Month: July 2014

Negotiating Consumer Proposals. What Your Creditors Expect.

Ted Michalos

Posted in Consumer Proposals

Reading time: 4 minutes

Hoyes, Michalos & Associates Inc. - Hoyes, Michalos & Associates Inc. | Ontario Licensed Insolvency Trustees
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There is a legal remedy available in Canada called a consumer proposal. With a consumer proposal you negotiate a repayment plan with your creditors whereby you repay a portion of what you owe. There can be negotiations but ultimately the cost of a consumer proposal is affected by what you make, what you own and who you owe money to.

You will want to offer as little as you can and definitely what you can afford.

Your creditors will ask for the greater of two numbers:

  1. The amount they would likely receive if you filed for bankruptcy; and/or
  2. An amount large enough to induce them to accept your offer.

The first number is a simple calculation based on bankruptcy rules: how much would you have to pay during a bankruptcy based on the things you own, the money you earn and the number of people that live with you. If you don’t offer to repay at least as much as you’d have to pay in a bankruptcy, then your creditors are better off rejecting your offer in the hopes that you will file for bankruptcy.

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Different lenders have different expectations

The second number is based on each lender’s internal policies – right now the consensus is about 1/3 of what you owe.  (If you owe $45,000 in debts you’d have to offer at to repay $15,000).

It is called a negotiation because you “propose” an offer that your creditors may accept, reject or counter.  Very few offers are rejected ‘just because’.  If they are turned down, it is usually because of some inappropriate activity on the part of the borrower (for example, you borrowed $20,000 to buy a car, but instead you took a vacation to Hawaii) or because they feel the amount you’ve proposed to keep as ‘living’ expenses are a unreasonable.  Frankly, this is rare.

Counter offers occur in only about 20% of all proposals.  Creditors usually only counter offer when they control the voting process.  Voting for or against your proposal is based on your debt.  Each dollar of debt represents one vote and we need half of the dollars to vote in favour for your proposal to be accepted.  When one creditor controls more than half of the dollars they tend to become more aggressive in their voting – they know that if they don’t vote in favour of your proposal it cannot be accepted.  In these cases, the creditors often asked for “a little bit more”.   (I should mention that voting is done by fax and e-mail – face to face meetings with creditors happen in less than 1% of all proposals).

That’s all there is to the process.

Who does the negotiating?

The offer you make to your creditors is yours however your trustee helps by providing advice on what creditors would expect and by communicating your offer to the creditors. We have dealt with thousands of different creditors, all the major banks and financial institutions. From experience we have a pretty good feel for what will fly.

So that get’s us back to the guy that will only cost you a “couple of hundred bucks”. They call themselves debt consultants, credit counsellors, financial planners – they all charge a fee to help you ‘negotiate your debt away’. What they really do is refer you to a licensed insolvency trustee to file a consumer proposal.  The reason they refer you to a trustee is because only a licensed trustee can actually file a proposal for you. Lawyers can’t. Accountants can’t. Certainly debt consultants can’t.

The “rip-off” I referred to at the beginning of this article isn’t the deal they are selling you – that’s real. It’s the fees that they charge. You don’t need a referral to speak to a trustee. Call them up, send them an email, stop by a trustee’s office.

Information about consumer proposals and bankruptcy is free – most trustees (including Hoyes Michalos) will meet with you to discuss your situation and help you develop a plan to deal with your debts for free. The only thing the debt consultant brings to the table is the fact that you answered their ad, instead of going directly to a trustee.

Top 5 Bankruptcy Issues for Small Business Owners

Ian Martin

Posted in Bankruptcy Basics

Reading time: 4 minutes

Hoyes, Michalos & Associates Inc. - Hoyes, Michalos & Associates Inc. | Ontario Licensed Insolvency Trustees
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Approximately 1 in 10 insolvencies we file are for individuals who are self-employed or operating a small business at the time they declare bankruptcy. For anybody who is contemplating declaring bankruptcy, there are numerous potential issues or questions.  For somebody who operates a small business or is self-employed, there is a unique set of issues to address. Here are 5 common concerns and issues you should be aware of if you are self-employed, in a sole proprietorship and are operating a small business and need to file bankruptcy.

Can I continue to operate my business?

One of the most common concerns is if you are even allowed to continue a business if you file for bankruptcy. The simple answer is yes. However, there are some special issues you will face:

  • if you were incorporated, you will have to continue as a sole proprietor; or
  • resign as the director (since you can’t be the director of a corporation if you are bankrupt).

What happens to my assets or equipment?

Bankruptcy sometimes means that you lose some of your assets.  For a small business, there is a bankruptcy exemption for ‘tools of the trade’ in Ontario for a realizable (sale) value of up to $14,405.  If your equipment exceeds that value (on a liquidation basis, not cost), you will be required to pay the excess to keep the equipment.

How do you determine my income for bankruptcy purposes?

The length of time that you are in bankruptcy and the amount you are required to pay depends on your income level after the bankruptcy is filed.  The concept is called surplus income.  For somebody in a salaried position with the same pay every two weeks, it is very simple to make an accurate estimate.  For somebody who is self-employed or operating a sole proprietorship (unincorporated business) your ‘income’ is based on net income. You are allowed to deduct legitimate business costs first.

Will I have access to credit?

There is the added difficulty that for a small business operator, income can fluctuate, sometimes quite significantly.  This uncertainty makes it more difficult to determine the financial cost of bankruptcy.

Because of the variable nature of income, business owners tend to rely from time to time on overdraft or a line of credit.  If you’ve filed bankruptcy, the existing credit facilities are gone.  To apply for new credit, you are required by law to disclose that you are in bankruptcy.  It might be that you are unable to obtain new credit.

Can I include debts owing to Canada Revenue Agency?

Income taxes and sometimes HST are often the largest debt for small business owners or self-employed individuals.  A bankruptcy and consumer proposal are both options for tax debt relief.  The exception would be if the CRA had registered a tax lien against your property prior to the bankruptcy being filed, since the lien makes the debt secured and bankruptcy only discharged unsecured debts.

The other issue with income taxes is keeping up to date after the bankruptcy is filed.  Unlike credit cards, you do not need to be credit approved to incur new tax debts.  Sometimes the challenge is because the business is struggling.  Sometimes the challenge is because people are not good bookkeepers or don’t properly understand their tax obligations.  Paying for an experienced bookkeeper is money well spent.

Do I have other options?

Yes, one of the most common alternatives to bankruptcy is to file a consumer proposal. A proposal allows you to keep all personal assets, including those you may be using in your business, and make a deal with your creditors to repay a portion of what you owe.

As you can see, there are many things to consider if you are filing bankruptcy and are self-employed or operate a small business.  A licensed trustee can help you understand the issues so that you take advantage of the opportunity for a fresh start that a bankruptcy or consumer proposal brings. Contact us today for a free consultation. Will will review your situation, give you a plan to deal with your debt and answer any questions you have.

How Long Is The Average Consumer Proposal?

Ted Michalos

Posted in Consumer Proposals

Reading time: 3 minutes

Hoyes, Michalos & Associates Inc. - Hoyes, Michalos & Associates Inc. | Ontario Licensed Insolvency Trustees
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Earlier this month we addressed the question – what are your creditors expecting to receive in a proposal. The next logical step in the negotiation process is to consider how long you should expect to be making payments.

By law, consumer proposals may be up to 60 months long.

The government agency that oversees consumer proposals does not produce public statistics on the average proposal term offered, or the average time taken to complete a proposal.

In our own practice, the average payment term offered is 47 months and the average length of time to actually pay off a consumer proposal is 42 months.  The difference lies in the fact that once you have filed a consumer proposal your finances improve to the point that people find that they are able to make a few extra payments to complete their proposal sooner.

How Long Should You Offer?

A more important question to ask when you are considering a consumer proposal is how long a term should you offer?

I am of the opinion that you should ask for 60 months to pay off your proposal. This produces the lowest possible payment over time. Another reason to pick the maximum term of 60 months is if you offer your creditors less than 60 months your creditors might simply ask you to pay the same amount for 60 months instead of the shorter term you have offered.  If you start at the maximum term you eliminate one variable – if your creditors want to ask for a change to your offer they may ask you to increase your monthly payment.  If your payment is reasonable based on your income and expenses they are less likely to do this.

This does not mean however that you will be ‘stuck’ with a 60 month proposal if your financial circumstances change.

By law consumer proposals are “open” which means you have the right to pay them off more quickly, which is what most people do.

The exception to the rule of offering a 60 month payment term might be if you expect a lump sum to be available to offer your creditors. Perhaps you expect to receive a bonus soon or proceeds from the sale of an asset. In these circumstances you can make a lump sum or even partial lump sum offer to your creditors. The same rules apply however as to what realization your creditors will expect in total.

Other Payment Considerations

It is also important that you select a trustee that handles enough consumer proposals to be familiar with all of the nuances associated with filing.

Your trustee is your expert into negotiating the best deal for you. You want a proposal that will be accepted by your creditors and one you can live with.

At Hoyes, Michalos two-thirds of our files are consumer proposals. We have the experience to help. Contact us for a free consultation to talk about how a consumer proposal can help you eliminate up to 70% of your debt.

Co-Signer Is Still On The Hook After Bankruptcy

Rebecca Martyn

Posted in Debts Discharged

Reading time: 4 minutes

Hoyes, Michalos & Associates Inc. - Hoyes, Michalos & Associates Inc. | Ontario Licensed Insolvency Trustees
Two individuals cosigning a document to show joint debt obligation

Lenders often will want a “co-signer” on money loaned to people who represent a marginal credit risk. Parents may co-sign for their son or daughter’s first car loan or mortgage because they don’t yet have a strong credit history of their own. A friend or family member may guarantee your refinancing loan because you do not have any property to secure the loan and can’t qualify for the loan without a co-signer.

Co-signing a loan means that if the primary borrower does not pay the co-signer will have to. A co-signing agreement creates joint and several liability for the loan. That means that the debt is owed both together and apart from the primary borrower.

Right To Collect

You both owe 100% of the debt. The loaner can not get paid more than 100% of what is owed, but they are empowered to collect from both persons named on the loan. Collection actions can be taken against either party and can include legal action resulting in wage garnishment or liens against property for both the primary borrower and the co-signer.

Lets say for example that your father agreed to co-sign a loan because you were having some financial trouble, really needed help, but could not get the loan without your help. Now it is a year later and you lost your job and missed the last few payments on the loan. Upon the default in the loan by the primary borrower (you) the creditor will contact the secondary borrower, the co-signer, (your father) to make good on the loan.

Bankruptcy Eliminates Your Obligation, Not The Co-Signers

One of the advantage of bankruptcy is that you would be absolved of any unsecured debt. However this benefit does not extend to your co-signer.

You would not have to pay, but your father would still be responsible for any co-signed debt. In the case of a mortgage, your lender would foreclose on the home and sue you for any deficiency. Since you went bankrupt, you don’t have to pay this balance so your mortgage lender will then proceed to collect the remaining amount owing from your co-signer.

If You Are The Co-Signer

As a co-signer, you have no legal recourse against the primary borrower. You can’t sue someone for something that you agreed to do.

Co-signing a loan means you have to pay it. If you enter into such an agreement it should be done with the expectation that you will end up having to pay the loan back regardless any promises to pay you get from the primary borrower.

Co-signed loans will show up on your credit report and can have an effect on your ability to borrow, including your ability to qualify for a car loan or a mortgage, just as if you had borrowed the money yourself.

Be careful that co-signing a loan doesn’t lead to your own bankruptcy. Clearly one should not enter into any sort of co-signing agreement if you lack the ability to make good on the money borrowed. No one should put their financial future at risk to help out a friend. If your friend needs help you are far better to simply give them the money they need with no strings attached, and if you can’t afford to do that, then you certainly can’t afford to borrow money to give to someone else, which is exactly what you are doing when you agree to co-sign a loan.

If you have co-signed a loan that has gone bad, you need to know your options, a licensed bankruptcy trustee is your best source for real relevant and frank advice about your options.

We meet with many people who have co-signed debts. Sometimes filing a bankruptcy or proposal is still the right solution for them if they have significant other debts. It’s also not unusual for both the original debtor and co-signer to file a bankruptcy or proposal if both have debts they cannot repay. Contact us today for a free consultation so we can give you some options to consider.

Calculating Payments in a Consumer Proposal

Hoyes, Michalos & Associates Inc.

Posted in Consumer Proposals

Reading time: 4 minutes

Hoyes, Michalos & Associates Inc. - Hoyes, Michalos & Associates Inc. | Ontario Licensed Insolvency Trustees
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While the cost of a consumer proposal varies for each person based on their income, assets and debts, typically consumer proposal payments result in settling your debts for around 30-40% on the dollar.

We explain how your trustee, or consumer proposal administrator, helps you determine how much to offer your creditors and what your consumer proposal payments would be.

What Factors Into Your Consumer Proposal Payments

Part of the consumer proposal process is crafting the plan you will offer your creditors. To determine how much to pay in a consumer proposal your trustee looks at three basic things:

  • who you owe money to and how much you owe,
  • what, if any assets that you have or what you would have to pay in the event of bankruptcy, and third,
  • it depends on your budget and whether or not you can afford the payment.

How to calculate a monthly consumer proposal payment will depend on any one or a combination of those three factors.

What we tell people when we first meet with them is that figuring out what the payment should be is usually one of  the last things that we do before we get together to file the documents with the Superintendent of Bankruptcy.  As the Trustee, we must be satisfied that your monthly  payment is affordable given your family budget, that the creditors will recover more than what they are likely to recover in a personal bankruptcy, and that you are offering enough that we believe will allow your creditors to vote in favour of accepting your proposal.

Everyone’s financial situation is different, so the decision as to how much to offer your creditors really cannot be determined until after we have had an opportunity to review all of the financial information.

How Consumer Proposal Payments Are Calculated

Here’s what your trustee will do as part of the process to calculate your payment before your proposal is prepared and filed.

Step 1: Calculate Expected Recoveries

calculate what the creditors would recover in the event you file bankruptcy. In a bankruptcy for example, the creditors would be entitled to any equity that there may be in a house.  As well, in a bankruptcy you could have to repay your creditors additional monies based upon the amount of your income. The more income you have, the more you would be required to pay. This is referred to as Surplus under the Bankruptcy and Insolvency Act. Once the value of your assets and bankruptcy payments is determined, we must be sure that your consumer proposal offers more than the estimated recoveries for your creditors in the event of bankruptcy.

Step 2: Understand Creditor Expectations

We also need to review who your creditors are as some creditors expect more than others. They may have internal policies that require minimum payouts, others will review your budget plan in your proposal and will review specific expenditures to make sure they are satisfied with your efforts.

In almost all cases however, payments in a consumer proposal are less than other debt relief options. 

Step 3: Calculate Your Monthly Payment

Finally, the budget needs to be analyzed to make sure that you can afford the monthly payment that would be required in order to get the creditors to accept it. The calculation of your monthly payment is very simple. We take the proposed total payout, based on expected realizations and creditor requirements, and divide it by the number of months in the length of your proposal. In a consumer proposal, the payments can last up to 5 years or 60 months.  To get the lowest monthly payment, you would spread the payments over the full 60 months however if you can afford more each month, you can shorten your proposal term or even offer a lump sum payment.

As you can see, determining how much the monthly payment is going to be in a consumer proposal takes some experience in knowing what will work and what won’t. At Hoyes Michalos, our success rate in filing proposals in 99%. In addition, only a licensed Trustee in Bankruptcy is authorized to file a consumer proposal under the Bankruptcy and Insolvency Act.

Yes you can reduce debt by up to 70% although each situation is unique. If you would like to know what your payments might be in a consumer proposal, the consultation process is free. Contact us today so we can help you make a successful proposal to your creditors.