’t going to be a big number.
I think a lot of people also are going to come in and ask you, and you mentioned this to me before, well what if I don’t want to go bankrupt then? What are the other options?
So, what I want to do is take a quick break and we will come back and talk about that. You're listening to a Frequently Asked Questions episode right here on Debt Free in 30. We'll be right back.
Announcer: You're listening to Debt Free in 30. Here's your host Doug Hoyes.
Doug H: We are back. I'm joined by Benny Mendlowitz and we're answering frequently asked questions that he gets asked when people come in for his advice on their debt situation. And one of the questions you get asked all the time is, okay what if I don’t want to go bankrupt?
Before the break we talked about if you go bankrupt there's a cost, if you have equity in your house for example that's potentially at risk, if you have a job that earns over the government minimum then potentially you have to pay more. Those sound like negative things, but I've got a lot of debt. So, what can I do if I don’t want to go bankrupt, but I still want to be able to deal with my debt?
Benny M: Well, that's a great question. So, we've been talking about what does it cost to file a bankruptcy? And we've talked about if you've got assets like equity in your home, paying that to your creditors, if you make over the government's limit, having to pay some of that to your creditors, because of these surplus income rules.
Let me tell you about a story that happened last week. I met with an individual who fell into both of those categories. He had just gone through a separation, divorce and as a result he managed to keep the home but he had a good job. So, not only was their equity in his home, there was also income that he would have had to pay to his creditors to file for bankruptcy. And it was a pretty expensive process. And on top of all that, he did not want to file for bankruptcy; he wanted to pay his creditors back something.
Doug H: So give me a rough idea of what kind of numbers we're talking about. And obviously we're not going to talk about this guy's specific situation cause we're not going to mention his name or anything, but when you mention equity in his house, what kind of dollars were we talking about there?
Benny M: If he sold his house and after paying his real estate agent all his fees associated with it, it probably would be something like 30 to $35,000 left for the -
Doug H: Okay, so $30,000 worth of equity in his house. So, if he was to go bankrupt you're either saying to him give me your house or give me $30,000.
Benny M: Correct.
Doug H: Now you also said he had income over and above the surplus income limits that we talked about in the first section. So, what kind of dollars per month are we talking about there?
Benny M: He was making about $3,000 a month take home pay. So, based on the numbers that we're looking at in our situation now, someone can take home about $2,000.
Doug H: And we're talking about a single person here.
Benny M: A single person because remember he's gone through -
Doug H: He's divorced now so he's got no spouse, no kids at the moment.
Benny M: So, he's over the threshold by $1,000. And our rules basically say you pay half of that to your creditors, which is about $500 a month. And he would have to do this for, as you know, 21 months. That's what the rules require you to pay surplus income to your creditors in a bankruptcy.
Doug H: Right. A normal bankruptcy, if you don’t have surplus income, don’t have any other issues, if it's a first time bankruptcy, you're bankrupt for nine months. But if you're over the government's limit, then your bankruptcy gets extended for another year. That's where you're getting the 21 months from.
Benny M: Correct.
Doug H: So, as I'm doing the math here, he's got $30,000 of equity in his house and he's got $500 a month for 21 months that he'd have to pay you, which is another $10,500 if I'm doing the math on my pad here correctly.
So, now we're up into the $30,000 plus range is what a bankruptcy would cost him. And he would have to pay that money in 21 months. So, he's going to have to be either giving you the house, or if he wants to keep the house he's going to have to be giving you a lot more than $1,000 a month cause he's only got 21 months to pay this $30,000 plus dollars. So, what did you come up with then? What was the answer for this guy?
Benny M: We sat down and explained to him what his options were. And one of the hidden gems in the bankruptcy process is the ability to file a consumer proposal. So, a consumer proposal is a process which is administered by a trustee, which we are. And it's a legal and binding settlement that you make with your creditors whereby you offer your creditors more than they would get in a bankruptcy, but it gives you a longer time period to repay that amount.
You can pay a consumer proposal back over a maximum period of five years, sixty months. So, we're looking at a 21 month payback to his creditors in a bankruptcy, versus a sixty month period in a proposal. And as long as the proposal offers the creditors the same or more, it has to be more, it can't be less than what they would have got in a bankruptcy, it works out better for the debtor and the creditors. It's a win/win situation. The debtor has the ability to pay this cause he probably can't pay this, come up with this equity in the home and make these surplus payments in under a two year period. But his cash flow will allow him to manage to pay these over a five year period.
Doug H: And so what kind of numbers did you come for with this guy? What was his monthly payment that he ended up agreeing to?
Benny M: We agreed to a figure of approximately $700 a month for a sixty month period. It works out to about $42,000, I think. Between the equity in the home and the surplus that he would have had to pay, he's basically paying his creditors a little more than he would have had to in a bankruptcy, but he can afford to make those payments over a period of time based on his family situation.
Doug H: And this was a guy who had significantly more than $40,000 worth of debts I assume.
Benny M: Oh he was well over $100,000. I think it was 110 or $120,000 worth of debts. He had a significant amount of lines of credit and credit cards, which were all, you know, part of it became his responsibility of part of his separation, part of it was part of his credit mismanagement. But however people get to my door; we try to come up with a solution for their problem.
Doug H: And that's a fairly common situation, where someone has gone through a separation or divorce that they end up with a bunch of debt.
Benny M: It happens quite a bit. There's legal fees, there's a little bit of animosity, sometimes one of the spouses agrees to take over the debts as part of the settlement separation or divorce and they write up the paperwork and all of a sudden one of the spouses is responsible for all this debt load that used to be carried for two incomes.
Doug H: And I guess if you're splitting off and I've got to either start paying the mortgage all on my own now, or I've got to go out and buy new furniture, find a new place to live, get another car, whatever it is, those are all costs as well that add up.
Benny M: They don’t go away.
Doug H: They don’t go away. So, it's not unusual to see this situation. So, the situation that this guy was in then, was he had over $100,000 worth of debt, lines of credit, credit cards, the usual kinds of things. And if he had paid it off on his own, obviously it would have cost a lot more than $110,000 cause he would have had to keep paying interest, you know, for probably the rest of his life to pay that off. I mean this is a guy who's making three grand a month now. So, how long would it take to pay off $110,000 if you're also trying to pay all your living expenses? It's essentially impossible, I guess.
Benny M: No, he would be paying his interest every month barely if he could afford that. And in some point in time he would run out of - it's the typical situation that I come across where somebody borrows from Peter to pay Paul. They're using certain lines of credit to pay this credit card and moving money around. He just couldn’t manage it anymore and he saw the writing on the wall, he knew he needed help and he came in and looked for advice from us.
Doug H: And he could have sold his house but that would have generated $30,000 which is not enough to pay off $110,000 worth of debt.
Benny M: That's right. And then he still would have had to find a place to live. And a lot of times in Toronto, the cost of renting a spot is pretty expensive when you compare it to what you're carrying costs are in a mortgage and your property taxes.
Doug H: Yeah cause obviously he's living in a smaller house or condo or whatever it was that he had.
And so if he had gone bankrupt, he would have ended up having to pay well over $1,000 a month during the bankruptcy, and that assumes his income didn’t go up or change in which case he could have had to pay even more, but in the consumer proposal $700 a month it was an affordable number. Still a stretch, it's not like he's getting off scot free here, but it was reasonable for him. And then he's now in the driver's seat. If he wants to sell his house at some point in the future, he can. If he wants to keep living there, he can as well. But it's a reasonable payment. So, as a result he is - he did not have to go bankrupt.
Benny M: He did not have to go bankrupt. We managed to come up with a plan that allowed him to repay his creditors a portion of the debt and avoid filing bankruptcy.
Doug H: Now obviously you only met with this guy in the recent past. The creditors have not yet had a chance to say yes or no to this. But you've been in this situation hundreds of times before. What's your expectation as to how the creditors are going to react to this?
Benny M: I wouldn’t be putting our name on the line. I wouldn’t be sending this out to the creditors if I didn’t think it was going to work. I know it's a fair deal because I am a trustee and licensed under the Bankruptcy Act. And my job is to make sure that I'm presenting a fair deal to the creditors and trying to get the debtor out from underneath his debt load.
So, to answer your question, our experience is that over 95% of the proposals we send out the door work. 100% of the proposals don’t work. I can't guarantee that because the creditors have a say in the matter. But those other 5% then don’t work, probably can be negotiated upwards because when a creditor says no to a proposal - there's only one reason they say no, they want more money. So, we see if there's a little bit of room to compromise between what was offered and what they're expecting.
Doug H: And in this case, if the creditors say no, he can still go bankrupt. He's offered them $42,000 in the proposal, $700 a month for five years. If he goes bankrupt, they're going to get maybe $40,000 or less; again, it's dependent on his income. So, from the creditor's point of view it makes sense, they're getting more money. From the debtor's point of view it makes sense because he can actually afford this. He gets to keep everything. So, it becomes a win/win situation.
Benny M: That's right. There's usually some odd circumstances that may require an adjustment, or maybe you've got some unusual creditors like Revenue Canada cause they have different rules that they play by. But most of the time when we send these proposals out the door, they work.
Doug H: Excellent. That's a great way to end the segment. Thanks very much Benny. We're talking about debt here on Debt Free in 30 and the ways to deal with it. We'll be right back. You're listening to Debt Free in 30.
Let's Get Started Segment
Doug H: We're back and 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 Benny Mendlowitz who is a trustee and bankruptcy and consumer proposal administrator working in the Hoyes Michalos North York and Scarborough offices.
So, Benny one of the questions people are asking you quite frequently is, so if I go bankrupt of if I file a consumer proposal, can I keep at least one credit card, cause you know, I need it for business, I need it for travel. Can I keep just one credit card? What's the answer?
Benny M: Doug, I get asked this all the time. The answer is black and white. The bankruptcy laws require a person to turn over, to surrender, all their credit cards at the time they file for bankruptcy. There are no exceptions to that rule.
Doug H: And does that apply in the case of a consumer proposal as well?
Benny M: Correct. Consumer proposal, bankruptcy, you must turn over your credit cards when you start the process.
Doug H: Okay, so now I travel for business. I have to buy things over the internet cause that's where I get my medical supplies or whatever. My kids in hockey and we travel up to Owen Sound all the time so we have to book a hotel up there. So, I need access to a credit card. So, I understand the day the bankruptcy starts I have to surrender them, but what am I going to do to be able to have a credit card in the future?
Benny M: There are options. And after the process starts we'll walk through everybody's situations and tell them what they are. Things like a prepaid credit card are available; things like a secured credit card are available. A non bankrupt spouse of friend can get you a secondary card on their account. There are ways to deal with that, but the bottom line is you file for bankruptcy, you file a proposal, you have to give up your credit cards.
Doug H: Okay and what you're saying is it's not really that big a deal because there are other options to deal with that. So, you got to follow the rules, but once you follow the rules there are other options to deal with that.
Okay, so that's the answer to the question on the credit card. So, what else are people asking you when they come in to see you, then? What other kind of hot buttons in their mind when they come in to talk to you?
Benny M: A lot of people come in and say how is this going to affect my credit? I really don’t want to have bad credit. Well, this sort of blows me away. You're here today because you have bad credit. Do a credit score, do a credit report and look to see what your creditors think about you right now. It's not going to be good. So, your credit is not going to get any worse by filing a proposal or a bankruptcy. This is the first step to rebuilding your credit. First we have to erase your debts.
Then we can talk about how you re-establish your credit, how you move forward to finance a vehicle, to save money to buy a home, to do all those other things you want to do. But this time we've got to do it a little more responsibly. We've got to come up with a plan. We can't worry about your future credit until we get rid of your old credit, until we help you come up with a plan to help you deal with those creditors.
Doug H: So, a credit score is a big deal for people, because that influences whether they can finance a car or buy a house, get good interest rates. And people are really worried about that. But in your experience, by the time they come to see you, their credit score is already lousy anyways.
Benny M: Absolutely.
Doug H: You're so far behind on your debts that it's not an issue. Now I have met with people whose credit score is still really good because they're using their credit to pay their credit. I'll take a cash advance for my credit card to pay my line of credit and next month I'll do the opposite. So, all my payments are up-to-date. Unfortunately like the guy we talked about in the previous segment, $100,000 worth of debt, at some point the bubble is going to burst. So, even if my credit score and my credit report looks pretty good today, we're about to drive off a cliff.
Benny M: This is like musical chairs. Sooner or later the music's going to stop and you're going to run out of chairs. It's going to happen, it's unavoidable. And at least the people who come to us in advance, who are not being pressured and stressed out about all the creditor calls, and the collection agencies, and the law suits and the garnishments; at least they're being proactive as far as coming up with a plan to deal with their debt. I can't save their credit but I can help them get rid of their debt and restart their financial lives.
Doug H: Which ultimately saves their credit.
Benny M: Correct.
Doug H: So, a year from now or two years from now you're going to be in much better shape cause all that debt is wiped out. And one of the biggest implications or one of the biggest factors in your credit score is the amount of debt you've got.
Benny M: Correct.
Doug H: So, getting rid of that debt in the longer term is going to help you. So, you mentioned the word stress. Do you get a lot of people coming in who are under a lot of stress?
Benny M: Almost everybody who comes in is stressed out. You can see it in their eyes, you can see it in their mannerisms. This takes a toll on people, it's not just a financial toll, it takes a toll on their families, on their work, on their sleep. People are really under the gun for all this debt load that they've got and their looking for some help.
Doug H: And in some cases it was financial mismanagement. But as you said earlier, in a lot of cases it's because they've gone through a divorce, they've been laid off at work, they've had a medical issue, they've had to support their elderly parents or their adult children. There's a whole lot of factors that go into it. And I guess that just adds to the stress.
Benny M: That's right. Everybody comes to my office with a different story, a different set of problems. Hopefully by the time they leave my office, they see that they've got some options, there's some light at the end of the tunnel and they feel better.
Doug H: And so when you talk to somebody six months after the fact, do they feel better?
Benny M: Absolutely. Everybody is just - a smile comes to their face. Now they can manage their monthly income and expenses. Now they don’t have to worry about the phone, they can actually answer the phone now. They used to be afraid to answer the phone because it was another collector calling. They are not quite yet debt free, but they are stress free.
Doug H: And that's really the whole point of the process. Well, excellent. I appreciate you joining me today, Benny. Thanks very much, we'll be right back to wrap it up. You're listening to 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, Benny Mendlowitz explained that there are costs to filing bankruptcy, but there is also a significant benefit, and that's the reduction in stress caused by excessive debt. That's the 30 second recap of what we discussed today.
I think Benny hit the nail on the head when he said that many people he meets with are under a lot of stress caused by their debts. That's why he's happy to explain what bankruptcy is and what it costs, but he spends most of his time discussing how becoming debt free can eliminate stress and give you a fresh start. That's an important message.
So, if you or someone you know has more debt than they can handle, there is help. Our website hoyes.com, thta's h-o-y-e-s.com, has lots of resources explaining all of your debt management options, including the consumer proposal option that Benny illustrated on the show. The point is that there are options and there is help available.
That's our show for today. 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.