How The Bankruptcy And Consumer Proposal Process Works
Today I sat down with Scott Schaefer, Chartered Accountant, Consumer Proposal Administrator, and Trustee in Bankruptcy at Hoyes, Michalos and Associates to discuss the roles of specific parties during a bankruptcy and consumer proposal. Scott explains the meaning of a debtor, creditor, and trustee, and breaks down the filing process, step by step.
The Main Parties Included In A Bankruptcy Or Consumer Proposal
Debtor - The person that owes money and is financial difficulty.
Creditor - The person or company that has loaned money and is owed money back. For example, credit card companies, banks, payday loan companies, the government, or even your mother.
Trustee - Trustees are appointed and licensed by the government to administer bankruptcies and consumer proposals.
Becoming a licensed trustee takes time and experience. Most trustees have a university degree or many, many years of work experience. The process involves many courses and exams; and once you have completed those, you sit before the Board of Examiners which includes a trustee, a lawyer, and a government representative for an oral exam. The entire process takes between three and five years on average.
What is the trustee's role during a bankruptcy or consumer proposal?
To gain a better understanding of your situation, your trustee will sit down with you to discuss who you owe money to, what your income is, and what is going on in your life that is causing you stress. Next, they will explain all of your options to help you find the best solution for your personal needs. This consultation is free and there is no obligation to make your choice on the spot.
Once you have made a decision about which debt solution works best for you, your trustee will file your paperwork with the government, in return, receiving confirmation that they have officially been appointed to administer your file. After your paperwork is filed, your payments will begin. Your trustee will be paid from this pot of money as regulated by the government.
When you file the trustee acts as a middle man between the debtor and their creditors. As Scott explains,
...[Trustees are] the ones to make sure all the rules get followed. [Trustees are] the ones that make sure both the debtors and the creditors do what they're supposed to do throughout the process.
What is the government's role during a bankruptcy or consumer proposal?
The government enforces the Bankruptcy and Insolvency Act to ensure that all rules and regulations are being followed. The Office of the Superintendent of Bankruptcy (OSB) monitors all trustees and maintains records of all insolvency filings. The OSB closely monitors and reviews all bankruptcy and consumer proposal files on a regular basis. Scott puts their role in perspective by using the analogy of a hockey game,
If you equate it to a hockey game, the referees are the ones who are calling the game, who make sure everything happens [the trustee]. But up above, there's somebody watching, making sure that the referees are doing their job as well [the government].
One division of the government is Canada Revenue Agency (CRA) who review and process all tax related documents. CRA is commonly listed as a creditor in many bankruptcies and consumer proposals. The Bankruptcy and Insolvency Act (BIA) does govern tax debts in the bankruptcy or proposal process so these are included just like any other debt when you file.
What is a meeting of creditors?
It is possible for a meeting of creditors to be called during a proposal or bankruptcy. If a meeting includes the trustee, the debtor, and the creditor. The meeting is held to gather more information so that creditors can come to a decision about those debts.
In a bankruptcy it's rare, and only if the creditors have extra questions. During a proposal, creditors will be deciding whether they will vote to accept the terms of the proposal (each creditor gets one vote for every dollar that they are owed), or to counter the proposal terms to request more money. In the majority of proposals, a settlement is reached prior to the meeting and no parties actually attend.
What are credit counselling sessions and why do I need to attend?
It is mandatory that the debtor attends a minimum of two credit counselling sessions. During these sessions, your trustee will help you to make a plan moving forward; to rebuild your credit and to use credit wisely. Scott points out that,
...It's actually giving people some tools for themselves, for themselves to move forward and get a fresh start. They've cleared their debts, they're moving forward and they're making things a lot better.
All credit counselling sessions are done one-on-one and not in a group session as each individual's circumstance is different. The trustee's goal is to provide you with practical, real-life advice. Scott used the example of setting up an emergency fund in an account that does not include fees and is in a different place than your regular banking; that way, your emergency fund is "out of sight, out of mind" and will only be used for emergencies.
Scott's number one rule for this new account is to pay yourself first. When you receive your pay cheque, make sure that a portion is contributing to your savings. Whether you contribute a lot or a little each time, the main point is that you are putting that money aside so that it can grow and benefit you in the future. This savings account should be started right away. Many worry that they will not be able to pay themselves first while also paying off their debt; but what they haven't factored in, is that once you file a consumer proposal or bankruptcy, you are making a one time payment each month, for example $300, that is much lower than trying to pay the minimum payments at $700 a month. The extra money that you will be saving can then go into the new account, which will help you to get the fresh start that you need. Scott's advice is to,
...put it into an RSP, put it into a tax free savings account. Make it so there is something benefiting yourself.
About Paying With Cash
Paying with cash instead of credit should be a main priority for staying out of debt. Credit is borrowed money that needs to be paid back at a later date in one lump sum. Paying with cash is different emotionally than paying with credit cards. As Scott explains,
There's proven studies out there that show that we spend more money when we charge something than we do with cash. I'm already buying this other stuff, I might as well just put it on the credit card and not worry about it. If you've got physical cash in hand or you're using your debit card, you only buy exactly what you [need].
- Office of the Superintendent of Bankruptcy (OSB)
- Bankruptcy and Insolvency Act (BIA)
- Canada Revenue Agency (CRA)
For a full transcript of this show read Show 26 Transcript: FAQ Show Bankruptcy and Proposal Process