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Month: January 2015

When To File Bankruptcy in Canada – Timing Matters

Reading time: 33 minutes

Calendar flipping through months to illustrate bankruptcy timing

If you are struggling with debt, bankruptcy may be your best option. But is there a better time to file bankruptcy in Canada? This is different than the decision of if you should file bankruptcy or not. If bankruptcy is the right choice, there are factors that also affect when to file bankruptcy.

When you file will affect how many tax refunds you lose

When you declare bankruptcy in the calendar year can mean the difference between losing only one year’s tax refund or losing multiple refunds. Your tax refunds for any year’s taxes that need filing, plus the refund from the year you file go to your bankruptcy estate.

If you normally get a tax refund, January or February might be a bad time to file bankruptcy.

Early in a calendar (January and February for example) you likely would not yet have filed taxes for the previous year as you don’t normally get t-slips until the end of February, so therefore if you file bankruptcy in that period, the refund would go to the bankruptcy estate along with the refund next spring. This is why many people wait until after their tax returns have been filed and they have received their refund to declare bankruptcy.

Does the time of year matter when you’re considering filing a consumer proposal?

One key difference between a bankruptcy and consumer proposal is that you keep your assets, and that includes any tax refund owing to you. So you don’t lose any tax refunds in a proposal.

There is however still a timing issue to consider when filing a proposal if you owe money, or will owe money, to Canada Revenue Agency. Your proposal will include all tax debt up until the year of filing but not any owing for the year you file your proposal.

What that means is if you file a proposal on December 29 and owe taxes for that year, those tax debts are not automatically included in your proposal. If you wait until January 2, then your prior year tax debts will roll into the proposal. In most case, unless there is a wage garnishment or other legal action pending, it’s best to wait to the new year if you can.

Creditor actions

Even if creditors are making collection calls or threatening other actions, if you are unemployed and have limited income and no assets, you might consider waiting until you’re back to work before filing. You don’t necessarily need the Canadian bankruptcy protection provided by filing bankruptcy if you have no wages.

If however your creditors are calling and threatening legal action, you may need to file bankruptcy right away to stop those activities. In this case the cost of losing your tax refund needs to be weighed against the cost of a potential wage garnishment or the emotional impact of continuing phone calls.

Determining what’s a preferential transaction

Bankruptcy law can set aside the transfer or property or assignment of security during a certain window prior to bankruptcy.

If you’ve recently sold, transferred, disposed of assets, borrowed money or make big payments to certain creditors, the timing of the bankruptcy could matter as the trustee may have certain obligations to investigate those types of transactions. If you think any of these types of transactions might apply to you, be sure to discuss them with your trustee before making any decisions about the timing of when to file or whether other options to deal with your debts may be more appropriate.

Sponsorship issues affect when to declare bankruptcy

When you’re sponsoring someone, you’re essentially taking on a financial responsibility and commitment to the person you’re trying to sponsor to come into Canada. That means there are complications when in comes to bankruptcy and sponsorship. You are disqualified from sponsoring an immigrant if you have an uncompleted bankruptcy – if you have not been discharged from your bankruptcy, you will not be permitted to act as a sponsor.

More bankruptcy and proposal related questions and answers can be found on our two FAQ pages:

FULL TRANSCRIPT show #22 When is the Best Time to File Bankruptcy

Doug Hoyes: Welcome to Debt Free in 30, the show where every week we talk to industry experts about debt, money and personal finance. I’m Doug Hoyes.

Today we’ve got a bit of a different show for you. Our typical show I have a guest on, we explore one or two topic areas in a lot of detail.

Today we’re going to do something a little bit different and go through a number of different questions. It’s going to be our first Frequently Asked Questions show. I’ve picked out a lot of the questions that we are typically asked, and we’re going to go through them one by one. And this will probably become a regular feature on the show. We will probably do it around the last show of every month.

So, here’s the first show. And my guest today, to help me through it, is Ian Martin who is a Chartered Accountant and a Trustee in Bankruptcy here at Hoyes Michalos. Ian, how are you doing today?

Ian Martin: Very well Doug. How are you?

Does The Time Of Year I File Bankruptcy Matter?

Doug Hoyes: I’m doing great. Thanks for being with me. Let’s get started with the first question, which is a bit of a question people – I think this is a question people don’t grasp until they come in to meet with us – so, my question is, does the time of year matter when you’re considering filing either a consumer proposal or a bankruptcy? In other words, does it matter if I file in January or the summer or the end of the year? What say you?

Ian Martin: Well, the honest answer is yes. For many people it does make a difference. And when you’re first meeting with a trustee that’s maybe not the foremost concern on your mind but usually the trustee will, in talking about the situation, help you to understand those considerations. If it is a consideration, usually it ties back to the expectations for your income taxes and whether or not you expect to have a refund or a balance owing. So, if you – what I like to do is just kind of walk you through the considerations.

Doug Hoyes: Okay, so let’s break it down piece by piece here. So, let’s talk about filing bankruptcy and you said taxes are a big issue. So, why is that? Give us the real quick overview. How do taxes work in a personal bankruptcy?

Ian Martin: Okay, so if you’ve met with the trustee and you decided that bankruptcy is the right answer, then you would have been told that in filing bankruptcy for that particular calendar year, the year in which the bankruptcy is filed, you will not receive your tax refund if there is one. However that will also apply if when the bankruptcy is filed, let’s say there is a prior calendar year or maybe more than that, that the tax return isn’t filed when the bankruptcy is filed. So, in that situation you would lose the refund for all those years.

Doug Hoyes: Okay, so let’s pretend that today is January the 30^th and I haven’t – let’s say it’s January 30^th 2015, just to have a number in our heads. I haven’t filed my taxes yet for 2014, last year –

Ian Martin: Like most people, right.

Doug Hoyes: Beause I haven’t – I don’t even have my T4 slip. My boss doesn’t give me my T4 slip till the end of February. So, I haven’t filed them for 2014 yet.

Ian Martin: So, in that scenario if you proceeded to file bankruptcy in January 2015, without having done your 2014 taxes, you would lose those two years of refunds because it’s the 15 is the year of bankruptcy and then there is a prior year outstanding when the bankruptcy is filed.

So, for most people that would be a common consideration. And if that is the case what people would normally chose to do is get their 2014 taxes filed before bankruptcy is filed, understanding there’s still the one year that is at risk. But they want to limit it to one year.

Doug Hoyes: Okay, so if you go bankrupt you are going to lose your tax refund for the year you file bankruptcy. That’s the rule, that’s how it works.

Ian Martin: Black and white, that’s the way it is.

Doug Hoyes: It’s real simple. So, if I go bankrupt in 2015, I lose my 2015 tax refund (sic). And this is where people get confused I think because your 2015 tax return, you’re not actually going to file until 2016.

Ian Martin: That is correct. And you’re right that’s a lot of confusion for people and I make sure it’s very crystal clear when I’m going through this consideration with people.

Doug Hoyes: That you explain what years we’re talking about.

Ian Martin: Right.

Doug Hoyes: Okay, so if I go bankrupt, I lose my tax return for the year I’m in and for any years I haven’t yet filed. So, if I didn’t do my taxes last year or the year before I’m going to lose those as well.

So, from a planning point, back to my original question, does it matter when you file bankruptcy in terms of the time of the year? Pull it all together for us then. So, a guy comes in, it’s let’s say the end of January or it’s in February. He hasn’t filed last year’s taxes. So, your advice to him is what?

Ian Martin: Well, the common choice that people would make would be to delay in filing bankruptcy, get the prior year taxes for the 2014 taxes filed, have the refund in hand. And at that point then proceed to file bankruptcy so that they’re limiting the lost refunds to the one year, the year the bankruptcy’s filed.

Doug Hoyes: So, that’s a pretty key point then, that if I wait a few weeks when you’re at the beginning of the year, get last year’s taxes filed, and it’s not just having it filed obviously, you actually have to have the refund in hand. So, you sign up for direct deposit, that’s how most people get their refund and it pops into your bank.

Ian Martin: And if you’re one of the go-getters who’s getting your return filed early in the new year, then it’s usually processed very, very quickly by Canada Revenue.

Doug Hoyes: Because they’re not doing anything else, the boom hasn’t hit yet.

Ian Martin: Right.

Doug Hoyes: So, now I think this is again a key point because what we haven’t talked about, is the way trustees get paid. A trustee gets paid a percentage of the money that’s in the pot at the end of the bankruptcy. The more that’s there, they more the trustees is getting paid.

Ian Martin: That’s correct.

Doug Hoyes: So, as a trustee, it is in my own interest for you not to file your taxes for last year. I would like there to be two years worth of tax refunds, not one, because that will give me more money at the end of the day.

Ian Martin: Like let’s say it’s late in the calendar year. Let’s say you’re meeting with a trustee in December instead of January. So, that you don’t find yourself in that situation where you might delay until February or March to file, it might make sense to make sure the bankruptcy is filed before the end of the calendar year so that that’s the year that’s at risk. So, you would have already filed the old year back in March or April. So, in that situation your still limiting it to one year of tax refunds without delaying the process of getting the bankruptcy started by a couple of months, potentially.

Doug Hoyes: So, you file bankruptcy in November/December. So, you’re only losing that year or you wait until let’s say till March of the following year and that way again your only losing one year. Well, obviously if your wages are being garnisheed you have to do that math. Does it make sense to wait two months, have my wages garnisheed two months so I can get my $100 tax refund? You’re going to want to figure out how big is my tax refund. I assume if you owe money to the government, well –

Ian Martin: That’s exactly what I was going to say. If you normally have a small refund or even a balance owing then these time considerations aren’t really applicable if you’re focusing on bankruptcy.

Doug Hoyes: Okay, so we talked about bankruptcy. Now what about a consumer proposal? Is it the same answer with a consumer proposal or is it different?

Ian Martin: It’s tax related but not exactly the same. And the reason for that is one of the key distinctions with a bankruptcy and a proposal is that in a proposal, you keep your tax refunds. The only exception to that would be if there was maybe taxes from a prior year where the government has a right of offset. But fundamentally, if you do a proposal, the refund money is not paid into the proposal like we just talked about where it is a bankruptcy.

Doug Hoyes: Because the whole concept of a proposal is I keep all my stuff.

Ian Martin: Precisely, precisely. So, with a proposal, it’s really – it’s still tax driven, but it’s more considering if you normally have a balance owing on your taxes.

So, let’s change the scenario. Let’s say I’m meeting with somebody relatively late in a particular calendar year and taxes are at least a significant part of the issue and furthermore they’re expecting to have more tax debts that are part of that calendar year. In doing a proposal, the taxes from the year in which the proposal is filed are not automatically included in the proposal. There are ways to include special provisions within the terms of the proposal to have that included as well; but you need to have the explicit agreement of Canada Revenue and they don’t always give that.

So, the risk there is that you file a proposal and say October/November of a particular year, it deals with taxes from all the prior calendar years but within a few months when you do the taxes from that year in which the proposal is filed, like bam you’re whacked with another tax debt that isn’t part of the proposal. And then it doesn’t really feel like much of a fresh start because you still have your proposal payment to deal with the old debts but still struggling with this new tax debt that isn’t captured by the proposal.

Doug Hoyes: So, very key point there, then. A proposal will automatically include your tax debt up to the end of whatever the last tax year was.

Ian Martin: That is complete.

Doug Hoyes: Correct. And tax years in Canada, if you’re a normal working guy, end on December 31^st.

Ian Martin: Right, calendar year.

Doug Hoyes: Calendar year, it’s based on the calendar year. So, if I do a proposal on January the 2^nd, 2015, my 2014 taxes owing are automatically included.

Ian Martin: Right and that’s precisely the point I was going to make. That if possible, if there’s not a wage garnishee or like really hard collection activity that’s going to happen, it makes sense to delay the filing of the proposal to the new calendar year so that any tax debts from the prior year are automatically dealt with through the proposal.

Doug Hoyes: Got you. So, if I file my proposal on December the 29^th, any taxes I end up owing for that year are not going to be automatically included. If I wait a few days and file my proposal on January the 5^th, then all the taxes from last year are automatically included, whether or not I filed my taxes yet obviously. By January 5^th, I probably haven’t.

Okay, so the answer to the question then if we can sum it up. In a proposal if you owe money, you want to file early in the year. In a bankruptcy if you owe money it doesn’t really matter, file anytime. In a bankruptcy if you’re getting a refund you want to file either towards the end of a year so you’re only losing one year or you want to file after you filed your taxes for the year, which means you’re probably filing March, April or later.

Ian Martin: I think that’s an apt summary Doug.

Who Will Find Out If I Go Bankrupt?

Doug Hoyes: Perfect, okay. So, that was our first question. We went into a bit more detail on that but that’s good, I think that’s a key question. We’ve got about a minute and a half here to do one more question. This is one we get asked all the time. Who will find out if I go bankrupt?

Ian Martin: That’s – it is a very common question. It’s an emotional process to file bankruptcy. It’s normal that people will be concerned about that. So, I’ll give you kind of my text book answer and then some practical considerations.

So, the textbook answer is that, filing bankruptcy means that you’ve met with a trustee. There’s different government forms that outline your statement of affairs that are filed with the government. So, the government obviously knows through the filing process. But then the trustee also has to tell your creditors that you filed bankruptcy as well. And that’s also positive cause that means they update their records and stop any collection activity. So, that’s the textbook answer Doug, that the government needs to know to get the process started and your creditors need to know but that’s all positive.

Doug Hoyes: Okay. And I think a real quick summary of that is, your bankruptcy filing or your consumer proposal filing will appear on your credit report. It will stay there for a period of time. A consumer proposal generally stays for three years after the proposal’s finished. A first time bankruptcy generally stays for six years, could be seven years after the bankruptcy’s finished.

So, anybody who has the ability to check your credit report is going to find out about your bankruptcy; but otherwise in a normal bankruptcy or proposal we’re not putting an ad in the paper, we’re not telling anyone else other than the people who need to know, the people who you owe money to, the government and anyone who’s going to check your credit report.

I appreciate that Ian. Thanks for being here on Frequently Asked Questions show number one. Thanks for being with me.

Segment 2 – Howard Hayes – Immigration and Bankruptcy

We’re back on our Frequently Asked Questions episode and I’m joined again by Howard Hayes. Howard happens to be our firm’s expert on immigration issues and bankruptcy. So, that’s what we’re going to talk about in this final segment.

So, Howard I’m guessing based on your accent you weren’t born in Canada. Is that right?

Howard Hayes: That’s right, yeah. I’m from Lincolnshire in the U.K.

Doug Hoyes: Oh yes Lincolnshire. I have no idea where that is.

Howard Hayes: Well, if you’re looking at a map of England you’re probably about a three hour drive north of London.

Doug Hoyes: So in the middle of nowhere I guess.

Howard Hayes: In the middle of nowhere, yes.

Doug Hoyes: So, you are now a Canadian citizen, is that correct?

Howard Hayes: That’s correct.

Doug Hoyes: Okay. So, you’ve gone through the whole citizenship process. You know what’s involved, which is probably why you’re our expert on citizenship here, so –

Howard Hayes: That’s right actually. When I went through the immigration, citizenship process, I remember one day I was filling out an application form and there was a question on there about have you been bankrupt? Now obviously because I work in the bankruptcy industry, that perked my interest and I started to question why would that be on the application form? So, everything stemmed from there really in terms of my interest in looking into what these rules are with how a financial can potentially impact your ability to be able to move to Canada and sponsor someone to move to Canada.

Doug Hoyes: And you’ve done some writing on that and I’ll put a link in the show notes to both the government’s resources and some of the stuff you’ve written. You can see that at hoyes.com on our website.

So, tell me the story then. The common question we would get asked is I’m a Canadian and I want to sponsor my mother, my father, my brother, my spouse or some other family member, my spouse to come to Canada. So, what happens if I have debt? Does it matter? Do debts prevent me from sponsoring someone? How does that all work?

Howard Hayes: I think first of all the first thing to look at is, there is a difference between the immigration process and the citizenship process. As far as I’m aware and by the way I would also say that before you make any decisions always refer to the citizenship and immigration website for up to date information.

Doug Hoyes: That’s a good piece of advice cause we’re not immigration lawyers. We’re not telling you how to do any of that and the rules could change by the minute so make sure you know what you’re talking about.

Howard Hayes: As of today, my best understanding is we’re looking at this difference between immigration and citizenship. Immigration is the right to be able to come and live in Canada. Citizenship is that you become a citizen of this country. So, you’re entitled to a passport, you can vote in the country. As far as I’m aware there’s no restriction on a citizenship application. So, whether you’ve got debts or not, if you’re applying to be a citizen, that’s not taken into account. It’s the immigration aspect of being a permanent resident, sponsoring someone to be a permanent resident, that’s where these issues of debt potentially come into it.

Doug Hoyes: And that’s really the key. It’s if I’m sponsoring someone. So, as far as we know and again we’re not immigration lawyers. So, if you’re listening to this from outside of the country and you want to immigrate to Canada, we’re not the guys to talk to about how that process works. We’re not experts in it.

What you’re saying is, well if I owe some money to Visa in the U.S, Visa’s a bad example cause that means two different things. So, I got a bank loan in the U.S and I want to come to Canada, fine, that’s not going to be the big issue. The issue is if I am a Canadian and I want to sponsor someone to come in, then there are a bunch of things that I can’t have showing up on my record in order to have someone come to the country.

Howard Hayes: That’s right. When you’re sponsoring someone you’re essentially taking on a financial responsibility and commitment to the person that you’re trying to sponsor to come into Canada. Part of the reason for that is because if the government is going to allow this person to come into Canada, they don’t want that person to be burden to the existing tax payers of Canada. They don’t want someone to just walk into the country and immediately be claiming benefits and social assistance because they have no job, no prospects, no support network of family and friends that’s going to help provide for that person’s needs when they arrive in the country.

Doug Hoyes: So, run me down the list then. Let’s assume that I’m the person who is sponsoring someone to come into Canada. What types of financial issues can I not have? What’s going to disqualify them?

Howard Hayes: So, there’s a couple of restrictions then. So, if you – one for example is support. Let’s say you owe child support and you’re in arrears with the support. You cannot sponsor someone whilst you’ve got those arrears. A second would be if you’ve had – let’s say you’ve previously sponsored someone and that person had to claim benefits because they couldn’t find a job. Then, until those benefits are repaid back to the government, again, you cannot sponsor a second person.

If you borrowed money previously on an immigration loan, now this is very rare, immigration loans are very rare. What an immigration loan would be is, let’s say again if you’re sponsoring someone and you need help with the cost of actually physically getting that person from Europe or Africa or wherever they’re coming from, Asia, you need the cost of a plane ticket. Well the government will help you with those costs sometimes. They will say well here’s a bunch of money you can use for the airfare to get that person here. If you haven’t repaid that loan, again you can’t sponsor someone else to come until that loan has been repaid.

Doug Hoyes: And what about bankruptcy?

Howard Hayes: So bankruptcy, if you’ve declared a bankruptcy and you haven’t been discharged from the bankruptcy, again you cannot sponsor someone until you’ve completed the process of being bankrupt.

Doug Hoyes: So, that’s really the key point then. If you are bankrupt right now you cannot sponsor someone to come into the country.

Howard Hayes: Correct. As soon as the bankruptcy is finished, you can continue with your application to sponsor someone.

Doug Hoyes: Once you’re discharged then you can. So, I guess the message, to answer the question for everyone listening today is if you have a bunch of debts now, and you also in the future want to be sponsoring someone to be coming into the country, then you’ve either got to deal with your debts now and then you can sponsor them. But you don’t want to sponsor them and then declare bankruptcy in the middle of that process cause that could certainly muck up the whole process. So, if you think you’re going to have to go bankrupt, I guess you’re going to want to do that bankruptcy, get it finished before the sponsorship process starts.

Howard Hayes: I guess the third option there would be that you go through the whole sponsorship process and then deal with the debt. But that’s probably a much riskier strategy because the whole sponsorship process from my experience is going to take at least a couple of years and that’s a long time to not be dealing with your debt.

Doug Hoyes: Yeah, it’s not a quick process so –

Howard Hayes: A question we often get is well, what if I do have the debts though and I really do need to sponsor my mom or my brother or my aunt to come to this country and for some reason I need to get that done right away. What are my options? What can I do? Rather than going bankrupt you can look at offering the creditors a proposal.

Doug Hoyes: Because in the rules, as we read them, it does not say have you declared a consumer proposal? It just says have you declared bankruptcy?

Howard Hayes: Exactly.

Doug Hoyes: So, that’s a key point. So, I guess the message for everyone listening is if you are going to be sponsoring someone and if you have debts, you better come in and talk to us or someone like us up front because there are a bunch of different options. You can deal with your debts, you can do the bankruptcy and then start the process, you can do a consumer proposal, but you don’t want to get caught in the middle of it cause that can really mess things up.

Howard Hayes: That’s right.

Doug Hoyes: Great. Thanks very much Howard. You’re listening to Debt Free in 30.

30 Second Recap

Howard Hayes: Welcome back. It’s time for the 30 second recap of what we discussed today.

Today was our first Frequently Asked Questions show, and my first guest was Ian Martin, a chartered accountant and bankruptcy trustee, who told us that timing matters if you are considering a consumer proposal or personal bankruptcy.

Ian also walked us through who will find out if you go bankrupt.

In the second segment my guest was Howard Hayes, also a bankruptcy trustee, who gave us some great practical advice on how to sponsor someone to immigrate to Canada even if you are having debt problems.

That’s the 30 second recap of what we discussed today.

So what’s my take on what Ian and Howard had to say?

Obviously I’m biased, but I think there is an obvious message here, and that’s that you want to deal with a reputable trustee.

Trustees get paid based on the money in the pot at the end of the bankruptcy, so a trustee gets paid more if they get two years’ worth of your tax refunds, instead of just one. A trustee is happy if you go bankrupt in January or February before you receive last year’s tax refund, because they get two year’s worth of refunds. They get paid less if you have already filed last year’s taxes.

So if your trustee didn’t mention to you that timing matters, you may not be dealing with someone who is looking out for your best interests.

That’s our show for today.

We’ll be doing a Frequently Asked Questions show every month, so if you have a question you want answered on the show, email us at DFI30@hoyes.com

Full show notes with links to everything we talked about are available on our website at hoyes.com, that’s h-o-y-e-s-dot-com.

Thanks for listening.

Until next week, I’m Doug Hoyes, that was Debt Free in 30.

Bonus Segment: Let’s Get Started –
Emotional Considerations of Bankruptcy

It’s time for the Let’s Get Started segment here on Debt Free in 30. My name’s Doug Hoyes and I’m joined by Ian Martin and the question we’re going to discuss today is, is it morally wrong to go bankrupt?

Ian, I’m sure you’ve seen this many times. People come in to see you and they know they owe the money, they want to pay it back and they’re feeling some stress, some angst over it that oh boy I want to pay my creditors. I don’t want to go bankrupt. I’m kind of taking the easy way out. I don’t want to do that. I think it’s morally wrong to be going bankrupt. What do you say to people in that situation?

Ian Martin: Well, I usually start by acknowledging the kinds of emotional considerations that you were just describing and I try to reassure people that despite that kind of conflict that they might feel this is a regulated process, it’s set by law and the idea of taking the “easy way out”. I hear that on a regular basis; but I think that’s more from people who really haven’t gone through this kind of process themselves.

And like I said a moment ago, it’s important to know that this is not something that Doug and Ian have thought up. This is a regulated process set by Parliament, very structured. It’s something that you only do when you truly cannot pay back the full amount of the debts.

Doug Hoyes: I think that’s kind of the key to it. It’s not a choice between well, okay I’ve got $50,000 worth of debts but I was off work for two years cause I was sick and I got laid off and now I’m back to work but there’s no way I can ever pay it back. It’s not a choice of do I pay it back or not. I can’t.

Ian Martin: Precisely.

Doug Hoyes: Mathematically, there is no way I can pay back that level of debt. So, my decision is not do I pay it back or not, it’s how do I deal with it?

Ian Martin: Right.

Doug Hoyes: And okay do you qualify for a debt consolidation loan? Can you do credit counselling? Do you have the money to make some kind of settlement offer? We will go through all the options with you obviously. But ultimately, if the answer’s no, this is the only option that I’ve got, then well I guess it’s something I have to do. I look it as a business transaction. The bank, the credit card companies lent you the money.

Ian Martin: I see where you’re going, yes.

Doug Hoyes: They knew what your income was. They knew what your situation was. They took risk lending you the money; but that’s why the interest they charge you on your credit card is 19%. They realize that there might be a chance that you will not be able to pay them back in full. And that’s how it works in business. Sometimes they win, sometimes they lose. I never lose a whole lot of sleep worrying about the bank, boy you know the bank, which makes a billion dollars every three months, is this going to hurt them that I’m not able to pay back my credit card.

Ian Martin: Sometimes they’re concerned if it’s only 1.1 billion instead of 1.2 billion, right?

Doug Hoyes: [laughter] Yeah, but it’s not something that I’m concerned with. Now I think where it is morally wrong, is if I use my credit card, if I borrowed money knowing full well I could not pay it back.

Ian Martin: Right and that’s taking us into a different realm of discussion.

Doug Hoyes: And I would say if someone comes into me and says well, okay I’m in financial trouble but I’ve still got $5,000 worth of room left on my credit card, should I just rack it up and then go bankrupt? I would say no, that is morally wrong but it’s also legally wrong.

Ian Martin: Yeah, with that kind of – I mean when I’m asked that kind of question I make sure that it’s very clear that if you were to do that this doesn’t mean that you can’t file bankruptcy, but what you’re doing is running the risk that people are going to review those records and use words like fraud and saying you never had any intention, which really could cause a lot of I’ll say complications I’ll say about getting your bankruptcy complete.

Doug Hoyes: Absolutely and that is fraud. Taking money that you know you can’t pay back, that’s theft. And in most cases you’re not going to get away with it anyway. All of these transactions are in the computer. When you file bankruptcy the bank, the credit card company, is required to review every transaction that you’ve made in at least the last three months and they can go back a lot farther than that. So, if they see that you took a big $5,000 cash advance yesterday and you’re going bankruptcy today, they’re going to notice and you’re either going to have to either pay it back or your bankruptcy won’t end.

Ian Martin: Right. That would also be a red flag. Fundamentally filing bankruptcy, it’s about allowing what we call the honest, but unfortunate debtor a fresh start from his or her debts when he or she simply can’t pay it back. So, that’s the bulk of the situations, but there are the exceptions to that where people are not always truly the honest, but unfortunate debtor.

Doug Hoyes: And I think that’s a very important concept and that’s something that’s enshrined in Canadian law, the honest, but unfortunate debtor. And so if you’ve been honest all the way throughout, I got the credit card, I fully expected to be able to pay it back but then something happened, job loss, marriage break up, illness whatever, I’m now in a position where I can’t pay it back, I’m unfortunate. I’m honest and unfortunate and that’s where the bankruptcy process exists.

And so, my answer to the question is no it is not morally wrong to go bankrupt if you are that honest, but unfortunate debtor. If you’re the guy who just racked up these credit cards without ever having an opportunity or without a thought to paying them back, okay not quite so honest.

The final comment I guess I would make on that is if bankruptcy really does bother you we do have another option called a consumer proposal, which is a negotiated settlement. That’s another way to deal with the debts and we’ve got lots of information on our website at hoyes.com that talks about that.

Ian thanks very much for being here with me today to answer the question is it morally wrong to go bankrupt? Thanks very much.

Ian Martin: Thank you Doug.

Consumer Alert – Late Payment Penalty Rates on Credit Cards

Posted in Loans and Borrowing

By Ted Michalos, CA, LIT

Reading time: 3 minutes

Man holding his credit card and stressed over his debts

Recently, I received a notice in the mail advising that TD was making changes to their credit card accounts. Credit cards already come with some of the highest interest rates of any borrowing option, plus a wide array of late payment, cash advance and other special fees. You might wonder, how else can they increase your cost of borrowing?

Penalty Rates on Overdue Or Delinquent Credit Cards

You credit card company may charge you 19.99% interest on all outstanding balances. And that rate will hold as long as you make at least the minimum payment. But if you miss a payment, watch out, the cost of your credit card debt goes up.

Almost all credit card companies have what they call a penalty interest rate clause.

What are the consequences of making a late payment when you owe money on your credit card?

If you miss a minimum payment by more than 30 to 60 days, the penalty interest rate kicks in and this rate is significantly higher than the rate currently charged on your credit card – often driving up your rate of borrowing to 25-30%.

TD bank is raising interest charges on overdue accounts and dramatically increasing the period you have to live with the higher rates. I assume that the other banks and credit card companies will follow suit with similar penalty interest rate charges.

Let me briefly describe the change TD has announced and then explain the significance.

The old policy for people that missed their minimum payment by 30 days was to increase the customer’s interest rate by 5% and keep it there until the customer made 2 minimum payments on time in a row.

The new TD policy is to charge 24.99% interest on purchases and 27.99% interest on cash advances until the customer has made 12 consecutive minimum payments on the account.

The bank’s notice provides an example that uses a $2,500 balance and explains that the new charges will cost the customer an extra $8.47 per month. That doesn’t sound too bad, unless you owe more than $2,500 and you end up paying that extra amount for a very long time. Using the bank’s example, the extra interest over 12 months equals $101. If any payments are late during that year the 12 month clock starts ticking again.

If you owe $25,000 on your credit cards then is will cost you and extra $1,000 per year. That’s money that previously would have reduced your debt (and therefore interest charges).

The truly frustrating part of all of this is the fact that the banks can simply alter the terms of your credit card agreement whenever they want. In this case, they are dramatically increasing the costs for people in default – the people in the most need of some extra consideration and help.

If you owe money on your credit card, check your credit card terms and conditions to learn what rate you may be trapped into if you miss a payment or two.

Late payment penalty clauses are one more reason to develop a plan to deal with your debt.

Stop The Collection Calls: Advice from Blair Demarco-Wettlaufer

Posted in Creditor Actions

By J. Douglas Hoyes, CA, LIT

Reading time: 44 minutes

One of the most common calls that our trustees receive are from people that are fed-up with collection agencies. Our guest on today’s Debt Free in 30 show is Blair Demarco-Wettlaufer, a Managing Partner for Kingston Data and Credit, a Canadian debt collection agency. Blair gave us the ins-and-outs of the collection world, including the typical life of a debt once it has gone to a collection agency and tips on what your options are for dealing with collection calls while I talk about your legal options to stop collection calls for good if you have more debt than you can repay.

How Do Collection Agencies Hear About My Debt?

A collection agency is contracted by companies to collect on outstanding debts. Think of them as “the middle man” between you and your creditor. A collection agency follows 4 basic steps from the time that they receive your debt, up to the time that your phone begins to ring.

An account is contracted out to the collection agency by your creditor typically once an account is three or four months past due with no activity. Some companies wait longer if they have internal resources, but that is the average.
The account is entered into the collection agency’s database.
A collection letter is sent to you by regular mail.
Six days later, the collection agency begins calling every three business days.

In Ontario the Collection Agency Act of Ontario requires agencies to send a letter once they receive a file and to wait six days for a response before they begin calling the individual. This means that, when dealing with a debt collection agency, it is your right to ask the agent on the phone to re-send the letter if you did not receive one before they began their collection calls. You can ask for a copy by mail. E-mail or fax doesn’t count unless you agree.

This letter serves a purpose in providing information you have a legal right to know including:

how much the creditor says you owe,
the name of the collection agency, and
the name of the creditor that they are collecting for, and a statement that the creditor has asked them to collect the debt.

When Legal Action Looms

What happens if you try to ignore your debts all together? A consequence for not paying off a debt could be legal action taken by the creditor, or by an in-house paralegal team in some collection agencies. If your debt is large enough (generally over $3000) and you have stable income, it is possible that you may be pursued through small claims court.

There are certain circumstances when legal action cannot, or most likely would not, be taken:

If the debt is over the 2 year mark outlined in the Ontario Statute of Limitations.
If the debtor does not have stable income.
If the debt is too small.
If the creditor does not have the necessary valid documentation, signed contracts, or invoices.

In other words, there are a lot of things that have to happen realistically for legal action, rather than an emotional agent on the phone saying, ‘I’m going to sue you if you don’t pay this.

Negotiating a Payment Arrangement on your Own

Blair suggests 3 options when your account is in collection and you would like to pay off all or some of your debt:

Make a Good Faith Payment – offer the agent a small amount of money to show that you’re taking your debt seriously. By offering $50 with a promise to discuss your situation further in a couple of weeks, the agent knows that you are open to discussion. However, Blair points out that the Statute of Limitations in Ontario states that no legal action can be taken after 2 years from the date of delinquency or last payment. Furthermore, after 6 years the credit bureau reporting ceases. Keep in mind that if you decide to make a good faith payment, you are restarting both of those clocks.
Offer A Series of Payment Arrangements – these arrangements can be completed through post-dated cheques or pre-authorized payments. Blair warns us that the agreement should be conducted in writing (i.e. an email) and that any written cheques should be clearly identified as post-dated and to the correct agency’s trust account.
Offer A Lump Sum Settlement – Offer a one-time payment to clean up the debt. If you go this route, make sure to get a Conditional Letter of Settlement from the collection agency outlining the amount, date, your name, and that you are thereby released from the debt.

Blair suggests that you should reach out to the collection agent and be honest about your situation. Don’t make promises that you can’t keep and be realistic about your offer.

Blair explained that you should not pay an agency if you disagree with the debt and can prove that it is not legitimate. For example, if it has passed the Statute of Limitations 6 year rule. After 6 years, the debt cannot be shown on your credit report and the opportunity for legal action has long since passed. Keep in mind that there are exceptions for this example, including money borrowed from Credit Unions. They can enact a “voluntary wage assignment” (which is included in the contract that you sign at the time of borrowing) and take 20% of your wages for 10 years to clear up your outstanding balance.

For those debts already listed on your credit report, Blair explains that paying them will slightly improve your credit rating. However, once a debt is listed as a registered item (your inactivity has been flagged by a collection agency or creditor), it is usually too late for the debt to be wiped clean and it affects your overall credit score. Once your debt has reached this point, collection agencies do not have the authority to simply wish it away. If a negotiation is not possible and you’re getting nowhere by making the minimum payments, Blair acknowledges that it might be time to deal with those debts through a consumer proposal or personal bankruptcy.

Stopping Calls By Filing Insolvency

If a negotiation is not possible and you’re getting nowhere by making the minimum payments, Blair acknowledges that it might be time to deal with those debts through a consumer proposal or personal bankruptcy.

If you cannot afford to repay your debt, then you have two options under the Bankruptcy & Insolvency Act which provide a legal stay of proceeding that stops creditor actions, including both collection calls and wage garnishments, and provides a process to eliminate your debt entirely.

File a consumer proposal – This allows you to make a settlement offer to all your creditors to repay a portion of what you owe, based on what you can afford. It deals not only with the account in collection but any other unsecured debt that you may be struggling with.
File bankruptcy – This is always the last resort however if you have several accounts in collection, or owe a significant amount of money to other creditors, and you cannot afford to make a deal through a consumer proposal then bankruptcy will allow you to clear up your debts and will stop collection calls.

If you cannot repay your debts, contact a Licensed Insolvency Trustee like Hoyes Michalos to discuss these options.

Resources Mentioned in the Show

Blair’s blog at Kingston Data & Credit
Collection Agency Act of Ontario
Consumer Protection Ontario: Collection Agencies – Know Your Rights

FULL TRANSCRIPT show #20 with Blair Demarco-Wettlaufer

Let’s play a word association game. Let’s pretend that you have debts and you’re behind on your payments. What words come to mind? For many people it’s the words collection agent or bill collector.

As frequent listeners to this show know, my name is Doug Hoyes and I am the co-founder of Hoyes, Michaels and Associates, a company that helps people deal with their debt, often through a consumer proposal or bankruptcy.

Guess what the number one reason is that people call our 310 plan helpline? The answer yep, calls or letters from collection agents. That’s the straw that broke the camel’s back for many people. You can owe a lot of money but as long as you’re making your minimum payments, you don’t worry about it until you get a call or a letter from a collection agent. That’s when you realize you’ve got a problem and you get on the phone to a company like ours.

So, how can you deal with collection agents? Can you make a deal with them? Or do you just need to go bankrupt and get it over with? How do they work? How do they get paid? What’s the deal on collection agencies? To find out, I’ve invited an actual collection agent on the show. So, let’s get started.

How are you? Where do you work? What do you do?

Blair Demarco-Wetlauffer: Well, hi Doug. My name’s Blair Demarco-Wettlaufer. I’m the managing partner for Kingston Data and Credit, a collection agency with three branches in Canada.

Doug Hoyes: And one of those branches is here in Cambridge, which is where we’re recording this today. So, let’s start and go through this chronologically.

Blair Demarco-Wetlauffer: Sure.

Doug Hoyes: How does a debt get to a collection agency such as yours?

Blair Demarco-Wetlauffer: Well, it depends on the size of the creditor. It could be anyone from Danny the dentist with this handful of accounts that haven’t paid him, all the way up to Bank of Montreal that has a very defined process for assigning files to a collection agency.

Typically they’ll come to our office, anywhere from 31 days past due all the way to two or three years past due. And some agencies in our business actually specialize in collecting debt that’s five, seven or even ten years a past due.

But typically my experience is they’ll come to our office about three months, four months past due where there’s been no activity and the creditors had to throw their hands up and say we need help.

Doug Hoyes: So, the creditor understands, you know what? I’m not going to collect this.

Blair Demarco-Wetlauffer: Or they don’t have the time to invest in reaching out to people.

Doug Hoyes: And so they send it off to you. You get a list, a file whatever, then what happens? What do you do with that debt? What’s your process?

Blair Demarco-Wetlauffer: Well, it depends on the client and the province or state that we’re collecting in. In Ontario, which is probably most of the people listening to this show, what’s required by the Collections Agency Act of Ontario is a file comes in, it gets put into our database, our contact management system and a collection letter goes out. That’s actually required by law. We have to send a letter and wait six days before we start calling.

Doug Hoyes: So, in every single case, you have to notify the debtor in writing?

Blair Demarco-Wetlauffer: Yes, in Ontario.

Doug Hoyes: In Ontario.

Blair Demarco-Wetlauffer: Ontario and B.C. Now, obviously if we get a file that is two or three years past due, we might get no address at all or an address where mail’s been returned or an address that isn’t forwarded anymore. But we still are required by laws, written in 1975, to mail out a letter and wait the six days.

Doug Hoyes: Okay. So, as a practical point here then, if I’m listening to this show and I’ve got debt and I get a call from a collection agency, I should have already got a letter or I can at least ask, well send me something in writing then.

Blair Demarco-Wetlauffer: Actually that’s in the act. If a consumer gets a surprise call from an agency, and obviously Canada Post isn’t without its quirks, and they say, I didn’t get a letter; they have the right under The Collection’s Agency Act to have that letter re-sent. They can ask for it by mail, if the consumer and the agency are willing to co-operate, they could e-mail it to them or fax it to them.

But the important thing is the consumer has a right to know how much is claimed is owed, who the creditor is, what the lawful name of the collection agency is and the name of the agent reaching out to them. Those are key points that have to be made.

Doug Hoyes: Okay, so you get the file and the debt could be, like you say, anywhere from 30 days and up in age, the first thing you do is send out a letter?

Blair Demarco-Wetlauffer: Right.

Doug Hoyes: And you said you have to wait six days?

Blair Demarco-Wetlauffer: Six days in Ontario.

Doug Hoyes: And then after that what happens?

Blair Demarco-Wetlauffer: Well, in a typical collection agency, collection agents will either make manual calls, where they pick up the phone and punch the buttons on the phone. Or they’ll work on a predicted dialer; where a predicted dialer will just spit out calls and leave pre-recorded messages or connect to a pool of collectors. I personally am very old school. I’m not a big fan of predicted dialers. I think they’re brute force engines.

So, typically what would happen at our office is one of our collection officers would pick up the phone and call somebody and try to reach them. We would call them on a three business day turnover. We want to create a sense of urgency and contact the consumer. That’s our ultimate goal.

A lot of consumers, actually about 60 or 70 percent of consumers, they play ostrich, they bury their head in the sand. They get a call and they ignore it or they get a letter and they disregard it. And that’s the biggest challenge because those are the people who are calling our office a year later saying, “I can’t get a car, what happened?” And they don’t realize.

So, a lot of our efforts on a daily basis are spent reaching consumers, making them aware of their debt and giving them their options, whether they want to pay it, whether they dispute it, whether it will be listed to the credit bureau or in a few rare cases, whether legal action will happen from it.

Doug Hoyes: So, we’re going to talk about that. So, just so I’ve got the chronology then. So, typically, and I realize every situation is different, the file comes in, you send a letter, you wait at least six days, and then you start making phone calls. At your agency you actually pick up the phone and call. Other agencies are using the, like you called the predicted dialers, the robo callers that are banging the phone call out every hour.

Blair Demarco-Wetlauffer: Exactly.

Doug Hoyes: Which drives people crazy, I understand that. And then you would typically call someone every three days if you don’t get through to them?

Blair Demarco-Wetlauffer: Every three business days, that’s right.

Doug Hoyes: That’s how you work.

Blair Demarco-Wetlauffer: And eventually we’ll reach the consumer and make arrangements or we won’t reach the consumer and we’ll decide okay, enough is enough we’ll place it on the person’s credit rating and move on.

Doug Hoyes: Okay, so I’m now the debtor, I’m the guy who owes the money. I get a call from a collection agency. So, I want your advice on what I should do. And I think there’s two scenarios. First scenario is I don’t actually owe the money. They’ve got the wrong guy, I already paid it, whatever. And the second scenario would be well, yeah I do owe them money and I guess I got to deal with it.

So, let’s take the first one first. So, I get a call for a debt that I don’t believe is mine. I believe I’ve paid, I want to dispute it. What should I do?

Blair Demarco-Wetlauffer: Well, first of all you should definitely pick up the phone and talk to the agent and let them know. The problem is a lot of agents aren’t educated in the laws or they’re not sophisticated enough to listen because they’ve been trained to demand the money and throw the excuses to the side. Regardless, you should communicate clearly and effectively that you dispute the debt, why you dispute the debt and what you want to do; if you can do that verbally, great. You know it could be an issue of identity theft, my I.D was stolen a year ago, I have a police incident report number, here you go, give that. Or, I’ve disputed this debt, I have a copy of the letter I sent to Bob the dentist three months ago, I’ll send you a copy, fine.

Ultimately though if you send a letter, a registered letter to the agency, disputing the debt and requesting no further calls, their done.

Doug Hoyes: So, I can actually stop you from calling me by sending you a registered letter.

Blair Demarco-Wetlauffer: Yes. You can’t stop the consequences but you can stop the calls.

Doug Hoyes: So, and the consequences in that case would obviously be if I actually do owe them money then I guess you’re going to place it on my credit report. You could return it back to the original creditor who could decide to take me to court and sue me.

Blair Demarco-Wetlauffer: A lot of agencies actually have their own internal paralegals and lawyers where they will initiate the legal action. You know especially when you’re dealing with debts upwards of $3,000 and more. That’s when small claims court becomes viable for the cost. You know, no one is going to sue anyone over a $53 library fine. It’s just not going to happen. But if you owe on your Visa $6,000 and you’re gainfully employed, yes the threat of legal action could be real.

Doug Hoyes: And so collection agencies will actually commence law suits. It’s not your common collection tactic obviously. It doesn’t happen in most cases I would assume.

Blair Demarco-Wetlauffer: Well, it depends on the creditor and the agency. There are some law firms acting as collection agencies and they sue 30, 40 percent of the accounts that come into their office.

Our office, we’ll choose a handful of files that we’ll take legal action on, on every year. If the debt’s over the two year mark, it falls outside the statute of limitations in Ontario. If the person isn’t gainfully employed we don’t want to take legal action because it’s the creditor throwing good money after bad. If the debt is too small, if it’s under $3,000, we generally don’t encourage it. And if the client doesn’t have ironclad documentation, a signed contract, invoices, then we can’t put a case together.

So, there are a lot of things that have to happen realistically for legal action rather than an emotional agent on the phone saying I’m going to sue you if you don’t pay this.

Doug Hoyes: Right, so what you’re saying if I’m a debtor, the threat of a lawsuit, it might be a real threat but you just gave us a list of a whole bunch of times where it’s not going to happen. And so you got to kind of understand your rights.

So, the second part of that question was what do I do if I actually owe them money and want to make a settlement or a payment arrangement?

Right now we’re going to take a quick break and we’re going to come back and you’re going to answer that question right here on Debt Free in 30.

Doug Hoyes: We’re back on Debt Free in 30. My guest today is Blair Demarco-Wettlaufer who is an actual real life collection agent.

Before the break we were talking about, you know if I get a call from a collection agency what should I do? We talked about the situation where I don’t really owe them money and I want to dispute it.

Okay, well what about the more common situation where I actually do owe them money, I haven’t paid it. I’m behind, that’s why it got turned over to a collection agency, what are my options then when I get the call from the collection agent?

Blair Demarco-Wetlauffer: Well, there are a couple of things that you can do. Obviously if you want to pay it or you feel you should pay it or you want to avoid the consequences for nonpayment, you should reach back out to the collection agent when you get the letter or you get the answering machine message. And you should be honest.

Most agents are motivated to collect the payment in full because they work on a contingency. The company, the collection agency works on a contingency or commission basis. They only get paid if they collect. And some agents are working in boiler room call centres where they’re driven.

But you as the consumer, what you should do is make a realistic payment arrangement. You shouldn’t promise something that you can’t do. You should not promise – if you’re reaching for that $100 a month payment, don’t offer it, offer 70, offer 50. Offer something realistic. From the agent’s standpoint, the agents often hear every day, I want to pay that bill but I can’t. My dog got sick or I’ve just lost my job.

There are a couple of things you can do to negotiate that will get you traction with the agent. The first is if you want to show the agent that you’re serious about taking care of this, you can do what’s called a good faith payment in our industry.

Let’s say you owe $1,000 and you just lost a job and you’re starting a new job in two weeks and you want the agency to leave you alone. You can say to the agent, Bob, I want to take care of this. I can’t right now. I have no income currently. I’m going to pay you $50 right now to show my intent and I will talk to you in three weeks. If you actually follow through with that $50 payment, it’s not a lot but it shows the agent you’re actually serious. Actions speak louder than words.

The other option that you can do is if you want to make arrangements on a balance, you can offer a series of payment arrangements; either through post-dated cheques or pre-authorized payments. Be careful with this though. Make sure that you get your arrangements by email or you’re sending cheques that are clearly identified as post-dated and that they’re made out to the right party, to the collection’s agency trust account.

The last thing that you can do is, let’s say you dispute a portion of the debt or a portion of the debt is interest that has accumulated over time or you were unsatisfied with the services. You can offer what’s called a settlement, a lump sum settlement where if you owe $1,000 you’re offering to pay $700. Protecting yourself as a consumer in this case, is very important. Before you pay one dime you should get what’s called a conditional letter of settlement from the collection agency that says on condition of Frank paying $700 by December 5^th, he is released from any claim and obligation relative to this debt. And that way if Frank makes the payment, he is resolved from any demand on the remaining balance. In most provinces, if you make a partial payment on the debt, that acknowledges liability for the full balance.

So, if you don’t get that letter first, you know if the agent says oh just pay $700 and we’ll make this go away, that doesn’t protect the consumer and the file could be reassigned to another agency a year down the road and interest could accumulate. Always get a settlement letter before you make a settlement amount.

So, there are a number of ways that you can negotiate with an agency but the important thing is to be honest and to only promise what you actually can do.

Doug Hoyes: So, I got two questions related to that.

Blair Demarco-Wetlauffer: Sure.

Doug Hoyes: The first one is you mentioned in the first segment about the limitations act, what they call on T.V the statute of limitations.

Blair Demarco-Wetlauffer: For legal action it’s two years in Ontario.

Doug Hoyes: Two years in Ontario. So, that means if I’ve disappeared off the face of the earth for two years, legal action hasn’t commenced, well probably it’s – it can’t now. That would be my defence in court.

Blair Demarco-Wetlauffer: Right, the ship has sailed.

Doug Hoyes: The ship has sailed. So, let’s say I’m a year and a half into this and I’m talking to the collection agent and I do what you said number one there make a good faith payment of $50. Well, I just started the two year clock again.

Blair Demarco-Wetlauffer: Bingo, the clock resets, absolutely.

Doug Hoyes: So, if I’m going to make a deal, I go back to what you said then. You better make sure you can honour it because if I pay that $50, I’ve now given the collection agent two more years to pursue me in effect.

Blair Demarco-Wetlauffer: Exactly. And for credit reporting, reporting to the credit bureau, it has a six year window in Ontario, that clock resets too with the payment.

Doug Hoyes: So, it’s – yeah that’s pretty dangerous if you aren’t going to be able to continue on with it.

Blair Demarco-Wetlauffer: So, the important thing is to know how much you owe, what are the consequences? Have the consequences been avoided? I mean a lot of cases, collection agencies aren’t sophisticated. They’ll list the file on the credit bureau and then call the consumer. To my mind that’s incredibly dumb. It’s far better to call the consumer and say I haven’t put this on the bureau yet. My client’s asked me to, what would you like to do? And consumers react far better to knowing it hasn’t been listed with the bureau yet.

Doug Hoyes: So, how do you get paid then?

Blair Demarco-Wetlauffer: Collection agencies – nine out of ten times in Canada, collection agencies work on a contingency basis or a commission basis. They get to keep a portion of what is collected. And this is important for consumers to know because there’s this misconception from T.V and U.S news that collection agencies buy the debt. That’s very common in the U.S and it’s starting to become common in Canada, but the debt would have to be two, three, four years old for someone to buy it.

In most cases the creditor retains ownership and hires the collection agency to act on their behalf. And they could receive anywhere between 10 percent to 50 percent of the amount they’re collecting, depending on the age, balance and type of creditor.

Doug Hoyes: So, if I’m a collection agent and I know that I’m going to collect somewhere between 10 and 50 percent is my commission, my contingency fee; I would much rather get a lump sum, which was your third option there that you mentioned. So, if it’s a $5,000 debt, I would much rather as the collection agent get $2,000 right now and write off the rest, take the money then I would get $50 a month for the next five years.

Blair Demarco-Wetlauffer: A lot of old school agencies work like that. In fact they’ll send out as that initial collection letter, a letter offering a settlement right off the get go. It’s like Oliver Twist begging on a street corner. Please sir, can you only pay $700 of the $1,000?

I personally believe a lot of consumers ending up in collections, they’re not bad people. Nine out of 10 consumers ending up in collections are procrastinators; they don’t understand their financial rights. They weren’t aware of the debt. They’ve had bad circumstances happen or they’ve reacted emotionally to a debt and they’ve made a bad decision.

Most consumers don’t have a spare $6,000 in their back pocket. That’s why they end up in collections. I, personally, would rather see a consumer make regular payments for the balance in full where it doesn’t strain the consumer rather than pin them up against the wall and ask them for a settlement.

A lot of – when I started in the business going from a credit manager – collectors had pieces of paper under glass on their desk and it was called the “open and done”. And they were told, you owe $10,782 at what point today can we expect payment in full, which is a shakedown tactic. I would far rather a consumer not be sent to borrow funds from friends and family and actually say well I got a limited income, I make $14 an hour. I can pay $100 a month, is that reasonable? Of course it’s reasonable. It’s an honest attempt. But a lot of the people in my industry think I’m a little odd.

Doug Hoyes: Gotcha. Well, and I’m kind of an outlaw in my industry too. So, we’re in the same boat here.

I’m thinking here from a business point of view. If I’m a collection agency, to take a $50 or $100 payment a month from a debtor, of which I may only be getting $5 or $10 a month, I’ve got take the cheques, I’ve got to deposit them, I’ve got to do the accounting, I got to get them to the bank, some of them are going to bounce. That’s a lot of work for not much return.

Blair Demarco-Wetlauffer: Our business can be very lean and there are a lot of hidden costs. We have to carry surety bonds and special insurance in different provinces. We have licensing costs. A lot of agencies fail to grow or fail to deal with volume.

But I can tell you in the last three years 178,000 consumers have been listed with our office. It’s mind boggling and most of the payments we get are $50, $100, $200 because that’s what consumers can afford.

And in this day and age, consumers obviously might not want to give out their banking information to a strange collection agency that they don’t know or trust, we get a lot of e-transfers, interact e-transfers. We get a lot of people making deposits straight into our trust account.

And those small amounts, they add up. When you look at thousands of those payments happening a month, collection agencies exist because of economy of scale. They can hire multiple staff, they can make thousands of calls, they can manage those payments. That’s where agencies have an advantage over the original creditor.

Doug Hoyes: So, you are willing to accept payments. You’re willing to accept deals. From a consumer’s point of view, make sure you understand what you’re getting yourself into. Don’t promise what you can’t do and it should work out for you.

Blair Demarco-Wetlauffer: Yeah, I remember years and years ago; I was doing collections for a municipality that had geared to income housing. And this one poor little old lady, Mrs. Smithers, owed $8,000. And we called her and she was on C.P.P, Canada Pension. And she offered $100 a month. She couldn’t afford $100 a month. So, we told her to pay $30. And I’ll tell you she walked into our office with her walker, the first day of each month and paid in cash. We never even had to call her. But that is what she was able to do. And because we were reasonable with her, she was reasonable with us. She never missed a payment, ever.

Doug Hoyes: It becomes a win/win for both parties.

Blair Demarco-Wetlauffer: Exactly.

Doug Hoyes: Great, thank you very much. I really appreciate you being here today Blair.

We’re going to have full show notes on our website at hoyes.com. I’ll also put links to your blog, which is one of the very few people in your industry who actually has a blog. So, it has some great information. I appreciate you being here today. We’ll be back to wrap it up right here on Debt Free in 30.

Blair Demarco-Wetlauffer: Thank you sir.

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

My guest today was Blair Demarco-Wettlaufer, a Managing Partner at Canadian debt collection agency. He shared with us a great insider’s view of the collection world, and gave lots of practical tips. He said that under the Collection Agency Act of Ontario a collection agency must send you a letter once they receive your file, so you are within your legal rights to request written confirmation of the debt owed. As Blair said, you can’t play ostrich with a collection agency, you must take action to deal with your debt.

That’s the 30 second recap of what we discussed today.

So what’s my take on Blair’s message?

I agree that you can’t just ignore a collection agent and hope they’ll go away. If a collection agent is calling, you have to deal with it.

If you legitimately owe the debt and you have the money to pay it, pay it.

If your total debts are manageable and you just need some time, ask to make payments over time.

But here’s the key: don’t ever make a commitment you can’t afford to keep.

If you have $50,000 in debts and you are behind on all of them, and a collection agency is calling you daily about your overdue $1,000 cell phone bill, it doesn’t make sense to try to pay the $1,000 if you can’t deal with the other $49,000. You need a plan to deal with all of your debts, so don’t put yourself in a bind by dealing with one debt and ignoring the others. We’ve got lots of resources on our website at hoyes.com that explains all of your options, and that’s a great place to start to make a plan.

That’s our show for today.

Full show notes are available on our website at hoyes.com, that’s h-o-y-e-s-dot-com.

Thanks for listening.

Until next week, I’m Doug Hoyes, that was Debt Free in 30.

Doug Hoyes: Welcome back to the podcast only bonus segment here on Debt Free in 30.

My name is Doug Hoyes, I’m joined by Blair Demarco-Wettlaufer who’s a collection agent. We had a great discussion in the radio portion of the show. But there were a few questions I wanted to ask that I didn’t get to, all the juicy stuff. So, for those of you who are sticking around you get to hear the good stuff.

So, my – the question I really want to ask you is, is it true that as a person who owes money, I should never pay a collection agency? In fact if you search that term on the internet I’m sure you can find articles I’ve written saying exactly that. And the reason I’ve said that in the past is well, look, if you pay a collection agent, it’s still going to show up on your credit report of a period of time and – so why bother? If a collection activity stays for six years on a credit report, which is typically how it works here in Ontario, whether I go bankrupt or pay a collection agent or do some other means of settling the debt, my credit rating’s pretty much pooched anyways. Wouldn’t I be better off doing something else?

Now, obviously you disagree. You believe there are cases where yes I should pay a collection agent.

Blair Demarco-Wetlauffer: There are cases where you shouldn’t. I absolutely agree.

Doug Hoyes: Okay, so let’s talk about the shouldn’t then first. When should you not pay a collection agent? It doesn’t make sense.

Blair Demarco-Wetlauffer: You should not pay a collection agency if you dispute the debt and you don’t feel the debt is legitimate. By paying it, you’re giving that debt legitimacy. If the debt is passed the ultimate statute of limitations, six years, unless it’s some weird case like a student loan or a provisional offences act, the statute of limitations is over. It won’t be on with your credit bureau, it won’t be open for legal action. You shouldn’t pay it in that case.

Doug Hoyes: What about the two year?

Blair Demarco-Wetlauffer: That’s for legal action.

Doug Hoyes: For legal action, okay.

Blair Demarco-Wetlauffer: Now there are a bunch of exceptions for this. So, it’s hard for me to give a general rule. If you borrow money from a credit union, credit unions in Ontario have this special thing called the wage assignment. And you sign a piece of paper and it says if I don’t pay this you can just take 20 percent from my pay. Only credit unions have this power and they can go just show your signed letter to your employer and you lose 20 percent of your pay and it’s good for ten years. Those are unique exceptions. Or student loans, they don’t have the same statute.

Doug Hoyes: Government taxes obviously another one.

Blair Demarco-Wetlauffer: Exactly. But I mean if someone is calling you for your Rogers bill from 12 years ago, no, times up. You should not pay that.

Now, if it’s on your credit rating already, paying it will improve your credit rating slightly. Obviously Equifax and Trans Union, the credit bureaus in Canada, they have a super-secret score formula that changes constantly and they’re not going to share it with you or me or the consumer.

But let’s say you have a Fido cell phone. It shows up as a trade line item and it’s an R1 because you’ve been making your payments. And then you get a little behind and now it’s an R2. And then you stop paying it completely it becomes an R9. People have heard that term, you have an R9 rating. And then the file gets sent to a collection agency.

At that point it’s still worth while paying because the collection agency hasn’t recorded it as a registered item. Registered items are bankruptcies, judgements and collection items. If I, as a collection agency, list that on the credit bureau, it’ll show up as Kingston Data and Credit/Fido for an original balance of $283 and a balance with interest of $302. That is a negative rating to that person’s credit. For six years from the date of delinquency. If they pay that it will be reduced to a zero balance or if they settle it, it will be reduced to a zero balance with the words settlement next to it. And that will improve their credit score. To what degree, only the IT wizards at Equifax and Trans Union know. But it will improve their rating.

I can tell you we get a call in our office every other day, every three days from somebody calling us saying I can’t get a car, I can’t get a house. There are legitimate reasons to pay the debt. And if you can avoid it going to your credit bureau as a registered item by a collection agency, yes you should pay it but only if the collection agency has the right to put it on your bureau. Someone calling you with a 12 year old debt can’t put it on your bureau.

Doug Hoyes: So, if the debt has already gone and it’s now showing up in the registered item sections, can I make a deal with you to clean that up or is it too late at that point?

Blair Demarco-Wetlauffer: It’s generally too late. There are a couple of things. The credit bureau isn’t a snap shot, it’s a regular reporting cycle. So, the credit cards you’re reporting every month we’re reporting every month. We don’t have the right to just wipe it away. That being said it’ll happen. We’ll get a file in our office that should have never been on the bureau. So, we do have the power to reach into our rating and make it vanish. But we can’t use that as a negotiation tool.

Some smaller collection agencies use that and if Trans Union or Equifax ever found out, they’d pull their ability to list on the bureau, they’re not – we’re not supposed to gamify or play jiggery, pokery with people’s credit ratings. That’s not supposed to happen.

Doug Hoyes: Really what this all comes down to as well, getting back to the question should I pay a collection agency or not, what’s the total amount of the debt? If we’re talking about a $500 cell phone bill, well okay I guess I could go bankrupt and get rid of that, if that’s my only debt that seems kind of silly.

Blair Demarco-Wetlauffer: Exactly.

Doug Hoyes: So, something that’s reasonable, okay.

Blair Demarco-Wetlauffer: It should be in your big game plan. If you can get out of debt in less than seven years and you’re not treading water on horrible interest rates, absolutely you should pay your debt. If you can’t get out of debt or you’re paying $300, $400 a month and you’re just satisfying minimum payments or interest rates, yeah you should look at a consumer proposal or a bankruptcy. I’d be the first to say that because you’re just throwing good money after bad and you’re not improving your personal situation.

The big picture matters. And if you can negotiate with the agency for a settlement, some agencies have to go back to the creditor; some agencies have blanket authority to accept your settlement on the phone right then and there.

The bigger creditors will tell the agency you can settle that debt for 70 percent or you can waive the interest. So, you can absolutely pay that and in some cases, in a lot of cases, it’s worthwhile to pay it before it gets to the bureau or to pay it to correct your credit rating if you plan on getting a car or a house, two, three, four years down the road.

But if you can’t get out from under in seven years or you have to pay one creditor to borrow money to pay another creditor, no you shouldn’t – things have gone horribly pear shaped, you should look at bankruptcy.

Doug Hoyes: And so would it be a relatively typical case where the creditor would give you the authority to make a deal?

Blair Demarco-Wetlauffer: Bigger creditors, absolutely.

Doug Hoyes: And a typical deal that they would authorize you to make without even having to go back to them would be like 70 cents on the dollar?

Blair Demarco-Wetlauffer: Exactly. And these debt settlement companies that are now coming under fire in Ontario, they’re holding this information secret because they’ve obviously called the same collection agencies over and over and over. Any consumer can get a settlement. And for the bigger creditors or the older the debt, the more lenient the settlement will be. The important thing, again like we said in the radio portion, get your settlement offer in writing before you pay a dime to protect yourself.

Doug Hoyes: So, if I had a debt that’s two and a half years old. It’s on my credit report.

Blair Demarco-Wetlauffer: As a trade line item maybe not as a registered item.

Doug Hoyes: Yeah, it’s just showing up there. And so I’m pretty confident that I’m not going to get sued for it because we’re past the two years. But I also know it’s going to be on my credit report for a while yet.

As a consumer, should I be talking to my friendly neighbourhood collection agent and saying okay look I know I owe that $1,000 on my cell phone bill, which is now $2,000 cause of all the interest and everything else that’s been accumulated over the last year and a half, I’m able to get $800 from my mother, is that something you would entertain?

Blair Demarco-Wetlauffer: There is no harm in making an offer. The worst the agency can do is say no. If you are making – the big thing when you’re making a settlement offer is get it in writing. It has to be a lump sum. And the whole point of a settlement is everyone can shake hands, make a compromise and walk away. You can’t make a deal saying well I’ll pay $800 or the $2,000 of that with $50 a month. Is that okay? No, no one’s going to do that. But if you have that lump sum that you can pay and the debt’s two, two and a half years old, make an offer. The worst thing they can do is say no.

Doug Hoyes: And what, and I realize every creditor is different, every situation is different, every personal situation is different, but if I offered 50 cents on the dollar on a two and a half year debt, two and a half year old debt –

Blair Demarco-Wetlauffer: Generally speaking probably you will be refused. What I’ve seen, and you’re right every creditor is its own special snowflake, but what I’ve seen is if I debt is about a year old, you can settle for about 80 percent. Debt that’s two years old, you can settle for 70 percent. Debts that are three and four years old you might be able to settle for 50 or 60 cents on the dollar and again, the bigger the creditor, the more likely that they’ll work with you.

Doug Hoyes: So, these debt settlement companies, and as you say they’re coming under fire in Ontario, and in fact the law is in the state of flux right now. So, what I would suggest to anyone listening to this show is you either go to our website or go online and see exactly where the law is at cause it might have changed.

Blair Demarco-Wetlauffer: Did you know the ironic thing – the law has been passed. It hasn’t been read in by the Lieutenant Governor –

Doug Hoyes: Yeah, it was passed in early 2014.

Blair Demarco-Wetlauffer: Here’s the irony, they’re registered under the Collection’s Agency Act. They’re all collection agencies now. And by that, when this law is enacted all the collection’s agencies out there are going to become debt settlement companies.

Doug Hoyes: Yeah, by definition or vice versa I guess. It’s quite interesting.

Blair Demarco-Wetlauffer: It’s ironical.

Doug Hoyes: So, the debt settlement companies that are advertising we can settle your debts for 30 cents on the dollar, are they sometimes able to do that? Are they always able to do that? Are they never able to do that? What’s your –

Blair Demarco-Wetlauffer: They’re sometimes able to do that. The biggest thing I’ve seen from less than ethical debt settlement companies is you come into my office Doug and I have all this debt. I want you to settle my debt.

So, you start making monthly payments to me which I put in my trust account. And I call Fido and I say, hi I’m willing to settle for 30 cents on the dollar or you won’t get a dime. And meanwhile you’re paying into the war chest, the settlement war chest and I keep calling the creditors every 90 days hoping I’ll wear them down. Meanwhile Fido and their collection agency are ruining that person’s credit rating and they’re paying for something that isn’t getting better. In fact Fido could stick to their guns and say our statements say two percent interest per month. It could be getting worse. Debt settlement companies are coming under fire because of this abuse.

Doug Hoyes: But if I’m a collection agent or a bank, why wouldn’t I take the 30 cents on a two and a half year old debt? Cause there is really no other legal way for me to collect it any other way.

Blair Demarco-Wetlauffer: They could play the waiting game. They could leave it on the credit bureau and hope you need something that requires a good credit rating. Credit ratings now are so much more important than they were in the 90’s when I first started in collections. You can’t get a bank account, an apartment, sometimes a job, you know certainly not a credit card or a house or a car without having a good credit rating. And most creditors will insist you pay your outstanding debts before they will give you something like a car.

Doug Hoyes: And that becomes the leverage then. So, it’s not the money as much as the effect on your credit report that induces you to pay.

Blair Demarco-Wetlauffer: Exactly. And every consumer should know that they have the right to pull their credit bureau for free. I’ve got a link on my blog to a link to the form they can mail into the credit bureau. Or they can actually go over to Burlington to Trans Union and a nice person will hand it to them across the counter with a booklet explaining it. You can get a copy of your credit rating for free. There’s nothing stopping you. There are a lot of online deals where you can buy it.

Doug Hoyes: Where you pay.

Blair Demarco-Wetlauffer: You don’t have to. There’s also a link on my blog where if you dispute an item on your credit bureau, you can fill in form and send it in and the credit bureau has to investigate that item to see if the debt is legitimate.

Doug Hoyes: Yep, cool. Well, I think that’s a great place to end it. What I’m going to do in the show notes then is I’ll put a link to your blog which has all this information on it. So, anybody listening can just go to hoyes.com and type in collection agents or type in podcast and you’ll be able to find the full show notes. We’ll put all the links there. And I think the basic message that you’re giving people is, don’t put your head in the sand. Don’t be an ostrich.

Blair Demarco-Wetlauffer: Right.

Doug Hoyes: But also, don’t do a deal that you can’t honour. That’s really what you’re saying.

Blair Demarco-Wetlauffer: And don’t do a deal that’s bad for you in the long run.

Doug Hoyes: It’s got to work for both parties.

Blair Demarco-Wetlauffer: Exactly.

Doug Hoyes: Fantastic. I appreciate you being with me Blair.

Blair Demarco-Wetlauffer: No, thanks that was great.

Doug Hoyes: Thank you very much. That’s was the bonus podcast segment here on Debt Free in 30.

Clean Up Your Debt Mess

Posted in Dealing with Debt

By J. Douglas Hoyes, CA, LIT

Reading time: 32 minutes

On this weeks segment, I was joined by Gail Vaz-Oxlade to look at practical strategies for dealing with debt and what people need to do to clean up a big debt mess.

On the second part of our segment I talk with my business partner and co-founder of Hoyes, Michalos & Associates, Ted Michalos. We discussed the topic of consumer proposals and Ted explained why they are a beneficial debt solution.

Gail is known for her simple debt solutions and no nonsense advice. She has written many books on the topic and is a frequent guest on our Debt Free in 30 Podcast. In her latest book Money Rules, Gail states,

Stop whining about being in debt, you had your fun, you made a mess, now it’s time to clean it up, get busy.

Today she offered up a four step plan for getting rid of debt on your own.

Make a list of your debts.
Order the list from highest callable interest to lowest interest. A callable loan is one where the lender can ask for payment without notice. If you can’t pay up, they could put the debt on your credit report and your credit score will be affected, OR they could increase your interest rate. Examples of callable debt: credit cards, finance company loans, payday loans. Pay these debts off first to avoid getting that call.
Calculate the minimum payments for each debt to know how much you need to pay to maintain your credit score.
Calculate the date that you will have the debt paid off completely – for EACH debt.

Gail acknowledges that it won’t be easy, but getting out of debt needs to be a priority, especially for people carrying around a big debt mess. When it comes to eliminating payday loans, she emphasizes the importance of breaking the cycle. To do this she suggests you

…get yourself another job. You have to work your buns off because you have to get ahead of the payday loan.

For more practical information and a guide to getting out of debt, read Gail’s book, Debt Free Forever.

Clean up your Debt with a Consumer Proposal

Gail’s advice uses practical strategies for getting rid of debt on your own; but what about the people who can’t even afford to make their minimum payments and are looking at years to pay off their debts? Ted joins me to talk about solutions for those debts that just never seem to go away.

Meet Mary and Joe

A married couple with decent jobs. Two years ago, this wasn’t the case. Joe’s company closed down and he was out of work for 6 months and his new job does not pay as well as his old one. Mary has medical issues, which means time off work, medical expenses, and having to use credit to make ends meet. Not to mention, they borrow money to help their kids and their aging parents, one of whom is in a nursing home that needs to be paid for each month.

Between them, they have $60,000 in debt. They earn approximately $4000 a month combined, but have to pay living expenses like rent and groceries. After all of their expenses they are left with only $500 a month to pay off their debts. At 10% interest on $60,000 worth of debt, it works out to about $500. So Mary and Joe can only afford to pay the interest and continue to get nowhere with their principal amounts.

It’s Never Hopeless

Mary and Joe’s situation may not be real, but I meet people just like them every day. Honest, hard working people who just can’t get ahead of their debts because life has gotten in the way. Ted explains one very good debt solution for the Marys and Joes across Canada: a consumer proposal.

A consumer proposal pays back a portion of what you owe to your creditors. The two conditions for filing a proposal are that

you need to offer the people that you owe more than they would receive in a bankruptcy, and
it must be a third of what you owe, which is typically enough to entice the creditors to go along.

Ted breaks down the benefits of a consumer proposal instead of a personal bankruptcy for a couple like Mary and Joe.

Assets

In a bankruptcy you have to surrender assets you own like equity in your house, RESPs or mutual funds towards your bankruptcy.

In a consumer proposal no-one seizes anything. Instead you make payment arrangements to pay part of what you owe based on the value of what you own and can spread those payments over a period of 5 years.

Income

Even if you don’t own any assets, in a bankruptcy if your income is over the government’s limits to maintain a reasonable standard of living, you have to pay what is known as surplus income, and your bankruptcy will cost more and last longer. You have to submit monthly income and expense reports and if your income goes up, your payments go up.

In a consumer proposal your income does not affect the amount that you pay or the length of your proposal. If your income increases during your proposal, your agreement with your creditors does not change. Furthermore, you have the opportunity to pay it off faster if you do get a better paying job.

Consider Mary and Joe. They make $4000 between them in a household of 2 people so if they filed for bankruptcy, their payments would be about $750 a month for 21 months (this is where surplus income affects them). The bankruptcy will cost between $15,000 – $20,000. They would lose their tax refund and their assets could be included, increasing the price even more. At $750 a month Ted points out that,

…they can’t afford to go bankrupt.

In a consumer proposal, Mary and Joe could offer $20,000 which is more than the $15,000 in a bankruptcy. But because they can pay it over 5 years, their payment would only be about $333 a month.

In Mary and Joe’s situation they were able to fit $500 in debt payments into their budget before. Not enough to pay off their debt, but more than their proposal payments. They could put that extra money into their proposal and pay it off early, in 40 months; or they could take the whole 5 years to pay it off as it is a locked in agreement with their creditors and have money left over to get back on their feet.

In either case, a bankruptcy or proposal, there are not up-front fees. You make payments only after filing the legal documents and the only payments you make are those required by your bankruptcy or proposal. There are not extra fees to pay the trustee — trustee fees come out of what you pay to your creditors.

Building a Plan to Get Out of Debt

The first step to knowing what kind of solution will work best for you is to know where you’re at. Calculate your debts and how long it will take to pay them off. That way, you’ll know whether you can use practical strategies for paying down that debt on your own, or if you should seek help to clean up the debt mess that you’re in.

Every day we meet with people who aren’t just a little bit in debt — they are deep in debt. In fact the average insolvent debtor from our most recent study owed almost $57,000 in unsecured debts. You might wonder how they got that far in debt, but in truth, it’s pretty easy. Things start out small. A little bit of credit card debt to pay for groceries or maybe even a trip somewhere. People put balances on their credit card fully expecting to be able to pay it off within a short period of time. But there is a fundamental problem they are avoiding — their budget doesn’t balance and that was why they had to turn to credit in the first place. Now they have both a shortfall in the budget (their expenses are higher than their income) and they have to make debt payments. So what happens?

They borrow more.

This is why credit card debt builds over time for most insolvent debtors. Once they’ve maxed out their credit cards they turn to even more expensive credit options like payday loans and quick cash installment loans and the next thing you know they are looking for help getting rid of payday loan debt too.

On today’s show we talk with Gail Vaz-Oxlade about how to build a repayment plan to deal with your debt before it reaches the tipping point. If, however, you find that you are looking at years and years to pay back your debt, then you may need to consider other options like a consumer proposal or bankruptcy.

Resources Mentioned in the Show

Consumer Proposal versus Personal Bankruptcy

FULL TRANSCRIPT show #19 with Gail Vaz-Oxlade and Ted Michalos

Rebroadcast as best of show episode 51

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.

This show is called Debt Free in 30 and as that title would indicate; our main objective here is to help our listeners find ways to get out of debt. But how do you actually do that? What practical strategies are there for becoming debt free? What practical, real life steps can you take if you have a debt mess? Fortunately I have just the person to answer that question. She’s written many books on money management and she has some very definitive opinions about how to clean up a debt mess. So, here’s my conversation with one of our most popular guests Gail Vaz-Oxlade, explaining how to clean up your debt mess.

I’m joined by Gail Vaz-Oxlade and Gail, in your book Money Rules, your rule number 87 is clean up your debt mess. Here’s a quote from you. I’m actually going to give your words back to you here. Quote: “Stop whining about being in debt, you had your fun, you made a mess, now it’s time to clean it up, get busy.” So, this show’s called Debt Free in 30, give us a quick overview of your basic strategy for cleaning up a debt mess.

Gail Vaz-Oxlade: Okay, so the first thing you need to do is make a list of all your debt. And you need to order the list from highest interest rate to lowest interest rate. You have to calculate what your minimum payments on each of those debts are so you that know what you have to do to keep them in good standing so you don’t end up wrecking your credit score.

The next thing you do is you calculate what the payment needs to be to be out of debt by a certain date; the minimums aren’t enough. So, if you have a loan – let’s say you have a line of credit and you have $12,000 on the line of credit. If you just keep making the interest payment and a small token amount towards the principle, you’re going to have that line of credit forever. Instead what I want you to do is pick a day by when the line of credit will be gone. It might be 12 months from now; it might be 24 months from now. If it’s 24 months from now, you will be paying $500 off the principle every month plus your interest cost. So you write all that down. Figure out what that’s going to be for each one of your debts.

The next step is very important. The next step is the snowballing. Once you have added up all the amounts you have to pay to be out of debt by a certain day, and that date may vary by debt. If you still have a car loan in place and it’s for three years, that’s how long it’s going to take. But you’re going to set the date for your line of credit, you’re going to set the date for your credit cards. What you do is you add up what you’re going to have to pay to be out of debt, you’ll come up with one lump sum amount and you are going to apply the minimum payment on everything except your most expensive debt and by that I mean the callable debt with the highest interest rate. And that’s where you’re going to put the majority of the money, so, doing that you’re going to reduce your interest costs faster.

Doug Hoyes: So, an example of a callable debt with a high interest rate would be something like a credit card?

Gail Vaz-Oxlade: Yes.

Doug Hoyes: A finance company loan.

Gail Vaz-Oxlade: Yes. Buy now, pay later.

Doug Hoyes: A pay day loan.

Gail Vaz-Oxlade: Pay day loan is a perfect example. Although usually people who are in the pay day loan cycle, what you have to do to get out of that is you have to get yourself another job. You have to work your buns off because you have to get ahead of the pay day loan.

Doug Hoyes: Yeah, you’re almost toast at that point.

Gail Vaz-Oxlade: Absolutely.

Doug Hoyes: So, you’ve got this list of all of my debts and I’m going to start with whatever the highest interest rate one is, that’s callable. So, if I happen to have a very high interest rate mortgage, well I guess it’s either sell the house or live with it. Those are your choices, right?

Gail Vaz-Oxlade: What you’re going to do is you’re going to try and get rid of the callable debt first because a callable debt is a debt that the bank can demand back without any notice, virtually no notice, 24 hours usually. So, they can come to you and they can say to you, you know that $12,000 line of credit you have? I want my $12,000 back. And if they can’t have it back they’ll immediately send you to collections which will ruin your credit score completely and make all your other debt more expensive.

Doug Hoyes: Or at the very least they can jack up the interest rate on that one. So, your really low interest rate line of credit that was at 4%, all of a sudden now it’s at 10% cause they’ve decided you’re a higher risk. That’s almost just as bad.

Gail Vaz-Oxlade: A lot of people don’t realize that that can happen. I’ve gotten quite a few letters from people recently telling me that financial institutions have been raising the interest rates on their lines of credit.

And they don’t understand why because the media keeps talking about the fact that we’re still in this low interest rate environment and the Bank of Canada rate hasn’t changed so why is the bank’s rate changing? People don’t recognize the fact that banks set the interest rates themselves; the Bank of Canada rate is what they get to borrow at. It’s not what consumers get to borrow at. And even with people who have good credit scores, sometimes what happens is the money market shrinks. And so, banks are having a harder time getting their hands on money and so what they do is they start taking a harder look at who could potentially be a risk. And if you missed a payment two years ago, you’re a bigger risk and so they jack up your interest rate.

Doug Hoyes: And that’s what does it. So, you got to start with the hard work which is make the list, sort it out and then come up with a plan to deal with it.

Gail Vaz-Oxlade: Absolutely and it’s all outlined in Debt Free Forever. I mean I have a step by step guide. There is no excuse for anyone not being able to do this. Because my editor Kate Cassidy at Harper Collins, she made me put every single step in that book with examples. And if you can’t afford to buy the book, go to the library.

Doug Hoyes: Yep, well we’re going to put a link in the show notes to that book. Because I agree, of all your books that’s my favourite because it is very practical, very methodical, it’s all right there. Great, thanks very much for this Gail.

Gail Vaz-Oxlade: Thanks Doug.

Doug Hoyes: So, there’s Gail Vaz-Oxlade’s advice on how to deal with a debt mess. Make a list of your debts, order them from highest to lowest, pay off the callable debts with the highest interest rates first, and keep working until you’re done. It’s hard work and you need a plan, but it’s a great strategy to clean up your debt mess.

But what if you have a huge amount of debt? In Gail’s example she’s talking about paying off your debt over a two or three year period. But what if your debt is so large that even if you cut your expenses and got a second job it would still take you ten years to pay everything off? Then what can you do? There are strategies to deal with that and that’s what we’ll talk about right after this quick break. That’s coming up next, right here on Debt Free in 30.

Doug Hoyes: Before the break we heard Gail Vaz-Oxlade describe how to clean up a debt mess. She gave a lot of great advice and you can find out more in her book, Debt Free Forever, which I’ll link to in the show notes over at hoyes.com.

Gail’s advice is to make an inventory of your debts, make minimum payments on all of your debts and devote all of your extra money to your high interest callable debts. That’s great advice but what if your debts are so huge you can’t even make your minimum payments?

Here’s an example. Let’s say that Mary and Joe have decent jobs now but two years ago Joe’s company closed down and Joe was out of work for six months and he’s not making as much at his new job now. Mary has had some medical issues so she’s had time off work and she has a lot of expenses for prescriptions, doctor visits related to her medical condition so they’ve had to use credit to survive. Their children are grown but they’ve also had to borrow some money to help out their kids and to help out their aging parents. As a result Joe and Mary have over $60,000 in debt between them on credit cards and lines of credit.

Joe and Mary are earning about $4,000 a month between them, but from that they have to pay rent and groceries and transportation and all of their other living expenses. They live pretty frugally but they’re still helping to pay for some of Joe’s father’s costs at the nursing home he’s in and that only leaves them about $500 per month to put towards their debts.

The interest rates on their line of credit and credit cards are fairly reasonable, averaging around 10% on everything, but unfortunately 10% interest on $60,000 in debt works out to about $500 a month just in interest. So, Mary and Joe can only afford to pay the interest and nothing more. They would love to pay off their debts but they just don’t have the money. Mary can’t work any more hours due to her medical issues and Joe keeps looking for a better job but hasn’t found anything yet.

They have a real debt mess. What can they do? Well, to answer that question I’ve invited back to the show my business partner and Hoyes Michalos co-founder Ted Michalos. So, Ted what do you think? Is this situation hopeless for Joe and Mary?

Ted Michalos: Well, it’s never hopeless. It may seem that way to them because they can’t see the forest through the trees but there are solutions. There are things that they can do to get relief from this debt.

Before we start exploring with that I think I want to expand a little more on your scenario. So, $60,000 worth of debt and the interest every month is $600 but the minimum payments they are expected to make are somewhere between $1,500 and $1,800. So, it’s not just that they can pay the interest, they probably already are having trouble making the minimum payments on all of this debt because where is that $1,800 going to come from?

They probably put a payment on the Visa card and then take it out again and put it on the Mastercard and take it out again and put in on the American Express Card. So, you’re right, they’re dealing with the interest but the debt is never going to go down.

Well, so what do we need to do? We’ve got to find a way to eliminate the interest and reduce the total amount that they have to pay.

The solution I think that comes to mind is something called a consumer proposal. Now this is a legal procedure where you repay a portion of what you owe. They’re becoming much more common and popular in the last few years. In fact now about half the people that go to see a bankruptcy trustee, thinking they have to file bankruptcy, end up filing a consumer proposal instead because it is a so much better solution.

Doug Hoyes: So, let’s break it down and go through this kind of step by step. So, why is it a better solution than just going bankrupt? They’ve got all this debt, why not just go bankrupt, blow it away and start over? Why are you not recommending that?

Ted Michalos: Well, so you got to understand how bankruptcy works. The concept behind bankruptcy is, look I can’t repay any of the $60,000. In exchange for eliminating the $60,000 worth of debt there are very specific rules for what you have to pay and what we have to deal with.

First and foremost we look at is there anything that you own that can be turned into cash to go to reduce your debt? So, if you have equity in your home or if you’ve got mutual funds or savings, if you got RESPs for your kids, all of these things can be seized to be turned into cash in a bankruptcy. In a consumer proposal, we’re not seizing anything. A consumer proposal is literally a deal that you make with your creditors to repay part of what you owe.

Doug Hoyes: Now Joe and Mary they don’t own anything, they rent, they’ve got an old car. They don’t have any investments. They make $4,000 bucks a month between them, so wouldn’t bankruptcy just be a quicker and cheaper option?

Ted Michalos: Well and it could be. But the second element of bankruptcy is there is a monthly payment based on family size and income. I don’t want to get too technical but based on their situation; they’ve got two people in the household, $4,000 coming in. Their bankruptcy payment would probably be somewhere in the neighbourhood of $750 a month. It would run for 21 months. So, bankruptcy is going to cost them between $15,000 to $20,000.

Doug Hoyes: And if you want to find out more about what Ted’s talking about you can go to our website and do a search for surplus income, that’s the concept that he’s talking about.

But Ted’s right, the more you make, the more you got to pay. That’s how bankruptcy works. Right now Mary’s income probably isn’t going to go up. Joe would like to find a better job so if his income goes up while he’s bankrupt then the payment goes up. That’s how it works, right?

Ted Michalos: That’s exactly right.

Doug Hoyes: It’s re-evaluated every month. So, bankruptcy doesn’t sound like a great idea because based on their current situation it could cost let’s say $750 a month – and again we’re giving round numbers, when you come in to see us we do you the exact math for your situation – and they will be bankrupt for 21 months and he might have to pay more than that as time goes on. Plus he’d lose his tax refund and any other assets he might have. So, the bankruptcy doesn’t sound like a great option.

Ted Michalos: Now and don’t forget, you said based on their living expenses they’ve got $500 a month to pay and we just said the bankruptcy is going to be $750, so it doesn’t solve the problem anyway.

Doug Hoyes: Yeah, they can’t afford to go bankrupt, that’s really what happens.

Ted Michalos: And that’s got to drive you nuts folks.

Doug Hoyes: So, okay a proposal then, is it possible to do the proposal for less than $750 a month?

Ted Michalos: Yes. So, the proposal, there are two conditions. You need to offer your creditors more money than they get in a bankruptcy. And currently you need to offer them about a third of what you owe. So, it’s one or the other. Well, we just said a bankruptcy is somewhere around $15,000. They owe $60,000, a third of $60,000 is $20,000. So, it’s more than the 15 and the question now is can we make it into a manageable payment? For proposals you’re allowed to pay over five years. So, $20,000 is something like $333 a month.

Doug Hoyes: So, and if they can afford $500 then I guess they can do it in 40 months instead of five years.

Ted Michalos: That’s exactly right.

Doug Hoyes: They can get it paid off quicker. So, the whole concept then in a consumer proposal is, you take what I would have had to pay in bankruptcy, offer a little bit more because we need the creditors to say yes to it; but I can stretch those payments out over a longer period of time then what would happen in a bankruptcy.

Ted Michalos: That’s exactly right. And there are two bigger benefits. So, the first is completely emotional. You’re going to feel better about paying back part of your debt. So you can honestly say if anybody ever asks you, have you filed bankruptcy the answer is no, you didn’t. You filed a proposal and you paid back what you could afford to repay.

And the second benefit simply is, if your situation improves in the bankruptcy you’re actually penalized. In the proposal it’s locked in. So, once the creditors and you have agreed to a payment plan, that’s what you owe. If you pay it off quicker? That’s great; you’re done with the solution quicker. If your situation improves, if you get a better paying job, if you inherit some money, even if you win the lottery, you’re not required to pay this thing off any quicker than what you’ve agreed to. So, you can actually start improving your life.

Doug Hoyes: And how long does this all take? So, I’m listening to this show right now and I think oh boy, ya I got to do this. So, I get on the internet, I go to hoyes.com, I contact Ted or one of your people and how quickly does it take before a proposal’s up and running?

Ted Michalos: Yeah, so somebody who’s got all the information that we need to prepare the legal documents, and we’re not talking about complicated stuff here. You could see me in the morning and if you had all your ducks in a row I could file a proposal for you in the afternoon. Realistically it takes a couple of days.

Doug Hoyes: So, two three days and the kind of information you’re looking for is what, your name, your address, who you owe money to?

Ted Michalos: That’s right, copies of your bills that sort of stuff. I mean it’s all stuff that you probably have at your finger tips. Now, you may not have opened the envelopes because you’re scared of what they say but you probably have all the information we need at your house.

Doug Hoyes: So, let’s say I’m listening to this on the weekend, I phone your office on Monday, I come in to see you on Tuesday, I give you all the information. I come back on Friday to sign the paper work. When do I have to start paying you and when do I know that this is all good?

Ted Michalos: So, the proposal, as soon as you file it, you stop making payments towards the debts. So, you stop making the credit card payments, the line of credit, the loans, all of that sort of stuff. They get 45 days to figure out whether or not they like your deal and so during that 45 days you’re not dealing with the credit cards anymore. You’re not dealing with the lines of credit, you’re not dealing with the loans. In most cases you will be required to make your first payment into the proposal in the first 30 days. And the reason you’re doing that? It’s a goodwill gesture. You’re trying to demonstrate that, yes, I can afford to make this payment, look I want this thing to work.

Doug Hoyes: So, in Joe and Mary’s case where they’re paying $500 or $600 bucks in interest right now a month, but really their payments are $1,500 bucks a month because they’ve got to make more because that’s what the deal is.

Ted Michalos: They’ve got to make the minimums.

Doug Hoyes: You got to make the minimums. They would instantly start a proposal where they’re paying maybe $350, $400, $500 a month right on day one. So, they’re better off right on day one and then, generally speaking, 45 days later it’s all official. That’s how it all works?

Ted Michalos: That’s exactly right, yep.

Doug Hoyes: And so there’s no massive upfront fees or anything like that?

Ted Michalos: In fact if somebody’s asking them for significant upfront fees, then they’re probably not dealing with a licensed trustee, they’re dealing with someone called a debt consultant and you don’t want to get me going on these days cause that’s a whole other program.

Doug Hoyes: Well, we’ll have to make a note for that. So, just to be very clear here, before I sign the paperwork with you to do a consumer proposal, how much money do I have to give you?

Ted Michalos: You shouldn’t have to give me anything.

Doug Hoyes: Zero, okay. So, there is no upfront fee until the process starts, until it’s filed with the government, it’s legally binding.

Ted Michalos: That’s right. And that’s the way the law is written.

Doug Hoyes: So, this isn’t just you being a nice guy.

Ted Michalos: No.

Doug Hoyes: It’s illegal or it’s not allowed –

Ted Michalos: Any trustee you talk to, the first thing you should say is do you need any money upfront and if they ask for any money upfront, go talk to another trustee.

Doug Hoyes: Because they’re not doing it right. The rule is whatever money you pay has to go into the process. There can’t be any charge up front for –

You’re looking for a solution for your debts here. You’re not looking for somebody to take advantage of you and hit you with a bunch of legal fees.

Doug Hoyes: So, what down sides are we missing here? Is this going to totally toast my credit? Is this going to make me so I can’t get a job? Like what are we missing here?

Ted Michalos: Let’s talk about the credit report cause this is one of those bugaboos that people have in their mind that it’s critically important that their credit report look great. And you know what? It is important that you have good credit. But frankly, in this couple’s case, they already owe $60,000; no one is going to approve them for any new credit. So, even though they’re making all the minimum payments and their credit report looks good, the fact is they don’t have good credit because no one is going to approve them for anything new.

By dealing with your debt, you’ll get over the hump. There will be a period of time when you don’t have access to credit but that’s a good thing, frankly. You need to learn to live within your means, to live with money you’ve got coming in and not rely on credit. And then once you’ve dealt with the debt, your credit will re-establish itself very quickly.

Doug Hoyes: So, your credit’s already shot, that’s why you’re talking to us. It can’t be any worse than what it already is. But by dealing with the debt you actually clean it up. That’s what you’re talking about.

Ted Michalos: That’s right. You’ll make your credit better.

Doug Hoyes: And there’s no other hidden things we haven’t thought of. You’re not going to get fired from your job. You’re not going to get evicted from your house. In fact if you actually owned a house and had a mortgage and it was up to date, you could just keep on paying it.

Ted Michalos: Yeah, a lot of people are worried so if I do one of these things, do I lose my car? Do I lose my house? A proposal is designed to deal with your unsecured debts. Things like your credit cards, maybe your income tax bill, your line of credit, your outstanding loan, even pay day loans. It doesn’t deal with things like your car lease or your car loan or your mortgage. As long as you make your payments on those secured debts you get to keep the things that you’re paying for. And that just makes sense.

Doug Hoyes: Sounds like a perfect arrangement. Well, there you go. So, if you’ve got a massive amount of debt that you can’t service on your own, a great way to clean up your debt mess is by filing a consumer proposal. We’ve got lots of information on that over at hoyes.com. Thanks for being here Ted. I’ll be back to wrap it up right after this. You’re listening to Debt Free in 30.

Doug Hoyes: Welcome back. It’s time for the 30 second recap of what we discussed today. My first guest today was Gail Vaz-oxlade who gave us a very concise strategy for cleaning up a debt mess. She said you should make a list of your debts, order your debts from highest interest rates to lowest, make your minimum payments on all of your debts but pay extra on your highest interest rate callable debt. Things like credit debts, pay day loans and lines of credit. Get rid of the callable debt first because the bank can call that loan at any time which can ruin your credit or jack up the interest rate. It’s hard work, you need a plan but it can work.

In our second segment Ted Michalos explained how if you have a huge amount of debt and can’t pay it in full, a consumer proposal may be the best option for cleaning up a debt mess. That’s the 30 second recap of what we discussed today.

So, what’s my take on cleaning up a debt mess? I think it’s obvious from what our two guests said today that the first step is to figure out where you’re at. How much debt do you have? And what will it take to pay it off? It’s always best to clean up your debt mess on your own. So, if you can cut your expenses and increase your income to free up cash, that’s the best way to go. If you can get everything paid off in a year or two, do it. Pick up a copy of Gail’s, Debt Free Forever book and follow her detailed instructions. If you have more debt than you can pay off in two or three years, or longer, it’s time to consider a more permanent solution and that’s where a consumer proposal comes into play.

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 participating radio stations and details on how you can download the show to listen to on your iPod or smart phone.

Full show notes are available on our website and I would 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 and that was Debt Free in 30.

Month: January 2015

When you file will affect how many tax refunds you lose

Creditor actions

Determining what’s a preferential transaction

Sponsorship issues affect when to declare bankruptcy

FULL TRANSCRIPT show #22 When is the Best Time to File Bankruptcy

Penalty Rates on Overdue Or Delinquent Credit Cards

How Do Collection Agencies Hear About My Debt?

When Legal Action Looms

Negotiating a Payment Arrangement on your Own

Stopping Calls By Filing Insolvency

FULL TRANSCRIPT show #20 with Blair Demarco-Wettlaufer

Clean up your Debt with a Consumer Proposal

Meet Mary and Joe

It’s Never Hopeless

Building a Plan to Get Out of Debt

FULL TRANSCRIPT show #19 with Gail Vaz-Oxlade and Ted Michalos

Get A Personalized Debt Free Plan Today