I am often asked how long a bankruptcy or consumer proposal remains on a credit report.
In Canada there are two large credit reporting agencies, or credit bureaus, Equifax and Trans Union, and they each report bankruptcies and proposals differently.
Bankruptcy is a legal process that helps you eliminate debt you can’t repay. That’s the positive side of bankruptcy, but I know people are worried about the impact bankruptcy will have on their credit report and their ability to get a loan after bankruptcy. I’m Doug Hoyes, a Licensed Insolvency Trustee with Hoyes, Michalos & Associates. Well, let’s look at how bankruptcy appears on your credit report.
Bankruptcy will appear in two sections of your credit report; the legal or public record section, and the individual account section which is a list of all of your debts. When you file bankruptcy, the Office of the Superintendent of Bankruptcy will send information to the credit bureaus who will put a note in the legal section that states you filed a bankruptcy proceeding and the date you filed.
Your credit report also includes a trade account section of activity reported to the credit bureaus by your creditors, which includes the name of the creditor, the balance outstanding, the last payment date and how many months you might be behind on payments. When you file bankruptcy, your creditors will add a note that the debt is included in bankruptcy.
The next update happens when you are discharged. The Office of the Superintendent of Bankruptcy will notify the credit bureaus when your bankruptcy is finished, which is when you get your discharge. This discharge date is added to the legal section in your credit report.
So when are these notes on your credit report removed? In the case of the legal section notice for a first time bankrupt, Equifax removes the notice six years after your discharge, TransUnion removes the notice seven years after your discharge. In your trade account section, the credit bureaus will purge this information six or seven years after the date of last activity which is usually the date you were discharged.
It’s important to know that you can start to rebuild your credit long before this six or seven-year period ends. There are steps you can take to rebuild your credit even while you’re bankrupt. I don’t recommend deciding to hold off on filing bankruptcy because you’re worried about your credit. If you have more debt than you can ever hope to repay, your credit is probably already bad or soon will be. You can get a secured and sometimes unsecured credit card after bankruptcy and sometimes while you’re bankrupt depending on what else is on your credit report.
Over the years I’ve had thousands of clients who have been able to get a loan after they’re discharged from bankruptcy. The terms of the loan like the interest rate and down payment required will depend on their income and what steps they’ve taken to rebuild their credit. Your ability to borrow at favourable terms will improve over time as you work to rebuild your credit, but the credit rebuilding process often starts and moves faster if you eliminate troublesome debt first.
According to Equifax’s website, “Bankruptcy stays on your Equifax credit report for 6 years after the discharge date, or 7 years after the date filed without a discharge date. If a second bankruptcy is filed, then the first re-appears on your Equifax credit report, and both bankruptcies remain for 14 years after the discharge dates.”
TransUnion
On TransUnion’s website, they state that they maintain information on your file for the maximum length of time permitted by provincial credit reporting legislation. In Ontario, credit reporting is governed by the Consumer Reporting Act which states, in subsection 9 (3) (e), that a consumer reporting agency shall not include in a consumer report “information as to the bankruptcy of the consumer after seven years from the date of the discharge except where the consumer has been bankrupt more than once.”
For a single bankruptcy in Ontario, TransUnion maintains this information seven (7) years from the date of discharge. If the consumer declares bankruptcy on more than one occasion, each bankruptcy will report on file for fourteen (14) years from the date of discharge of each bankruptcy
TransUnion also states that when a bankruptcy is removed from your file, all accounts reported as included in that bankruptcy will also be removed from your file.
Summary
Equifax automatically deletes a first bankruptcy six years after the date of discharge, whereas TransUnion leaves the bankruptcy on your credit report for seven years after the date of your discharge.
Consumer proposal reporting
Consumer proposal reporting was updated by both credit bureau’s in 2019. Both have added a maximum time period of 6 years after the date of filing or default.
Equifax
A consumer proposal will be removed from your Equifax credit report 3 years after you’ve paid off all the debts according to the proposal, or 6 years from the date it was filed, whichever comes first.
TransUnion
A consumer proposal and all accounts reported as satisfied through the proposal will be removed from your TransUnion credit file 3 years from the date you satisfied the proposal or 6 years after the date you defaulted on the account, whichever date comes first.
Summary
What this means is the maximum period a proposal will remain on your credit report is 6 years from the time you file and can be shortened if you pay off your proposal in less than three years. For example, for a five-year proposal, the note will be removed one-year after completion. For a 4-year proposal, 2 years afte completion (because you reached the maximum 6 year period). If you pay off your proposal in two years, it will only be on your credit report for a total of 5 years (2 years + 3).
Path to credit recovery
If you are avoiding talking to a bankruptcy trustee because you are concerned about how your credit will be affected, it’s important to consider two factors:
If you have bad credit today, bankruptcy or a consumer proposal can be a step in repairing your credit history because it eliminates debt you may otherwise not be able to pay. Even if you think you have good credit, your ability to obtain a new loan may be negatively affected if you carry too much debt.
It is important to note that your credit report is only one element lenders use to decide if they will let you borrow money. They are also interested in your income, job stability, assets, and perhaps co-signers. By saving money and paying your regular monthly bills on time, it is possible to gain access to credit in less than seven years after your bankruptcy has ended.
If debt is holding you back from rebuilding your credit, talk with a Licensed Insolvency Trustee about how to eliminate your debt. We provide free, no-obligations consultations during which we will conduct a full debt assessment and provide you with options to get out of debt so you can build a stronger financial future.
Today on Debt Free in 30 I discuss options for dealing with the Canada Revenue Agency when you owe them money with our resident Hoyes, Michalos tax expert, Trustee in Bankruptcy, Ian Martin.
Ian is both a licensed Bankruptcy Trustee and Chartered Professional Account, and he also has seven years of experience working at Canada Revenue Agency. As someone who understands both tax law and insolvency law, Ian brings a wealth of knowledge to the conversation and provides in-depth answers to many common tax debt questions.
Here are just some of the topics we discuss on this month’s FAQ podcast.
Can tax debts be included in bankruptcy?
Yes they can. It is a common misconception that tax debts cannot be included in bankruptcy. For individuals, both a bankruptcy and consumer proposal can eliminate tax debt, including not just interest and penalties but the principal tax owing as well.
The confusion generally begins when you start taking about different types of tax debts, especially personal debts versus business tax debts.
Personal income tax debts are eligible for discharge in a bankruptcy.
If you are a small business owner you may owe money for HST payments in addition to tax on your personal income. If you operate as an individual or sole proprietor, Ian explains that your HST debts are considered personal debts that would be dealt with through a personal bankruptcy.
If your business is incorporated, the corporation is considered in a legal sense a separate person. That means business income taxes in a corporation are the company’s debts, not yours personally.
However there are corporate debts that can cross over into personal debts and those are debts you assume as a director. Ian discusses how and why corporate debts for payroll deductions and HST can become personal debts of the company’s director’s and that these debts can also be eliminated if they file personal bankruptcy or a consumer proposal.
Should you go bankrupt if you owe money to Canada Revenue Agency?
If you have a tax debt, Ian addressed the issue of whether or not those debts are large enough to deal with through a consumer proposal or bankruptcy. Ian explains how the answer can only be determined by completing a financial debt assessment. When doing so he would ask several questions like:
What kind of resources do [you] have? What kind of income do you have? What kind of reoccurring payments can you make towards it? Do you have some kind of property or assets that you could sell or refinance to come up with money to pay towards the debt obligation?
Ian explains that making the decision about what to do about your debts owing to CRA, is complicated by the fact that Canada Revenue Agency has strong collection powers and this means they may not be willing to make a deal with you directly.
the tricky part is, the person to whom you owe the money, whether it be Canada Revenue Agency or somebody else, often times, they’re kind of in the power seat in terms of dictating the time frames and the terms of repayment.
Will CRA negotiate a settlement?
Ian described a few general principals around negotiating on your own with Canada Revenue:
Generally CRA won’t accept payment terms of less than one year.
Don’t ignore CRA. They have strong powers of collection and can freeze your bank account and garnish your wages.
You can make a fairness application to reduce penalties and interest.
You cannot settle the actual taxes owing (principal) without filing bankruptcy or a consumer proposal.
As to the last point, Ian explains why lawyers and accountants cannot settle your actual taxes payable. They can be helpful in making a fairness application to deal with penalties and interest, or to dispute an incorrect assessment, but they cannot settle legitimate assessed tax debts. That can only be done through a licensed Bankruptcy Trustee.
In the case of settling tax debts with CRA through a consumer proposal, Ian also described the general guidelines CRA is looking for when deciding whether or not to accept your settlement offer. He explain that CRA is often unique among creditors in that they look beyond just the dollar value of the settlement to issues of character. In Ian’s words, they are looking to see:
if you’re up to date with your returns, if you co-operated with them in the past. If there had been a prior insolvency, a prior bankruptcy or a proposal where taxes were one of the large issues, so they want to see have you been a problem in the past basically, but then also, how are you going to be in the future?
If you’ve got tax debts we recommend listening to the entire podcast with Ian as he covered these and many other issues in greater detail. You can also read the full transcript below.
If you have other general questions how to eliminate tax debts, contact us for a free consultation. Our team can help you find the right solution for you.
FULL TRANSCRIPT show #30 with Ian Martin
It’s the end of the month so that means it’s time for another Frequently Asked Show here on Debt Free on 30. And since we’re headed into the peak of tax season, we’re going to spend the entire show answering questions about debt and taxes. Like what can you do if you owe Canada Revenue Agency money for back taxes? What if CRA has already frozen your bank account? Can you go bankrupt and get rid of your taxes? That’s just the tip of the iceberg when it comes to frequently asked questions about taxes.
So, for answers to those questions and more, I’m pleased to welcome back to the show our resident debt and taxes expert, Ian Martin. Ian, thanks for being here, how are you doing today?
Ian Martin: It’s a beautiful day Doug. Good to see you.
Doug Hoyes: Great, thanks Ian. So, you’ve been a guest on the show before, but I don’t think you’ve ever told our listeners about your background. So, can you give us your quick professional history?
Ian Martin: Sure, and I guess if I’m being put out there as a tax expert people want to have some confidence that I know what I’m talking about, right?
Doug Hoyes: Absolutely.
Ian Martin: So, as you know I’ve been working with you for the last six years. I’m a Trustee in Bankruptcy, help people deal with their debts. But I think my other personal background that put me in a good position to talk about this kind of topic. I’m a CA by background. I started out years ago with one of the big firms where you get exposure to a lot of different stuff, accounting and tax. I worked in the industry for a couple of years, where I did some tax compliance work there in a manufacturing company. But here’s the key, I spent almost seven years of my life working for the Canada Revenue Agency.
Doug Hoyes: Seven years.
Ian Martin: Seven years, yes, seven years. It was a long time. And we can make fun of the government and what that means. But it actually was very valuable work experience. It gave me a good working knowledge of different aspects of the Income Tax Act and things that they look for in terms of auditing and collection and appeals and stuff like that. That was before I started working with you six years ago.
Doug Hoyes: And that’s exactly the reason I wanted to have you on the show today. Like you said you’re a CA and a Trustee in Bankruptcy so you understand that end of it; but having actually worked for many years at Canada Revenue Agency gives you that kind of, that inside look at the way they view things.
Ian Martin: I think it gives me a very well rounded view of the world here.
Doug Hoyes: A very well rounded view. So, I can tell people what I think their position is, but you were actually there and we’ll get into that as we get into the show.
So, with that background let’s start with the most frequently asked question about taxes. We’re not going to bury the lead here, let’s get to the good stuff right off the bat. And I’m sure you get asked this question many times every week and it’s the same question I get asked all the time and that’s this: can you go bankrupt on taxes owing?
Ian Martin: In a word, yes.
Doug Hoyes: So, there you go, real simple, thanks for listening folks, there’s our show. And this is probably the biggest misconception there is. People figure well you can’t go bankrupt from the government. The government always stays there.
Ian Martin: Till death, death and taxes, right?
Doug Hoyes: Absolutely, it never goes away. But you’re saying yes you can. Well, let’s break it down. So, personal income taxes, so, let’s say I owe personal income taxes from prior years, your saying that’s included in the bankruptcy.
Ian Martin: Absolutely, no doubt.
Doug Hoyes: No doubt, easy answer. Don’t even have to couch it. Okay, what about things like if I was self-employed. So, I do work on the side or I’m a self-employed guy working in construction, I’m a roofer, I’m a plumber, maybe I’m a self-employed consultant and I owe money for taxes in that case. Is that included?
Ian Martin: Yes. So, usually that individual there’s quite often amounts owing for personal taxes but also HST. If you’re a small business operator as an individual or sole proprietor, again those are ultimately personal debts that would be dealt with through a personal bankruptcy.
Doug Hoyes: And so HST you mentioned, that is also included in a bankruptcy.
Ian Martin: Yes, absolutely.
Doug Hoyes: Okay, so personal income taxes, HST is included. Now what if I’m self employed but I do it through a corporation. So, I have my own corporation and the corporation – well, let’s take a couple of different scenarios. The first scenario being the corporation itself owes taxes. How does that work?
Ian Martin: Right and I guess I don’t want to sound too much like a textbook but I think that’s the distinction where the corporation in a legal sense is a separate person.
So, foremost if your corporation owes debts, it’s that person owes it, not you as the individual owner, automatically. So, if there’s a corporate income tax debt, you are not personally responsible for it but there’s some kinds of company debts, corporate debts that will kind of cross over that line where you do become personally responsible.
Doug Hoyes: So, let’s break this down then. So, the corporation owes taxes, then yeah I guess the corporation could go bankrupt if it had to; of course it means the corporation is out of business at that point. And I think in my experience, tell me if I’m wrong, but it’s pretty rare that we see a corporation that owes a lot in income taxes because that would mean the corporation made a lot of money.
Ian Martin: That’s exactly what I was going to say.
Doug Hoyes: That’s pretty unusual. Now you were hitting on something else though. So, I operate the corporation, I’m the director of the corporation.
Ian Martin: That’s the key word there, the director.
Doug Hoyes: I’m the director so it doesn’t matter that I own it; the key point is that I am the director of the corporation, so what happens with tax debts of my corporation if I’m the director of it? So, if the corporation owes income taxes, purely income taxes –
Ian Martin: So, that’s on the money that the company made.
Doug Hoyes: Yeah, the company made a profit, didn’t pay taxes on it. Am I liable for that as a director?
Ian Martin: No.
Doug Hoyes: Okay, now the corporation has employees. And they obviously take CPP, EI, income tax off your payroll each year. Your payroll deductions every week, if those don’t get remitted to Revenue Canada, am I potentially, as a director, liable for that?
Ian Martin: Yes, and that’s the key word there. The director is viewed to have a – what they call a fiduciary responsibility. You have a responsibility to make sure the company is remitting these moneys to the government. And because of that, the director is held personally responsible for the amounts that are not remitted.
Doug Hoyes: Okay, so if I’m the director of a corporation, I am taking money from my employees in this example, that I should be handing over to the government. The government is saying that was never your money to begin with.
Ian Martin: That’s exactly the point. They’re saying it was not your money.
Doug Hoyes: So, you have to pass it on to the government. If you don’t, well, you are personally responsible for it.
Ian Martin: Correct, the buck stops at the director.
Doug Hoyes: So, it doesn’t matter that you’ve got a corporation, you are still personally responsible for moneys that you have withheld from your employees. What about HST?
Ian Martin: It’s really the same consideration you were just talking about with the payroll stuff. It’s by virtue of being the director, that you are looked to being personally responsible because in a similar sense, it’s money that was collected from the customers, the HST component of it, and held effectively in trust for the government, but because it wasn’t remitted, but it should have, it was never the company’s money. And that’s also why the director would be held personally responsible.
Doug Hoyes: So, there’s the key to it. Any money that went into my hands that was really not mine to begin with, the money I took off for my employees that I should have sent into the government, the money I collected from my customers on HST, that I should have sent into the government, even if I’ve got a corporation, I am personally responsible as the director for those amounts.
Ian Martin: Yes, absolutely.
Doug Hoyes: Pretty much that simple. Okay, so let’s take this a step further then. So, someone’s listening to us today and they either owe taxes personally because they – I mean a common scenario would be you cash in your RSP when you’re out of work, you end up having to pay tax on that, they only withhold 10 percent at the bank but then at the end of the year when you come to file your taxes now you owe 30 percent or 40 percent.
Ian Martin: Yeah, the real tax rate is 30 percent so you owe more taxes.
Doug Hoyes: You owe more. So, that would be an example of taxes that would be included in a bankruptcy, or if I operated a company and I had these director’s obligations. So, how do you decide, you’re the tax expert here, you’re the insolvency expert, how do you decide whether or not the debts I have are big enough that I should go bankrupt? We know that yes taxes are able to be included, but how do you decide if my tax debts are big enough that I really should be considering a bankruptcy?
Ian Martin: That’s kind of a – I feel like my answer’s going to be a bit soft on that one, Doug. And in a sense I feel like it’s the same kind of consideration generally with regardless of the nature of the debt. Because ultimately, when people have debt obligations, what we’re trying to look at when doing an assessment, what kind of resources do they have? What kind of income do you have? What kind of reoccurring payments can you make towards it? Do you have some kind of property or assets that you could sell or refinance to come up with money to pay towards the debt obligation?
Doug Hoyes: So, that’s kind of the first step then is, how can you pay this back on your own? What resources do you have?
Ian Martin: Right, that’s a good way of saying it. Effectively, am I in a position on my own to work out a payment plan. And the tricky part is, the person to whom you owe the money, whether it be Canada Revenue Agency or somebody else, often times they’re kind of in the power seat in terms of dictating the time frames and the terms of repayment.
Doug Hoyes: So, in your experience, what kind of payment plan is Canada Revenue Agency likely to accept? Obviously if I can give them all the money tomorrow, they will accept that.
Ian Martin: That’s a great option, but typically not realistic.
Doug Hoyes: Yeah and if I’ve got property to sell or something then maybe I can do that. If I need 20 years to pay them back, they’re unlikely to accept that. In fact that’s pretty much an obvious no.
Ian Martin: Right, I mean obviously you’re exaggerating there a little bit to make the point. 20 years, whether it’s Revenue Canada or somebody else, typically people don’t go in for a 20 year payment plan.
Doug Hoyes: But if it’s something like six months to a year.
Ian Martin: Yeah, I was going to say that. From my experience what you see with the collectors, what they’re looking for is a payment plan usually less than a year, usually I see examples of six months, nine months maybe 12 months. I’ve seen extraordinary examples maybe as long as 18 months. But even with the government trying to propose some kind of multiyear plan, it’s extraordinary unlikely.
Doug Hoyes: So, the answer to the question then is, if you can take care of the tax debts on your own over let’s say a maximum of a year, you probably don’t need to go bankrupt, that’s a better option for you. But if it’s going to take a lot longer than that, then perhaps bankruptcy is something that you’ve got to consider.
Ian Martin: And when I meet with somebody that’s exactly what I try and point out. Is it maybe not as quite as bad as you thought and before we talk too much detail about something like bankruptcy, because that’s the last resort as you know, maybe it’s worth another chat with your CRA collector to see if there is the possibility of a voluntary payment plan.
Doug Hoyes: Well, and so I would like to get into this whole notion about what are the different options for dealing with tax debt. We’ve kind of touched on a couple.
We’re going to take a quick break and come back so that we can deal with that in a bit of depth, we’re talking about taxes here on Debt Free in 30. My guest today is, Ian Martin. We’ll be right back.
Announcer: You’re listening to Debt Free in 30. Here’s your host, Doug Hoyes.
Doug Hoyes: We’re back and my guest today is Ian Martin. We’re talking about taxes. And before the break we were talking about the different options that you can use when you’ve got a bunch of tax debt.
So, why don’t we start with that? I know I got a bunch of taxes owing. Where do I start? What are some things that I should – I don’t want to go bankrupt. Don’t talk to me about that. Talk to me about everything other than that. Where would you start?
Ian Martin: Well, I think we kind of got started on this conversation before the break, Doug and the first step is talking to your CRA collector and you need to be working with them to make sure – if they can’t get a hold of you, that leaves them with this great uncertainty where they then have powers to do things like freeze bank accounts and garnishee wages. So, number one, don’t ignore them.
Doug Hoyes: And they can freeze bank accounts, start garnishing your wages. They don’t have to go to court or anything, they can just do it.
Ian Martin: Correct.
Doug Hoyes: Okay so CRA is not someone you should just ignore.
Ian Martin: Correct. So, that’s point number one. But then the idea in starting the conversation with the collector is looking at the amounts and they’ll send you a questionnaire looking for some different income on a monthly basis, your different living expenses and then from there it’s trying to work out the details to say is there a payment plan that is feasible for you that is going to fit within the time frames and the amounts that they’re willing to work with? So, this is just the general idea of, can we work it out? Can we work it out on a co-operative basis where they withhold from taking more aggressive collection activity against you?
Doug Hoyes: So, you should talk to them.
Ian Martin: Correct.
Doug Hoyes: If you ignore them then they’re going to go right to the let’s get your attention step, which is freeze your bank account, garnishee your wages.
Ian Martin: It’s very effective in getting people’s attention.
Doug Hoyes: Absolutely. So, at least if you’re talking to them, there’s a chance that something can be worked out.
Ian Martin: And even when you’re having that kind of conversation, even if you haven’t hammered out the precise numbers yet, if you’re hopeful that that’s going to be the case and hopeful that it won’t come to bankruptcy, even if it’s a small amount like a little bit of good faith money on a monthly basis, can help in terms of having some co-operation with them as well.
Doug Hoyes: So, try to work it out directly with them.
Ian Martin: Signs of good faith.
Doug Hoyes: It’s common sense, try and work something out. Well, let’s say that it’s either not possible or the debt is too high, what would the next step be? What are some other options?
Ian Martin: There’s an internal process at the Canada Revenue Agency that’s referred to as, fairness. So, the idea here is not to reduce the amount of tax that was owed. There’s a separate process where if you’re contesting the amount of tax that was assessed, there’s a whole appeals process to go through there.
So, we’re assuming the amounts have been confirmed, you’re not disputing that, but the very punitive penalties in interest are really crushing. So, you make an application under what’s called fairness, and they take it on a case by case basis, honestly from my experience don’t move very quickly; we’re talking about many months or a year or more where they’ll review your application and look to see if there are factors pretty much beyond your control where they might give you a bit of a break in terms of the interest and penalties that were levied. But it’s not reasonable to have an expectation that they will reduce the amount of tax that was assessed.
Doug Hoyes: Okay.
Ian Martin: And that’s a misunderstanding for a lot of people.
Doug Hoyes: Yeah and that’s a very key point there. CRA does not have the power to reduce the taxes owing, the principle, like it’s pretty much that simple, unless you go through a formal process like a bankruptcy or a proposal. They do have the power in isolated circumstances to reduce the penalties and interest but that’s a pretty tough argument to make and you’re going to have to have a pretty compelling reason.
Ian Martin: So, for example being the small business owner that fell behind on his taxes and his HST for example, that would not be viewed as a compelling argument. It would be that, there is some kind of an extraordinary factor family wise or beyond your control that lead to you falling behind on things. So, there’s a somewhat sympathetic view of things but it has to be pretty extraordinary to get a positive result for that.
Doug Hoyes: Yeah, so if I had a very serious medical issue and I was in the hospital for six months, okay that might be a compelling reason why you’re not able to get things filed on time. They may give you a break in that case. But it’s not going to deal with the principle.
Ian Martin: Correct. And I like the way you said that, because it’s timing. If you have your returns filed but there’s extra penalties and interest because they were filed late, if there is a plausible explanation why that was the case, then you could see some co-operation that way.
Doug Hoyes: But then again, we’re only talking with fairness about principle on interest. So, what’s the other option then when I owe a lot of money both on principle and penalties and interest? I don’t want to go bankrupt, what’s my final step?
Ian Martin: I guess in general when I talk to people about taxes and Canada Revenue, it falls into two broad categories. You can work it out with them as we’ve been talking about or you can’t. And if you can’t then they have the power to take things from you against your will where then it’s a pretty good sign that you need the kind of protection that a trustee can bring. And if it’s – if you’re looking for an option other than bankruptcy then that would be making a formal proposal to the creditors like a consumer proposal that I could administer for you.
Doug Hoyes: Got you. So, that’s your final option. And I know I hear on the radio all these ads from guys that say we can work with Revenue Canada, we can make deals, those lawyers that advertise that kind of service and obviously a lawyer can negotiate, but a lawyer doesn’t have the legal power to do a consumer proposal or a bankruptcy, which are the only legal means that Revenue Canada, Canada Revenue Agency, will reduce the principle owing. That’s what you’re saying.
Ian Martin: Right and when I hear the examples of lawyers trying to negotiate settlements of taxes, I get concerned about that quite honestly because I feel that sometimes there’s an unrealistic expectation that is created in the marketing for some of those companies. Usually it’s more about, what we were referring to a minute ago about getting some concessions on penalties and interest, but it’s very, very extraordinary that there would be a concession on the amount of tax that was actually levied.
Doug Hoyes: Yeah and so if you want to make an application to the fairness committee and you want to have someone help you prepare it, sure a tax lawyer would be perfectly good to do that, maybe even better than an accountant to do that, but to expect principle to go away is just not realistic.
Okay, so that’s the options, now you mentioned that CRA has extraordinary powers, one of the powers being they can freeze your bank account and we see this all the time. You haven’t been making payments, you haven’t been talking to them, that’s primarily the reason they do it. So, they just notify your bank, boom your bank account is frozen. So, what can you do in that case?
Ian Martin: Well, I guess there is always the remote chance – well as you said, this is a tactic to get your attention. So, if it’s not too bad, if it’s not too big a number, and that then prompts the conversation with the CRA to work something out, then they do have the power to voluntarily hold that freeze, to withdraw that so that you can continue using that bank account on a reasonable way. And it just kind of facilitated my conversation to work it out.
Doug Hoyes: So, the first step if your bank account has been frozen by CRA is get on the phone, talk to them and say okay you got my attention. Can you unfreeze my account so I can start setting up some kind of payment system with you? Whether they’ll let you do it or not, that’s up to them.
Ian Martin: And I think this is probably point out the obvious that in the meantime if the account is frozen, I don’t need to be an accountant or a trustee to know this, most times people once they’re aware that if they do have some money coming in, they’re going to make sure they don’t deposit it into that same bank account so that would also be frozen. I think that’s kind of common sense observation, but I thought I’d put it out there.
Doug Hoyes: You’re going to put it somewhere else if at all possible.
Ian Martin: Right.
Doug Hoyes: So okay, I owe a ton of money and CRA says no we’re not lifting the freeze on your account, I guess at that point I’m back to the options we talked about in the –
Ian Martin: Yeah, that’s where it’s taken us back to, where you’re coming to the conclusion that I can’t work it out with them, what can I do? This then takes you back to the legal options of a bankruptcy or a consumer proposal, where one of the basic concepts with those things is that it gives you legal protection so that the people you owe money to no longer have recourse against you. That sounds kind of technical; they can’t take anything from you anymore. So, that freeze, then upon filing a proposal or bankruptcy, the trustee is able to lift that freeze so that the CRA can’t take things from you anymore.
Doug Hoyes: So, the trustee, once you file a legal process either a proposal or a bankruptcy, has the power to notify the bank and CRA to lift the freeze and then it gets lifted. And you’re right practically speaking. By that point you’ve probably opened a new bank account somewhere else but that’s the practical answer to how to get a freeze lifted.
Okay, we’ve talked a bit about bankruptcy; let’s talk a little bit about the actual bankruptcy process. So, let’s assume it’s the middle of the year, I owe a lot of taxes and I decide to go bankrupt, so I come in and talk to you. With respect to taxes, what are the things you’re going to be asking me about, what are the things you’re looking at?
Ian Martin: Usually my first question is if you’re up to date with filing the returns. And there’s a couple of reasons for that. Number one, assuming that bankruptcy is the right answer, is going to be a condition of getting your bankruptcy done that the returns are filed up to date, regardless of what the number is, regardless of what the overall amount is, both your trustee and the government are going to want to know that you’re filed up to date and that way they know basically what the debt was and if there’s any kind of money to be paid out of the bankruptcy that will dictate how that gets paid out.
So, there’s that part. But I think there’s another part as well. It happens from time to time that the government will send these notices or the freeze or the wage garnishee to get your attention. And then that will prompt somebody to call us up and sit down and say their gut instinct is I got to file bankruptcy to stop the freeze and make this stuff go away. But maybe it’s somebody that hasn’t done their returns for the last three, four or five years.
Something that a lot of people don’t know is that the government has the power by law under the income tax act to basically, say make up – it doesn’t sound very fair, but basically they have the power to do the assessment based on some kind of estimate from information that they have. And until you actually file your actual return and prove that number is wrong, that is the legal assessment against you that allows them to freeze bank accounts or seize wages.
Doug Hoyes: So, if you owe a bunch of money because you didn’t file taxes, get your taxes filed and it may be that you don’t owe as much as the government thinks.
Ian Martin: That’s exactly what I was going to say. So, I met with a gentlemen just before, just a couple of months ago, and he had a notice that his bank gave him that said something like 25, 30 thousand dollars on his taxes but it turned out once he got his returns filed it was only a couple of a thousand dollars. So, he didn’t need to file bankruptcy, he was able to work out a payment plan just by getting the returns up to date and seeing what the real number was.
Doug Hoyes: That’s why when you come in to see us we’re going to make sure we got the numbers right.
Well, that’s a great place to end it. You may not need to go bankrupt because maybe you don’t owe as much as you think you needed.
Thanks for being with me today, Ian. We’re going to take a quick break and we’ll come back to wrap it up right here on Debt Free in 30.
Welcome back, it’s time for the 30 second recap of what we discussed today. On today’s show, Ian Martin answered the most frequently asked questions about debt and taxes. He explained that income tax problems can be solved and even if CRA has frozen your bank account a bankruptcy or consumer proposal can eliminate tax debt. That’s the 30 second recap of what we discussed today.
Ian’s message today was easy to understand. It is possible to deal with tax debt, but you have to pro-active so consult with an expert to understand your options.
That’s our show for today. For more details on how you can use a consumer proposal or personal bankruptcy to eliminate tax debt go to our website at hoyes.com, that’s h-o-y-e-s.com, for more information. Thanks for listening, until next week, I’m Doug Hoyes. That was Debt Free in 30.
It’s time for the Let’s Get Started segment here on Debt Free in 30. Today we’re talking about taxes and my guest is Ian Martin who worked for CRA for a number of years. He’s now a Bankruptcy Trustee and Consumer Proposal Administrator. We talked earlier about consumer proposals. That is an option for dealing with taxes.
So Ian, you said earlier, and correct me if I’m wrong, if you file a consumer proposal, taxes are included. If you owe taxes from prior years those are included, right?
Ian Martin: That is correct. No misunderstanding.
Doug Hoyes: And so specifically taxes are included automatically up to the end of the previous year. Is that correct?
Ian Martin: Correct, the prior calendar year ended before the year in which you’d be filing a proposal.
Doug Hoyes: So, let’s say it’s March, April, May of the year.
Ian Martin: Yeah, let’s give an example.
Doug Hoyes: And so if I filed a proposal today in the middle of the year, let’s say it’s the middle of 2015 now, my taxes would be automatically included up to the end of –
Ian Martin: 2014.
Doug Hoyes: If I went bankrupt today, my taxes are included right up to the date of bankruptcy because you as the trustee are going to do a separate tax return right to the date of bankruptcy.
Ian Martin: Yeah there’s a little bit different special rules that apply in a bankruptcy where there’s a separate return that goes right up to the date of bankruptcy where that would all be included.
Doug Hoyes: Whereas in a consumer proposal, you’re only including the taxes automatically up to the end of the prior years. There’s some more complicated rules you’re not going to get into with respect to that. So, if you owe a bunch of taxes, the best time to do a consumer proposal then is earlier in the year rather than later.
Ian Martin: Yes, I guess that would be the common sense answer. You wouldn’t file – with your example there, you wouldn’t file in December of 2014 expecting to have a large tax burden for 2014.You would wait a week or two and file in 2015.
Doug Hoyes: And then obviously it’s been included.
Ian Martin: Yeah, no hoops to jump through.
Doug Hoyes: Got you. Okay, so in a consumer proposal every creditor gets to vote on it.
Ian Martin: Right.
Doug Hoyes: And again I’m over simplifying the process, but in simple terms each creditor gets a vote for every dollar they’re owed. If more than half of them say yes then the proposal is accepted. And again I’m over simplifying, but that’s the gist of it. So, if CRA is your biggest creditor, if you owe more than half of the dollars to them, they’re the guys who get to say yes or no.
Ian Martin: It’s the only vote that matters.
Doug Hoyes: That’s the only vote that matters. So, in your experience what are the chances that CRA is actually going to accept a proposal? Have you had them accept proposals from you?
Ian Martin: Yes, I have. It’s gone the other way as well but, yeah. I don’t want to have people think it’s an impossibility.
Doug Hoyes: So, it is possible. You worked at CRA for many years. You’re now on the other side of the desk. You’ve had many creditor’s meetings with them. What are they looking for? What’s going to make them say yes to it?
Ian Martin: The way I see it is that CRA, Canada Revenue, they take it more on a case by case basis compared to some of the big banks when they receive proposals.
So, what they’re looking for if they’re sitting down with you and asking questions is a lot about your past, quite honestly, if you’re up to date with your returns, if you co-operated with them in the past. If there had been a prior insolvency, a prior bankruptcy or a proposal where taxes were one of the large issues, so they want to see have you been a problem in the past basically, but then also how are you going to be in the future?
Doug Hoyes: So, they’re actually looking at your character here.
Ian Martin: Yeah, that’s a good way of putting it.
Doug Hoyes: And I agree with you. A big bank is looking at it going, hey you know what, if a proposal gets us more money than a bankruptcy we’re going to take it, whereas CRA has a different view; we are here to guard the tax payer’s money. So, your character then becomes an issue.
Ian Martin: There’s definitely different considerations and definitely a higher level of scrutiny that the government exercises in saying yes to it, because you’ve indicated it, basically a proposal is an offer to settle the debts for less than the full amount. The banks usually if you – they’re more formulaic in terms of what they look at.
Doug Hoyes: It’s a math question for them.
Ian Martin: Correct, whereas Revenue Canada is more, there is some softer considerations that will also weigh on whether to say yes or no.
Doug Hoyes: So, if you’re filing a proposal and you haven’t done your taxes for the past three years, it’s going to be a no.
Ian Martin: That’s going to be pretty difficult. Before they’re even willing to be able to say yes or no, they’re going to want to see what the returns are, what is the dollar amount, because they want to know what it is they’re considering.
Doug Hoyes: Because unlike a bank the credit card company can look at your statement and see how much you owe. CRA can’t do that because you haven’t filed your taxes yet.
So, at a bare minimum your taxes have to be filed and up-to-date. And your chances of success are increased if you have made a significant effort in the past too. You’ve been trying to make monthly payments, you’ve been filing your taxes on time. If you’re way behind on taxes and you haven’t given them any money in five years, your chances of success are significantly less.
Ian Martin: I agree. And I think kind of the common sense explanation of that is that why would they say yes if they’re looking at your situation and think that agreeing to some kind of compromise through the proposal is basically going to be a waste of their time.
Doug Hoyes: Yeah and really they are the honest, but unfortunate debtor kind of guy. If you can convince them you are honest, but unfortunate, you got a much greater chance of success. They obviously also look at the math as well. And they want to be receiving more in a proposal than they would get in a bankruptcy.
Ian Martin: Right and that would be for anybody, whether it’s the government or a bank. What I find is that there is, as I said, a higher level of scrutiny and sometimes the government will seem to push for a higher rate of return. But I don’t think it’s formulaic, I think it ties back to some of these other considerations. But really they want to know where the money’s going to come from as well. They want to know of a self-employed guy, how is business going to be so much better than it was in the past?
Doug Hoyes: And so if you can prove to them that not only there is a legitimate reason for the past but you can stay up to date in the future, then you’ve got a good chance of success with them.
Ian Martin: Correct.
Doug Hoyes: Great. Thanks very much, Ian. That was some good tips on taxes and debt. You are listening to Let’s Get Started here on Debt Free in 30.
It is not legally possible to file personal bankruptcy on your own. Bankruptcy can only be filed by a licensed trustee in bankruptcy under the Bankruptcy and Insolvency Act (BIA) as set out by the Office of the Superintendent of Bankruptcy. This arm of the Canadian federal government is responsible for licensing trustees and monitoring the administration of bankruptcy laws.
To file bankruptcy, you must meet in person with a trustee in bankruptcy to complete an assessment. This assessment is focused helping you look at your financial situation to determine if bankruptcy makes sense and then, only if it does, your trustee will explanation the rules and regulations that are associated with the bankruptcy process. Your trustee will discuss the type and amount of debt that you have, any assets that might be affected in a bankruptcy, and your monthly income and expenses. Using this information, your trustee will explain the cost and length of bankruptcy and answer any questions that you might have.
Can I file bankruptcy with a debt consultant?
Although a quick search online will provide many offers for dealing with debt, a debt consultant cannot help you to file bankruptcy on your own. These companies offer to get rid of your debt by organizing your paperwork, negotiating with your creditors, and charging high upfront fees, but they cannot administer a bankruptcy and will refer you to a trustee in bankruptcy anyway. They have no legal authority to discharge your debts as they are not accredited counselors, paralegals, or licensed bankruptcy trustees.
Filing for bankruptcy is a legal procedure. It is important to get all the facts and to understand the process before it begins. Avoid people claiming to be able to clean up your debts for high upfront fees. Licensed trustees in bankruptcy do not charge a consultation fee and will be able to administer your bankruptcy from start to finish.
It is not uncommon for someone to contact us soon after being notified that their wages are, or will be, garnished. Today we talk about what to do if you receive a notice of garnishment, or a notice from a creditor threatening to garnish your wages, or your employer has already started garnishing your paycheque.
Our biggest piece of advice if you receive a garnishment notice is be proactive and don’t panic.
First, a few basic definitions about wage garnishments:
Wage – An amount of money that a worker is paid.
Garnishment – A legal procedure the creditor goes through to collect on the debts owing by trying to take property that is in someone else’s hand other than the debtor.
Wage Garnishment – Collecting a debt owing by notifying your employer to take a certain amount of money from your paycheque for the benefit of a creditor.
The wage garnishment process
Rebecca explains that a wage garnishment is part of provincial legislation, in Ontario that means under the Ontario Wages Act.
Do I have to be notified of a wage garnishment?
In effect, you are notified by being a participant in the entire garnishment process. Here is how the wage garnishment process works:
A creditor first issues a Statement of Claim.
You have 21 days from the time that it is mailed to respond.
You can dispute the claim by filing a Statement of Defense within those 21 days if the debt is not yours or a mistake has been made.
If you do not respond, the court will rule in favour of the creditor and you automatically lose.
If you lose, or don’t defend the action, the court will a judgement in favour of the creditor for the debt.
Once the have a judgement order, you creditor can apply for a garnishment order.
A garnishment order is obtained.
Your creditor will notify your employer.
Your employer must comply to the order.
Your company can garnish your wages without notice because they must comply with a legal garnishment order, however typically they include a note with your pay stub.
Exceptions To The Rule of Getting a Court Order for a Garnishment
Canada Revenue Agency does not need a court order and can send a CRA Requirement to Pay to your employer which automatically triggers the wage garnishment to start.
Credit Unions include a Wage Assignment clause in the paperwork that you sign that stipulates that if you fail to pay, they can simply send that wage assignment to your employer.
Any creditor can ask you to sign a document known as a voluntary wage assignment that entitles them to notify your employer to garnish your wages without going to court.
If you are dealing with the threat of a wage garnishment
A threat is different than the actual wage garnishment. It’s pretty easy for anybody to say I’m going to garnishee your wages. Take that as a warning sign that you have a debt problem.
A threat of garnishment is usually a symptom of an underlying problem – you owe a debt you can’t pay. If you can’t pay your bills, you need to be proactive and deal with the debt head-on.
You need to take control, which may mean finding a way to arrange payment if you can or contacting a Licensed Insolvency to help eliminate your debt if you can’t.
As frequent listeners to this show know, I’m the co-founder of Hoyes, Michalos & Associates. A firm that does bankruptcies and consumer proposals and I can tell you that based on my experience over the last couple of decades, that if I was to make a list of all the reasons someone calls a Bankruptcy Trustee in a panic, there is one common reason that is always at the top of the list. What makes someone in debt call my office in a panic? Two words, wage garnishment.
Obviously people go bankrupt because they have too much debt, but debt is generally something that builds up over an extended period of time. It doesn’t accumulate over night. So what’s the straw that breaks the camel’s back? What drives people to the breaking point and forces them to call our 310 plan helpline? Wage garnishment. If a bill collector threatens a wage garnishment or if a wage garnishment actually starts, many people decide they have no choice but to seek the protection of a consumer proposal or a bankruptcy because a bankruptcy or consumer proposal filing immediately stops most types of wage garnishment.
So, what is a wage garnishment? Is it legal? Who can get one? How do you stop it? Those are important questions so let’s spend the rest of the show talking about everything there is to know about wage garnishments.
To help me do that I’m joined today by Rebecca Martin, Rebecca thanks for being here. Welcome to the show. Can you give us a quick introduction about you?
Rebecca Martyn: Yes, as you said my name is Rebecca Martin. I am a trustee here with the Windsor & Leamington offices of Hoyes, Michalos & Associates. I got my training at a big accounting firm and joined Hoyes, Michalos back in 2003 once I received my license.
Doug Hoyes: There you go. So, let’s talk about the legalities of this first. So, let’s kind of go through this quickly and hit all the key points to begin with. So, we’re talking about wage garnishment, so tell me right off the bat, what is a wage?
Rebecca Martyn: A wage is something you get paid for working.
Doug Hoyes: Okay and what is a garnishment?
Rebecca Martyn: A garnishment is the actual legal procedure the creditor goes through to collect on the debts owing by trying to take property that is in someone else’s hand other than the debtor.
Doug Hoyes: Okay so what then is a wage garnishment?
Rebecca Martyn: So, the actual wage garnishment is the legal procedure where the creditor collects the debt owing to you by your employer.
Doug Hoyes: Okay so that’s where they’re taking the money off my paycheque. So, you call it a legal procedure, so I assume therefore it is governed by some law?
Rebecca Martyn: Yes there is a legislation or for it. It’s called the Ontario Wages Act.
Doug Hoyes: And therefore this only – what we’re talking about today – applies specifically in Ontario. It’s provincial legislation. So, if you happen to be listening to this show somewhere other than Ontario, the rules are probably very similar, but maybe not exact. So, that’s our little caution for the day. This is Ontario law that we’re talking about here today.
So, what based on the law, would not be included as part of wages?
Rebecca Martyn: Well, whenever you get paid you automatically have certain deductions, like E.I, C.P.P, income tax, those aren’t included as wages.
Doug Hoyes: Okay, so the wages are what I actually get. So, how much then under the law, the Wages Act of Ontario, how much can be garnisheed? What’s the maximum a creditor can get if they go through this legal procedure?
Rebecca Martyn: So, 20 percent can be garnisheed unless it’s for family support in which case it goes to 50 percent, but you have to keep in mind that the court can either increase or decrease that amount.
Doug Hoyes: Okay, so a typical creditor that would be someone like the credit card I didn’t pay, my bank loan, anything like that, the most they could get is 20 percent of my wages, unless the court says something different. Is that a correct summary?
Rebecca Martyn: That’s right.
Doug Hoyes: Okay, and so who can get a wage garnishment?
Rebecca Martyn: Well, anyone if you’re owing money. The creditor can take you to court, and if they win the court can give them the order to garnish your wages.
Doug Hoyes: And so, if I’m a creditor, let’s flip it around here then, somebody owes me money; let’s say I’m a bank or a credit card company, what do I have to do then? What’s the process? I have to go to court. How does that work? What’s involved there?
Rebecca Martyn: So, essentially the first thing you do is you issue what’s called a Statement of Claim. That gives the debtor so much time to actually respond to it. If there’s no response and it goes to court, the creditor automatically wins and the court issues a judgment and that judgment then allows them to garnishee the wages.
Doug Hoyes: And so, that judgement then I have to turn it into the garnishment order itself. So I have to go back to court to get that or there’s some further legal process I guess to get that. And how long does that take? Like if someone owes me money, can I get a garnishment today?
Rebecca Martyn: No, you can’t get a garnishment today. If you’ve ever seen a Statement of Claim form it says that you’re given a certain amount of time to respond, as the debtor. And I believe that’s 21 days from when it’s deemed to have been mailed, they will get a judgment unless there’s some sort of statement of defense filed.
Doug Hoyes: Got you. And in my experience, and I’m sure your experience is the same, it usually takes a lot longer than that. A big bank isn’t going to cut it right to the day. They’re probably going to send you out the notice, give you ample time to respond; they might give you 30 days, 40 days, 50 days, 60 days, whatever. And then, that’s when the court date actually happens. And so what you said, if I don’t show up in court, I automatically lose.
Rebecca Martyn: That’s right.
Doug Hoyes: Whereas if I do show up in court, I’ve got a chance to fight it. But my chances are pretty slim I would assume because I owe them money; unless I can prove I don’t owe them money, I’m going to lose is what’s going to happen.
So, are there any – we talked about the usual guys, banks, credit card companies, things like that – are there any special rules for anyone else other than those guys I just mentioned?
Rebecca Martyn: Yeah, that’s true. Canada Revenue Agency, they don’t need a court order. They can just notify your employer that you’re owing tax money and they can garnish your wages.
Doug Hoyes: So, what’s the piece of paper that they would send to your employer to do that?
Rebecca Martyn: The document is called a Requirement to Pay.
Doug Hoyes: So, it’s a Canada Revenue Agency Requirement to Pay notice. They don’t need to go to court to do that. They fill it out, they send it to your employer, boom, a wage garnishment can start. So, okay Revenue Canada – Canada Revenue Agency – doesn’t need to go to court. Who else has special rules when it comes to wage garnishments?
Rebecca Martyn: Credit Unions do. They don’t need a court order as well. A lot of times when you get your loan from a Credit Union, they have you sign a piece of paper called a wage assignment. And if you’re not making those payments on that loan, they just send that wage assignment to your employer and that gives them the authority to garish your wages as well.
Doug Hoyes: That’s something that perhaps people don’t fully understand because they always think of a Credit Union as being, well they’re in my neighbourhood, they’re not a big bank, they’re very friendly. Well, yeah they are, but they also have this special power under the Ontario Wages Act that allows them to get a garnishment without having to go through the normal court process. Does that apply to anyone else? Anybody else on this list of special people that we’re talking about?
Rebecca Martyn: Well, I suppose if you get in any kind of debt and you signed with a creditor they can then technically send that to your employer and ask that your wages be garnisheed.
Doug Hoyes: So, any voluntary wage assignment. And we see this quite common. At least it has been in the past with things like payday loan. So, they give you the payday loan but they get you to sign a piece of paper saying if you don’t pay me then we can immediately go to court and – in fact we don’t need to go to court, we can just send this piece of paper right to your employer and start garnishing your wages.
Okay, so that’s the big picture on wage garnishments. Have you got any examples of people that you’ve run into, people you’ve helped, who had a wage garnishment and then you know if so, what did you do? What was the solution?
Rebecca Martyn: Well, you’re right. Just like you said at the beginning of the program that just the wage garnishment is what causes a lot of people to call us in the first place. And, so I thought I would share a couple of stories of people who I helped last week.
So, the first guy and I’ll call him Frank. And Frank’s not his real name; it’s just a name I made up. A few years ago he was self employed and as a lot of times happens, they ran into trouble and then started using his tax money, the money he should have been paying for tax money to help fund his business and before he knew it, he owed Revenue Canada $25,000. He eventually had to retire but he still owes Revenue Canada this $25,000. He can’t pay it. He can’t work out a payment plan so the only source of income he has now is C.P.P. So, Revenue Canada, Canada Revenue Agency starts garnishing his C.P.P. So, he came to see me and he decided to file bankruptcy. So, he files for bankruptcy, we sent notice to Service Canada, they’re the ones who issued the Canada Pension Plan and we sent notice to Canada Revenue Agency and then the next month he gets this full pension cheque again.
Doug Hoyes: And that stopped it right away then.
Rebecca Martyn: And that stops it right away. There’s a little big of a lag. But depending on when you’re filing and you can’t come in on, let’s say the last day of the month and expect the pension cheque tomorrow to have the garnishment removed from it. But the next month will have the garnishment removed.
Doug Hoyes: And that’s because obviously the cheque is being cut a few days in advance by the government or the electronic deposit has been paid.
Okay, so that was an example of somebody who had a government debt. Have there been other types of debts you’ve been able to help with when it came to wage garnishment?
Rebecca Martyn: Oh yeah absolutely. So, the other person I saw, I’m going to call her Joan. She went through a marriage separation and lost her car. So, the car company sold it and went after her for the balance owing. And so they took her to court and got the garnishment order and sent it to her employer and she said she didn’t even know about it. All of a sudden she gets a note for her HR department saying we have this notice, we’re going to garnishee your wages. She came to see me, she filed a consumer proposal. So, we notified the court, we notified the creditor, we notified her employer. You’re under consumer proposal protection so now the wage garnishment stops.
Doug Hoyes: So, the message here is for those types of debts that you just talked about, a bankruptcy or a consumer proposal, very quickly stops wage garnishments, and that for a lot of people is the whole reason that they do them. Great thank you very much, Rebecca, thanks for joining me. We’re going to take a quick break and then come back and talk a bit more about wage garnishments here on Debt Free in 30.
Announcer: You’re listening to Debt Free in 30. Here’s your host, Doug Hoyes. Doug Hoyes: We’re back here on Debt Free in 30 and today we are talking about wage garnishments. It’s one of the most common reasons that someone starts thinking about having to go bankrupt or file a consumer proposal. In the first segment Rebecca Martin walked us through some of the technical aspects, what is it? How does it work? And now we’re going to look at some practical things. I’m joined again by Ted Michalos. Ted, how are you doing?
Ted Michalos: I’m fine Doug. How are things?
Doug Hoyes: It’s all good. So, wage garnishments. Would you agree that this is in fact one of the main reasons that someone is contacting you? That’s kind of the impetus; the straw that broke the camel’s back kind of a thing?
Ted Michalos: That’s a perfect analogy. It is the straw that breaks the camel’s back. You’re already afraid about your debt loads and the people that you owe. You get notices from the court or collection agency and maybe you’ve been ignoring them. Finally somebody has taken you to court. They’re garnishing your wages, now what do you do about it?
Doug Hoyes: And it’s really the symptom of the underlying problem. I’ve had this underlying problem for a long time. It takes a while to go to court and garnishee someone’s wages, but now it crops up.
So, okay you asked the question. Give us the answer. What do you do about it? When you are threatened with a wage garnishment, and let’s start with that. Let’s say there’s not any actual court actions yet, but the collector says well if you don’t pay me I’m going to garnishee your wages. What’s your thought process at that point in time?
Ted Michalos: So, the first thing people have to recognize is, a threat is different than the actual wage garnishment. So, it’s pretty easy for anybody to say I’m going to garnishee your wages. Take that as a warning sign or a signal that it’s time for you to do something about this debt. So, they may or may not do it. Don’t leave yourself open to what they want to do. You need to take progressive steps that deal with the debt problem now. Now that may mean contacting someone like Doug or myself, somebody from our firm. It may mean simply moving money around. It depends on your own unique financial situation. The important thing to emphasize is, somebody’s made the threat, you need to deal with it before they actually make it a reality. You do not want a wage garnishee. You start missing mortgage payments and so on.
Doug Hoyes: So, what you’re talking about then is that you’ve got to be in control.
Ted Michalos: Yep.
Doug Hoyes: You’ve got to be proactive. Okay, so let’s talk about some proactive things you can do. So, you mentioned moving money around; what are you talking about there?
Ted Michalos: Okay, so the person that only has one problem account. Let’s say you defaulted on your Rogers account because you got mad at them because they’re crooks. You stopped paying that bill. They’re now threatening you with a wage garnishee. They’re going to take legal action against you. Alright well, pay off the account. That’s the simplest solution to make that problem go away.
The difficulty is, most folks we talk to don’t just have one account that’s in trouble, they have a series of accounts that’s in trouble or they’ve got accumulated debt; they don’t have access to money they can move around. I suppose you could take a cash advance on a credit card to pay off the Rogers bill, but now you’ve got a problem with the credit card.
Doug Hoyes: Yeah and that’s not certainly something we would want to recommend. So, if you have one account that’s relatively small and you can deal with it then you’re advice is pay it and you’re done. Problem solved. That’s it. So, if it’s an old cell phone bill, okay it’s $500, fine. I will come up with the $500 and pay them off. If it’s a $20,000 line of credit that I wasn’t able to pay, and now I’m a few months behind, they’re threatening to take me to court, they’re threatening to garnishee my wages, I can’t just ignore it. I can’t just move money around cause it’s too big a number. And you’re saying I shouldn’t be ignoring it because with an amount like that they’re probably going to do something.
Ted Michalos: Okay so the way that you phrase that question, pretty much produces the answer. You’ve got more of a problem than you can deal with yourself. So, you’ve got to look to outside sources.
So, the first place I always recommend is family and friends. So, if you’ve got other people that you rely on and you trust that will give you good financial advice. Now be careful here. You’re talking about your money. I know you’re uncomfortable talking to anybody about it but getting advice from Aunt Betty may not be the best source of advice to deal with this problem because there’s a threat for legal action.
Doug Hoyes: Well, and Aunt Betty may not be a financial expert. So, when my car’s making a funny noise I probably don’t talk to Aunt Betty because she’s probably not a mechanic. Now I do have a brother-in-law who is a mechanic and she would be a perfect person to talk to. So, family and friends is a great place to start but you’ve got to kind of take the advice with a grain of salt. And I guess what you’re really saying is look if Aunt Betty is rich and can loan you the money to pay off the debt, fine, then she’s an excellent person to talk to.
Ted Michalos: Or Aunt Betty may have been through this herself before. So, she may have a solution or a path that you can follow. And what you’re looking for is tools to help you through the problem. So, you start with family and friends because these are people that you trust.
The next layer out is some sort of professional. Do you talk to your banker? Well maybe if you don’t have a lot of debt, if there’s only one or two things and then there’s a chance that you can consolidate or group things together. It might be more effective to talk to your accountant or lawyer if you have access to those things. Frankly, I think the average person, their best bet is to go on the internet and find someone like us; a Credit Counsellor perhaps, a Trustee in Bankruptcy, somebody who is a trained professional in dealing with debts.
Doug Hoyes: So, let’s talk about the banks. That would be an obvious thing. I owe a bunch of money to this guy, if I can borrow some from that guy, pay it off then I’m good. What do I need to worry about though when I’m talking to the bank?
Ted Michalos: Well, the first concern for the bank is, they want to lend you money when you don’t need to borrow it. If you’re already in trouble, the bank’s going to say well we’ve already loaned you some money in the past, if I loan you more to pay off the other guy, now I’ve got all your eggs in my basket if something goes wrong, I’m going to take a hit. And more importantly, they may charge you extra money because they’re now saying oh you want us to help you out when you’re in trouble? That’s a little more problematic than when you go to them when you don’t have any problems at all. So, the bank is a logical place to look, but I wouldn’t put a lot of faith in that unless you don’t have a lot of debt; your situation isn’t complicated.
Doug Hoyes: And this is a numbers game.
Ted Michalos: It’s all a numbers game.
Doug Hoyes: So, if the bank or the finance company is going to charge me a pretty high interest rate because like you say I’m already in a bit of financial trouble, then am I just making my problems worse by trying to replace one debt by another? Obviously I don’t want to be doing that.
Ted Michalos: What you are, is you’re trying to buy some time. And remember what we’re talking about here is how do we avoid a wage garnishee. So, buying time is good, it doesn’t solve the problem. What you really want to do is dig down and solve the problem. So, if you have a sore tooth you go to the dentist. If you’re hair’s looking bad you go to your stylist. If you have problems with your finances, with debt, you should talk to an expert that deals with finance and debt.
Doug Hoyes: My hair looks great. You can’t see it on radio. I just want to make that point. And so you’re right. You’ve got to look at the bigger picture here and treat the underlying problem. I’ve got too much debt, that’s why I haven’t been able to pay them back. Now, buying time might be a perfectly good answer in some cases. If I’ve got a $1,000 cell phone bill but I know my tax refund’s coming in in a month and I know it’s going to be $1,500, okay then buying time makes sense. If I know that at summer shut down we get all our vacation pay paid out and I get a summer bonus, great maybe that’s enough to clean it up so buying time makes sense.
But let’s take the scenario then where buying time isn’t going to solve the problem, yeah okay I’m getting $1,000 tax refund but I’m being potentially sued for $20,000, that’s not going to work. Buying time isn’t the answer. So, what are the next steps then? What are the next things I should be thinking about?
Ted Michalos: Alright, when you do speak to a professional they’re going to talk to you about credit counselling as a solution, consumer proposals, maybe even personal bankruptcy. All of those things may be intimidating because you’re not familiar with them, you don’t know they mean. So, do a Google search on all three terms to get a better idea about it.
But frankly, what we’re talking about is a structure or solution that somebody can provide you with to get you out of this trouble. Now right now we’re just talking about the threat of a wage garnishee. So, the problem here is you’re afraid. If you want a real problem, don’t do anything and they start garnisheeing your wages. Now you got a real problem the wage garnishee is a bigger problem than just owing the debt because now there’s no money for the rent, groceries, you can’t put gas in the car. Things are going to start – it’s a domino effect. You’re going to have a problem across the board, not just where you were.
Doug Hoyes: And if you got a legal garnishment coming against you or it’s already started, then at that point you’ve got a consumer proposal or a bankruptcy or pay it; those are your only choices and that’s what you got to do.
Ted Michalos: Pretty much it.
Doug Hoyes: Okay, well I think that’s a good summary. So, in summary what you’re saying is you’ve got to be in control, you’ve got to be proactive, sitting there waiting for the problem to go away isn’t going to help. The threat of a garnishment is nowhere near as serious as an actual garnishment. They’re going to threaten you all the time, but you can’t leave it forever cause if they do take you to court then you’ve got a garnishment and that really mucks up your personal finances. I appreciate that, thanks for coming in, Ted.
Ted Michalos: Have a nice day.
Doug Hoyes: Thanks very much. We’ll be back to wrap it up right here on 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 Rebecca Martin who explained that a wage garnishment is a legal procedure where someone you owe money to, collects a debt by taking a portion of your pay cheque.
In our second segment Ted Michalos gave a practical approach for dealing with a wage garnishment. That’s the 30 recap of what we discussed today.
So, what are my thoughts on wage garnishment? Well, as I said twice during the show, a wage garnishment is often the proverbial straw that broke the camel’s back when it comes to debts. We often assume that our debt problems are not serious until a wage garnishment starts. When we start losing a chunk of our paycheque, we know we have a problem.
I agree with what Rebecca and Ted said on the show. A wage garnishment will not just disappear on its own. You have limited options for dealing with a wage garnishment. You can quit your job, but that’s not a great long-term solution. You can let the garnishment continue, but that can be very costly. Think about what it’s like to have an immediate 20 percent cut in your pay, and you can see by just letting the garnishment continue may put you in a very difficult financial position. If you’re wages are being garnisheed for one debt, it’s quite likely that you have other debts as well and that’s why often the solution is to file a consumer proposal or bankruptcy. That’s not a decision to be taken lightly, but as Ted said earlier sometimes it’s better to put your debts behind you and get a fresh start.
That’s our show for today; we’ve got more information on how to stop a wage garnishment on our website at hoyes.com. We also have full show notes on our website and links if you want to download an audio copy of this show. That’s hoyes.com, h-o-y-e-s-dot-com. Thanks for listening. Until next week, I’m Doug Hoyes. That was Debt Free in 30.
It’s time for the Let’s Get Started segment here on Debt Free in 30. I’m Doug Hoyes and today I’m joined by Rebecca Martin, who is a Bankruptcy Trustee and Consumer Proposal Administrator at our Hoyes, Michalos office in Windsor and Leamington, Ontario.
Rebecca, thanks for sticking with me here. We’re talking about wage garnishments today so let’s start at the very beginning. Give me a quick definition. What is a wage garnishment?
Rebecca Martyn: A wage garnishment is the document that allows the creditor to take a portion of your income.
Doug Hoyes: Okay and it’s governed by the Wages Act of Ontario. There are specific limits. A normal creditor can only garnishee 20 percent of your paycheque; however for people listening today, think about that. If I was to lose 20 percent of my paycheque, what kind of shape would I be in? The answer is, not very good.
So, if someone is faced with a wage garnishment, walk us through your advice. So, let’s say they get a piece of paper in the mail that says there’s going to be a court action coming up. What’s your advice? What should they do with that piece of paper?
Rebecca Martyn: Well, if they get a document saying there’s a court action coming up, they really need to take some sort of action. As you mentioned earlier if they actually are disputing this debt, they need to go to court. They can’t just ignore it. If they ignore it, it doesn’t matter if they don’t owe the money, they’re going to get a judgment against them.
So, if they think they have some sort of defence, they need to actually file a Statement of Defence and if they look at the bottom of that Statement of Claim form, it actually does list a website address where they can obtain the document. Or it will have the phone number for the local court. Call the court, tell them you’re disputing the debt, have them walk you through it and how to fill out a piece of paper to file a Statement of Defence. If there is no defence, if this is legitimately your debt, you haven’t been able to work out a payment plan then you need to talk to someone.
Doug Hoyes: And really the only legitimate defence is going to be I don’t owe them money. I already paid it. I have cancelled cheques that show I paid it or this was never my debt to begin with, they’ve obviously got me confused with somebody else. There’s some legitimate reason why it’s not your debt, in which case, as you say, you’ve got to file a statement of defence and usually the local court is pretty helpful with that. But like you said you can go on the government website and get that information as well. And based on that then you file your statement of defense.
Assuming you legitimately do owe the debt, you go to court and the judge says well you owe the debt, sorry, you lose, here’s a garnishment order given to the creditor. So then, let’s put myself in that position. I now know that my wages are about to be garnisheed because I’ve got this judgment against me, what are my options?
Rebecca Martyn: So you essentially have I guess four options. You do nothing, you just let the garnishment go on and you just deal with 20 percent of your wages taken until the debt is paid off in full with interest.
Doug Hoyes: And that maybe makes sense if it was an old cell phone bill for $300. Okay fine I guess I’m going to lose $300, plus interest, plus court charges off my paycheque, but okay probably not that big a deal. What if it’s a bigger amount? What are the other options I’ve got?
Rebecca Martyn: Well you can try going back to the creditor and working out a payment plan. I say try because the reason they went to court is you weren’t able to work out a payment plan. But you could always go to the creditor and say I realize I owe all this money, let’s see if we can figure out a payment plan to get the garnishment lifted and allow me to receive my wages and you to get some money for the next how many years to get it paid off in full.
Doug Hoyes: And in your experience is that likely to be successful or not?
Rebecca Martyn: No, I don’t think it’s likely to be successful because the creditor’s there because you couldn’t work out a payment plan in the first place or you chose to ignore them.
Doug Hoyes: Yeah and they’ve already got this piece of paper from the court saying that they can garnishee wages, so why – there’s no leverage now why –
Rebecca Martyn: Yeah, why are they going to take less?
Doug Hoyes: Makes sense. Okay, so that’s the first two options, what are the final two?
Rebecca Martyn: So, to get the wage garnishment lifted you can either file an assignment of bankruptcy or you can file a consumer proposal.
Doug Hoyes: And we’ve talked about those different options in shows in the past. And the decision as to whether I do a bankruptcy or a consumer proposal is going to be a number of different factors. It’s going to have to do with my income, what I own. If I own a lot of assets I don’t want to go bankrupt because I could potentially lose them. A proposal is often a better option in that case. So, let’s assume we pick the proposal option then. So, the debtor then contacts someone like you. That would be the next step I assume, right?
Rebecca Martyn: Yep, that’s exactly it. They contact us. We basically have to gather a whole bunch of paperwork and then we get them back here to actually start the process. And the day they sign, that’s the day that the court and their employer gets notification saying that the debtor’s under protection, the wage garnishment lifts.
Doug Hoyes: So, let’s walk through that piece of it. So, let’s say I come in. You need a bunch of information. You need to know who I owe money to, what my income is, that sort of thing. That takes a couple of days, to get that up and running. You get the paperwork printed up. I come in to see you at 9:00 in the morning to sign the paperwork. Walk me through what happens next then. So, I sign the paperwork, what happens next?
Rebecca Martyn: So, once you sign the paperwork we electronically submit it to the Office of Superintendent of Bankruptcy. As soon as we get that file number we can then issue what’s called a Stay of Proceedings –
Doug Hoyes: So, how long does it take to get that file number?
Rebecca Martyn: Basically as soon as you press the button, it’s instantaneous.
Doug Hoyes: Instantaneous. So, you’ve got a direct link with the government. It’s not like you’ve got to fax it in and wait three days. If everything’s in order, I’m still sitting there having just finished signing the piece of paper, you’ve now got that file number back from the government.
Rebecca Martyn: That’s right.
Doug Hoyes: And then from there it’s just a case of sending a special piece of paper, the stay to the creditors and that stops the garnishment.
Rebecca Martyn: Yeah and we notify the employer so they know.
Doug Hoyes: So, it’s not coming off my cheque. Perfect, well that’s a good way to end it. That’s how wage garnishments work and that’s how you can stop them. Rebecca thanks very much for being here today.
Rebecca Martyn: My pleasure, thank you.
Doug Hoyes: Thank you. That was Let’s Get Started here on Debt Free in 30.
One big fear surrounding the prospect of filing for bankruptcy is the uncertainty of how a bankruptcy will affect your future. I’ve met with people in my office in the past who have said they don’t want to go bankrupt because they’ve heard that it stays with you for the rest of your life and that you can never get credit again.
When filing for bankruptcy you are required to attend two credit counselling sessions. These sessions are free and are a chance for you to get some individually tailored advice for what steps to take in the future to help minimize the negative impact of a bankruptcy. You will review budgeting techniques, shopping habits, money management, warning signs for debt, credit rebuilding and formulating a plan to help you achieve your financial goals and learn tips to help put you back on track to recovery after a bankruptcy.
Here are 10 tips to help you get back on track:
Make a budget and stick to it – One key step on the road to recovery is understanding different budgeting techniques. You’ll want to have a firm grasp on how to plan financially for the future so that you can monitor on a regular basis what monies are coming in and what’s going out.
Use cash! – Now that you’re not juggling debts, consider using a cash budget. Some fixed bills like mortgage payments or car insurance are easy to set up as direct withdrawals from your bank account; but try using cash for all other things like groceries, toiletries, and gas for your car. It’s amazing how much you think about spending and saving when you hand cash to someone as opposed to plastic.
Pay utilities on time – Utility companies don’t normally report to the credit bureau unless you’re payments are late. Don’t damage your credit rating further by getting behind on utility bills.
Watch your credit report – Check your credit report on a regular basis. Make sure that the information pertaining to your bankruptcy is accurate and that anything new you’re trying to re-establish is there as well. If you don’t check its accuracy, no one else will do it for you. You don’t want to find out when it’s too late that there’s incorrect information being reported.
Get a secured credit card – Possibly the fastest and most common way to rebuild credit after a bankruptcy is to put a deposit down on a secured credit card. Be careful, it’s a secured card, not a pre-paid card, as they sound similar.
Avoid financing a car purchase, save up and pay cash – It’s easy to get lured in by lenders offering credit to anyone. Signs that read “all applications approved” are too good to be true. Just because they’ll give you the financing, does not make it a smart choice if they charge 30% interest rates! Unfortunately, one of the most common reasons why we see people filing 2nd bankruptcies is because they signed up for a high interest rate car loan after the 1st bankruptcy was over.
RRSPs & TFSAs – Prove to the banks that you can be responsible with your finances by investing money into Tax Free Savings Accounts and RRSPs. Putting money into RRSPs can also lead to bigger tax refunds which can be used for further savings and large purchases so that you don’t have to borrow funds.
Beware of Scams – Beware of companies (particularly on the internet) that offer credit repair services. Only you can repair your credit and paying someone a fee does nothing to speed up the process.
Know your borrowing limit – If you do need to borrow again, try to remember this golden rule: The amount you borrow should not be any more than what you earn in a month. For example, if you are paid $2000 per month, don’t have debt of more than $2000 at any given time.
Educate Yourself– Don’t be shy about telling others what you learned from the bankruptcy process, whether good or bad. Use that knowledge to educate your children on steps you can take to avoid a bankruptcy by following some of the previous tips.
Recovering from bankruptcy is not impossible. It’s not a quick fix and it will require some patience along the way, but the benefits of getting your fresh start make it all worthwhile. If you are considering bankruptcy, know that you’d don’t lose everything and you have options. Contact us today for a free consultation with an Ontario Licensed Insolvency Trustee.
Budgeting for maternity leave should be proactive. Today’s show featured Christi Posner, a Credit Counsellor for The Credit Counselling Society and lead writer for mymoneycoach.ca. Christi is a new mom and shared her experiences and advice for dealing with debt, managing your money, and preparing for maternity leave. Although especially true for couples thinking about starting a family, her strategies are relevant for anyone looking to re-evaluate their finances and take a proactive approach to money management.
The best advice for dealing with any situation, is to be proactive. Plan ahead, be prepared, and know your options. If your future goals include starting a family, begin the process early. It may seem eager, but the more prepared that you can be for a new baby, the better. Christi explained that,
once I stopped dreaming and would come back to reality, I would realize that [a house and kids] wasn’t where we were right now and we weren’t where we wanted to be.
She admits that her turning point was when
We wanted to get married and we wanted to have a house and a yard and everything. We couldn’t afford any of that with all our debt. So, that’s where we really had to start.
Christi suggests starting a savings account dedicated to your goal; look into your benefit options at work and through the government, get your debts in order, and create a budget. Planning for the future will get you where you need to be financially and reduce any unneeded stress when that time comes. The same rings true for individuals looking to buy a house, make a career change, or simply go on a vacation; be proactive.
Christi breaks down her approach into three simple stages:
Create a Budget
Balance the Budget
Live the Budget
This begins with asking yourself the hard questions. Do you know where you money is going? Why are you in debt every single month? Are you living beyond your means?
Also know that your expenses are going to change during maternity. Some costs will go down. You may be driving less so you might save on fuel costs. You may spend less on clothes and entertainment. Christie even found she could save money on her cell phone plan because she was able to use wi-fi while at home. But recognize other costs will go up. Christi talked about her personal experiences and what costs surprised her along the way.
we knew that we had to put our budget into action on auto-pilot because paying bills and saving money wasn’t going to be on the top of our minds as new parents.
I agree with this approach and recommend this strategy for anyone looking to save their money. The budget that you created ensures that you have money in the bank and having that money filtered out automatically, will help to avoid missing payments or opportunities to keep your finances on the right track during any circumstances.
Plan Ahead to Stay Out of Debt
I’m heartened to see that so many understand that deciding to raise a family is a huge financial commitment that requires thinking carefully about the impact it may have on your budget and overall financial health. All too often I see families struggling with debt, or worse, how divorce and parenting alone can often lead families to turn to credit to make ends meet.
Almost one in five insolvencies (18%) are lone parents (either single, separated or divorced)
While having children does not cause financial problems, there is no question that bankruptcies affect families. In order to ensure that you don’t become one of these statistics, take a cold hard look at your finances as part of your preparation for maternity:
if you owe money today, make a plan to get out of debt now because money pressures only increase as your children get older;
make a family budget that will ensure you stay out of debt once you’ve reached that goal;
start saving as early as you can through programs like an RESP so you do not have to go into debt later in life for costs like your child’s education. This time arrives much quicker than you think.
To learn more, listen to the show or read the full transcript of today’s podcast below.
This show was rebroadcast as episode 47 during the Best Of summer segments.
Today we will talk about debt and money and personal finance, but to start we’re going to talk about pregnancy. What? No, don’t worry this show always gets a clean rating on ITunes. Today the discussion will be about financially preparing to start a family.
It’s great that we have kids when we’re young, because otherwise we wouldn’t have the energy for the 2 am feedings and diaper changes. But the disadvantage of having kids when you’re in your 20’s or 30’s is that you’re still young, so you’re probably not well established financially. You haven’t been in the workforce for 20 years, you probably just bought a house so you’ve got mortgage debt; you probably just bought a minivan with a loan, so cash is very tight.
So, how can you financially prepare before your bundle of joy arrives? I don’t know. I’m a guy and both of my sons are teenagers so my memory of those early days are somewhat foggy. So, today my guest has a much more recent experience with starting a family, so let’s hear what she has to say. So, let’s get started. Who are you and what do you do?
Christi Posner: Hi Doug, my name is Christi Posner and I am a Credit Counsellor for the Credit Counselling Society. I’m also a lead writer for mymoneycoach.ca, which is a website that helps people learn to manage their money and learn about credit and learn how to pay down their debt and save money.
Doug Hoyes: Very cool. Well, thanks for being with me, Christi, and I will put notes to that website you reference and everything else we talk about in the show notes over at hoyes.com. So, you had your first child in 2014. So, when was your son born?
Christi Posner: He was born in July of 2014 on a beautiful summer day. So, he’s about 8 months old now, yeah.
Doug Hoyes: So, you’re still at the very early stages obviously with a young child at home. Why don’t you walk us through a bit of your history then? Tell us how you got started in the whole credit counselling thing. Give us a bit of your life story.
Christi Posner: For sure. I always knew from a young age that I wanted to be a mom. My mother asked me what I wanted to be when I grew up one day and it was a mom. That was my answer.
So, I knew that as I went through university and I got my Bachelor of Human Ecology and learning how families handle their stress and their money and their time and learning all about that. Come 2010 when I graduated from university I applied to a position at the Credit Counselling Society as a Credit Counsellor and it ended up being my dream job. I was really lucky to come out of university and work for such a great company.
So, during university, and as I’m growing into my 20’s and starting to establish myself, I would continually dream about what having a family would look like. I had a boyfriend and we were starting to talk about those kinds of things. And I would dream about our little kids playing around in the house one day and running through the yard and that kind of thing. But once I stopped dreaming and would come back to reality, I would realize that wasn’t where we were right now and we weren’t where we wanted to be.
When he became my fiancé we were living in a condo at the time where we had to walk up three flights of stairs just to get to our condo, and I couldn’t imagine being nine months pregnant or carrying car seats or kids up those kinds of stairs. We didn’t have a yard to play in. We weren’t physically where we wanted to be. We weren’t married yet and we were in a ton of debt from university. I used to work for banks and credit card companies and I had really tempting staff rates and I had racked up a lot of debt before I became a Credit Counsellor and really got myself together.
So, we decided that if we were going to have a family one day, we were going to have to start working towards that goal. And we wanted to get married and we wanted to have a house and a yard and everything. We couldn’t afford any of that with all our debt. So, that’s where we really had to start. So, the hard conversations and the arguments and everything started happening so that we could get our debt in order and reach our goals essentially.
So, we started by creating a budget. We had to sit down and take a real hard look at where our money was going, why were we going into debt every single month? And was it frivolous spending? Were we living beyond our means? We had to figure that out. So, we took a hard look at our money, we wrote it down on a spreadsheet on our computer and we also tackled our debt by consolidating it together, his debt and my debt together and we found that if we stuck to a budget, a realistic budget, we were going to be able to pay 25% of our take home income towards our debt. And we did. And in two years, we paid off over $30,000 of consumer debt together.
By that point we were then able to see that there was a chance that we could get married one day. We actually could afford a wedding and by the time that we became debt free from our consumer debt, the housing market had actually improved and we were able to sell our condo for a profit. So with that profit we made a down payment on a house with a yard and then here we are four years later and we’ve got a cute little baby boy and we’re very, very happy.
Doug Hoyes: Very cool. So, you said you did some analysis to see what was happening with your spending, why you were in debt. Obviously, I understand you were going to school, you had student loans, things like that, but you said even after you were done school you were still in effect running a deficit every month. So, why was that? What was causing that?
Christi Posner: Back then I had no concept of a budget. I usually spent money whenever I needed it, or whenever I wanted to spend it, or I felt like it, and I usually had to dip into my credit cards to make it to the next payday, and it was really hard to keep track of my money, because at the time I was working three different part time jobs while I was attending university, so my income was changing every time I got a paycheque. So I just spent until there was really nothing left to spend.
Looking back now, I can see that my expenses added up to more than the money I was actually bringing in. Once my fiance and I sat down and actually looked at what our income was, and where our money was going every month, we were then able to start making some positive changes.
Doug Hoyes: So, the key point is, you had to write down where your money was going every month so you could figure out where your money was going. And you discovered that it really was a case of just spending more than what was coming in. And because you had access to credit, well you put the spending on the credit card and it’s all good. And it wasn’t until you took a step back and actually crunched the numbers and said, oh wait a minute my ultimate objective here is to own my own home, have a family and there’s no way I can do that if I’m digging myself into debt. And that’s what caused you to step back and say okay we’ve got to actually watch where the money is going and that was really the first step for you then, reducing your expenses to below your income?
Christi Posner: Yes exactly. And we had to make sure we were not living beyond our means anymore.
Doug Hoyes: Great. You had to be sure you weren’t spending beyond your means anymore. That’s a great spot to end the first segment. So, we’re going to take a quick break and be back with more tips from Christi Posner.
Doug Hoyes: Welcome back to Debt Free in 30. My name is Doug Hoyes and my guest today is Christi Posner who is a Credit Counsellor. She is also a writer and she is a relatively new mother. And she’s been walking us through what it’s like to get financially prepared to start a family.
And so before the break, she told us that the first step is to write it all down; make a budget. You need to see your numbers in front of you and that has two components. Christi said, well you have to start by looking at the income; what’s going to be coming in when you’re on maternity leave and she had some good suggestions there in terms of looking at what maternity benefits you would qualify for, what other government benefits, what’s your employer going to do and so on and then obviously taking a look at your expenses.
And Christi when you were talking about expenses, part of your analysis was to figure out what expenses I have now and what expenses are going to change. So, can you give us some examples of that? You talked about it a bit before the break. What expenses did you see that actually went down when you were planning for maternity leave and when you went on maternity leave?
Christi Posner: Some of the expenses that I was surprised by, I thought that our fuel would stay relatively the same but the fuel for our vehicles went down significantly because I’m home most of the time. So, that’s one place that we found we were going to save money.
And another one was our cell phones. I’m on my cell phone quite a bit and I used quite a bit of data while I was in the workforce and my cell phone plan, because I am home with Wi-Fi, I didn’t really use any data, so that went down significantly as well.
Doug Hoyes: Did you actually change your cell phone plan? Or it just went down because you weren’t being charged the same overages.
Christi Posner: I changed my cell phone plan because I didn’t require the same amount of data that I was using while I was working. So, we made a change and significantly reduced that cell phone plan.
Doug Hoyes: That’s a very good practical point then. Take a look at what you’re paying on your cell phone now. And that’s an area where 20 years ago, 30 years ago, nobody had a cell phone because they didn’t exist and now they’re tied to our hip at all times. But you’re saying okay a big chunk of my bill was data. If I’m at home, I link into the Wi-Fi, I don’t need it. No sense continuing to pay for three megs a month if I’m not using it.
So, those are a couple of the things that went down. You mentioned in the earlier segment about clothing. Did you reduce your clothing expense or did that go up? I mean obviously you had to start buying clothes for your son, but did your own personal clothing expense change or how did that work?
Christi Posner: They definitely did. My priorities changed really quickly when we were looking at our maternity budget. Because when you want to have a family, that’s where your money is going to go and if you have to choose baby clothes over spending tons of money on my own clothes, that’s perfectly fine. I feel like I used to spend money just because I had it, which isn’t the way to manage your money. Just because you have money doesn’t mean it needs to be spent. It’s kind of my new mantra that I think of.
Doug Hoyes: That’s very good.
Christi Posner: So, oh yeah the clothing expenses certainly went down as well as going out. I don’t go out as much anymore. So, I don’t need as much entertainment expenses. So yeah, there were a lot of changes.
Doug Hoyes: It’s kind of hard to be hitting the bars when you’ve got to go to bed at 7:00 at night, so I understand that.
So, those are the expenses that went down, what expenses went up? So, obviously there’s the obvious ones, well I have to start buying diapers, I have to start buying wipes. Do they still have diaper genies? Is that still a thing? Do they still have that or am I –
Christi Posner: Yeah, they do.
Doug Hoyes: Okay, cause I loved that thing.
Christi Posner: That’s not something, a route that I went. We actually did a full analysis of the cost of disposable diapers versus cloth diapers and while we’re not big fans of the fun of cloth diapers I will say, we decided to go that route because financially it made sense. We ended up spending a couple of hundred dollars on a set of diapers that is going to carry us through not only our first child, but any other children we may have versus spending a 100 and some odd dollars on diapers every single month.
So, that was another area that – when we looked that that budget we saw we’re in a big deficit if we’re going to go on a maternity leave income, we had to make some hard choices and that was one of the ones we made, was to cut out the disposable diapers –
Doug Hoyes: And are you washing them yourself? Do you have some service do that? How does that work?
Christi Posner: Oh in Winnipeg we don’t have a service like that available so yes I am washing them myself. And it’s not as bad as the horror stories you hear, it’s really not.
Doug Hoyes: Wow, you’re tougher than I am cause I know changing diapers was – it was never the fun thing, the happiest days of my life were when my sons were toilet trained, let me tell ya.
So let’s get back to our discussion about expenses.
Your point on diapers is that you actually crunched the numbers, and figured out what it would cost to buy disposable diapers and compared that to the cost of buying cloth diapers and washing them yourself, and you decided it was worth it to go with the cloth diaper alternative. So, even though that resulted in more work for you, it was a significant saving.
So what about other expenses? Were there any expenses you actually had to save up for?
Christi Posner: First we had to save up to actually furnish the nursery. So we had to buy a crib, a change table, a rocking chair, and we actually found a nice dresser on Kijiji for a steal of a deal. Once our son was born we realized that we still weren’t as prepared as we thought we were going to be, because as parents you will never have everything you need prepared. There are always going to be moments where you’ll be thinking “I need to go get this, I don’t care how much it costs.” It’s going to save my sanity, so I need to buy it right now.
So some of those things that we didn’t actually expect that we had to buy were things like formula. We had to buy that to have it on hand when I wasn’t available to feed our little guy at home. So that was an expense that we didn’t think that we’d have to buy. We always thought that I’d be able to pump enough milk for when I was away, but you can’t always prepare for things like that. We also recently started introducing solids to our son. That was something new recently. Within the first six months of when he was born there wasn’t really much of a change in our grocery budget because he wasn’t eating solids, because he was breast fed. But once we introduced the solid food we had to buy the ingredients which started to increase our grocery costs as well. We found it was more cost effective to buy our own ingredients and make our own baby food, rather than buying the ready made food generally, but we did have to have some ready made food as well for when we are on the go. Now we are buying things like bowls, spoons, cups, those sorts of utensils for baby. Next up we’ve got to purchase a car seat, so there are these on-going expenses that always come up for us. So what we are doing to prepare for it is we are constantly transferring money every payday into a baby savings account, so that we always have funds available for these unexpected items that come up.
Doug Hoyes: So there’s all sorts of things that came up that you don’t even think about, and you’re right, things like car seats; unless you’ve had to buy one you don’t know what they cost.
You talked about things that happened before your son was born. Wind the clock back a bit for me and tell me what advice you would give to new mothers and fathers in the very short period of time before your first child is born, say a week or two before birth, what are some last minute planning tips you would give to new parents?
Christi Posner: One of the best things that I did just before I went into labour, was setting up automatic bill payments and also setting up automatic transfers to our savings accounts so that our budget was on auto-pilot.
We first had to make sure that our maternity leave budget balanced, so that our expenses were equal to our new income that was going to be coming in and not more than our income that was going to be coming in. Once that was done we knew that we had to put our budget into action on auto-pilot because paying bills and saving money wasn’t going to be on the top of our minds as new parents.
We made sure that all of our bills, our water bill, our cable bill, the electricity bill, all those bills would be automatically pulled out of our chequing account. I know that the sound of that scares a lot of people, because they are worried that if the money is pulled out automatically, what if the money is not there, then I’m going to be charged another forty dollar insufficient funds fee, and I’m going to be going further into debt. But, I have to say that if you have taken the time to create a balanced budget and you are actually following it you don’t have to have that fear anymore, because the money will always be there.
So setting up automatic bill payments and also setting up automatic savings was the other thing we did to prepare financially before our baby was born. We set up automatic transfers from our chequing account into our different savings accounts every payday to save up for things like Christmas gifts, house repairs, emergencies, baby things. So we had all of those things going automatically which really helped us through.
Doug Hoyes: Set up as many of your bills as possible on automatic payment, and have a savings account to help you through.
That’s great advice, Christi, thanks for joining me today, I’ll be right back to wrap it up here on Debt Free in 30.
Doug Hoyes: Welcome back. It’s time for the 30 second recap of what we discussed today. My guest today was Christi Posner, a Credit Counsellor, a writer and a new mom.
Christi gave us a lot of great advice on preparing for a new baby and she gave us lots of practical advice on budgeting, reducing expenses and being prepared for the start of a new family. That’s the 30 second recap of what we discussed today.
So, what are my thoughts on Christi’s advice? Well, I thought she had a lot of great advice. I liked her approach to preparing for a new family and in fact her approach works well for any upcoming life change, whether it’s getting married, starting a family or moving to a new city or even retiring. Her starting point for preparing for a new baby is to get a handle on your expenses. She advises you to write it down and then start examining where you can cut expenses to build up your savings. That’s good advice.
Christi also suggests that you go to the employment insurance website to find out what level of maternity benefits you will likely quality for. That helps with your future budgeting. There’s also the universal childcare benefit of a $100 per month for children under the age of six. And as I’m recording this, the government has announced that it will be going up to $160 per month and will be reflected on your July 2015 cheque. That’s a few extra dollars to factor into your budget.
I also liked her advice to consider what expenses you can reduce when you go on maternity leave. Christi found that she didn’t need a big data plan on your cell phone because well she’s home with her baby she can use the Wi-Fi at home. So, she pro-actively changed her cell phone plan in advance. That’s another key point. Don’t wait until after your baby’s born to make changes. You’ll have other things on your mind. So, if you can do it now, that’s the best strategy. Be pro-active.
She found that her cost for her clothing went down when she wasn’t going to the office each day and her fuel costs also dropped. That’s good to know because that also gives you some extra room in your budget. Of course some expenses go up. We talked about diapers on the show and that’s obviously a new cost. She also mentioned that initially their food bill didn’t change much, but now that her son is gradually starting to eat different types of food, those costs go up. Even if you make your own baby food there is still a cost and that should be factored into your budget.
I also fully agree with her advice on automatic bill payments. Instead of worrying about when your hydro bill and other bills are due, set them up as automatic payments so they’re automatically paid. It’s easy and you have no worries.
To summarize, make a plan, be proactive and you can be as ready as possible for your new child.
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 on your iPod or Smartphone.
Full show notes are available on our website and I’d love to hear your comments which you can leave right on our website at hoyes.com. That’s h-o-y-e-s.com. Thanks for listening, until next week, I’m Doug Hoyes. That was Debt Free in 30.
Let’s Get Started Segment
Doug Hoyes: It’s time for the Let’s Get Started segment here on Debt Free in 30. I’m Doug Hoyes and my guest today is Christi Posner, a Credit Counsellor and author. And Christi, we’ve been talking today about getting prepared to start a family, financially.
So, what do you do, what advice do you give people if they are about to go on maternity leave or they’re thinking about starting a family and they have debt. You don’t know how you’re going to get by ‘cause you’ve got debt, you have the new family coming, what’s your thought process in terms of advising people like that?
Christi Posner: So this happens a lot, like your baby was due like yesterday and you have a ton of debt and you don’t know what you’re going to do about it, especially with your income changing.
So, one of the things that we did when we were looking at our maternity leave budget – once we wrote everything down, our income and expenses – and we saw that there was a deficit and we weren’t going to be able to make it, we made sure we were on the same page. We didn’t want to end up, after all this hard work of paying down our debt, we didn’t want to end up back in debt a year later once I’m done the maternity leave. That was our goal. So we needed to make that budget balance.
So, some of the outside of the box ideas that we started looking at were if we can look at increasing our income; if there’s a possibility that you can make some income, even while you’re home on maternity leave, it’s worth exploring. Sometimes people will babysit another child or sometimes people will do a home business, deliver papers or there are different ideas. But, it’s important that you look at what are the rules when you’re on maternity leave that you need to follow in terms of how much income you can earn and then see, is it worth it? Is this something that I can do? Maybe there is some contract work that you can do here or there.
Doug Hoyes: That’s a key point what you’re saying, because if I end up taking on a full-time job while I’m on maternity leave, I’m no longer eligible for my maternity benefits. So, you’ve got to be very careful of what the rules are.
Christi Posner: Right.
Doug Hoyes: Okay, so that’s very good advice. So, looking at ways to increase your income if possible would be one step. What would be the next steps?
Christi Posner: Yup. Other things that we did, we looked at – being realistic with ourselves, it wasn’t something that we were going to be able to do, increase our income too drastically while we were on maternity leave. My husband could possibly do some overtime. That was one other option just to get some extra income here and there.
But we also looked at saving up in advance. So, if we had saved up in advance because we knew we were going to be pregnant one day, then maybe we have that reserve that we can top ourselves up during maternity leave for those 12 months and give ourselves a little bit of extra income.
Doug Hoyes: And that obviously means you’ve got to start in advance. You’ve got to be putting the money away while you’ve got it. And so you have to be living as frugally as possible before you’re going to end up needing the money.
Christi Posner: But if you’re not there anymore and you don’t have that time left, like I said this is something that happens often. So if you’re due or you got a new baby and you’re in debt and you don’t know what to do because you just can’t make it month to month anymore, what you should do is get help from a professional, someone that you can trust like a non-profit Credit Counsellor or like a trustee that can help you to look at your current situation and look at your debt and help you find ways to make it.
So, there are a lot of options out there that are worth exploring in terms of debt; whether it’s finding a structured plan on how to pay down your debt with a more affordable monthly payment, with lowered interest rates. There’s a lot of different options out there and that’s what these people are there to do, is help you, look at your budget, see if it’s realistic, see if it’s manageable for you and also help you create a plan for your debt so that you can make it month to month and you can enjoy that time with your family and your new baby.
Doug Hoyes: You raise a good point, having a new baby is something you’re not used to. By definition, if it’s your first kid, you’ve never had one before. That’s a stress in-and-of itself. You’ve got the sleep deprivation and all the other things that come with it. You really don’t want the debt piece layered on top of that because that’s just going to make it worse and worse, obviously.
So, your advice is tackle it head on, get a handle on the numbers and obviously you’re a big fan of writing it down, tracking expenses, knowing where you’re at. And then if you’ve got a deficit that you can’t solve on your own, then you’ve got to go and talk to the professionals.
So to finish up, Christi, what’s your number one piece of advice for new parents?
Christi Posner: My advice would be to create a budget, balance the budget, and live the budget.
So create a budget first. The one that I use and have used for years and years and years is available on the home page of mymoneycoach.ca.
The second step is to balance that budget. Make sure that your expenses match your income. Include a realistic debt repayment plan in your budget so that you can become debt free.
Finally, live the budget. Do it as simply as you can. Put that plan into action, put it on auto-pilot, because it’s been really, really great for this new mom.
Doug Hoyes: Perfect. That’s a great way to end it. Keep it simple, track your spending, chip away at the debt. Thanks for joining me, Christi. I really appreciate it.
Whether it’s because you work under contract or your business has announced some closures, being concerned about the security of your job is stressful. Combine that with extra credit card debts and you worry about whether or not you will be able to keep up. You wonder whether you should act now, or wait until your situation becomes a little more certain. Here is one person’s story. We’ve changed her name and some details but this is a true story of someone we helped from our Toronto location.
The Challenge
Cynthia has worked in marketing since she graduated from school but was recently told that her employer would not be renewing her contract this time around. Cythia has no assets and no savings so doesn’t have anything to fall back on to get her through if she stops working. Although she began looking for work right away she was worried something may not come soon enough, or at her same pay level, to allow her to keep up with the rent on her Yonge & Bloor apartment and her debt payments.
Cynthia didn’t want to file for bankruptcy. Since new employers often ask to do a credit check as part of the hiring process, Cynthia was worried about what they might think if a bankruptcy appeared on her credit report.
The Scenario
Cynthia owed about $18,000 in credit cards. Her current income was around $3,200 a month – enough for her to keep up with her rent and minimum payments but she hadn’t really made much headway towards reducing her overall debts.
When we originally meet with Cynthia one of the first things we talked about was the urgency of her situation. With 6 months more to run in her employment contract she was able to keep up with her rent and minimum payments for now. A job loss or reduction in income however was going to make that almost impossible.
Because she really wanted to file a consumer proposal and avoid bankruptcy we worked with her to develop a contingency plan. This plan had a few pieces to it:
If she found new employment she would file a consumer proposal once her new job started. Cynthia really wanted to file a consumer proposal so if she found herself in the job market again she could honestly say, if it ever came up, that she didn’t file bankruptcy.
If she didn’t find work, Cynthia would remain in her holding pattern. We explained to Cynthia that without employment she may not be able to afford the minimum bankruptcy payments but with no wages to garnish she could hold off filing until she found a job. She could tell creditors for the time being that she wasn’t working so couldn’t make any payments.
If she found work, but at a reduced income level, Cynthia would consider bankruptcy. As she has not been bankrupt before, if her income was below the surplus income threshold, she would be eligible for discharge in the minimum period of 9 months as long as she completed her duties.
What’s important to learn from this case study is that no matter what, you always have options. When she left our office after her initial consultation Cynthia said that she already felt relieved. She appreciated having a plan and something to work towards.
Cynthia did end up finding a new job and did file a consumer proposal. She was able to eliminate her credit card debts within three years. Perhaps the threat of a job loss was just what she needed to take some action to deal with her finances.
If you are overwhelmed with debt, we give you options so you can eliminate your debt and rebuild your finances. Contact us today for a free no-obligation consultation and talk with a Licensed Insolvency Trustee near you about how you too can become debt free.
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