Rethinking the cost of bankruptcy
On today's show, Ted Michalos talks about the cost of bankruptcy. He begins the show by rethinking the way we look at bankruptcy. Instead of costing you money, he explains that, bankruptcy saves you money because it reduces high debt payments. If you are eliminating overwhelming debt there is actually a net benefit for those who are carrying a very heavy debt load.
I don’t know that I accept the premise that it costs money to file bankruptcy; I think it saves you money, it solves a serious problem for people.
On our Let's Get Started segment of the show Ted sticks around to give his rant on for-profit credit counselling agencies and what questions you should be asking before paying any money or signing any paperwork.
How are bankruptcy costs calculated?
Looking at the technical side of bankruptcy, Ted tells us that the amount paid into a bankruptcy is determined based on your income, dependents and any assets that you might own.. Ted explains what it means to have surplus income and how a consumer proposal differs from a bankruptcy.
Although the thought of what might happen to your assets scares many people, Ted assures that most of what you own, you keep. He explains that,
there are exemptions under the law that protect your furniture, your personal possessions, musical instruments, sports equipment, cars; so people that have to file bankruptcy aren't looking at losing anything.
UPDATE: see our post on recent legislative changes to exemptions and bankruptcy law in Ontario.
For example, an RRSP is exempt in a bankruptcy if you haven't made a contribution in the last 12 months. If you have, only that money from the last 12 months can be included in the bankruptcy. Ted advises anyone considering cashing in their RRSP to pay down debt talk to a professional first.
Even your house isn't necessarily at risk. During the podcast, Ted provides advice on how you can keep your home if that's what you want to do.
Watch our video: How Much Does Bankruptcy Cost?
How much does a Trustee in Bankruptcy get paid?
As Trustees in Bankruptcy, we frequently get asked how much we make when a client files a bankruptcy or consumer proposal. Our fee is regulated by Rule 128 of the Bankruptcy and Insolvency Act. Ted assures us that when you file bankruptcy, there are no up-front costs associated with your first consultation and you aren't required to pay any additional funds on top of your regular monthly payments.
...whatever payments you're required to make into the bankruptcy goes into a trust account, which is why I'm called a trustee; and then at the end of the bankruptcy, depending on how much money is in there, it's proportioned out.
First the government gets paid a filing fee to actually file and regulate the bankruptcy and second the trustee gets paid based on the amount of money in trust and the rest is divided among your creditors.
How will surplus income affect the cost of a bankruptcy?
To determine the cost of a bankruptcy, aspects like family income and the number of dependents in the household are taken into consideration. Ted explains that
the government has set thresholds, they've set limits for what they think families of different sizes need to have for a reasonable standard of living.
Essentially, the more income you have, the more money that you will have to pay into the pot to be divided among your creditors. If income is over the threshold that the government has set for your family size, then you have surplus income. You will have to make what are called surplus income payments and your bankruptcy will be longer.
Ted discussed how a consumer proposal can help you reduce your monthly costs of bankruptcy by instead making a deal with your creditors to pay a portion of what you owe.
Watch our video: What Does A Consumer Proposal Cost?
Ted's Rant: The Cost Of For-Profit Credit Counsellors
We close out the show with a discussion about not-for-profit and for-profit credit counsellors. The cost of dealing with a not-for-profit credit counsellor is that through a debt management plan you repay your debt in full over four years, and the interest on your debt stops. Differently, for-profit counsellors or debt consultants charge up-front fees, aren't regulated by the government and will refer you to a licensed trustee to file a consumer proposal anyway. Ted expresses his dislike for debt consultants stating that,
the simple test here is if somebody asks you to bring cash up-front for the first meeting, or if at the end of the first meeting they ask you to sign something and agree to pay them cash, you're in the wrong place. You're dealing with someone who is charging you a fee for information that you're entitled to for free.
For more information and specific examples about the cost of bankruptcy or a consumer proposal, listen to our podcast or read the full transcript here.
Resources Mentioned in the Show