Month: April 2014

Bankruptcy Protection in Canada: An Automatic Stay of Proceedings

Hoyes, Michalos & Associates Inc.

Posted in Bankruptcy Basics

Reading time: 3 minutes

Hoyes, Michalos & Associates Inc. - Hoyes, Michalos & Associates Inc. | Ontario Licensed Insolvency Trustees
Stay of proceedings and insolvency video thumbnail

Once a bankruptcy or a consumer proposal is filed in Canada, a “stay of proceedings” kicks in.

What is a stay of proceedings?

Stay of Proceedings Video Thumbnail

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Once a bankruptcy or consumer proposal is filed in Canada, a stay of proceedings kicks in. I’m Doug Hoyes, a Licensed Insolvency Trustee with Hoyes Michalos. People file insolvency for 2 reasons, to eliminate debt they can’t pay on their own and to stop creditor actions. Today I’m going to explain what a stay of proceedings does and why it’s important. A stay of proceedings means that unsecured creditors can no longer start or continue lawsuits and must stop collection actions. They must stay away. A stay of proceedings stops collection calls, wage garnishments, and stops creditors from freezing your bank account. The stay of proceedings in a bankruptcy or consumer proposal is automatic, it happens as soon as you file. Of course, it’ll take a few days for calls to stop, since it will take some time for the paperwork to be processed by your creditors, but the legal stay of proceedings is immediate. When you file a bankruptcy or consumer proposal you meet with your Licensed Insolvency Trustee, you sign the paperwork and then while you are still in our office we electronically transmit your information to the Office of the Superintendent of Bankruptcy, a division of the federal government, and we immediately get back a file number proving that you have filed. So, if 5 minutes later you get a collection call you simply say “Hey, I’ve filed bankruptcy or I filed a consumer proposal, here’s my Trustee’s phone number, talk to my Trustee”. The protection is immediate. There are exceptions to what a stay can do, a stay does not stop secured creditors. If you stop making your mortgage payments, your mortgage lender can foreclose on your home. If you stop making your car payments your car lender can repossess your car. However, if you keep up with your payments secured lenders can’t seize your house or your car just because you filed a bankruptcy or a consumer proposal. A stay can’t stop actions for debts not discharged by bankruptcy. So, a stay won’t stop garnishments for child or spousal support or repayment of debts due to fraud for example. If you have creditors threatening legal action, talk with a Licensed Insolvency Trustee because only an LIT can file a consumer proposal or bankruptcy and immediately get you the protection offered by a stay of proceedings.

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People file insolvency to eliminate debt and to stop creditor actions while they do so.

What a bankruptcy “stay” means is that unsecured creditors must stop collection actions. Creditors are prohibited from launching or continuing lawsuits, and wage garnishments, against the bankrupt individual in question. Indeed, this automatic feature of bankruptcy law forbids creditors from contacting you at all.

Secured creditors, meanwhile, can still seize those assets you’ve provided as security if you don’t keep up with your payments.

How fast does the stay work?

The stay is automatic. It happens as soon as you file a bankruptcy or consumer proposal.

Filing for bankruptcy protection immediately negates any actions that have been started or are pending.

The trustee sends the stay to the bankruptcy court that is looking after your legal proceedings, and to your employer if there’s a garnishee underway, and should do so immediately after you declare bankruptcy. Creditor calls may take a few days to stop as notifications get sent and communication is filtered to the right departments.

It should be noted that the Stay of Proceedings does not apply to certain debts — including child support, spousal support and repayment of debts based on fraud or misrepresentation — that cannot be eliminated by bankruptcy law.

In part, the stay dictates:

upon the filing of a proposal made by an insolvent person or upon the bankruptcy of any debtor, no creditor with a claim provable in the bankruptcy shall have any remedy against the debtor or his/her property or shall commence a claim provable in bankruptcy until the trustee has been discharged or until the proposal has been refused, unless with the leave of the Court and on such terms as the Court may impose.

Typically, this arrangement is a cut-and-dried affair, with creditors and employers both understanding the intent of the stay and abiding by it faithfully. Sometimes, a bankruptcy trustee must threaten legal action because of a misunderstanding on the part of a stay’s intended recipient. And other times a creditor applies to the bankruptcy court to continue a specific legal action against you, and it is their right to do so if they can demonstrate that there are reasonable grounds for legal action.

If you have creditors threatening legal action, consider the benefit from a stay of proceeding provided under bankruptcy law.

Get creditor protection, stop the calls, stop the garnishments and eliminate debt. Give us a call at 1-866-747-0660. We can help.

Why Is Cash Store Filing for Bankruptcy Protection?

J. Douglas Hoyes

Posted in Viewpoints

Reading time: 4 minutes

Hoyes, Michalos & Associates Inc. - Hoyes, Michalos & Associates Inc. | Ontario Licensed Insolvency Trustees
cash-store-filing-bankruptcy

On April 15, 2014 Regional Senior Justice Morawetz of the Superior Court of Justice – Ontario released his order granting Cash Store Financial Services Inc. protection under the Companies’ Creditors Arrangement Act, a form of bankruptcy protection for large companies.

To obtain bankruptcy protection in Court a large corporation must prepare hundreds of pages of legal documents.  You can read all of them here but I’ll save you the trouble of reading them and give you the quick summary:

The company has a cash shortfall of about $2 million per week, so they want court approval to borrow $13.5 million to get them through the next month.  The interest rate on the loans will be 12.5%.

My first thought: why not get a payday loan?

Oh yeah, they can’t afford those rates.

In their court documents they say that:

“Cash Store is a leading provider of alternative financial products and services, serving individuals for whom traditional banking may be inconvenient or unavailable.”

Interesting.

“…serving individuals for whom traditional banking may be inconvenient or unavailable.”

Is that really who they “serve”?  They go on to say that:

“It is estimated that forty-seven percent of Canadians live from paycheck to paycheck. Of this forty-seven percent segment, approximately twenty percent (seven to ten percent of Canadians) experience cash flow problems and use payday loans. Cash Store customers rely on the services Cash Store provides, as they often are unable to access traditional bank products from other financial institutions.”

(In Canada we spell it “paycheque”, not “paycheck”, but perhaps I’m quibbling here).

Here’s a statistic they didn’t mention: almost 1 in 4 people who go bankrupt owe money on a payday loan, and when they go bankrupt they have an average of four loans outstanding and owe a total payday loan debt of more than twice their total monthy net pay! (NOTE: payday loan usage statistics in this article updated for our most recent payday loan study).

So to connect the dots: ten percent of Canadians borrow from payday lenders, and 37% of bankrupts have payday loans.

I realize that correlation does not prove causation, but it is an interesting statistic, isn’t it?

Why is Cash Store Filing for Bankruptcy Protection?

You would think that with the high interest rates they charge they would make a lot of money, but unfortunately for them, as I reported back in February,  the Ontario government shut them down, and they are no longer able to offer loans in Ontario.

Here’s the thing: if you want to make money as a payday lender, you need repeat customers.  You won’t get rich on one $500 loan, but if you can loan $500 every payday you can make a lot of money.  The borrower uses this week’s loan to pay off the loan he got last payday.

Unfortunately for the Cash Store, if you can’t make new loans, your borrowers don’t have the money to pay off the old loans.  Here’s what they said in their court documents:

“Since Cash Store is unable to make new loans in Ontario, its ability to collect outstanding customer accounts receivable has also been significantly impaired.”

Bingo.

No new loans and you are out of business.

No new loans and you are going to court filing for bankruptcy protection.

And that is the essence of my problem with payday loans:

They are very expensive, so it is very hard to generate enough cash to ever pay them off, so you end up borrowing and borrowing, and next thing you know you have four revolving payday loans for a total debt of $5,174, and with all of your other debts you have no choice but to go bankrupt.

Payday Loans A good choice between paycheques Video Play Thumbnail

I’m sorry that the 470 Cash Store employees in Ontario may permanently lose their jobs, but I hope that hearing about the Cash Store’s problems forces all of us to think about payday loans.

I don’t agree that they are loans for people for whom “traditional banking may be inconvenient or unavailable”.  How is banking inconvenient?  I can bank on-line 24/7, and I know of at least one bank that is open late, and open on weekends.

If traditional banking is “unavailable” to you, you probably have serious financial problems, and you should get immediate expert help (and not from a payday lender).

Tax Debt Settlement: What CRA Wants

Ian Martin

Posted in Debt Relief

Reading time: 6 minutes

Hoyes, Michalos & Associates Inc. - Hoyes, Michalos & Associates Inc. | Ontario Licensed Insolvency Trustees
Proposals to CRA

As a licensed insolvency trustee, I meet with a lot of people who owe money to the Canada Revenue Agency (CRA). Though you can settle taxes in a consumer proposal or eliminate them by filing personal bankruptcy, there is an assortment of considerations that are unique when trying a tax debt settlement with the tax man. In this article, I will review the special collection powers that the CRA has, the options for making a settlement arrangement or filing bankruptcy when you have CRA debts, and what CRA is looking for in terms of a tax settlement amount.

CRA Collections: What Can CRA Do?

The most common collection activity is for the CRA to garnishee your pay cheque or freeze your bank account. Other types of creditors can do this as well, but there is a difference. For other creditors, obtaining a garnishee order from the courts typically takes several months with a variety of notices being sent to you. With the CRA, the authority comes from the Canadian Income Tax Act. All that is required is the review from the proper authorities in your local tax services offices. No court review is required.

If you are self-employed, perhaps you are not worried about a wage garnishee. However, the CRA can send a notice to the company that contracts work to you. Upon receipt of such a notice, the company is required to send to the CRA the money that would be otherwise paid to you for the work you have done.

The final CRA collection tool that I will mention is the statutory CRA tax lien. Basically, the CRA has the right to register a lien against your house without your consent. It’s kind of like having a second mortgage.

CRA Debt Settlement Options

Negotiating Payments on Your Own

The first option with any debt is to attempt to negotiate repayment terms. The CRA is no different. If you are trying to make a payment arrangement with the CRA you can expect to receive a questionnaire requesting you to outline your monthly living expenses. This is an attempt to determine how much you can reasonably afford to repay on a monthly basis. Be aware, you will be required to pay back all tax debts and may or may not receive a reprieve from penalties and interest depending the Canada Revenue Agencies perception of how bad your personal financial situation is and what caused you to fall behind on your taxes in the first place.

Ultimately, you’ll be able to keep up with the required payments or not.

If the time for negotiation has run out and you can’t pay the CRA, you have to seriously consider options that provide legal protection of your wages and assets. The legal means to stop CRA collections is to file a consumer proposal or personal bankruptcy. Both of these options requires the assistance of a licensed insolvency trustee.

Contrary to popular opinion, income tax debts are included in a consumer proposal or personal bankruptcy.

However, each of these options for tax debt relief have special considerations with respect to the CRA and the settlement of tax debts.

Consumer Proposal

A consumer proposal is a formal method to settle tax debts where you can negotiate an agreement with CRA to pay less than the full amount owing. In fact a consumer proposal is the only method by which you can obtain CRA debt forgiveness.  A tax lawyer can help you make payment arrangements, dispute an assessment and perhaps help reduce interest and penalty charges, but they cannot help you if you can’t pay the underlying tax debt itself. Here, only a Licensed Insolvency Trustee can help with back tax settlement.

How much will the CRA accept?

Every situation is different.

For debts like credit cards and lines of credit, banks will often agree to a accept where repayment terms where you pay 25% to 30% of the debt. With the CRA, your cra settlement payments may be a little bit more unpredictable. The Canada Revenue Agency will consider factors like your budget, if there has been a prior proposal or bankruptcy, if you made every effort at payment, if your returns were filed on time, as well as the risk of you incurring tax debts in the future. Trying to estimate a certain settlement percentage for taxes debts is folly as the CRA collectors take each proposal on a case by case basis.

If the CRA is one of your smaller creditors you have less to be concerned about. A proposal is binding on all creditors, including the CRA, as long as the majority, by dollar value, accept the proposal. Even if the CRA votes no, if more that 50% of creditors who make a claim in your proposal vote yes, your proposal is accepted and your tax debts are included.

If your tax debts are high, form a large percentage of your creditors, CRA may request further consideration. That’s where, as Licensed Insolvency Trustees, we can advise you on what CRA is likely willing to accept and how much to offer as a tax settlement.

Personal Bankruptcy

With bankruptcy, there are two special considerations that I want to highlight.

  • First, if your tax debts are $200,000 or more and represent 75% or more of the total debts, a court hearing will be required to establish the terms of discharge from bankruptcy. The court will consider factors like conduct, prior bankruptcies and ability to make payments. It’s common that the outcome of such a hearing would be a court order to pay a specified percentage of the debt and/or serve a suspension. The court does have the option to refuse the discharge altogether, but that would only be used in very extreme situations.
  • Second, being discharged from bankruptcy does not remove a tax lien from your property.  CRA has the ability to register a lien against your property without your consent. If you think there is a possibility that this has already happened, you should discuss it when you are meeting with the trustee before filing bankruptcy. The trustee can talk to you about how to verify if and for how much a lien is registered. If most or all of the tax debt has been registered against your property, it probably would not make sense to proceed with filing bankruptcy unless you had other significant debts. However, the CRA cannot file a lien after you have filed bankruptcy.

The bottom line is that the CRA has a lot of extraordinary powers to collect debt. Even though they are often slow to react, it does not mean the threat is not real. If you need help with tax debts, contact us to discuss your tax relief options.

When Your Ex-Spouse Fails To Pay Credit Card Debt

Rebecca Martyn

Posted in Debts Discharged

Reading time: 3 minutes

Hoyes, Michalos & Associates Inc. - Hoyes, Michalos & Associates Inc. | Ontario Licensed Insolvency Trustees
divorce-credit-card-debt

Divorce can create some complicated financial problems especially when it comes to credit card debt. Who continues to use this credit can cause financial problems for the ex-spouse. If you have shared debt you may worry who is responsible for credit card debt in a divorce and what happens if your ex-spouse fails to pay off credit card debt as they agreed.

Who is responsible for credit card debt during or after divorce?

In a divorce, the obligation to repay credit card debts you owe cannot be legally assigned by a divorce agreement like assets.

Creditors cannot be bound by any agreement between you and your spouse. From your credit card provider’s point of view joint debt means that each of you is responsible for the entire debt. If you, or your spouse, continue to charge purchases to your pre-divorce credit accounts, the other spouse will become liable for any unpaid balances. Even if your spouse agrees to repay all the past credit card debt and this is formalized in your divorce or separation decree, creditors will look to you to collect, if your spouse fail to make those payments.

You and your ex-spouse may have signed a separation agreement and your ex-spouse agreed to pay the joint credit card. This agreement is between you and your ex-spouse and didn’t involve the bank. If your ex-spouse failed to pay the debt, you will be responsible for the all of the payments on the joint credit card; not just want you consider your share. Also, any missed payments or late payments will continue to affect your credit score no matter who was supposed to make them.

What to do about debt in your name during divorce

If you are getting divorced and think this will be a concern, talk to you bank before you sign the separation agreement about getting two separate loans in each of your names to pay off the old joint debt. Your bank probably won’t just remove your name from the account if there is an existing balance. They will want to be sure they can collect, despite your divorce. If you have good credit, you can each borrow your share to pay off the full balance.  Once the old accounts have been paid off and balances transferred, close the pre-divorce credit accounts if that’s possible. At a minimum, get in writing from the bank any adjustment to the agreement as to who is responsible for payments.

When divorce debts cause a financial problem

If your spouse stops making payments, or files bankruptcy, and the bank pursues you will need to make a plan to eliminate those credit card debts.

If you are financially able you can make a payment arrangement with the creditor.

If you have other debts and paying off these pre-divorce debts becomes a problem, contact us to talk about your options.  You can file on your own, or if necessary, both divorced or separated spouses can file a joint bankruptcy or joint consumer proposal if that makes sense.

WSIB Debts, Clearance Numbers & Bankruptcy or Proposal

Scott Schaefer

Posted in Debts Discharged

Reading time: 3 minutes

Hoyes, Michalos & Associates Inc. - Hoyes, Michalos & Associates Inc. | Ontario Licensed Insolvency Trustees
wsib-updates-contractors

The Ontario Government made The Workplace Safety and Insurance Board (WSIB) coverage a mandatory requirement for most in the construction industry, including a self-employed contractor with no employees. This law requires these contractors to have a WSIB Clearance Number or Certificate in order to continue with their contracts and to be paid. These clearance numbers are valid for 90 days and are issued when the contractor is in good standing with reporting and payments. While we all can agree there are good reasons for this law, issues can arise when an independent contractor runs into cash-flow and debt problems.

The Self-Employed Cash Flow Crunch

Debt problems for self-employed contractors do happen. A job can cost more than expected, customers might not pay on time or at all. There may be longer periods without contracts, weather delays, start-up costs, and many other reasons why cash flow becomes a problem. Not being able to work due when you can’t get a clearance certificate will only escalate the cash crisis. In addition, if the individual is not able to pay the WSIB premium then they are likely carrying other debts as well like HST, credit cards and bank loans.

Effects of Bankruptcy or A Proposal on WSIB Debts

Can WSIB be included in a personal bankruptcy or a consumer proposal? The answer is yes. A representative from WSIB advised me this month that their current policy is that a new WSIB account number will be issued after a bankruptcy but the same account number will be maintained for someone in a consumer proposal. For a proposal, WSIB allocates the arrears to a sub account so that the account appears to be started at zero.

If you are a contactor and are struggling with your debts (including WSIB premiums) then maybe a consumer proposal or personal bankruptcy will help. A few key points to consider:

  • WSIB filing and reporting will have to be up to date
  • You will want to ensure you are able to get your HST and personal tax returns filed, and
  • You will want to review your business and projected cash-flow to ensure your future business venture will be successful and able to stay current with your future WSIB and tax remittances

If you are experiencing debt problems in your small business, please contact us to talk with a bankruptcy trustee who, as a restructuring professional, can to review your situation and make a plan to deal with your business and personal debts so that you can create that fresh start you need for your business and personal life.