Month: October 2014

Bankruptcy, Sponsorship and Citizenship in Canada

Bankruptcy, Sponsorship and Citizenship in Canada

Can I Sponsor Someone While Bankrupt?

As a licensed bankruptcy trustee in Canada and someone who has gone through the immigration and Citizenship process I realized that sometimes the paths of bankruptcy law and immigration law cross.

The biggest effect that a current or past debt problem will have on immigration is that you cannot sponsor someone to immigrate to Canada while you are an undischarged bankrupt. The good news is that once you receive your discharge you are eligible to make a sponsorship application.

If you are in debt and looking to sponsor a family member discuss this openly with your bankruptcy trustee. They can still present you with several options that can allow you to clear up your debts.

You can clear your debts up quickly then proceed with your sponsorship application. This means filing bankruptcy first and then submitting your sponsorship application after your receive your bankruptcy discharge.  In Canada, a first time bankrupt could be eligible to receive a discharge from personal bankruptcy in just 9 months. Your bankruptcy can be extended however to 21 months if you have to pay what is called ‘surplus income’. It is important to discuss the likelihood that your bankruptcy will be extended with your trustee before signing any documents.

You can file a consumer proposal which does not have any impact on a sponsorship applicationA consumer proposal legally protects you from your creditors the same way a bankruptcy does and helps you to make a negotiated settlement on your debts.  There is however one significant difference between a consumer proposal and bankruptcy when it comes to immigration law. A consumer proposal means you avoid having to declare bankruptcy. Since you are NOT bankrupt, you are still free to submit your sponsorship application right away. Talk to your trustee about whether or not you can afford a consumer proposal and if this is a good option for you.

You may also choose to sponsor your loved one now and then file the bankruptcy when your sponsorship application is complete.  Given that sponsorship applications could take many months or years to complete, this would be a long time to have to try and hold off your creditors however.

If you have filed bankruptcy already you can talk to your trustee about the possibility of filing a Consumer Proposal even while bankrupt. A successfully accepted consumer proposal will annul your bankruptcy filing freeing you up to be able to submit your sponsorship application. Be aware that you will have to be able to financially support a consumer proposal for this option to work.

Bankruptcy and Citizenship Applications

Unlike with immigration applications, bankruptcy does not affect your efforts to become a Canadian citizen.  You can still apply for Canadian Citizenship regardless of whether you have filed a personal bankruptcy before, are still currently bankrupt or are considering bankruptcy.

A bankruptcy, debt settlement or consumer proposal will not affect a citizenship application.

Filing a bankruptcy does not necessarily restrict your ability to travel either, but you must keep your trustee informed of where you are and how to contact you.

Always check with Citizenship & Immigration Canada for the latest updates to rules and discuss your debt options carefully with a trustee before making your decisions.

Any of our Ontario bankruptcy trustees would be happy to help you review all of these options and provide you with debt advice on how these laws will apply in your particular situation. Don’t think you have to struggle with debts to avoid jeopardizing your citizenship or sponsorship opportunities.

Predatory Practices of U.S. Debt Settlement Companies

debt-settlement-companies-post-updated

Blair Mantin is a trustee with Sands & Associates in British Columbia, where there are no laws to regulate debt settlement companies.  Blair explained that the worst offenders are debt settlement companies based in the U.S. that charge high up front fees and end up not settling the debts.  As a result many people end up arriving at his office with financial problems that are more serious than if they had just met with Blair and his team initially.  

Canada vs US Debt Settlement

As Blair explains:

I have seen very few Canadian-based debt settlement companies who their clients have been essentially been ripped off. I have seen a ton of U.S.based debt settlement companies who have essentially ripped off their clients.

So the issue one is lack of protection, but issue two is just lack of awareness. Debt settlement companies have no requirement at all to inform you of all of your options for dealing with your debts.

In contrast, a licensed bankruptcy trustee or consumer proposal administrator is required to give you a full assessment (in person, not over the phone) and they are required to explain all options.  There’s another big difference between debt settlement and consumer proposals, as Blair notes:

The easiest way to differentiate a consumer proposal from debt settlement is a consumer proposal is a done deal from the start. So you know exactly what percentage of the debt you’re going to pay back and you know a good starting point is probably 30 cents on the dollar so you agree to pay back 30 cents on the dollar on your debt and you get up to five years to do that and your creditors are refrained from taking any action against you. So no further interest can be charged, no more calls, no more legal action.

As we discussed in the show, a debt settlement may be a good option if you have a lump sum of money today, but in most cases a consumer proposal, where you get legal protection and have the ability to pay over a period of time, is usually a better option.

As Blair explains in the show, a consumer proposal can help young people who have wages to protect, and can help seniors on pensions in some situations.

Limitations Act

In the bonus segment we discuss the Limitations Act and old debts, legislation that is similar in British Columbia and Ontario.  In simple terms, a standard creditor has two years to commence legal action against you.  If they don’t, they do not have the legal right to sue you.

This is a complicated area of the law, and there are many conditions.  The limitation periods do not apply to some debts, like Canada Revenue Agency or child support.  If you are sued you must prove to the court that two years have elapsed (since you last made a payment, for example), so the burden of proof is on you.  As Blair Mantin explains, if you have old debts it may not be necessary to file bankruptcy to get legal protection.  However, the debts continue to exist and will show up on your credit report, so professional advice is required to fully evaluate your options.

Resources Mentioned in the Show

FULL TRANSCRIPT show #8 with Blair Mantin

debt-settlement-companies-post-transcriptDoug Hoyes:  Welcome to Debt Free in 30. We’ve got a great show for you today. So let’s get started. I’d like my guest to introduce himself, who are you, where do you work and what do you do?

Blair Mantin:  Thanks, Doug. So my name is Blair Mantin. I’m a trustee with Sands and Associates based in Vancouver. And Sands and Associates is BC’s largest firm focused exclusively on helping individuals and small businesses solve their financial problems. So we’re licensed trustees, we’re credit counsellors. We’re the folks people should see if they find themselves in a situation when they’ve just got too much debt and they don’t know where to turn.

Doug Hoyes:  Fantastic. And you originally grew up in Ontario did you?

Blair Mantin:  Yeah, that’s right so I grew up just outside of Toronto. I went to York University and then after spending a little bit of time travelling the world, I lived in London, lived in Buenos Aires. I have settled in Vancouver and really love it there. It’s a beautiful place.

Doug Hoyes:  We should do a travel show someday.

Blair Mantin:  “Insolvency Around the World.”

The View from British Columbia

Doug Hoyes:  That’s right but not today. We are recording this in Ottawa, Ontario, the nation’s capitol where we’re both here attending a conference about insolvency so it was a great opportunity for us to get together. We’ve known each other for many years, worked together many times, we talk on the phone all the time but actually being in the same room is kind of cool. I’d like you to give us maybe a quick overview of what the situation is like in British Columbia at the moment in terms of over the last few years have the number of bankruptcies been increasing, been decreasing, what are the things you’re kind of seeing in the market right now?

Blair Mantin:  Yeah, there’s been in a big ramp up in BC and there’s a number of reasons for it and I’ll explain those as we go along but really since 2009, the number of bankruptcies and proposals has increased and it’s kind of maintained at that level. So it goes up or down a few percent per year but not a real dramatic change so it seems like there’s a new normal where it’s about a thousand people a month in the province of BC area, they’re filing a bankruptcy or doing a consumer proposal.

Doug Hoyes:  And are you seeing an increasing number of consumer proposals as a percentage?

Blair Mantin:  Definitely. So in the four years that I’ve been with Sands and Associates, I think we’ve went from about a third of our files being consumer proposals to — and in some of our offices, it’s a majority every month. So the more people become aware of the consumer proposal as an option, the more people tend to opt for it.

Doug Hoyes:  And is that what it is, is it a case of knowledge, people don’t know that they exist or are there other factors that are driving that?

Blair Mantin:  Absolutely. It’s a question of knowledge so our whole marketing strategy is one word, it’s awareness. We just want to create awareness of consumer proposals because I meet with people who they just had no idea that this existed and sometimes they break down in tears when they say you’re telling me that I can freeze the debt, no more interest, reduce it by 70 percent and I get up to five years where no one is going to bother me, I just need to make the payments? It’s the answer a lot of people have been looking for but unfortunately sometimes get to us after trying several things that just really didn’t help the problem.

Doug Hoyes:  Well, we’re going to talk about some of those several things. In Ontario, the situation is very similar. Overall, probably Ontario and British Columbia are very similar in terms of the profile of the people who get into financial trouble and we’re now in a situation in Ontario where we are filing more proposals than we are filing bankruptcies. That certainly wasn’t the case many years ago.

American Debt Settlement Companies

But you talked about other alternatives that people end up trying first and then end up coming to see you. So let’s talk about some of those alternatives. One of them I guess is debt settlements which explain to me, and we’re recording this in 2014, so if someone is listening to the podcast three years in the future, then the law might be different but what is the state of the legislation right now in British Columbia?

Blair Mantin:  Completely non-existent.

Doug Hoyes:  There is none.

Blair Maintin:    No, it’s an absence and it’s such a conspicuous absence that there is really no consumer protection legislation in BC so we got a lot of US based debt settlement operators that were essentially outlawed in the U.S. because the Federal Trade Commission passed some legislation a few years ago as they set their sights on Canada and we’ve seen other provinces like your home province of Ontario, we’ve seen Atlantic Canada, we’ve seen Alberta put in legislation to protect consumers. BC has done nothing unfortunately. I’ve even met with the government. I’ve presented to the BC Justice Ministry and everyone is aware of the problem but it’s just they haven’t been able to get on the legislative agenda to get the laws passed to fix it.

Doug Hoyes:  And so who knows what’s going to happen because it’s up in the air right now. So explain to me what your problem is with debt settlement companies because as I understand it and you’re right, we’ve got the same situation in Ontario, there was a new consumer protection law passed in 2014 but it’s not due to officially, the section dealing with debt settlements and some other areas isn’t officially due to come into effect until 2015. We’re not exactly sure on the timing of that.

Debt settlement on the surface sound like a really good idea. I owe a bunch of money, and I make a settlement where I pay less than the full amount owing. So I’ve got $10,000-$30,000 in credit cards or whatever, well if I can settle that for 30 cents on the dollar or less why wouldn’t I? What’s the problem?

Blair Mantin:  Well, the problem is that when you undertake a debt settlement plan you don’t have that ability to make a settlement for probably a year, or two years or three years so what happens is the debt settlement companies kind of steps in the middle and says go silent on all of your debts, don’t pay anybody, we’re going to negotiate with your creditors and the whole time you’re paying them fees. Well, theoretically, you’re supposed to also be saving money to make a settlement offer at sometime in the future.

The consumers that I see, and this is everything from 75 year old retirees to 22 year old college graduates, they’ve paid fees for a year or two years and maybe they’ve saved money or maybe they haven’t been able to, but I see them when they’re just not able to get any settlement. So the creditors don’t agree to the settlement or the debt settlement company just decides, well, you haven’t saved enough money so therefore we’re booting you from the program. So for a space of a year or two years, they’ve been investing money and I haven’t seen it be successful.

Doug Hoyes:  Now, there must be some that are successful or otherwise these guys wouldn’t exist so let me play devil’s advocate here and obviously I’m your side of this argument because I’m not a big fan of the whole debt settlement industry in general, but, obviously they exist for a reason. There must be some cases where that actually does make sense for someone.

So you talked about the case where it’s kind of hard to save up for a settlement so you’re envisioning a scenario where I owe a bunch of money and the debt settlement company says okay, we can make a settlement for — again, I’m pulling numbers out of the air, but let’s say 30 cents on a dollar. So you’ve got $20,000 worth of debts, we need $6,000 plus whatever the fees are or whatever. I don’t have $6,000 but in a typical scenario that you see, I have to save up that money so how do I go about doing that? Where am I saving this money? How does it work?

Blair Mantin:  Right. So essentially you have a blended monthly payment where upfront the majority of that is going to fees and then after the fees are taken, and these can be a few thousand dollars, then the majority of that monthly payment starts to go into a set-aside fund or some form of savings. Again, I don’t see very many, obviously of my clients, because they’re dealing with me, it didn’t work, I see that they get the fees paid and then they’re not able to continue with the payments or the creditors just get tired of waiting and they keep calling the person and keep telling them, you know what, these guys haven’t been in touch, they’re not getting a settlement from us, or they eventually sue them or garnish their wages or assets.

I think in a situation where it would make sense is if you’ve got that money sitting around, if you’ve got 30 to 50 percent of your debt and you can offer it cash tomorrow, yeah, probably debt settlement can be a great option and can be done very, very quickly and there are some reputable operators. Unfortunately, the ones that I’ve seen mostly in BC, they’ve been outbound call centers from the US and I don’t use the term lightly but preying on people who didn’t understand they had other options.

Doug Hoyes:  So your biggest argument isn’t necessarily with the potentially reputable Canadian companies, you’re much more offended and you see much more damage done by the American companies that aren’t really even located here. They’re all doing it totally over the phone. You can’t even come in and meet with someone which makes it kind of hard to understand who you’re even dealing with I guess.

Blair Mantin:  Yeah, that’s exactly it. So I’ve seen very few Canadian-based debt settlement companies who their clients have been essentially been ripped off. I’ve seen a ton of U.S.-based debt settlement companies who have essentially ripped off their clients.

Doug Hoyes:  Well, and that’s why on this show we like to present all the options. We don’t want to say debt settlements are always wrong. You should never consider them because you just painted a picture of where it may actually make sense. If I’ve got some debts that have been around for a while, I’ve now accumulated some money maybe, I got a severance payment from work, maybe my mother is willing to give me the money, whatever. Okay, then rather than me trying to make deals with three or four different people and make sure the paperwork is all right, a debt settlement may be a possible option for the person.

Your bigger problem though is when I’m setting aside the money over a longer period of time because things can happen in that intervening period. Have you actually seen cases where creditors have taken people to court and sue them?

Blair Mantin:  Oh definitely. Yeah, and sometimes that’s the wake up call that causes the person to look a bit more broadly at what are the options so the two big issues that I have, one is that there is no legal protection so yeah, I’ve seen a lady who thought she was doing very well with debt settlement and then was served with litigation papers that creditors were suing her and were essentially were going to register on title to her house. So she came in and we were able to stop it before they registered but often it’s the creditors that really get in touch with the person and say you’re not perhaps not following the best option for you in this situation.

So the issue one is lack of protection, but issue two is just lack of awareness. Debt Settlement Company has no requirement at all to inform you of all of your options for dealing with your debts.

So if you think it’s either pay it all in full or, I can pay 30 percent, it’s a debt settlement over time and I’m not going to get sued, well, if those are your only two options and you can’t afford to pay it in full, well, that sounds good but once you research all of your other options and essentially consumer proposal for most of the folks that I’ve seen, this is what they wanted all along, this is what they really needed and they just weren’t aware of it.

Doug Hoyes:  Maybe we can talk about some specific examples of consumer proposals then that work. We’re going to take a quick break and then we’ll be right back on Debt Free in 30.

Consumer Proposals

Welcome back to Debt Free in 30. My name is Doug Hoyes. I’m here with my guest today, Blair Mantin who is a trustee I bankruptcy and consumer proposal administer from the beautiful province of British Columbia. He’s with a company called Sands and Associates. If you want links to anything we’re talking about, want to find out more about Blair or about Sands, you can go to our website Hoyes.com and if you just click on the podcast link or go to the blog, you can find the show notes for this episode.

Blair, what’s the website for your company?

Blair Mantin:  It’s Wehelpwithdebt.com.

Doug Hoyes:  Wehelpwithdebt.com. It’s all one word?

Blair Mantin:  Yeah. It’s easy to remember and it says what we do.

Doug Hoyes:  Okay. Perfect. So we were talking in the last segment about debt settlements which are a good option for a very limited number of people. Not so great an option for others. And you said that in a lot of cases, a consumer proposal is a better option. So now a consumer proposal sounds to me very similar to a debt settlement because because, every month I’ve gotta put some money into the process. Obviously it’s not similar. That’s really where the similarities end so give me a quick overview, give me the 10 second overview of what a consumer proposal is.

Blair Mantin:  Sure. So these easiest way to differentiate it from debt settlement is a consumer proposal is a done deal from the start. So you know exactly what percentage of the debt you’re going to pay back and you know a good starting point is probably 30 cents on the dollar so you agree to pay back 30 cents on the dollar on your debt and you get up to five years to do that and your creditors are refrained from taking any action against you. So no further interest can be charged, no more calls, no more legal action. Nothing against you.

So right from the start, you’ve got the deal and you’ve got the protection which contrasts against debt settlement where it’s all done based on faith that at the end when you’ve got this money, we’re going to make the offers and the offers are going to be accepted. Another big different as well is we can deal with income tax debt, we can deal with student loans as long as you’ve been out of school for five to seven years or more, debt settlement can’t deal with any sort of government debt. So it’s an all inclusive way to solve your financial issues.

Doug Hoyes:  And when you say it’s done up front, the process is the proposal is filed so the person who has the debt works with you, you figure out what’s going to make sense, what can they afford, what are the creditors likely to accept. You send the proposal out and they have 45 days to say yes or not to it. If the majority has said yes based on dollar value, that’s what you’re talking about, it’s a done deal at that point. No one is changing their mind later. So give me some tangible examples here. So paint me a picture of somebody that you have helped and obviously I don’t want you using a completely real example with real names and real amounts and everything but give a composite perhaps of a — because you deal with people of all ages, right?

Blair Mantin:  Oh definitely.

Doug Hoyes:  Young, old, whatever so why don’t we start with somebody who is perhaps younger, maybe I don’t know, do you deal with a lot of married couples?

Blair Mantin:  Mm hmm.

How a Consumer Proposal Can Help a Young Couple

Doug Hoyes:  So give me a scenario where a consumer proposal would make sense for someone like that.

Blair Mantin:  Sure. So let’s start at the young end of the spectrum. So I meet a lot of people who are pretty early on in their career and they might have some student loans but their big issue is that they’ve accumulated a lot of debt, perhaps and by their own admission sometimes by being a little irresponsible, not understanding how credit works, getting that first credit card that’s offered to them on campus and then accepting all the credit limit increases that go.

So a couple that I met with within the last month, these have been gentlemen who were working in the financial industry in Vancouver and they couldn’t be bankrupt. They could not basically satisfy their regulatory requirements if they filed a bankruptcy but they had about $30,000 of credit card debt and every month so much of their take home income, because we’re earning around $3,000 a month, so much of that was going to the interest payments and when they looked at the statement and saw well, it’s still going to take 50 years or 70 years depending on the card to get out of debt, they just realized we’re just treading water at this point.

So they did consumer proposals with us, the proposals were accepted and I think they’re just a both just a few months in now to making payments, full legal protection, no need to file for bankruptcy.

Doug Hoyes:  And it doesn’t have a huge negative impact on their job obviously because they didn’t go bankrupt.

Blair Mantin:  Yeah, the big question, will my employer even know and as long as there is not a wage garnish, no, I’ve got no reason to notify your employer at all.

How a consumer proposal can help Seniors

Doug Hoyes:    Yeah, unless they for some reason are doing credit checks on you every week which would be highly unusual for an employer to be doing. So what about at the other end of the spectrum then, are you seeing more and more people who are older or either approaching retirement, already retired, what kind of scenarios do you see there?

Blair Mantin:  Yeah, definitely one of the fastest growing segments for our firm and I think it’s consistent across the country is the senior citizen demographic. So it’s folks that have finished their working life with some debt and they’ve continued to accumulate that debt over time. So some people I see, you know, they’re just on the cusp of 65 where they’re going to get full CPP and OAS and until they start to get that sort of an income, they’re making do on less than a $1,000 a month and they’ve used credit to fill in that gap. So I’ve seen a lot of folks in that type of example where there just hasn’t been enough income and until they hit 65, they continue to accumulate debt and even with CPP and OAS, it’s not going to be enough to chip away at that debt over time.

So often times that client is going to opt for bankruptcy because typically they’re low income and they’re not able to pay much more than just what a minimum fee bankruptcy would cost which is usually about $200 a month over a period of nine months but the odd time the consumer really wants to do a proposal, the age range is pretty dramatic. It’s probably from 18 to 90 in terms of people that have done proposals but definitely for senior citizens it’s more bankruptcy is an option.

Doug Hoyes:  Yeah, and I guess if you’re retired but you’ve got a significant pension, perhaps you worked for a company that had a full pension plan, maybe you were a government employee and worked for a big company, than you still have significant income coming in just not enough to be servicing all the debts so you don’t want to do a bankruptcy with the negative implications for that so in those cases, a consumer proposal does work as well then.

Blair Mantin:  Exactly. And it’s also a consumer proposal. Generally and I try to counsel people to this, it’s something you don’t have to feel ashamed about. It’s not the easy way out. You’re offering your creditors more than they would get if you filed for a bankruptcy so sometimes that takes a little while to sink in but I do see, especially of my senior citizen clients that are proud that they’re doing a proposal, they’re paying back what they can afford to pay back and they feel ethically that’s the right way to do it.

Doug Hoyes:  And that’s the peace of mind. That’s fantastic. I really appreciate you being here with us today, Blair, and thanks for your comments.

Blair Mantin:  My pleasure. Thank you.

Doug Hoyes:  Thank you. We’ll be right back to wrap it up.

30 Second Recap

Doug Hoyes:  Welcome back. It’s time for the 30-second recap of what we discussed today. My guest today was Blair Mantin. A trustee with Sands and Associates, the largest personal and solvency firm in British Columbia, who told me that his goal is to create awareness of debt management options including consumer proposals which are gaining popularity in both British Columbia and Ontario.

We discussed the debt settlement industry, that’s strong in B.C., due in part to a lack of laws regulating them. Blair explained why the unregulated debt settlement companies cause problems for consumers because in many cases, they don’t actually deal with their debts. That’s the 30-second recap of what we discussed today.

Doug’s Take on Debt Settlement Companies

So what’s my take on debt settlement companies? I agree with Blair’s comments; you have to be careful with debt settlement companies. As I said in the show, as I record this in late 2014, I expect the rules regulating debt settlement companies in Ontario to be tightened up considerably but as of now, I don’t know the exact timing so check back on our website at Hoyes.com for further updates.

As Blair said, debt settlement companies generally only talk to your creditors at the end of the process, not the beginning. There is no standard for how a debt settlement works but here’s the basic idea. You’ve got some debts that you can’t pay so you go to a debt settlement company and they say no problem, we’ll take care of it for you. Here’s the plan. Put aside $500 a month and when you have enough cash saved up, we’ll talk to the credit card companies or the banks and we’ll make a deal. They’ll tell you in many cases they can make a deal for 30 cents on the dollar or less, that sounds great but does it work?

Yes, I will admit that in some cases, it does work. The problem is that in most cases, it doesn’t. Let’s think about it. Let’s say you owe $10,000 on a credit card and you want to settle it for 30 cents on the dollar, that’s $3,000 so before you can make a settlement, you need $3,000. If you’re going to save it up at the rate of $500 a month, it will take six months for you to get the money, but wait, the debt settlement company guys don’t work for free.

They want to get paid and their fee could easily be $1,500 or more so that’s another three months of savings. So for eight months, you stop paying the credit card and save $500 each month. So here’s a question for you. What do you think the chances are that your credit card lender is going to leave you alone if you’re not making payments for eight months? Do you think the bank will stop phoning you and stop sending letters and just leave you alone? No, it’s more likely that after a few months, the bank will take you to court, sue you and try to garnishee your wages. Banks don’t generally just sit around and do nothing if they aren’t getting paid. And that’s the problem with debt settlement. In most cases, you need a lump sum of money to make it work and if it’s going to take you many months to save up the money, you’ll probably run out of time before you can make a settlement. Of course it’s worse than that because if you pay a fee to the debt settlement company up front and they don’t solve your problem, you’re actually worse off.

My company, Hoyes Michalos, is licensed to do consumer proposals and it’s very common for us to be able to negotiate a settlement of around 30 cents on the dollar. Sometimes higher, sometimes lower. As Blair said on the show, with a consumer proposal, it’s a done deal from the start. The people you owe money to have 45 days to vote on your proposal so in most cases in 45 days, you know the exact deal. You don’t have to worry about paying big fees for many months without knowing whether or not you have a deal. That’s why in virtually all cases, a consumer proposal which is a legally binding deal, legislated by the federal government and approved by the courts, is better than the much less certain debt settlement process.

That’s our show for today. Full show notes and show links to what we discussed today are available on our website at Hoyes.com. Thanks for listening. Until next week, I’m Doug Hoyes. That was Debt Free in 30.

Thanks for listening to the radio broadcast segment of Debt Free in 30 where every week your host, Doug Hoyes, talks to experts about debt, money and personal finance. Please stay tuned for the podcast only bonus content starting now on Debt Free in 30.

Bonus Segment – Limitation Periods

Doug Hoyes:  Welcome back to Debt Free in 30. This is the bonus segment. We often run out of time on our radio broadcast which has a limited time period so for our podcast listeners only, well, we like to throw in a bit more content and I’m sitting here talking to Blair Mantin. And there were a few other things he wanted to chat about. One of them being limitations periods. So what is that, why is it important and why should anyone care?

Blair Mantin:  Well, I think it’s probably one thing that is so unknown but for many people, it’s the right answer. Essentially a limitation period is the period of time under which if you stop paying your debt, essentially your creditors have to take action within a certain period of time or they lose the right to take action. And take action means taking you to court, having a payment hearing and then getting the right to seize your assets or your income.

So most people first off don’t know if there’s any limitation period. They think if you owe money, you owe it for the rest of your life and that’s that. That’s only true with government debts. So yeah, income taxes, you can’t wait it out or student loans, very difficult to wait it out; however, for private debts there is a limitation period and it changes province to province, and in the province of B.C. there was a massive change just over a year ago that actually nobody knows about.

Doug Hoyes:  So explain to me what the old rules were in B.C. and what the new rules are now.

Blair Mantin:  So previously in B.C., if you owed somebody money, you weren’t able to pay it, they had six years to decide whether to take action against you or not so six years is a long time. It’s a long time to wait out, a lot of things can happen in six years. So for many people, the idea of getting protection from waiting for the limitation period to expire just wasn’t an option.

Doug Hoyes:  And the rules now are?

Blair Mantin:  The rules now, two years.

Doug Hoyes:  Two years.

Blair Mantin:  Huge, huge difference. It’s important to know when the clock starts ticking and it’s from when you make your last payment or sign a written authorization that basically you agree that you owe this money. So when you’re dealing with somebody on the phone and they’re saying just make a good faith payment of $25 or $50, what you may not understand is that you’re resetting that limitations period every time you do that and it could be as short as two years. I believe Ontario has been two years for quite some time now.

Doug Hoyes:  Yeah, Ontario is also a two year period, like you say for what we call general debts. So you’re right. If you owe money on income taxes, you overpaid child tax credits or something like that, sorry, that doesn’t count. Government debts are not included in that. If you have debts for things like support obligation, child support, alimony, nope, that’s not included either. But if it was a normal type of debt, a credit card, a bank loan, Payday Loan, something like that, it’s a two-year period in Ontario as well. And you’re right, it’s two years from in essence the date of the last activity. So the last date you made a payment for example.

So why does that matter then?

Blair Mantin:  Well, it really matters in that if you’re a person where you just can’t afford to pay anything on your debt, you can’t afford to do a proposal, even the cost of a bankruptcy is prohibitive for you, you may think that you’re in legal limbo for the rest of your life, you’re not. If your judgement proof is what it’s called, if you’re judgement proof, even if your creditors sued you, they couldn’t enforce it but you’re not looking at the rest of your life looking over your shoulder. You’re looking at two years limitations period and then essentially you can move on and not worry about these debts. So it doesn’t make sense if you’re somebody who earns a lot of income because you’re going to get sued in those two years. It doesn’t make sense if you’re somebody that’s got a lot of equity in their house because you’re going to get sued in those two years, but for somebody with minimal income, minimal assets, sometimes the right answer is to avail themselves of the limitations period.

Doug Hoyes:  So I’ve got some debts from two years ago, three years, four years ago let’s say and I wasn’t able to pay them. Perhaps I was laid off, perhaps I had a medical issue, something happened and I wasn’t able to pay them. I’m now back in the workforce and the collector has tracked me down and is saying hey, we want you to pay, what you’re saying is you should not automatically rush to pay them. You should first of all consider the implications of this limitation period. So how do I know if it’s been two years or not?

Blair Mantin:  Well, ideally, you’ve kept records so ideally you’ll know when the last payment has been but you have the right to demand from a creditor written proof of this obligation. You have the right to ask for account statements. Sometimes you have to pay, sometimes not. Morally, you may still feel as though you want to pay this debt back especially if you have the means. You borrowed the money and the vast majority, 90 percent of people that we deal with are honest but unfortunate folks that even though the debt statute barred, if they’re able to pay it, they will, but if you’re not able to pay it, you should at least be aware of whether the debt is still legally valid or not.

Doug Hoyes:    And in a lot of cases your credit report is going to show a last activity date too so I guess that would be good evidence. So the process then would be if a creditor sues me on a debt that let’s say I haven’t made any payments on in three years, they still can sue me. Anybody can sue, I can sue you because the sun is shining today I guess if I want. They sue you, you have to then go to court and your defense would be that the limitations period has expired, is that correct?

Blair Mantin:  Yes, your defense is very short. It’s irrefutable unless they can prove that the limitations period has not expired and there’s been some activity, then yeah, the lawsuit could not succeed.

Doug Hoyes:  And so good proof would be, well, here’s a copy of my credit report. It shows that the last activity was three years ago. Now, you said that you may still decide to pay the debt, you still owe the money which means it still appears on your credit report I guess.

Blair Mantin:  Mm hmm.

Doug Hoyes:  And how long is a debt going to appear on your credit report for?

Blair Mantin:  Normally, it’s six years from when it’s written off.

Doug Hoyes:  So if I had a debt from three years ago, and if a credit decides to sue me, then I can go to court and say hey Judge, it’s been more than two years. Here’s proof, here’s my credit report. Here’s my accounting records or whatever. The judge throws the case out. They can’t get a judgement against you but there is still a note on your credit report that’s going to be there, for in my example, another three years after that, six years in total saying that you didn’t pay this debt which obviously has a negative impact on your credit report. So that would be an example of an old debt where you may still decide to deal with it in some way.

Blair Mantin:  Yeah, exactly, if your credit report is going to be important to you, then yeah, this is probably not the right strategy but the folks that I’ve seen that this has been the lifesaver, have been the old senior citizens who just know their credit report is not really going to help them again in the future and they just don’t have the means to even afford the cost of a very small proposal.

Doug Hoyes:  Yeah, but I think that’s kind of the key. If you’re already retired, you’re 70 years old, you’re 80 years old you’re never going to have employment income again anyways and perhaps you don’t have any assets or very limited assets, there’s not a whole lot of risk. Nobody can garnish your wages, nobody can seize your house if you don’t have one, does it really make sense to try to come up with the money that you don’t have to pay these people, does it really make sense to do a bankruptcy or proposal, maybe not. It may just be better to say you know what, I know you can’t take action against me.

I always recommend to people it’s a good idea to open a bank account somewhere other than where you owed the money because if they tracked you down, then even though legally we can debate whether they can do it or not, it’s not that hard for Bank ABC to take money out of your account if you owe them. But in those specific cases, it’s a good idea to know what the limitation period is. And let’s face it, in a lot of cases, you may decide okay, I’m going to make a deal with this guy because I know I owe the money and I can’t afford to pay him the $5,000 which is now $10,000 with interest but I have a saved up a couple of thousand, maybe that’s a case where you decide to settle with him directly.

You gotta make sure you get all your paperwork done correctly and make sure you have proof that that’s full and final settlement but in a lot of cases, creditors are going to take that deal because they can’t get anything else anyway and I guess that kind of loops back to our discussion about debt settlements earlier. That might be a case where a debt settlement makes sense although probably that’s something you can negotiate yourself. You don’t have to pay a huge amount of fees.

So when you’re meeting with someone, you’re always going to ask them okay, how old are these debts that we’re talking about because there are other options.

Blair Mantin:  Yeah, the majority of folks that I deal with, they’re moving money around each month from one credit card to the next so the debts are generally pretty recent so in most cases, yeah, the idea of even waiting two years is not going to be too palatable and again, if they’re earning money or have assets, it doesn’t make sense. But in some cases, I meet with folks and they’re still trying to get things in order, they’ve got a lot of old debt that they didn’t even know about and they pull their credit report and all the last dates of activities are all quite old so it’s just part of explaining to everybody all of their options which you don’t really find in other professionals that you might deal with in the financial community.

So if you go to see a debt settlement, are they going to tell you about the limitations period, hopefully. Maybe not. If you go to see a credit counselor, are they going to tell you, hopefully but maybe not. If you see a trustee, we’re obligated to tell you everything, the full spectrum of all of your options which includes what happens if you did nothing and invoked the limitation period.

Doug Hoyes:  And obviously all trustees aren’t perfect either so that’s one of the reasons we’re doing this show to provide information to people that maybe you didn’t know about, and let’s face it, nobody has any incentive to publicize the fact that there is this limitation period which is two years both in British Columbia and in Ontario. And in a lot of cases, it’s just okay, I can pay this debt back but I need a few more months and since I know it’s already past the two years I don’t have to be in a panic, even though the phone is still ringing because they’re turned it over to a new collection agency. I don’t have to be in a panic about it today. I can wait, get my affairs in order and then deal with it. So there’s always options.

Well, that’s great. That’s very good advice. Thank you very much, Blair, for being here.

Blair Mantin:  Thank you.

Doug Hoyes:  That was the bonus podcast only section of Debt Free in 30. Thanks for listening.

Why Our Credit Reporting System Is Broken

Do you care about your credit score? Most people do. You want a good credit score so you can get a credit card or qualify for a loan to buy a car or a house.  Makes sense.

However, the steps you take to improve your credit score may not be sound financial decisions if all you look at is the credit score number.

Why? The credit scoring system is designed to help the banks, credit card companies and other lenders.  It was not designed to help you.

What does your credit score measure?

In theory, a credit score is a measure of borrower risk. By looking at several factors, the lender wants to know how likely it will be that you will default on your loan payments. It’s not a measure of how hard or easy it will be for you to keep up with those payments or whether or not you can afford the loan. Your lender just wants to know if you will default on the payments.

A credit score is based on five main factors (in order of importance):

  • Payment history 35%
  • Amount owed and utilization 30%
  • Length of credit history 15%
  • New credit 10%
  • Types of credit used 10%

Payment history

Payment history is the most important factor, accounting for more than a third of your total score.  According to the model, you will have a higher score if you make all required payments on time.  However:

  • Not all payments are tracked;
  • You don’t receive any benefit from paying your balance in full each month, or making extra payments on your term loan;
  • The term of the loan isn’t factored into your credit score.

All this translates into a scenario where someone behind on their rent, paying only the minimum on their credit cards with a seven year car loan and close to bankruptcy could have better credit score than someone with a single credit card paying the balances in full each month.

Utilization

Credit models can only tell if you are a delinquency risk if you use credit. Most credit scoring models suggest keeping balances on revolving credit accounts below 30% of the credit limit. Let’s look at why this is bad for you:

  • If your only credit is a credit card, you need to carry a balance to increase your credit score.
  • You can lower your utilization rate by increasing your credit limit.
  • Debt levels are not tied to income.

So, someone who earns $50,000 per year and has three credit cards, each with a $10,000 limit and a $3,000 outstanding balance, may have a better credit score than someone with a $600 balance on one $1,000 card earning the same income. Does that make sense?

New credit and types of credit

Another problem with the credit scoring system is that your credit score increases if you have multiple sources of credit.  That means someone with a credit card, a bank loan, a car loan and a mortgage will have a better credit score than someone with only one loan or someone who has paid off their loans in the past.  Is more debt in your best interest? I think not.

Worried about your credit? For more information on credit scores and credit repair try our Free Online Video Course on Rebuilding Credit.

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Financial conflicts

The problem is that the bank’s goals (make money) are different than your objectives (stay out of debt), and the credit scoring system often encourages higher bank profits:

  • Increasing the length of time your loan will be outstanding and reported in your credit score may increase your credit score, but it maximizes the interest you will pay, and that maximizes the bank’s profits, but costs you more in interest.
  • Keeping your utilization rate at around 30% increases the interest you pay, and maximizes the bank’s profits.
  • Increasing your credit limit runs the risk of additional borrowing, which, you guessed it, increases your interest costs and maximizes the bank’s profits.
  • Borrowing multiple types of loans, and having new loans means you continue to make interest payments and maximize the bank’s profits.

So, if you want a high credit score, keep your utilization rate at around 30% and maintain only the required payments.

But is that good for you?  Of course not.  If you want to be strong financially:

  • Pay off your credit card balances in full each month;
  • Keep your term loan amortization periods as short as you can comfortably afford;
  • Don’t keep high credit limits if you don’t need them and can’t afford to pay them off.;
  • Keep your debt service ratio (the ratio of your debt payments to your income) well below the norm considered acceptable.

You only need a credit score high enough to qualify for the amount of loan you need, not the amount of loan the bank wants to give you. That may mean that you don’t need a perfect credit score, only a score that is good enough to accomplish your objectives.

How would I design a better credit reporting system?

If I could, I would design a system that benefits the consumer, not the banks (so it will never happen).  In my system a higher score would mean that I am doing better financially.

In my system, someone who pays their credit card balances in full each month would have a higher score than someone who leaves a balance.  To be financially healthy you need to pay your balances in full each month, and that’s what my scoring system would acknowledge.

I’d score someone who has lower debt service ratio (the percentage of your income taken up by debt payments) better than someone with a higher ratio. In my opinion, the lower the debt relative to your income the more secure you will be financially.

Better yet, I’d value a low credit availability to net income ratio higher than someone who has a lot of credit potential, no matter what the type of loan. The more credit you have available, the higher the risk you will use it. And the more you use debt as a source of income, the worse off you are.

I would encourage lenders to place greater reliance on the person, and less reliance on a computerized score. Reverse that thought and I would encourage individuals to shop around for someone who will consider their situation, not just look at your credit score numbers or treat you like a profit model.

In the “old days” your local banker would meet with you personally.  They knew where you lived and where you worked, and your personal character became an important consideration when granting a loan.  They didn’t care if you had four different types of loans and managed to maintain a balance of 30% of your available credit each month.  They were more interested in whether or not you had the capacity to repay the loan.

Of course it’s wishful thinking to expect we will go back to the days when you were a real person, and not just a series of numbers on a computer screen.

It is what it is, so you must look after yourself.  Don’t bury yourself with extra debt just because you think it will improve your credit score since this can lead to more debt problems.  Borrow responsibly, and as little as possible.  That may hurt the bank’s profits, but you will sleep soundly at night, because you have rejected the tyranny of the credit score.

If debt is holding you back from rebuilding your credit score, we can help you eliminate your debt. Contact us today to book a free consultation with a Licensed Insolvency Trustee to talk about your debt relief options.

Mortgage of 85% Or More A Bankruptcy Risk

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Without the ability to borrow with a mortgage few of us would be able to buy a home.  That’s why mortgages are great, but only to a point.  It is possible to have too much mortgage.

Avoid a high ratio mortgage

A mortgage is considered a high ratio mortgage when you have less than a 20% deposit or down payment when you purchase your home. Take on a high ratio mortgage and you have to pay mortgage insurance through a mortgage insurer such as Canada Mortgage and Housing Corporation (CMHC), Genworth Canada or Canada Guaranty.

The risk of a high ratio mortgage to your financial stability doesn’t just apply when purchasing a home. It is also a factor to keep in mind when taking out a HELOC to pay for renovations or considering taking on a second mortgage in order to consolidate existing credit card and other debts.

Rising house prices cannot compensate for second or even third mortgages to refinance credit card debt or HELOC balances that increase when homeowners default or miss payments due to a sudden financial hardship like a job loss or increase in interest rates.

A detailed review of our Joe Debtor insolvency study in 2013, when homeowner insolvencies were high, found that 9 in 10 insolvent homeowners carried a high ratio mortgage at the time of their insolvency. The average mortgage debt amounted to 85% of the net realizable value of their home.

Almost one in ten had negative equity in their home before factoring in selling costs and only 57% had positive equity once commissions and other closing costs were considered.

Piling on credit card debt

The danger of a high ratio mortgage is that it can be the trigger point for filing bankruptcy. If you have little or no equity in your home you have no room to maneuver.  If you can’t or don’t want to sell, you make do by using your credit cards to pay your living expenses so you can keep up with your mortgage payments. If your renovation costs exceeded your budget, you may be forced to turn to higher cost unsecured debt to finish the project.  When this happens:

  • you may not be able to consolidate unexpected credit card debt.
  • you may not even be able to sell your home for enough to pay off the mortgage and start over. In fact, 43% of all insolvent homeowners had no equity value in their home at all.

In addition to owing 85% of the value of their home in mortgage debt, the average insolvent homeowner owed an additional $72,500 in unsecured debt. While a high ratio mortgage was the initial risk, it is this unsecured debt that becomes the final straw that leads to insolvency.

When you can’t pay your mortgage

While it may not be surprising to find that insolvent homeowners have little, or no, equity in their home at the time of filing, it may surprise you to know that most do not lose their home in a bankruptcy.

The better solution may be to clear up outstanding unsecured debts through bankruptcy or a consumer proposal. Filing bankruptcy or making a debt proposal with your creditors will eliminate your unsecured debt payments, improving your cash flow and serving as a preventative measure against foreclosure. The trick however is to work hard to put any additional payments you can towards your high-ratio mortgage and reduce  the balance to a more manageable level as fast as  you can.

If you are struggling with mortgage payments and other unsecured debts, contact us today to talk with one of our experienced Licensed Insolvency Trustees about your options. In a free consultation we will review your specific circumstances, understand what you need to accomplish and help you develop a plan to eliminate overwhelming debt and put your finances back in balance.

Time To Change The RESP Rules for Bankruptcy?

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On today’s podcast we cover several issues around Registered Education Savings Plans including:

  • what they are and why you should invest in an RESP to save for your child’s education;
  • what happens to your RESPs if you file insolvency;
  • why the rules around RESPs and bankruptcy are different in Alberta than Ontario; and
  • what is happening with regards to recent legislation proposals surrounding RESPs and bankruptcy in Canada.

Today’s first guest was Mike Davies, a financial planner with IPC Investment Corporation in Brantford, Ontario.

Why are RESPs a Good Investment?

Registered Education Savings Plans allow a parent or grandparent to save money, tax free, for a child’s education, up to a maximum investment of $2,500 per year.  The federal government will make an additional contribution of 20% of your contribution, so by investing in an RESP you have a guaranteed rate of return of 20% in the year of contribution.  Extra government help is also available.

Can I withdraw RESP money to pay off debt?

As Mike Davies explains on the show, when money is taken out of an RESP and is not being used for the educational benefit of a child, the grant will have to be repaid to the government. Additionally, any growth in the plan will be subject to tax at your marginal tax rate plus an extra 20 percent. Think of it as getting your capital back, less any changes in the value of your investments. You should consult with your advisor to see if there any other costs involved.  So, if you are in debt and take money out of your RESP, you may end up with a big tax obligation.

Our second guest, Barton Goth, a bankruptcy trustee from Edmonton, Alberta, explains that the rules surrounding RESPs and bankruptcy are different in Alberta and most other provinces.

Due to a change in provincial legislation on April 1, 2014, RESPs are exempt from seizure in a bankruptcy in Alberta.  In Ontario, RESPs are not exempt in a bankruptcy.  In simple terms, if you go bankrupt in Ontario you lose your RESP.  In Alberta, you don’t.

If you have RESP assets you would like to keep, one option is to file a consumer proposal, where you make a deal with your creditors. One of the biggest benefits of a consumer proposal is that you keep all assets, including your RESPs and still eliminate your debt. 

Should the RESP and Bankruptcy Laws Change?

It is not fair that the laws are different depending on whether you live in Alberta, Ontario, or another province.  In the final two segments of the show, Doug Hoyes and Ted Michalos both agree that the RESP laws should be changed to be similar to the RRSP laws.

Under current bankruptcy legislation, that applies in every province in Canada, Registered Retirement Savings Plans (RRSPs), are exempt from seizure in bankruptcy, except for your contributions in the previous year.  If you file for bankruptcy in Canada you can keep your RRSP, except for the contributions you made in the last 12 months.

Ted Michalos and Doug Hoyes both agree that the federal government should change the rules for RESPs to make them similar to the RRSP rules, so that most Canadians could keep most of the money they have saved for their children’s education, even if they file bankruptcy.  As Ted says in the show:

The young family that’s saving for one, two, three kids education in the future, it can make a critical difference, and if they haven’t got the money in the future, then it’s more likely than as a culture we’ll either be giving them grants or loans or some other way of funding that education.

If you have an RESP, and have debt, there are options. Before cashing in your RESP, reach out to one of our experienced professionals for a free initial consultation to discuss your specific situation.

Resources Mentioned in the Show

FULL TRANSCRIPT show #6 with Mike Davies

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Doug Hoyes:  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. Today we are going to discuss RESPs, Registered Education Savings Plans.

Why in the world are we discussing investments on a show about debt? Two reasons; first, this is also a show about personal finance and if you have children or grandchildren, RESPs are an important topic. So to start the show, I’ve asked a financial advisor to explain all of the basics about RESPs. Then in the second segment, I’ll bring on a debt expert to explain what happens to an RESP if you get into debt trouble. So to start, I’m joined by a financial planner, let’s welcome him in, who, where do you work and what do you do?

Mike Davies:  I’m Mike Davies and with my business partner, Don Moffat, we are financial planners with IPC Investment Corporation here in Brantford.

Doug Hoyes:  So who exactly is Investment Planning Council, who is IPC?

Mike Davies:  IPC is a Canadian wealth management company with over $22 billion of assets under administration and over 900 advisors across the country.

Doug Hoyes:  Thanks, Mike, and welcome to Debt Free in 30. We are recording this today on location at 218 Brant Avenue in Brantford, Ontario so why am I telling you the address? Because Mike and Don’s firm, IPC Investment Corporation and my firm, Hoyes Michalos, both have the same landlord and we both have an office here at 218 Brant Ave. Our companies are not related but since I’ve bumped into Mike and Don in the office for the last 10 years, I thought they’d be good guys to have on to explain the investment implications of an RESP so that’s why Mike’s here today.

I’ll give my standard disclaimer here that what you are about to hear on this show are the opinions of my guest and you should not take any action based on what you hear today until you’ve researched this topic for yourself and if necessary, consulted with a professional advisor. So with that background, let’s get started. Mike, give me the basics. What is an RESP?

Mike Davies:  Well, simply put an RESP is a savings plan that can be used by parents or other family members to help pay for the educational expenses of their children after high school.

Doug Hoyes:  Okay. So what’s the point of an RESP? If I’m a parent or a grandparent or another family member, maybe an uncle for example, and I want to save for a child’s post secondary education, college, university or whatever, what makes an RESP so attractive?

Mike Davies:  Well, what is particularly attractive about this program is the federal government will make additional contributions or grant payments as they are known of 20 percent of your contribution but only up to a limit of $2,500 annually.

Doug Hoyes:  Okay. So give me an example here. So if I put a $1,000 into a qualifying RESP, what happens?

Mike Davies:  So in that example, the government is going to contribute an extra $200 for you by way of the grant.

Doug Hoyes:  Okay. So what about people who can’t afford to make a full contribution?

Mike Davies:  Well, recognizing that not everyone can easily afford to make contributions to an RESP, the government further assists people who have low to moderate incomes by awarding an extra 10 or 20 percent of grant money on the first $500 contribution. And further additional help may be available through the Canada Learning Bond which provides an additional grant of $500 in year one and $100 annually thereafter for as long as they qualify and are making contributions.

Doug Hoyes:  Okay. So that sounds good. Obviously the government is kicking in money into this program so let’s get into the nitty gritty of it here. What specifically are the rules? What do I need to get one of these RESP plans open?

Mike Davies:  Well, to open a plan, you’ll need a social insurance number for your child. All Canadian children are eligible to participate and receive the grant. And grant money can be received as soon as the children are born and the plan has been opened for them and can continue to be received until the age of 15 or age 17 if certain conditions are met. Any unused grant will accumulate annually so if you missed one  year of contributions but we’re able to double up in the next, you’d receive twice the amount of grant money.

Doug Hoyes:  So is there an annual limit on what can be contributed?

Mike Davies:  There is no annual maximum that can be deposited but you can only receive grant money on the first $2,500 of your contribution or the first $5,000 contribution if sufficient carry forward room exists. And there is a lifetime maximum contribution to the plan of $50,000 per child with maximum grant paid out of $7,200 per child.

Doug Hoyes:  Okay. So if I’m 40 years old, I mean, I wish I was still 40 years old, but if I was 40 years old and I get laid off and I want to go back to school, can I use an RESP to fund that?

Mike Davies:  RESP are opened with a child’s name attached to them so not directly,  but if this was the only way for you to get money to pay for your own schooling, you could collapse the plan, repay the grant money and get back the capital that you had originally invested. But another option, which may be better, is to withdraw money tax free from your RRSP under the governments life-long learning program and then repay the money borrowed from your RRSP at a later date.

Doug Hoyes:  Okay. So RESPs are really designed for younger people, not older people. There’s other things older people can do if education is what they’re looking for. So I guess education is getting pretty expensive now.

Mike Davies:  The cost of obtaining post secondary education is increasing all the time. Even today, it’s not unusual to hear that with tuition fees, books and the cost of accommodation, it can cost $10,000 each year for a four-year program. In fact, a report by TD issued in 2011, suggested at that time, a student living at home would have costs roughly $55,000 and if living away from home, $84,000. Even more worrying perhaps is that for children born at the time the report was written, by the time they attend university, the stay at home would’ve risen to $102,000 and if living away from home, they would’ve increased to a $139,000.

Doug Hoyes:  Wow, so it’s very expensive. So I guess anybody who is looking to be going to school should be certainly investigating those costs. So let’s go back to one of the first questions I asked. What then is the real point of an RESP?

Mike Davies:  So the point of an RESP is to encourage parents to start saving for their child’s education from a very early age. The combination of regular savings over an extended period of time plus the government grant money will help reduce the need for a more substantial payment when the child goes to school.

Doug Hoyes:  So if I’ve got a child or a grandchild and I want to save for their education, why don’t I just put the money in a savings account? This RESP thing seems like a lot of work, I got social insurance number, a whole bunch of stuff I’ve got to do. Wouldn’t it just be better to just stick it in some other savings vehicle like a savings account?

Mike Davies:  Well, that is one option. The disadvantage of that choice would be the loss of the 20 percent government grant on those contributions. It’s a far more attractive proposition to contribute say $1,000 and have the government kick in an extra $200 rather than leaving that on the table. Furthermore, investments inside an RESP grow tax free, whereas the interest earned in a simple savings account would be subject to tax of the parents marginal rate.

Doug Hoyes:  Okay. So this show is called Debt Free in 30, we talk about debt and issues relating to that so what happens if I get into financial trouble and I want to cash in the RESP before my child goes to school? What happens then, do I have to pay tax, what costs are there?

Mike Davies:  As discussed previously, when money is taken out of an RESP and is not being used for the educational benefit of a child, then the grant will have to be repaid to the government. Additionally, any growth in the plan will be subject to tax at your marginal rate plus an extra 20 percent. Think of it as getting your capital back, less any changes in the value of your investments. You should consult with your advisor to see if there any other costs involved.

Doug Hoyes:  Great. Thanks very much, Mike. I really appreciate you joining us here today. The point then is an RESP is a way for the government to help you save for a child’s education. They’re actually kicking money in to do it. It’s something that certainly should be considered, but as I said off the top, you’ve got to really crunch the numbers, talk to a financial advisor to make sure it makes sense for you. Mike, thanks for being here today.

Mike Davies:  You’re welcome.

Doug Hoyes:  Thanks.

RESPs and Bankruptcy

Doug Hoyes:  Welcome back to Debt Free in 30. Today we are talking about RESPs. In our first segment, we found out what they were, how they work, what the rules are. Now we’re going to talk about what happens to an RESP when you’re in debt. And so I’ve got an expert in the field here to talk about it. Can you please tell me who you are, where you work and what you do?

Barton Goth:     I’m Barton Goth. I’m from Edmonton, Alberta. I work at a firm, Goth and Company, Limited. This is a trustee and bankruptcy firm so we deal with people that have financial troubles on a daily basis.

Doug Hoyes:  Now, you’re from Alberta and that’s the reason that I wanted to have you here on the show because Alberta has, I believe, a different rule than anywhere else in Canada. Certainly different than the rules in Ontario. In Ontario, the rule is, if you have an RESP, and you go bankrupt, you lose that RESP. It becomes an asset of your estate so as the trustee, my job is to send a letter to the RESP company and say hey, send me the money. They’re not going to send me all the money. There’s going to be some government grants they have to give back and so on but you as the person in debt lose all that money. What are the rules in Alberta?

Barton Goth:     We used to have the exact same rule in Alberta up until April 1st of this year. Then things changed. They amended the Civil Enforcements Act of Alberta to make all RESPs exempt assets meaning if you file a bankruptcy in Edmonton or anywhere else in Alberta, this is not an asset that you are going to lose. It’s a protected asset. It’s something that you can retain and you don’t have to worry about dispersing amongst your creditors.

Doug Hoyes:  What’s your opinion on that? Is that a good thing, is that a bad thing? What are your thoughts on it?

Barton Goth:     Overall, I don’t disagree with the notion of exempting an asset that’s for the betterment of a child. It’s very difficult to sit there and know that you’re trying to set something aside and have done on a regular basis that’s going to hopefully improve the future economic status of someone that doesn’t really have much a choice.

In the same breath, there’s also the other side of the coin which I understand these monies are monies that are contributed by the debtor. These are monies that weren’t used to go to the creditors to pay down debts that obviously exist. So as much as there’s two sides of that equation, I tend to feel for the child who doesn’t have control. He didn’t make the decision. They didn’t choose to charge up the debts. They’re largely just a victim, if you will, of not having some of those opportunities that may have existed otherwise.

Doug Hoyes:  So we’re recording this in late 2014 so you’re saying that in early 2014 the law changed in Alberta. They are currently looking at potential changes to federal bankruptcy law which may or may not happen in 2015. It all depends on what the government does. What do you think the federal government should do? Should they make a law that applies in all of Canada similar to what is in Alberta now which is that RESPs are exempt, you don’t lose them if you go bankrupt. What do you think the federal government should do? If you have the opportunity to tell the federal government what to do, what’s your advice to them on this one?

Barton Goth:     Well, what I would suggest is I would suggest the amendments in Alberta are good amendments largely, although there are a few things that they haven’t thought of so I would encourage and I would support the notion of exempting those assets, exempting those RESPs, but I’d want them to be a little bit cautious because when you have an exemption that exists and you don’t have any controls associated with that exemption, there’s opportunities for potential abuse.

Right now for instance, if somebody came in January 1st to my office and asked me about bankruptcy and learned that there’s this exemption rule, there’s nothing preventing them from saying okay, let’s hold off and not file with Goth and Company. Let’s put some of my money that I would’ve lost otherwise into an RESP and maybe four months later I’m going to try another trustee and hopefully I’ll be able to keep those funds. Now, in practice, this doesn’t always protect those funds. If this gets found out, that very quickly is something that can be overturned but the opportunity is there. I would suggest to the federal government that they make a 12-month period prior to filing of a bankruptcy where any contributions to those RESPs would be something that can be clawed back, it would become beneficial to the estate or to the creditors of the bankrupt.

They do the exact same thing for an RRSP. There’s a federal exemption that exists for all RRSPs with the exceptions of that 12 month period immediately preceding the bankruptcy filing. And I would support something like that.

Doug Hoyes:  So when you go bankrupt now, if you put money into your RRSP, your registered retirement savings plan anywhere in Canada, any money you put in the last year, you can lose. The trustee can take that which prevents someone from going out and borrowing $15,000 on their credit cards, dumping it into the RRSP and then going bankrupt the next day. Anything that’s been in your RRSP for a year, is okay, you’re not going to lose it in a bankruptcy. You’re saying we should essentially have the same rule for an RESP, a registered education savings plan. Any money that’s been there for more than a year, if you go bankrupt, that money stays there, that becomes money for your child and that’s the way it should be.

Barton Goth:     I think that would be a good system to balance the rights of the creditors versus the rights of the child who largely hasn’t charged up these debts, yes.

Doug Hoyes:  Excellent. Great. Thanks very much for that, Bart. We appreciate it. This is Debt Free in 30. We’re going to take a quick break and then wrap up our show on RESPs. Stay tuned.

 30 Second Recap

Doug Hoyes:  Welcome back. It’s time for the 30-second recap of what we discussed today.

My first guest was Mike Davies, a financial planner who explained what RESPs are and how they work. He explained that they’re a great way for parents or grandparents to save for their child seduction because the federal government contributes 20 percent of your contributions so your education savings grow faster.

My second guest was Barton Goth, a bankruptcy trustee from Alberta who told us that unlike in Ontario, RESPs are exempt from seizure in a bankruptcy in Alberta. That means if you go bankrupt in Alberta, you get to keep your RESP. That’s the 30-second recap of what we discussed today.

So what’s my take on RESPs? There a number of issues here so let’s take them one at a time.

First, are RESPs a good investment? Well, yes, if you qualify, you should consider RESPs. As Mike Davies explained, the common scenario is a parent or grandparent who wants to save for their child or grandchild seduction. If you start when the child is young, the earnings can compound quite nicely.

As we discussed, there are two benefits to an RESP as compared to just putting money in a savings account. The government is giving you free money and the earnings accumulate essentially tax free. That’s a good deal. But this show is called Debt Free in 30 and we talk about debt, so let’s not forget the obvious point. Savings make sense if you don’t have debt. If you have debt, becoming debt free is almost always more important.

So let’s take an obvious example. Let’s say you’ve got a $1,000 in cash so should you put it in your child’s RESP or should you use it to pay down debt? Well, the $1,000 instantly becomes $1,200 inside your RESP because the government gives you a grant of 20 percent so on the surface, it would appear that investing in the RESP is the obvious answer. But if you have a credit card with a 20 percent interest rate, using the $1,000 to pay down your credit card by a $1,000 saves you 20 percent over the next years which is the same return as the RESP. So to answer the question about what’s better, contributing to an RESP or paying down debt, you have to crunch the numbers.

If you don’t pay down debt, how long will it take you to get out of debt? If you’re going to pay 20 percent on your $1,000 credit card for the next five years because you never pay down the principal, you’re just paying interest, then you’ll be paying a $1,000 in interest over the next five years. You only get the 20 percent grant in an RESP in the year you contribute so paying down the debt saves you interest forever.

To be clear, I’m not saying you should always pay down debt. I’m saying what I say on every show. You’re the boss. You need to decide what makes sense for you and your family. If you really want to contribute to your child’s RESP, great. Cut your expenses so you can do both, pay down your debt and invest in an RESP.

Remember, as I said in the show, as I record this in the fall of 2014, the law in Ontario is that you lose your RESP if you go bankrupt. So if you have debt and risk losing an RESP, you may be better off to either file a consumer proposal so you can keep your RESP or pay down debt and then worry about a registered education savings plan.

Of course there are lots of other factors to consider. If your child was just born, you have a lot of time to save for their education so perhaps you make small contributions now and use most of your resources to pay down debt. If your child is only a few years away from college, perhaps an RESP is important. Again, every situation is different. So you need to do your own research and decide what’s best for you.

That’s my take on whether or not RESPs are a good investment. So what’s my take on what the law should be for RESPs in a bankruptcy? On the podcast only segment of this show, I interview my business partner and Hoyes Michalos co-founder Ted Michalos who back in July 2014, submitted a report to the federal government advocating for changes to RESP rules. His comments are similar to what we heard from Barton Goth and they’re similar to my views.

I believe that RESPs should be treated the same way that we treat registered retirement savings plans in a bankruptcy. Under current Canadian law, if you go bankrupt, you keep your RRSP except for what you contributed in the last year. So if I have been contributing $1000 to my RRSP for the last 10 years and I now have $10,000 in my RRSP, I only lose the last $1,000 if I go bankrupt. I lose the last years contributions, I get to keep the rest. Why, because the federal government decided that it’s important for people to save for their retirement  but it’s also important that people don’t use the RRSP as a way to play games with the people they owe money to. You’re not allowed to put a pile of money in your RRSP today and go bankrupt tomorrow, that’s not fair. But you are allowed to keep the money you have saved in past years.

I believe that RESPs should be treated the same way. You shouldn’t be allowed to dump a pile of money into an RESP to keep it away from your creditors the day before you go bankrupt, but I believe that if you have diligently saved money over many years in an RESP, you should be able to keep it. After all, that money is there for the benefit of your children. They didn’t cause your debt problems so they shouldn’t suffer unduly when it comes to their education.

In my experience most people who go bankrupt don’t have a huge amount of money in RESPs so the big banks won’t lose much money if this rule is changed. We’ll see what happens when the government reviews our insolvency laws probably in 2015.

My hope is that the government acknowledges that saving is a good idea and saving for the benefit of your children or grandchildren is an even better idea. I think the one year rule is a good compromise. If you go bankrupt, you get to keep most of your RESP for the benefit of your children but the one-year rule prevents abuse of the system.

Will the rules change? Who knows, but just like we did back in 2008 when Ted Michalos and I traveled to Ottawa to testify before the government to argue for fair laws, we will continue to fight for what’s fair. Keep watching our website, we’ll post updates if there are any changes. For up to the minute updates, you can follow me on Twitter @doughoyes.

That’s our show for today. This show is on the radio every week and also available on our website and on iTunes so please go to Hoyes.com for a full list of radio stations that carry the show. We also have links and details so you can listen to the show on our website or download the show to listen on your iPod or Smartphone. Full show notes are available on our website and I’d love to hear your comments which you can leave right on our website at Hoyes.com. Thanks for listening. Until next week, I’m Doug Hoyes. That was Debt Free in 30.

Thanks for listening to the radio broadcast segment of Debt Free in 30 where every week your host, Doug Hoyes, talks to experts about debt, money and personal finance. Please stay tuned for the podcast only bonus content starting now on Debt Free in 30.

Bonus Segment – Ted Michalos Tells the Federal Government to Change the RESP Rules

This is the bonus segment of Debt Free in 30. I’m Doug Hoyes and I’m joined by Ted Michalos. My business partner and Hoyes Michalos co-founder. We’re going to talk about the current state of the law when it comes to RESPs and bankruptcy. So on the second segment of the show, we had Barton Goth from Edmonton talking about the rules in Alberta which are, as of early 2014, that if you file bankruptcy, you don’t lose your RESP.

Now, Ted, in Ontario right now and I’ll tell everyone we’re recording this in the fall of 2014, it’s possible that the law will change which is what we’re going to talk about, but as of right now, if you go bankrupt in Ontario and you have an RESP, what happens?

Ted Michalos:  Well, unfortunately, the funds in that RESP will be collapsed and seized in other words to be given to your creditors.

Doug Hoyes:  So you go bankrupt, you lose your RESP. Now, back in July of 2014, the Office of the Superintendent of Bankruptcy asked for submissions from people as to what laws you think should be changed because every five years the government has to look at insolvency laws. So you wrote a detailed brief to them. One of the items you covered was RESPs, Registered Educational Savings Plans, and you recommended that the law change. You don’t believe they should be completely lost in the bankruptcy. So what first of all did you recommend?

Ted Michalos:  All right. So a little bit of background. Last time the government made changes to the act, they made RRSP contributions, so registered retirement savings plan contributions, that had been on deposit for more than 12 months exempt under the law. That means someone saving for their retirement, if they hadn’t put money in in the last 12 months, that money was safe. It would still be there for their retirement. And that makes a certain amount of sense from a policy perspective. You want people to save money for their retirement.  Well RESPs were created so that young families, people with limited means, could save money for their children’s or their own education in the future.

So it seemed inconsistent to me that we would be exempting money saved for retirement for the older members of our society and seizing funds for the younger members of our society. So the recommendation that our firm made was simply that RESPs be treated the same way as RRSPs. Money that has been on deposit for more than 12 months would be exempt from seizure and therefore available for these families when they need them in the future.

Doug Hoyes:  So what you’re recommending, someone goes bankrupt, they get to keep their RESP except for what they put in in the last 12 months. So why that last 12 month thing? Why is that in there?

Ted Michalos:  The only reason I put that in there is to be consistent with the existing law, and the reason they put it in the existing law for registered retirement funds is so that people don’t get cute. I mean, it’s possible that you could take large cash advances on your credit cards or lines of credits or loans, dump the money in an RRSP and if that 12 month rule wasn’t there, they might be exempt under the law. So this simply makes sure that people have had the money on deposit for a significant period of time. It wasn’t a planned event.

Doug Hoyes:  And so what you’re trying to do is balance two different factions here in effect?

Ted Michalos:  That’s exactly right. The Bankruptcy and Insolvency Act is always about balance. You’re trying to give the honest but unfortunate debtor a fresh start while maintaining the rights of the creditors. Somebody has to pay for this money that’s been borrowed and it’s a balancing act about where does the money come from.

Doug Hoyes:  So you think the 12 months is a suitable requirement. So let me take the side of the creditors then, the people who are owed money. They’re all saying well wait a minute, on your current law, someone has money in an RESP, it gets collapsed, we get that money. If these new rules that you’re proposing come into place, we won’t get that money. Is this going to be a huge thing that they’re going to all complain about? Do you see a lot of people who go bankrupt, who have a lot of money in RESPs?

Ted Michalos:  I don’t see there being any significant blow back for this. The amount of money that’s traditionally cashed out of an RESP might be a couple of thousand dollars at most. It doesn’t represent significant dollars to the financial community; the major banks in Canada, the credit card companies, the lenders aren’t going to miss that money. Certainly, they’d like it but they’re not going to miss it. Whereas the young family that’s saving for one, two, three kids education in the future, it can make a critical difference, and if they haven’t got the money in the future, then it’s more likely than as a culture we’ll either be giving them grants or loans or some other way of funding that education.

An interesting side note of course is the RESP funds on deposit are almost always held with financial institutions so to some extent, there’s a benefit to them in allowing the money to stay on deposit. It’s the same argument they made with registered retirement savings plans. They wanted the money to be exempt so that it would be there and available and still in their portfolios. The same logic applies to RESPs.

Doug Hoyes:  I put my money with a bank into an RESP or an RRSP, they’re paying me interest at one or two percent but that’s money they can then turn around and loan to somebody at a higher rate for a mortgage or a loan. So even though they’re going to lose a bit if these funds aren’t given to them in a bankruptcy, there’s still a pool of money there that they’re probably still making money on. So we don’t have to worry about the banks is what you’re saying.

Ted Michalos:  That’s exactly right. And to kind of give you some prospective, the average person who files owes somewhere in the $60,000 – $70,000 in unsecured debt and my guess is the average RESP that we cashed out because they don’t appear in every bankruptcy, might only amount to $500 or $600 on average.

Doug Hoyes:  Yeah, and that makes sense because I had $50,000 in my RESP, then probably I’d say okay, I better pay my debts off with it. It’s not something I’m going to — you’ve got a lot of money if you’ve got that much money in an RESP, you’re probably not in serious financial trouble either.

Ted Michalos:  Well, and by extension, people know that the current rules are that as a trustee, I will seize it if you file bankruptcy so if they are going to collapse some sort of investment before they file, likely it would be the RESP anyway.

Doug Hoyes:  Yeah, it’s money you’re going to lose anyways, so okay if in the two or three months before my bankruptcy, I’m getting behind on my rent payment or something, oh well, might as well cash the RESP in because I’m going to lose it anyways. Obviously, we’re not recommending people do that because when you go bankrupt, if you did cash an RESP in or any other investment right before bankruptcy, what happens? What are the implications?

Ted Michalos:  Well, the risk is that we’ll look at what you did with the money and say perhaps it wasn’t appropriate. So in the example that you just gave, I cashed out my RESP and I paid the rent. As a trustee, that wouldn’t bother me too much. But let’s say you cashed it out and you put $1,500 on the debt that you owed your Uncle Bob. That would probably be something that we would look at carefully and likely I’d contact Uncle Bob and say well, you need to pay that money back because you were treated better than all the other creditors.

Doug Hoyes:  An obviously if it was $15,000 or $20,000 in the RESP and you paid one creditor but not the other than it becomes even more of a serious issue.  So I guess the bottom line is it’s not a big asset from the point of view of the banks right now so they shouldn’t really care about it. It’s really not a huge asset when it comes to bankruptcies in general because most people who are in dire financial needs have probably cashed it in already. What we’re trying to do is encourage savings. We both believe that’s a good thing. And looking forward to the future is a good thing so by changing the rules, that gives a good balancing act. That’s really what we’re talking about.

Ted Michalos:  That’s exactly right.

Doug Hoyes:  Excellent. Well, thank you very much, Ted. That’s the bonus segment here on Debt Free in 30 with RESPs. I think we’ve covered all the basics. But if you want more information, you can always go to our website at Hoyes.com. This was Debt Free in 30.

Can’t Pay Your Mortgage? Options To Keep Your House

when-you-cant-pay-your-mortgage

We know that your home is probably your biggest asset and while you may be struggling to keep up with your mortgage payments you may want to keep your home no matter what.

What’s the Underlying Issue

Your first decision is whether or not you want to keep your home. A review of your budget will tell you if it is your mortgage payment that is causing your financial problems or if other spending and debt payments are the real problem.

A general rule of thumb is to keep your housing costs below 30% of your income. If your housing related payments are pushing 50% or more, you may need to consider downsizing.

If you deferred mortgage payments due to the COVID-19 economic shutdown, we explain what to do if you’re struggling to make mortgage payments post-deferral.

If, however, you are regularly missing your mortgage payments, because of other debt, then you have more options to explore below.

Financial Options If Other Debt is the Problem

  1. Consider selling and downsizing your home. You could also rent for a period of time. If your only financial problem is your mortgage payments because they just won’t fit into your budget, and you can’t increase your income, then selling your home may be your best financial choice. If you can sell your home for more than the mortgage, you can use the equity for a down payment on a smaller home or to cover your rent for a period of time. If you have a shortfall after selling your home, your lender will pursue you for the difference. This shortfall is considered an unsecured debt and can be included in a bankruptcy or consumer proposal.
  2. Refinance other debt with a second mortgage. If the cause of your financial problems are a few unsecured high interest debts, like credit cards, and you have positive equity in your home, you may want to consider refinancing with a second mortgage. A word of caution however. Placing yourself in a high-ratio mortgage situation is a significant risk factor for bankruptcy. Almost all of our clients who own a home at the time they filed for bankruptcy had a high-ratio mortgage. Consolidating other debt with a debt consolidation loan, secured by your home, is only a good alternative if you deal with all of your debts and can continue to afford to make all of the monthly payments. You do not want to choose a solution that will only put your home more at risk.
  3. Filing bankruptcy does not mean you automatically lose your home. By law, your creditors are entitled to the equivalent of the equity value remaining in your home, after deducting reasonable selling costs. It is possible to keep your home in a bankruptcy and continue with your mortgage when you declare bankruptcy by ‘paying’ the equivalent equity value to your trustee as part of your bankruptcy payments.
  4. Make a proposal to your creditors. If the equity in your home is significant, this can result in fairly large monthly bankruptcy payments which may not fit within your budget. A viable option is to file a consumer proposal instead. With a consumer proposal, you calculate how much you would have paid in a bankruptcy, and offer slightly more to your creditors in the form of a proposal. The advantage is that you can spread those payments out over a longer period of time (up to 5 years). Alternatively you can borrow against the equity value in your home and make a lump sum payment offer. Again however we caution you to ensure that you are not putting your home at risk by taking on too large a mortgage.

You don’t have to risk your home because of unsecured debt. Talk with an experienced Licensed Insolvency Trustee about the best options based on your individual circumstances. Contact us today for a free consultation.