Month: July 2017

Budgeting During Job Loss

Woman holding box of personal belongings as she has lost her job

Job loss can make you feel disconnected from your life and from your routine. It’s important to set yourself up for success so you can avoid future debt problems. This means ensuring you have proper budgeting tactics in place. This will help reduce financial challenges and restore a sense of control to your life.

Look at your current resources

This may include severance, savings, family income, child benefits, unemployment insurance and so on.  Although your severance is paid to you after your employment has ended, it is still considered to be personal earnings. Your severance could affect the amount of EI benefits you receive, as well as the starting date for those benefits. Be careful not to deplete your severance too quickly and see how you can make the most of your resources.

Take inventory of your spending habits

Start by looking at your credit card and bank statements. Think about your daily cash habits and cut out anything you don’t need or don’t use. Typical areas where people cut back are:

  • Cutting that gym membership when you hardly even go
  • Paying for a landline when most of my calls/texts are come through to your cellphone
  • Opt for one streaming service, not 3 or 4
  • Reduce the amount of time you eat out and pack a lunch instead
  • Plan your meals and shop with a grocery list to help eliminate food waste
  • Say no to the newest clothing trends when your current wardrobe can last you another year
  • If you have any unused items or clothes at your house – sell them to supplement your income

If you’re looking for help with this step, read our post on how to plan a simple and realistic budget.

It’s substitution, not starvation

It is important to remain socially supported during this time. Don’t deny yourself the social interaction with friends, but perhaps choose an alternative. Try a potluck dinner, movie night in or a games night at home. You may find that your friends are also relieved to have options that are less of a financial burden. The same principle applies for spending on items such as your morning Starbucks. You can still enjoy that ritual cup of coffee every morning, just make it at home.

Run the numbers

After factoring in these changes, list all of your monthly income sources and all of your monthly expenses. Make sure you’re including your debt payments into your list of expenses. Check to see if you have a surplus, are breaking even or running a shortfall (deficit). Deficits can only be run for a temporary period of time before they start to add up and become a significant problem.

If you have extra money left over after paying everyone, pay extra on your high interest rate debt. Paying off your high interest debt first will help you in the long run.

Avoid high interest debt

Using a quick solution like a payday loan may seem like a good idea, but that’s because payday loans are not very well understood. In fact, repeat payday loan users are more likely to say their debt load increased after turning to the payday loan for help. If we actually calculate the annual rate of interest of payday loan, it is well over 500%. If you’re struggling making ends meet, try one of these methods of debt management instead of turning to a payday loan.

The good news is that once you find a new position you can choose to maintain these changes. This will help you recover more quickly, pay down debt and save for the future.

However if you find that these steps are not enough, and you are continuing to feel too much pressure, please feel free to contact us for a free consultation. Our licensed professionals will meet with you in a respectful and confidential manner and help you determine the best possible solution to deal with your debt.

Helping Family Financially Not Always A Good Idea

Concerned daughter as parents lend money to their son

We all want to help when someone is in trouble. But helping family out of financial trouble can come with unexpected costs and consequences. It is for that reason that I strongly advise against ever loaning money to family and friends.

On today’s show we hear three stories:

  1. Mabel is a widow who chose to help her adult son who was struggling financially after a divorce. In the end, Mabel ended up maxing out her own line of credit and was having trouble keeping up with her own rent and debt payments.
  2. Larry loaned his son money for a down payment on a new home. Unfortunately, Larry’s son separated from his wife who received the house as part of the separation agreement.  Larry’s down payment went to his son’s ex-spouse.
  3. Amanda’s parents gave her the 5% down payment she needed to enter the housing market. Unfortunately Amanda quickly found out she couldn’t keep up with the bills associated with her new house. Maintenance, a job loss and a flooded basement resulted in her selling the home for less than she owed including some additional credit she incurred trying to keep up.

What’s common about all these stories we heard on today’s podcast is that in each case, loaning money to someone to ‘help out’ ended up with very bad consequences for everyone involved.

There are plenty of reasons not to loan money to a friend or family member:

  • If they don’t pay you back, you could jeopardize your relationship.
  • Other family members may expect the same treatment or become resentful if you are seen to be favouring one child with money over another.
  • If you have to borrow money yourself, this can lead to your own financial struggles, even your own bankruptcy if you are not repaid.
  • You may be enabling bad spending behaviour by bailing your friend or child out, rather than forcing them to deal with their money problems on their own.

Sometimes the best help you can give is no help at all. However if you do want to do something, ask yourself these questions first:

  1. Can you afford it?  I recommend gifting money over loaning them money.  That way you only gift money you can afford.  Also, if there is no obligation to pay it back, there is less of a chance that the gift will create friction between you.  If they pay it back, you will appreciate the gesture and the friendship will last.
  2. Are you really helping?  Again, this goes back to enabling bad financial choices.  If your child can’t afford to maintain their new home, you are doing more harm than good.  If they know they can turn to you for a loan, they will never learn to save or live within their means.

The Helping Family Financially Checklist

The simple solution is don’t loan anyone any money. However, if you really want to help out, follow these principles:

  1. Gift the money with no expectation of repayment.
  2. If you can’t afford to help financially, say so up front.
  3. Don’t loan money to someone who isn’t taking responsibility for their own finances.
  4. Protect yourself if you can (like taking out a second mortgage) however recognize that events like a divorce may mean you will lose your money anyway.
  5. Lastly, think about Thanksgiving or Christmas.  Will your help bring everyone closer together or cause more family arguments and stress?

Listen to the full podcast to hear more of my thoughts and reasoning behind why you should never loan a family member or friend money. The full transcript is also posted below.

If you liked this show, you may also like to hear Dr. Lee Anne Davies talk about seniors and debt or read our article four reasons more seniors will be filing bankruptcy.

FULL TRANSCRIPT show #110, rebroadcast as show #149

should you loan money to family and friends

Today I want to talk about something that gets a lot of people into trouble: loaning money to family and friends.

I understand the issue.  You’ve got some money, your family member or friend needs some help, so you help them.

That’s what decent human beings do, right?

Yes, but it can cause problems.

Let’s start with a story about Mabel.

Mabel is a widow, 65 years old, with three grown adult children. She is a really good person.  She is kind and giving, and never complains or asks for anything for herself. Her son, Randy, went through some tough times.  He lost his job, and then went through a divorce.  He needed a place to live, so he moved back in with Mabel for a while, and then she loaned him money for lawyer’s fees for his divorce, and she loaned him money to take care of some of his debts and for first and last month’s rent for a place of his own.  Mabel is on a pension, and doesn’t have a lot of money herself, so she borrowed against her line of credit to get the money for her son.  He promised he would pay her back, but he still hasn’t found a good job, so now Mabel is maxed out on her line of credit and is having trouble covering her own rent and her debt payments.

Sadly, this is a very common story.

I have met with many “Mabels” over the years, and they are all good people, wanting to do the right thing.

Unfortunately, if you borrow money to help someone, and they can’t repay you, you can end up in serious financial trouble, and may even need to go bankrupt yourself.

I have genuine empathy for people like Mabel, because she was honestly trying to help, with no regard for her personal situation.  I assume that her son Randy was also genuinely thankful for her help, and had every intention of repaying his debt in full.

Unfortunately, life happens, and when Randy is unable to pay back the money, Mabel is left in a very precarious financial position.

In my experience, this is most common with seniors.  “Once a parent, always a parent”, as the saying goes, and it is difficult for a mother or father to view their offspring as anything other than their children, because that’s what they are.  We are genetically programmed to help and protect our children, which is great for the preservation of the human species when the children are young, but it is of less value when the child is 40 years old.  It’s difficult for a parent who has always helped their children to say “no” to their requests for financial assistance.

For me, I have one strong recommendation:

Never loan money to family or friends.

Why?

Because if they are unable to repay you, you may lose a friend, or suffer irreparable harm to your family relationships.  Thanksgiving dinner isn’t a lot of fun of the topic of conversation is “when are you going to pay me back that money I loaned you?”

How to Say No (or Yes)

So what should you do if a friend or family member asks for financial help?  Here’s my strategy:

First, and most importantly, you should determine what help you can actually provide.  If you have a million dollars in the bank, and your son asks for fifty bucks to fix the flat tire on his car, you will not suffer any adverse financial consequences if you help your son.  If you are Mabel, on a fixed income, and the only way you can help is to put yourself into debt, you should seriously consider whether or not you want to jeopardize your financial future to help your adult child.

If you can’t help, say so.

I can think of many people who had to file bankruptcy because of the debt they incurred to help their adult children.  They just couldn’t say no.  When they finally went bankrupt, and lost all access to credit, they had one profound feeling: relief.  They could honestly tell their children “sorry, I would love to help you, but I have no credit, and no money, so it’s impossible for me to get the cash to help you”.  Not having the money is the perfect excuse for not helping, because it’s the truth.

My point is that you don’t have to wait until you file bankruptcy to say no.  You don’t owe anyone an explanation, but if you feel compelled to give one, tell the truth: “I don’t have the financial resources to lend you money.  I can’t put myself into debt, and jeopardize my retirement, to help you out.  I can’t”.

What if you are financially stable, and you can help out without jeopardizing your financial future?  The next question to ask is: “should I help?”

At some point we all must “grow up” and fend for ourselves.  If you continually bail out your friends and family, they will have no incentive to take care of themselves, by reducing their living expenses, getting a better job, and working hard.

Think of it this way…

Would you helping a gambling addict by giving them money to gamble?  Would you help a person with a drinking problem by buying them a drink?  Would you offer a match to someone who is trying to quit smoking?

So in the same vein, why would you help someone with a spending or saving problem continue to live beyond their means?

Sometimes the best help you can give is no help at all.

But what if the person genuinely needs your help?  What if your daughter is going through a separation and needs help to find a place to live, until she can get back to supporting herself?  What if your son has a medical issue and requires medication, and he can’t afford it?

If you decide that you have the resources to help out, and they really need your help, my advice is the same: don’t loan them money.  However, if you feel so inclined, give them the money.  No strings attached, no conditions, no expectation of repayment.

Why a gift and not a loan?  Because there is no legal or moral obligation to repay a gift.  The recipient does not have to feel that they are indebted to you.  (They may feel that way, but it’s not a legal obligation).  You do not have to worry about whether or not you will ever be repaid, because there is nothing to repay; it was a gift.

If you have the money, and if they really need it, give it to them.

If they say they want to pay you back, say “fine, but don’t even think about it until you are back on your feet”.

In Debt for a Down Payment

But what about loaning your children money for the down payment on a house?  Isn’t that a good idea?  What’s wrong with a parent helping their offspring get a good start in life?

Again, there are two questions to ask: “can I afford it, and am I actually helping or harming my kid?”

Let’s Look at Larry’s Story:

Larry bought his first house 30 years ago, and he’s owned four houses, and every one of them went up in value, and he wanted his adult children to also benefit from home ownership.  He gave his oldest son $50,000 towards a down payment, and he planned to give his two daughters a similar amount when they finished university and were ready to buy a house or condo.  Larry’s son split up with his wife, and she got the house as part of the separation agreement; Larry’s down payment was gone.  Larry had some business issues of his own and was unable to help his daughters when they were ready to buy, and they now resent the fact that their older brother got money from Dad, and they probably won’t.

This may sound like a fanciful, made up story, but it isn’t.  It’s very common, actually.

As a parent you have an additional decision to make: will I help all of my children equally?  If your family is like every other family in the world, each child is different.  They have different jobs and different earning capacities.  Some are married, some are not.  Some want to settle down and buy a house; some prefer to be mobile and rent.

If you are the parent, it’s your money, so you can loan or give it to your kids as you see fit.  But, if kid #1 gets money and kid #2 doesn’t, will that create friction?  Will Thanksgiving dinner be uncomfortable?  Is that what you want?

Let me repeat my advice again: don’t loan your kids money.

Now I get it.  You understand why it’s dangerous to loan your kids money, but you want to help, regardless of what I say.

Since you won’t take my advice, here’s what you should do if you really want to help them out.

First, think of all of your children together.  Kid #1 needs help today, but Kid #2 may need help tomorrow, so don’t spend all of your money on Kid #1 and have nothing left for Kid #2.

Second, do the math and determine what you can afford to give them, on the assumption that they will never pay you back.

Third, let all of the kids know what the deal is.

The deal may be “Kid #1 needs help, the rest of you are fine on your own, so I’m only going to help Kid #1”.  It’s your money, you can do that.

The deal may be “I have $300,000 in investments that I probably won’t need, and that money will probably be your inheritance when I die, so I’m going to set aside $100,000 for each of my three kids, and I will give them that money when they are ready to buy a house, or start a business, or go to school, or whatever other suitable purpose they have for it.  It will be a gift, not a loan”.

While I believe we should all learn to fend for ourselves, it’s your money, and you can distribute it as you see fit.

What about a second mortgage?

Instead of gifting the money to my child, should I loan them the money to buy the house, and secure it with a second mortgage?  Yes and no.

If Larry had leant his son the money and secured it with a mortgage, when his son got divorced Larry would still have a claim on the house, so in the separation there would have been less equity to distribute between Larry’s son and his ex-wife.  That’s why a second mortgage is a good idea: it protects the lender in the event of a marriage break up, or if the borrower has to declare bankruptcy: the equity, up to the value of the mortgage, goes to the mortgage lender, not the other creditors.

However, loaning money to a child to buy a house may complicate the process of getting a first mortgage.  It may be necessary to tell the bank you “gifted” the money so your child qualifies for a mortgage, so you can’t register your second mortgage until the financing is in place.  It costs money to register a mortgage, and you have to agree on repayment terms, if any.

Let me emphasize again the two salient questions: can you afford it, and are you helping your kid?

If you can afford to lose the money, whether it’s a gift or a second mortgage is less important.

Of more importance is whether or not you are helping your kid by loaning or gifting them the money to buy a house.

I can tell you many stories of parents who provided the money for a down payment, and as a result the kid bought a house much bigger than they could reasonably afford, which caused severe financial pressure for the kid, because the cost of a house is more than just the cost of the mortgage.  It’s great that mom and dad helped with the down payment, but they probably won’t be helping with the utilities, property taxes, and repairs and maintenance, so by “helping” junior buy a house they may in fact have subjected the poor kid to many years trapped in a house they cannot afford.

The issue is that the future is uncertain.

Your child doesn’t expect to lose their job, or get divorced, and they don’t expect that the real estate market will ever decline, but stuff happens.

The correct answer, in times of trouble, may be to sell the house, reduce expenses, and rent for a period of time until their situation improves.

However, if I’m the child and selling the house means I won’t be able to fully repay my parent’s loan, I may decide to hold on to the house until I’m back above water.  I feel obligated to repay my parents, so I continue to own when I should be selling.  The house becomes an anchor, holding me in place when I need to move.  I’m trapped.

If house prices go up, and junior gets a promotion at work and has a long and successful marriage, your second mortgage will be repaid, with interest, and everyone will live happily ever after.  That would be great.

However, if junior gets transferred to another city and has to sell the house, quickly, at a loss, and is not able to fully repay your loan, you have a problem.  If junior gets divorced or loses his job or if the real estate market corrects, junior may not be able to repay your loan in full.  Now junior feels bad, you are upset, and the other kids are worried that you won’t be able to help when they need your assistance.

The Bail Out

There is a final category of help that I see all too often: The Bail Out.

Amanda Was Overstretched, and Her Parents Paid For It

Amanda’s parents gave her a 5% down payment so she could buy a house.  The maintenance costs were more than Amanda expected, but she managed by using her line of credit to pay the bills.  Then Amanda lost her job and got behind on her mortgage, so her parents gave her the money to catch up on the mortgage, but they didn’t have enough money to help her catch up on the property taxes, and when the basement flooded Amanda didn’t have the money to make the repairs, so she ended up selling the house at a loss.  She was not able to repay her parents for the down payment or any of the bail out money.

Again, this is a very common story.  It is not uncommon to help someone pay their debts, only to lose the house anyway.

Buying a house with 5% down is a recipe for disaster.  If the real estate commissions will be 5% when you sell the house, you have no equity, so no margin for error.  You can’t afford any surprises, like a leaky roof or flooded basement.

When you are that close to the edge, money to cover extra costs is usually throwing good money after bad.  It was probably inevitable that Amanda would lose the house, so her parents did her no favors by delaying the inevitable.  She should have sold the house sooner, and that would have saved her parents a lot of money, and grief.

It’s your money, so consider the future carefully before financially assisting friends and family.

So let’s wrap this up with my practical advice.

Better ways to help out

The simple solution is don’t loan anyone any money.  If you really want to help, give them a gift with no expectation of repayment.

Whether it’s a gift or a loan, before you do anything, answer these three questions:

Can I afford to help?  This question is critical.  If you will need to borrow to help your family, you can’t afford it.  The answer is no.  You can’t afford to help, and helping out will only put you in deep trouble, and may even lead to your own bankruptcy.

Will helping them financially really help long term? Giving your kid the money for a 5% down payment to buy a house they can’t afford is harming, not helping.  At its best you are enabling bad financial decision making, at its worse you’re setting them up for further financial disaster. Don’t do it.

If I decide to help, how can I protect myself?  Registering a second mortgage after loaning the money may protect you if the house must be sold, but if they divorce or can’t make the payments you may still incur some costs to collect.

I know of many families who have been irreparably harmed by “helping out”, and that’s why, if possible, I suggest you avoid loaning family members money.

My final piece of advice:

Think about Thanksgiving, or Christmas, or whatever the next family gathering will be: will your financial help bring everyone closer together, or cause more stress?

It’s your money, so it’s your decision.

Top Bankruptcy Myths Dispelled by An Expert

A two column chart on a notepad for facts and myths

The internet is a good source of information, if you can find a credible source. If you’re considering filing bankruptcy or a consumer proposal, the best source of information is an expert in personal insolvency. Today’s guest is a Licensed Insolvency Trustee with over two decades of experience, and we’re here to bust bankruptcy myths and sort fact from fiction.

The truth is, personal bankruptcy or a consumer proposal is a viable option to get you on your way to debt freedom and Licensed Insolvency Trustees are the only ones who can file those for you. When you’re in need of professional information, go straight to the source.

Bankruptcy Myth #1 People Who Go Bankrupt Are Spendthrifts

Contrary to popular opinion, bankruptcy is not caused just because  people are overspending, it’s that their income has been reduced but their expenses have stayed the same. A study we conduct on the causes of insolvency  found only 37% of debtors mentioned financial mismanagement and over-extension of credit as the sole reason for filing bankruptcy. More often, their debt was accumulated over time by people who are struggling to make ends meet. They live paycheque to paycheque and use debt to pay for every day living expenses. Then something catastrophic happens. So debt, coupled with a sudden job loss or pay reduction, illness or health-related issues, or relationship breakdown is often what triggers someone to file a bankruptcy or consumer proposal in Canada.

Bankruptcy Myth #2 Mostly unemployed people file bankruptcy

Again this is not true. In our study, 81% were working at the time of their filing. Most Canadians in financial difficulty aren’t lazy, unemployed or blasé with their money, but rather are good, hardworking people who have been forced into bankruptcy as a result of extenuating circumstances. An increasing percentage of insolvent people in Canada are retired seniors. Less than 6% are unemployed at the time of filing and some of these are individuals off work due to illness, pregnancy or because they are sole caretakers for their children or parents.

For those with a higher income, a consumer proposal is more often the solution over personal bankruptcy. This is because in a bankruptcy, the more you earn, the higher the cost. A consumer proposal allows you to spread potentially high monthly payments over a period of up to 5 years, interest free.

Bankruptcy Myth #3 Everyone Will Know I Filed Insolvency

Once you choose to file for bankruptcy (or a consumer proposal), there are documents that must be prepared and filed with the government and this information does become part of the public record. However, the amount of information that is readily available to the general public is very limited and not easily accessible. If someone wants to see whether you filed insolvency, they must do a bankruptcy search, a pay to see the results, through the Bankruptcy and Insolvency Records of the Office of the Superintendent of Bankruptcy.

Contrary to the popular myth, a notice does not appear in the newspaper signifying that you filed personal insolvency. This can be the case for business bankruptcies or if the value of your assets (excluding secured assets) will exceed $15,000, but this does not happen in most individual bankruptcies. A consumer proposal is never reported in the newspaper.

Who Finds Out?

  • Your creditors will find out; they need to be notified so that they cease collections and garnishments that they’ve started.
  • Canada Revenue Agency gets notified (even if you don’t owe them money), for tax purposes.
  • Your employer will only find out if your wages are currently being garnisheed. They need to know in order to stop a wage garnishments and ensure you start receiving your full pay again.
  • Credit bureaus know and a consumer proposal and bankruptcy will affect it in different ways.

Bankruptcy Myth #4 Insolvency Will Ruin Your Credit Forever

While bankruptcy is a negative mark on your credit score, it puts you in better financial standing for the future than does ignoring your debts. Generally, a bankruptcy note will remain on your credit record for 6-7 years after you discharge, and a consumer proposal will remain for 3 years after successful completion of the proposal. After filing bankruptcy, you can immediately begin to repair and build up your credit.

If you’re at the point where you’re considering a bankruptcy or consumer proposal, it’s because you already have a poor credit utilization ratio, are most likely late on payments, which means your credit score has already taken a hit. Although you might be surprised to know that many people who file bankruptcy have a good credit score at the time of filing.  This is because they never miss a minimum payment, yet they can’t pay their way out of debt.

Bankruptcy or a consumer proposal is the first step in repairing your credit score.

Bankruptcy Myth #5 If You Go Bankrupt, You Lose Everything

A common myth about bankruptcy is that the insolvent will have everything seized once they file. In Canada, however, there are personal bankruptcy exemptions within certain monetary limits. While what you get to keep and what you lose in a bankruptcy can be complicated, generally, bankruptcy exemptions include:

  • Household goods such as food and furniture
  • Clothing
  • Automobiles (up to a certain dollar amount)
  • Pensions and retirement savings

Bankruptcy Myth #6 Government Debts Are Not Included in a Bankruptcy

Bankruptcy deals with unsecured debts, like credit card debts, unsecured lines of credit, payday loans, past due bills and yes, most government debts.

  • Any tax debts you owe up to the date of bankruptcy are included in your bankruptcy as long as the CRA hasn’t placed a lien against your property making it a secured debt.
  • Bankruptcy is an option for student loan debt relief. Student loans are included if you haven’t been a student for more than seven years. The best way to determine whether or not it’s eligible is to bring your student loan documents to your trustee.

Some debts cannot be discharged by filing bankruptcy. Secured debts, which are guaranteed against assets (such as home mortgages), are not affected. Also, certain kinds of unsecured debts may not be erased, including alimony or child support and court fines and penalties.

Bankruptcy is not a scary. It’s a way for the honest, but unfortunate debtor to obtain relief from overwhelming debt. If you are struggling contact a Licensed Insolvency Trustee for help.

Resources mentioned in this show

FULL TRANSCRIPT show #150 Top Bankruptcy Myths with Leigh Taylor

Top Bankruptcy Myths Dispelled by An Expert
Doug Hoyes: We just celebrated Canada’s 150th birthday and this is Debt Free in 30 episode number 150 so to celebrate both of these milestones I’m bringing back a guest from one of our most popular shows ever. Back in season number one, show number 33, originally broadcast in April of 2015, my guest was Leigh Taylor and the topic of that show was smart ways to pay off debt.

Even though that show aired more than two years ago it is still downloaded many times each month and as of today it is one of the top three downloaded shows in the history of this podcast. That tells me that Leigh was a great guest because that show has been shared many times by our listeners. So today, two years later, I’m bringing Leigh back for round number two.

Today I want to ask Leigh about debt and bankruptcy myths. We get a lot of information from the internet and that information is not always accurate so today we’re going to dispel the top debt myths that Leigh and I encounter as we help people with their debts. So, let’s get started, Leigh, welcome back to the show, how are you doing today?

Leigh Taylor: We’re doing just great Doug.

Doug Hoyes: Excellent, well thanks for being here. So, you’re talking to me from Winnipeg today I believe. Tell me a little bit about your company and what you do there.

Leigh Taylor: Well, LC Taylor, as a matter of fact LC Taylor is 25 years old this year. We operate in Manitoba and North-Western Ontario. We deal with a broad spectrum of insolvency situations but we mainly focus on personal insolvency solutions.

Doug Hoyes: So your company is very similar to what we do, we deal with people, actual real people. What are the issues that you see in, you know, Manitoba now? What are the kind of hot buttons that you like to talk about?

Leigh Taylor: Well, there’s a number of them. The one that comes to mind of course is the issue with credit counselling organizations. There’s a whole plethora of agencies out there, some purporting to be – to have some official capacity etc. that purport to deal with personal financial problems, you contact them and they will go to bat for you to solve your financial problems. A lot of them are available on the internet some of them are based out of Florida or someplace down in the states etc. Not all of them are as upfront with their situation as you might imagine.

And the difficulty is that they try to give an easy, simple solution to people and we’ve had a lot of situations where people have spent hundreds of dollars trying to go through them to solve their problems to no effect. They don’t have any of the necessary tools disposable to solve the problem. And eventually they will come to a licensed insolvency trustee such as ourselves only to find out that they should have come to us first.

Doug Hoyes: Yeah and that’s something we see a lot here in Ontario. We use the term debt consultants; I mean you’re using the term credit counsellors. Obviously they’re terms that aren’t legislatively mandated so it’s not like a Class A mechanic, we all know what that is. So, we use the term debt consultants because it covers a very wide range. Obviously there are credit counsellors who are legitimate, the not-for-profit credit counsellors. My advice to people is if you can actually go in and meet with them and if they’re not charging you a huge upfront fee then they are probably much more likely to be legitimate. Would that be how you would help consumers decide who’s legitimate and who isn’t?

Leigh Taylor: Yes, I think that’s probably a good rule of thumb. The problem with credit counsellors in general, again I’m using sort of a broad definition here, well, put it this way there’s an old adage that if the only tool you have is a hammer, every problem looks like a nail. And credit counsellors do a good job within their limited scope of abilities and the tools that they can offer, consolidation loans and these sort of things. But when you get down to hardcore financial problem that needs a statutory solution, they don’t have it. Not all of them recognize that they don’t have it but they don’t always refer their clients to licensed insolvency trustees that can put together legally binding proposals or bankruptcies that actually work in some situations.

Doug Hoyes: Yeah, totally agree with you. I mean if your wages are being garnisheed by CRA, by Revenue Canada, then you’re going to need something legislative, a consumer proposal or a bankruptcy to deal with it. If you need some budgeting help then a credit counsellor’s going to be a fantastic resource for you. So, I think that’s some good advice to alert people that there are many different solutions out there.

And you’re right, obviously you and I are biased, we’re both licensed insolvency trustees. You know, our hammer, to use your expression, is consumer proposals and bankruptcy but we are also legally required to explain to people all of their options. So, if someone comes in to see you and me and the correct answer is go see a credit counsellor, you need some help with budgeting or you need to get a second mortgage and refinance, then obviously that’s what we’re going to do. That’s the way you operate as well I assume.

Leigh Taylor: Yes, for sure. We talk to an awful lot of people and like most licensed insolvency trustees, we give free initial consultations so it doesn’t cost you anything to sit down with us, to go over your situation, come up with various options that are available. So, they can decide what’s in their own best interest. Not necessarily what’s in their creditor’s best interest or our best interest but what’s in their best interest?

I guess you could say that of all the people that we talk to, and we talk to an awful lot of people, we find solutions other than bankruptcy or proposals for more than half of them. Probably about 12% of the people we talk to end up going bankrupt. So, there really is a lot of solutions out there that people can take advantage of.

Doug Hoyes: Yeah and we’re exactly the same way. Of the people that call us, roughly 30% are going to end up filing a consumer proposal or a bankruptcy, which means 70% are going to be referred to someone else who can help them, a tax preparer, refinancing, maybe they just need budgeting help, maybe they weren’t insolvent. So, I think those are valid points.

So, okay we’re talking about the services that licensed insolvency trustees provide. Let’s get into talking about some of the myths surrounding both debt and bankruptcy. And we talked a little bit about it with both credit counsellors. They’re very good at helping with budgeting and getting you back on track. I think one of the big myths that I see or I think people in general would consider to be the truth is that people who go bankrupt are spendthrifts and can’t handle their money. I mean I can certainly dispel this myth based on our data here in Ontario. We know from our Joe Debtor study that our clients on average have income that is almost 40% below the median income in Ontario. So, do you see the same thing in Manitoba? What are the common reasons that people end up having to file a consumer proposal or a bankruptcy?

Leigh Taylor: The biggest single factor over the years is proven to be true and that’s marriage breakup. You know, the rate of marriage breakup in this country is getting higher and higher it seems. And it’s almost a typical situation. You can see a young couple, a couple of kids, they’re both working, they’ve got perhaps a normal amount of consumer debt, credit cards etc., a house mortgage. If they’re just starting out the mortgage is probably as big as they could afford at the time.

And then things don’t work out, you end up having a split, you end up with legal fees, you end up with all sorts of acrimonious types of interactions etc. to the point where now you have two separate families trying to support the kids in their own ways, the expenses get higher. It becomes harder and harder to meet what may have been a reasonable level of credit. And they just can’t make it.

And it’s usually we find on average two, two and a half years after the financial trauma, the marriage breakup or whatever that people actually get to the point where they have to seek professional help to solve the problem. But certainly marriage breakup is the biggest one. The thing sort of closely on the heels of that might be that there is no single factor other than that that really contributes to it. People can have a reasonable amount of debt but they lose their job, there’s a death in the family, there’s all sorts of innumerable financial traumas that can happen in people’s lives. And it’s that combination of where over a period of time if you don’t do anything about it it’s going to result in requiring a statutory remedy.

Doug Hoyes: Yeah and I think the key point there is in a lot of cases it’s just not your fault. And yes okay, I guess we could debate whether my marriage got into trouble because it was my fault or not but ultimately things happen and you are better off getting professional help in dealing with them rather than letting it get worse and worse.

And I agree with what you’re saying, it is often a couple of years after the event itself whether it’s the marriage breakup or job loss or a medical issue or something that the debts finally catch up to you. You were able to keep it going for awhile. And again, I think that disproves the myth, it’s not you spent too much money, it was just things happen.

So, let me throw another myth at you and get your take on this one. So, myth number two everyone will know I filed bankruptcy. So, I meet with people all the time. They’re worried that if they file a consumer proposal or go bankrupt, everyone will know and I think there’s really two parts to this myth. Who will know and who needs to know? So, let’s start with the first part. If you go bankrupt, who will find out that you went bankrupt?

Leigh Taylor: Well first of all your creditors will find out. If somebody is taking legal action against you or whatever, the stay of proceedings kicks in, official notices have to be sent out to those people as well.

Doug Hoyes: So let me just stop you right there because you used two big words, creditors and stay of proceedings. So, I know what they mean, I’m pretty sure I know what they mean, but explain in layman’s terms what’s a creditor? Like what’s the difference between a creditor and a debtor and then what’s a stay of proceedings?

Leigh Taylor: Okay, a creditor is anybody that you owe money to. So, if you’ve got a Visa card and you owe them money and a bankrupt occurs, one of the things you’re going to be doing is producing it’s called a statement of affairs, a legal document that says this is who I owe money to, these are all my assets, all the things I own.

And based on that notices will go out to the creditors, to people you owe money to, telling them that the bankruptcy has occurred and they can no longer sue you, they can no longer contact you to collect the debt, they can’t garnish your wages. So, they will be notified as well.

The notice doesn’t normally on a consumer bankruptcy, some administration bankruptcy, go into the local papers, no need for that. There are some exceptions but they’re pretty rare. Your neighbours don’t know, your mother isn’t necessarily going to find out. But part of that too is that nobody really cares that much anymore. When you get an access of hundred thousand bankruptcies a year in Canada it gets a little tedious to say well, did my neighbour go bankrupt? Privacy is a little overrated in that kind of a situation.

Doug Hoyes: Yeah, everybody knows everything. So, we’re going to get back to the list of people that would find out so the people you owe money to is the obvious one. You mentioned a stay of proceedings the, so can you put a bow on that as to what that means?

Leigh Taylor: Well, it’s an automatic legal procedure as soon as you file an assignment in bankruptcy or go bankrupt. The bankruptcy access, nobody can take any collection practices against you. If the creditor phones you up and starts giving you a hard time simply say I went bankrupt, this is my trustee you can talk to them. And legally they’re not entitled to take any further collection practices against you.

Doug Hoyes: Yeah and that obviously would apply in a consumer proposal as well. So, I always explain it to people as the creditor’s the people you owe money to have to stay away, it’s a stay of proceedings. So, as a result once the bankruptcy or the proposal is filed, nobody can be taking you to court, garnishing your wages, anything like that. Okay, so we know the people you owe money to will find out that you went bankrupt, what about Revenue Canada, do they find out?

Leigh Taylor: Yes, Revenue Canada’s going to know. A notification gets send to Revenue Canada, certainly if you owe Revenue Canada any money, back taxes or whatever, back taxes or whatever you’re going to want that stay of proceedings again. And that’s pretty straightforward with Revenue Canada. When you file bankruptcy the trustee is going to do any income tax returns [that are standing] at the date of bankruptcy. And two returns in the year that you go bankrupt. So, Revenue Canada would get notified of that at the end of the first year you’re back on your own with Revenue Canada.

Doug Hoyes: And in the case of a consumer proposal if I don’t owe any money to Revenue Canada they still find out but it doesn’t really affect anything, I’m still getting my refund in the normal way.

Leigh Taylor: Yes.

Doug Hoyes: And what about my employer?

Leigh Taylor: Well, it could depend on your circumstances. If there is a garnishment order outstanding then of course your employer’s going to find out about it because we’ll send the notice to them so they stop taking the money off your cheque. If there is no garnishment order there is no other reason that your employer has to find out about it particularly, then your employer may never know. A lot of times though we find that employers are referring people over to us. They get the garnishment notice, they don’t want their employees working to pay off some court order, they want their employees to be able to get by just fine on their wages. So, it’s not unusual for employers to send them to us to solve the problem.

Doug Hoyes: Yeah and in most cases the employers happy that you’ve taken action because the payroll person, it’s a nuisance for them to have to be, you know, doing the garnishment off your paycheque, sending it off. They’re happy to say great, we don’t have to worry about this anymore. It’s simpler for the employer and obviously it’s better for the employee as well. So, final point on this then, credit bureaus, obviously they find out about a consumer proposal or a bankruptcy.

Leigh Taylor: Yeah, they’ll get the information directly from the [unintelligible [00:15:13] office so it goes directly onto their files. That’s – a lot of people, one of the first things they ask is, is this going to affect my credit rating? I’m not sure that people understand exactly what a credit rating is other than they’ve been taught over the years that it’s a good idea to have a good credit rating and a bad idea to have a bad one, not really understanding the difference.

But it’s not that bankruptcy hurts your credit rating, strange as that sounds, your credit ratings already in the ditch. If you’ve got a whole bunch of credit cards and people suing you and all these people are going to be reporting to whatever credit agency they’re reporting to, your credit rating’s already off track. Nobody’s likely to loan you a lot of money based on your credit rating because it’s so bad. What bankruptcy actually does is it improves your credit rating because it puts a stop date on collections and it typically says once you’re discharged from bankruptcy those debts are discharged. There’s some exceptions but we’re talking generalities now. So then you can start rebuilding it.

Doug Hoyes: So, let’s talk about the rebuilding then because myth number three that people are totally worried about is well, if I go bankrupt or file a consumer proposal it’s going to ruin my credit forever. So, what you’re saying is the consumer proposal or bankruptcy puts a stop to the debts. How long is my credit impact then? Is it forever or is it for a period of time. How does that work?

Leigh Taylor: Well, generally speaking once you’re discharged from bankruptcy, that’s key, the credit reporting agency will report the fact of bankruptcy for six years after you’re discharged, which means that you can start rebuilding it. People are going to know you went bankrupt. But going bankrupt is one of the first steps to rebuilding your credit. It puts a stop to the old debts, all the creditors know that.

And if you understand that your credit rating is merely a gage that creditors, lenders will use to judge how much of a risk are you? If we loan this guy or give him a credit card or whatever is he simply going to run it up and go bankrupt again or whatever? So, it simply says that now you’ve got rid of your old debts, how long is it going to take to get it back?

And you can start rebuilding your credit right away. There’s things you can do. You can get secured credit cards for example. There’s administrative costs involved in that but nevertheless that’s a handy way to start rebuilding your credit. You can start dealing with rather general Visa or general credit cards if you need loans or whatever then talk to your local branch of a bank or credit union where you can talk to a real person, get an idea of what your situation is, show them that you’ve been able to keep track of your expenses, you’re not going to fall back into the same trap you fell into before. And build up your credibility. And you build it up with the lender in conjunction with the credit bureau.

Doug Hoyes: Yeah by paying your bills on time and so on. And I think you made a key point there and that is if you’re considering filing a consumer proposal or a bankruptcy the phrase you used is your credit is already in the ditch meaning you’ve already got bad credit so saying oh I’d really like to preserve my credit, I don’t want to go bankrupt, well, wait a minute, you already are in bad shape.

So, if you can’t go to the bank and refinance all your debts at a lower interest rate then doing a proposal isn’t going to make it any worse to your credit that as you say is already in the ditch. So, I think you shouldn’t be comparing your credit to perfection because it isn’t that. If you’re in a situation now where you can’t borrow anyways or the only borrowing you can do is at super high interest rates then it makes sense to say okay let’s bring an end to it and get started. So, okay so credit is not a forever thing.

I know one of the other objections to filing a bankruptcy and that would be our myth number four and that is if I go bankrupt I’m going to lose everything. So, walk me through that. Is that true? Are you going to lose absolutely everything if you go bankrupt?

Leigh Taylor: No, that’s not the case. Now it’s going to vary from province to province because what the bankruptcy act says is that if an asset or a class of assets is exempt under federal or provincial legislation, then it’s not part of the bankruptcy estate. And the most common ones are equity in your home, that will vary from province to province but most provinces allow some equity in your home. Motor vehicles under certain circumstances can be claimed exemption from seizure. What they call tools of the trade, if you’re an electrician then you need your screwdrivers and wire cutters etc., those are going to be exempt from seizure in most provinces. And there’s others too depending on your particular situation.

The other one I wanted to note and that we get asked more often than not is am I going to lose my house? Well, if you have a house and I’m using Winnipeg where a house is worth $300,000 I don’t know if you can get one of those in Toronto?

Doug Hoyes: No, you can’t, no, you can’t.

Leigh Taylor: A $300,000 house with a $280,000 mortgage against it, well they reality of it is there’s no equity in the house. If you can keep up and afford to keep the house, mortgage payments etc. then the trustee isn’t going to be interested in the house. We get it appraised, look at the mortgage, not enough equity in there, we can leave it with you. So, in most cases that’s the scenario we’re looking at. It’s not too often we come across situations where they have a three or $400,000 house with an $80,000 mortgage.

Well, the solution is not bankruptcy in most cases. You can refinance, file a proposal, do a sort of a consolidation work out rather than a statutory remedy. So no, it’s – everyone is an individual situation so it’s a problem when you generalize too much in this area. But the answer to that is no and the detailed answer is talk to a licensed insolvency trustee in your area and find out just what assets are or not part of a bankruptcy situation.

Doug Hoyes: Yeah and I think that’s a good idea because I mean you mentioned cars for example. And it’s true in Ontario we have a similar law that a car worth up to a certain amount is exempt from seizure. But how do you determine what the value of the car is, what happens if there’s a loan against the car, what happens if it’s a lease? There’s always complications that will make it more complicated.

Well, no problem that’s something we deal with every day, obviously you deal with it every day so that’s why we encourage people, come on in, let’s take a look at your car documents, let’s take a look at your loan documents, same with your house, your mortgage whatever. We can then do some digging and figure out what exactly will happen. It’s the same with RSPs. RSPs are generally exempt from seizure, meaning we’re not going to take them, the only obvious exception is any money you’ve put in in the last 12 months. But again, what does that mean and how is the 12 months figured out? Bring your paperwork in, we can take a look at it and come up with a very specific answer for you.

So, let me throw myth number five at you then and this is the last one we’re going to talk about and that is that government debts are not included in a bankruptcy. In other words a bankruptcy or a consumer proposal doesn’t get rid of government debts. So, tell me what happens if you owe money to the government and either go bankrupt or file a consumer proposal. Let’s start with the simple example which would be income taxes.

Leigh Taylor: Income taxes are reasonably simple. You’re correct, they are part of the bankruptcy. Revenue Canada will file their claim etc. and be a creditor like any other creditor and get paid something maybe out of the bankruptcy along with the other creditors.

One of the reasons that the trustee will file what we call a pre bankruptcy and a post bankruptcy tax return, that means we’ll file a tax return from January 1st of the year so if you went bankrupt today it would be from January 1st to June 9th. And what that does is finds out is there a refund there because a refund that is a debt that is owed to you and goes to your trustee or if you owe taxes based on that short period of time, we pro rate all the exemptions and everything else. So that it sort of gets you on track. If you owe Revenue Canada money it’s caught up in the bankruptcy.

We file a post bankruptcy tax return going from the day of the bankruptcy to the end of the year so that we can get you back on track if you will. Now if you owe money and don’t make the proper deductions during bankruptcy you could be faced with paying money back at that point in time. And if there’s a refund it goes to the trustee.

Doug Hoyes: And obviously if you owe money and don’t go bankrupt you’re paying taxes anyway so that’s no different. But your basic point is if you go bankrupt any taxes you owe up to the date of bankruptcy are included in the bankruptcy.

Leigh Taylor: Yes. There’s a lot of other kind of government debts involved but they all fall into the same general category. You get, you do get some situations where EI overpayments maybe as a result from fraud or misrepresentation that you didn’t fill out the cards properly or something and you can have a problem with those debts sticking around. You don’t see much of that anymore. It used to be a common experience but we don’t see too much of that anymore. But generally speaking yeah just because it’s the government doesn’t make it any different than other creditors in a bankruptcy.

Doug Hoyes: What about student loans?

Leigh Taylor: Well, student loans are a really interesting twist over a number of years. You understand how they came about and everything. The bottom line right now is if you go bankrupt and within seven years prior you cease to be a student, then that is going to be accepted from the discharge and it will be dealt with separately. There’s separate rules dealing with it. If it’s five years old then you can apply to have it included. If it’s more than seven years old then it’s automatically included. Now there’s been the odd court case in different jurisdictions that deal with how do you measure the seven years? I think the latest one comes out and says it’s basically seven years from the term or the studies that you borrowed the money to do.

Doug Hoyes: Yeah and again that’s a classic example of don’t believe what you read on the internet. Come in, bring your student loan documents, we can give you the phone number to call either the provincial or the federal student loans depending on who you’re dealing with and figure out what the correct answer is.

So, last question related to this myth, what debts do not go away in a bankruptcy? So we talked about student loans that are less than seven years old, are there any other obvious ones that yeah if you owe that you’re still going to have to pay?

Leigh Taylor: Okay there’s just a few of them if you want to generalize them fines or penalties imposed by the courts so if you’ve got a speeding ticket or impaired driving charge or something of that nature, it’s not going to be discharged. You need to deal with it and notwithstanding the bankruptcy. Alimony maintenance or child support, past, present of future is not going to be affected by bankruptcy so that continues on, which means that maintenance enforcement could continue to collect if they’re responsible for collecting on those kinds of a debt. You want to make sure that’s taken care of.

As well any debt which arose as a result of fraud, embezzlement of fraud misrepresentation of any sort is considered non-dischargeable as well. And that, you get into legalities when you talk about that because what is misrepresentation and these sort of things and you may want to talk to a lawyer to get into that definition because that can get pretty complicated. And other than student loans you talk about things like intentional injury claims. And other than that all the debts are going to be affected in bankruptcy.

Doug Hoyes: Yeah the main one you mentioned would be child support. You’re still paying that whether you’re bankrupt or not, whether you’re in a consumer proposal or not, it’s not going to affect it.

So, okay so I think we went through five myths there and we helped dispel them so to close the show Leigh, are there any pieces of advice that you could give someone that is listening to this? I guess one obvious piece of advice you just gave us was when you’ve got these kind of issues make sure you’re talking to an expert not somebody who just is a debt consultant and just started in business yesterday but an actual licensed insolvency trustee. Is there anything else other than that that you would be giving people as general advice?

Leigh Taylor: I think the best advice that I can give to anybody is that when you start to recognize that you’re having financial difficulty, do something about it. Don’t sit back. I think we mentioned earlier that it’s two, two and a half years after a traumatic financial event that people start actually trying to do something about it.

If they start earlier then first of all they can crack the problem, they get some good advice, they can talk to a licensed insolvency trustee, get an assessment about the situation. What caused it, they can correct it and it gives them a lot more options, a lot more things that they can do to solve their problem. It doesn’t necessarily have to be that bankruptcy is the only solution. You wait long enough, that’s what’s going to happen. So, early recognition, do something early about it and chances are you’re going to come out better.

Doug Hoyes: Excellent. Well, I think that’s a great way to end it and I think that’s great advice. I mean if you’ve got a medical problem you’d do the same thing, right? I’m going to go talk to a doctor right away. I’m not going to wait till it becomes more severe. So, how can people track you down? So, if someone is listening to this you’ve got an office in Winnipeg, you’ve also got an office in Kanora Ontario, which is kind of the northwestern corner of Ontario. What’s the best place to reach you, what’s your website, how can people find you?

Leigh Taylor: Okay, if they just Google LC Taylor they’re going to come up with it so I think that’s probably the best idea. They can contact my phone, the number in Winnipeg is 204-925-6400. And they can email is at lctaylor@lctaylor.net. And if you just have general questions.

Doug Hoyes: Give you guys a call. Well, what we’ll do in the show notes is put up links to all that and it’s literally LC, the letter L, the letter C Taylor is the name of your firm. So, Leigh thanks very much, I appreciate you being here today.

Leigh Taylor: Always a pleasure Doug.

Doug Hoyes: Thanks very much. Well, that’s our show for today. Full show notes including a full transcript and links to Leigh’s website can be found at hoyes.com that’s h-o-y-e-s-dot-com. As I said that’s our show for today. Thanks for listening. Until next week, I’m Doug Hoyes. That was Debt Free in 30.

 

Will A Second Mortgage Clean Up All Your Debts?

second-mortgage-clean-up-debts

If you have a lot of credit card debt and own a home, you may be thinking of getting a second mortgage to pay off debt. Interest rates are low, and home values are rising. Is now the right time to consolidate credit card debt into your mortgage, and what are the risks?

In today’s article, I’ll explain the pros and cons of refinancing consumer debt with a second mortgage. I’ll also discuss options to deal with high balances on your credit cards if you don’t qualify for a debt consolidation mortgage or the rate is just too high.

What is a second mortgage and how does it work?

A second mortgage (also called a home equity loan) is a new mortgage loan secured by any equity in your home after deducting your primary mortgage and theoretical selling costs. Proceeds from a second mortgage can be used to pay off debt, finance a renovation or for whatever purpose you’d like to use the money.

A second mortgage is just one mortgage solution to help you consolidate credit card debt.

A second mortgage is not the same as a home equity line of credit (HELOC). A second mortgage has a fixed monthly payment and amortization period, similar to how your first mortgage works. A home equity line of credit is an open, revolving credit limit that allows you to borrow and repay as you need money and comes with monthly minimum payments.

Refinancing is when you break the terms of your current mortgage and get a new mortgage. You can add to the principal of your first mortgage when remortgaging if you want to pay off other debts with the extra money. However, it’s not always wise to refinance your first mortgage if your primary lender will charge a pre-payment penalty or they are not willing to lend you more money at the same low rate.

How much can I get approved for a second mortgage?

The amount of home equity you have determines how much you can borrow with a second mortgage. Equity is what your house is worth if you were to sell it minus real estate commissions, outstanding mortgage principal, penalties, legal fees, and property taxes.

Traditional lenders will loan up to 80% of your home equity on a first mortgage. A second mortgage can allow you to access up to 90% of your home value for a debt consolidation mortgage. A second mortgage is a high ratio mortgage making it riskier to the lender, which means that second mortgages carry higher interest rates than a first mortgage.  However, more than equity room, affordability should be your primary consideration when determining how much to borrow on a second mortgage.

If your home’s value has risen, you may have substantial equity built up in your home that you can use to consolidate debt including high-interest credit cards, payday loans, and other unsecured debt. I’ll discuss more on the pros and cons of using that strategy for paying off debt below.

What happens if you don’t pay your second mortgage?

When you take out a second mortgage, your lender will place a lien on your property. If you fail to make your monthly payments, there is a risk that your lender can foreclose on your home. In the event of foreclosure, your second mortgage lender will only be paid out after the first mortgage, property taxes and legal costs.

One of the most significant risks of home mortgage debt consolidation is converting unsecured debt into secured debt.

Unsecured debts like credit cards, lines of credit, payday loans, and income taxes are debts where the lender has no recourse if you don’t pay except to sue you in court, obtain a judgment order and maybe a garnishment order.

A second mortgage is secured with collateral, your home. If you don’t pay your mortgage, your mortgage lender can take your house. If you don’t pay your credit card debt, your credit card lender can take you to court and sue you, but they would need special permission from the court to enforce a judgement by registering the judgement against your house, which is why a credit card lender typically gets a court order to garnishee your wages, as compared to a mortgage lender whose primary recourse is to take your house.

Is consolidating debt with a home equity loan good or bad financially?

The number one reason people take out a second mortgage is to pay off credit card debt and other bills. The question is, will a second mortgage help you clear up those debts or add further strain to your finances? For some people consolidating debts with their home equity works, and for others, it simply prolongs the inevitable.

When lenders are considering an application for a second mortgage, they have specific qualification guidelines:

  • You must have sufficient available equity to cover the amount you are asking to borrow
  • You will need a solid employment history and acceptable debt-to-income ratio, generally below 43%, including any new financing.
  • You will need a credit score in the low to mid- 600’s depending on the lender. Your credit rating will affect not only whether you receive a second mortgage but will also influence your interest rate.

However, the point of this post is to help you determine if it’s wise for you to get a second mortgage, not whether the bank will agree to lend you more money.

Here are five factors you should consider before you commit yourself to consolidating debt with a second mortgage.

Can you borrow enough to pay off all your debts?

As a starting point, if you don’t have sufficient equity in your home to repay all your outstanding credit card debt (or whatever debts you want to put in your consolidation loan), then this is a non-starter. It probably does not make sense to consolidate some but not all your debts. If you can’t deal with everything with a refinanced second mortgage, you should look to other debt relief solutions to solve your debt problems.

Can you afford the extra mortgage payments?

Second, you should evaluate whether taking out a second mortgage will solve your cash flow problems.

One advantage of a second mortgage is that you convert several credit cards and bill payments into one extra mortgage payment. However, second mortgages charge a higher interest rate than a first mortgage. If you have bad credit, this rate can be very high. I have seen people take on a second and even third mortgage with a rate of 29% or more. If your mortgage rate is high because you are a high credit risk, there may not be enough savings to make a long-term difference in your ability to get out of debt.

Will you risk foreclosure?

If you can’t afford to keep up with the payments over the long run, you could end up defaulting on your new second mortgage. This will only make your situation worse, further dragging down your credit score and potentially risking your home to foreclosure.

Keep in mind a second mortgage loan is secured by your property, and if you stop making your payments, you can lose your home since your debt is no longer unsecured.  Converting unsecured credit card debt into a secured second mortgage entitles your second-mortgage lender to take your house through foreclosure or power of sale, even if there is no equity in the home.

What are your future plans?

A second mortgage can be a risky way to consolidate if it doesn’t help your long-term financial goals.

If interest rates rise, or the housing market crashes, and your home value declines, or you lose your job, your financial situation may become even worse.

If you need to sell your house, you will have to pay off the second mortgage. You should factor in real estate commissions and moving costs as you may have less net equity than you think, depending on the time involved.

Is the interest rate too high?

By their very nature, second mortgages have a significantly higher interest rate than your first mortgage. While a first mortgage may carry a rate of, say, 3%, a second mortgage from a more traditional lender might cost up to 10%.

If a traditional lender turns you down for a second mortgage, they are doing so because they believe the risk of lending you more money is too high. They are concerned about your ability to make your future mortgage payments.

When a traditional lender denies you credit, you may be tempted to turn to alternative lenders. This means borrowing against the equity in your home but at an even higher interest rate. Second tier private mortgage lenders or B-lenders may be willing to approve your mortgage application; however, the interest rate on high-risk second mortgages can be extremely expensive. Sub-prime mortgage lenders can charge second mortgage rates between 10% and 29%.

Your primary mortgage lender will often give you a reason why you are being denied a debt consolidation loan through your mortgage. It could be because you do not have enough equity to pay off your debt or because they are not convinced your income will be enough to make the payments, even if you have the equity.

Rather than approaching a high-cost secondary lender, you may want to consider an interest-free consumer proposal. I’ll explain when to consider that option to use your home equity to deal with unsecured debt at the end of this article.

When not to get a second mortgage debt consolidation loan

There are four situations when you should not get a second mortgage to pay off debt:

  1. You have some equity in your house, but you can’t borrow enough to pay off all unsecured debts
  2. You don’t have the income or credit to qualify for a second mortgage
  3. The interest rate is so high you won’t be able to afford the monthly mortgage payment
  4. You are using a second mortgage to cover monthly expenses because your budget is not balanced, and consolidating other debt into a second mortgage won’t solve that.

Although you can get rid of credit card payments and overdue bill payments with a second mortgage, you now have two mortgages to pay.

There are inherent risks with a second mortgage, even if you qualify and can afford the payment today. Stress test your decision based on what may happen in the future. Rising interest rates will make your mortgage payment much higher. If housing prices fall, and you have borrowed 80% to 90% of your current home value, you may find yourself with negative equity in your home and large monthly mortgage payments.

When to consider a consumer proposal

It may sound counter-intuitive to talk with a Licensed Insolvency Trustee about your debt when you have equity in your home. However, if you are struggling with significant unsecured debt, a consumer proposal may be a better option than taking on a risky second mortgage.

A consumer proposal allows you to stay in your house and make a repayment plan with your creditors to pay back what you owe over up to five years.

There’s no interest on consumer proposal payments, unlike a second mortgage that could carry a higher interest rate, which means all your payments go towards paying down the principal of your debt.

How much of a debt settlement you may be able to offer, if any, depends on your income and home equity. It is possible to file a 100% consumer proposal instead of creating another mortgage to pay.

If you have high credit card balances and own a home with positive equity, I generally recommend talking with a mortgage broker first to see how expensive a second mortgage may be. If you don’t qualify or can’t afford the payments, it’s time to speak with a Licensed Insolvency Trustee about the benefits of filing a consumer proposal instead.

Debt Consultant Warning: This is Not a Pretty Picture

10 reasons why you should never use an unlicensed debt consultant video thumbnail

The federal government is well aware of the questionable practices by many unlicensed “debt consultants” in Canada, yet they seem to be doing little other than issue consumer alerts and reports.

Hoyes Michalos has written many blog posts, social media posts, and letters to our government in an attempt to spur some kind of action that will protect consumers from debt consultants who charge exorbitant, unnecessary fees to unsuspecting debtors to “help” them file a consumer proposal.

Yet debt consultants are still actively operating without bounds. We just recently began working with a client who experienced the horrors of dealing with a company who she signed a contract with to help her through the consumer proposal process.

Signing agreements with crazy clauses

Our client (who came to us on her own, not referred through a debt consultant), gave us permission to publish these documents she received and to share her story about her struggle with debt.

She reached out to Consumer Debtor Protection Services of Canada (CDPC) for help. As is normal for debt consulting companies, they required that she sign a contract for their services before doing anything.

10 reasons why you should never use an unlicensed debt consultant

Read Transcript

10 reasons why you shouldn’t use an unlicensed debt consultant:

  1. They are not licensed by the federal government.
  2. They cannot file a consumer proposal.
  3. They charge unnecessary consulting fees.
  4. On average, people paid $2400 and up to $4200 in extra fees
  5. Most just refer you to a Licensed Insolvency Trustee.
  6. They can’t get you a better deal on your consumer proposal.
  7. They charge extra fees for services that are not necessary.
  8. You may not understand who’s doing the actual work.
  9. They propose credit repair & proposal loans which may not be in your best interest.
  10. They are not a Licensed Insolvency Trustee.

Close Transcript

What’s even more alarming to me is the additional agreements she signed as part of the process. As you can see from the image below (client information removed), the terms of this agreement are somewhat alarming as the people of CDPS can contact on behalf of the debtor.

I’m concerned about this paragraph in particular:

I further freely and fully authorize any employer, former employer, landlord, school, university, any bank, caisse populaire, finance company, credit union, mortgage broker, condominium corporation, hydro company, telephone company, cable and/or internet providor or any other company with whom I deal on a credit basis, as well as any organization, municipality, police department, provincial or federal government ministry, institution or department, Canada Revenue Agency, social services, WSIB, Revenue Quebec, CSST, or any insurance company who has information about me, and to whom a signed copy of this authorization is delivered, to furnish any information, reports, or copies of records which may be required by CDPC, or its accredited representatives.

This seems like overkill to me to help someone deal with some debt and in all likelihood refer them to a Licensed Insolvency Trustee to file a legal process on the client’s behalf.

What’s worse, is these agreements were delivered and signed via email. I’m not sure how well most people understand exactly what they as signing under conditions of stress and concern about debt problems when they are presented over the phone or email.

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Suing for unpaid fees

After paying $1,200 in fees and finding herself still in debt, with no foreseeable solution, our client came to see our Licensed Insolvency Trustee, Rebecca Martyn, in our Windsor Ontario office. This client has since chosen to file a consumer proposal with us.

Now she is being sued for “liquidated damages” of another $1,371 by Consumer Debtor Protection of Canada. Luckily for her, this debt will be included in her consumer proposal.

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Warning: stay away from debt consultants

Unfortunately, Consumer Debtor Protection is not the only company charging debtors to collection documentation to file a consumer proposal. You can read our review of a similar contract and terms of service for a company called Trust Advisory Service as reported to us by a client.

While the government may not be doing enough to remove unlicensed debt consultants from the industry, I’ll once again provide a clear warning about debt consultants: They often charge money for a service that is not necessary and do not solve your debt problems, and their fees can reach thousands of dollars.

In fact, the Financial Consumer Agency of Canada has issued their own warning about unlicensed consultants who propose to help you pay off your debt. From their consumer alert which you can find here, and an excerpt from that warning states:

The Financial Consumer Agency of Canada (FCAC) is warning consumers who can no longer keep up with their debt payments to be cautious.

Some companies are misleading consumers by promising quick and easy solutions to help pay off their debt or repair their credit. In some cases, consumers may end up in a worse financial situation than before they got help.

Here are some of our recommendations:

  • You do not need to pay a fee to see a Licensed Insolvency Trustee.
  • ONLY Licensed Insolvency Trustees can file a consumer proposal.
  • A debt consultant cannot get you a better deal in a consumer proposal.
  • Licensed Insolvency Trustees are federally regulated, as are our fees.

Speak directly with a Licensed Insolvency Trustee. This client now wishes she had come straight to us in the first place, but hopefully this experience can help others make the right decision at the start of their journey towards becoming debt-free.

10 Tips for Dealing with CRA and Tax Debt Problems

The word tax spelled using letter blocks with coins on top of each block

We are seeing a growing number of people in Canada finding themselves owing a tax debt to the CRA. You pay taxes on your total income for the year. If you’re an employee working for a company, your employer will withhold and remit your taxes automatically, and usually, you don’t end up with the complication of a big tax liability at the end of the year. But what if you have more than one job and one employer doesn’t know about the other? What if you have pension income coming from more than one source? Are you making enough installments if you are self-employed? Outside income can lead to a big income tax debt problem.

Today’s podcast discusses ten tips on how to avoid complications with the CRA and gives advice when dealing with the Canada Revenue Agency and tax debt problems from our in-house tax expert and Licensed Insolvency Trustee Ian Martin.

If you find yourself needing tax debt help, consider talking with a Licensed Insolvency Trustee today.

Many people use “tax return” and “tax refund” interchangeably, but this is incorrect. Your tax return is the document that you, or your tax professional, complete and file with the CRA. Your return has all of your personal information on it and is where you calculate whether you owe, or are owed money. Your tax refund is the monetary amount you will receive once the CRA has assessed your tax return.

Ten Tips To Avoid A Tax Debt Problem

  1. File your taxes on time. You avoid any penalties and accrued interest if you do end up owing money to the CRA.
  2. File your return even if you don’t think you’ll owe. The government takes information from your return to calculate your Ontario Trillium Benefit and your Canada Child Benefit. You also don’t get your refund if you don’t file. They’re giving you your money back so you might as well file.
  3. Know your tax bracket. If you find yourself owing tax at the end of each year, do the research and see if it’s because you are in a higher tax bracket based on your total income especially if you have two jobs, take money out of RRSPs, or have other earned income. Make installments to avoid a large tax liability at the end of the year.
  4. Be aware of different deadlines for self-employed. Self-employed persons have the extended deadline of June 15th to file taxes, not April 30th. Although the return date is extended, know that the deadline for any amount owning is still April 30th. Again, making installment payments when you are self-employed is key to avoiding a significant tax debt at year-end.
  5. Should you use a tax professional? If bookkeeping and preparing tax returns aren’t your forte, leave it to a professional. You can even try using a tax preparer for a few years to understand how to do the returns correctly, and then if you’re comfortable, you can migrate to doing your tax returns on your own.
  6. Want to lower the taxes you pay and still get a refund? Take advantage of all tax deductions including RRSPs. The money put into your RRSP lowers your taxable income and reduces the amount you have to pay in taxes. Saving money is also a good idea for your future.
  7. If you owe the CRA money. If you can, make your payment on time to avoid penalties and interest. If you don’t have all the money, contact the CRA to make payment arrangements. Like dealing with any debt you may need to find ways to reduce expenses, or if it’s a significant amount, use your assets or a loan to help with that payment.
  8. Bankruptcy can eliminate tax debt. Bankruptcy can eliminate your tax debt, but you need to act early. The CRA can file a tax lien on property until the debt is paid. It’s essential to file bankruptcy before it gets to this point. Once the lien is placed on your house, your tax debt is considered a secured debt as it’s now attached to your home.
  9. Make a deal with CRA through a consumer proposal. Because tax debt is an unsecured debt, there are options to help you deal with those debts. With a consumer proposal, your trustee will negotiate a deal to repay a lesser amount with the CRA and your other creditors. If a majority of creditors agree, all creditors included must accept the offer including the Canada Revenue Agency. It’s important to know that a CRA debt consumer proposal is the only way the Canada Revenue Agency will accept an offer to repay less than the full amount of tax assessed.
  10. Don’t ignore your tax debts. The CRA might not call immediately while they catch up with processing your return and reviewing your assessment but when they do, know that they have extensive and very powerful collection practices. Unpaid tax debt may also impact your credit score. Be proactive and take charge of the situation, ignoring them won’t make them go away.

Resources mentioned in this show

FULL TRANSCRIPT show Dealing with CRA and Tax Debt Problems #148 with Ian Martin

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Doug Hoyes: On today’s show we answer a simple question, how can you deal with Canada Revenue Agency when you have tax debts? Why is this an important question? Because taxes are a big issue for our clients, we know from our Joe Debtor study that 40% of our clients owe money on taxes when they file a consumer proposal or bankruptcy with Hoyes Michalos.

Of those 40% who owe taxes, they owe an average of just under $23,000 in taxes and that represents about a third of their total debt. So why do people owe money on taxes and what can be done about it? To answer those and many more questions and to give us ten tips for dealing with CRA and tax debts, I’m pleased to welcome back on the show our resident Hoyes Michalos tax expert, Ian Martin. Ian, welcome back. how are you doing today?

Ian Martin: Very good Doug, how are you?

Doug Hoyes: I am great, thanks very much. You’ve been a guest a few times here at Debt Free and 30. About a year and a half ago you were a guest on show number 84 and I’ll put a link in the show notes to that show so that our listeners can go back and listen to that show. Today I want to cover some new areas with you. But before I do I’d like you to give our listeners the 30 summary of your professional career. I know you’ve been with Hoyes Michalos for the last eight years, what did you do before that?

Ian Martin: Well, even before that part as a trustee at Hoyes Michalos obviously I talk to people who find themselves struggling with debt so I’m very conversant with that part of that. But before that I was an employee of the Canadian Revenue Agency for almost seven years.

Doug Hoyes: Oh boy.

Ian Martin: I know you’ve teased me about that many times over the years.

Doug Hoyes: I have.

Ian Martin: But it gives me knowledge and insight about how the tax man works. I understand about taxes more than the average person does. And even before that I am a CA by trade. So, I think really the combination of education and training over the years puts me, well really over the last 20 years, it puts me in a good position to be conversant to help people manage their tax debts.

Doug Hoyes: I rescued you from CRA is what you’re saying there.

Ian Martin: Well, it was a joint effort, but yes.

Doug Hoyes: There you go, joint effort. So, I mentioned our Joe Debtor study where I said that 40% of our clients owe tax debt. So, can you give us a quick overview of the kinds of taxes we see people deal with through either a bankruptcy or a consumer proposal?

Ian Martin: Right, right. There are a lot of different ways. The first and most obvious way is on your personal income taxes. And that can come from a variety of ways. So, this would be I file my personal tax return, I have some money on it but something that a lot of people get confused on is somebody who has a small business and operates as sole proprietor so that means that they’re not incorporated. So, for that person their business activity goes on their personal tax return. And even if it is a business it is personal tax that they owe. That’s the most common example.

But then also for the sole proprietor maybe like a contractor, sub contractor, people often owe money on their GST or their HST account and that can grow without them really realizing it. So it’s another common example. I can think of two other common ones. People who have their own employees, there’s requirements just as you do for me when you pay me every couple of weeks Doug. You’re required to –

Doug Hoyes: I do, got to give money to the government.

Ian Martin: Yeah. So, right, so you’re required as my employer to withhold a certain amount of different statutory obligations. You remit that on my behalf. So then we often see people who things get tight and they either don’t fully understand that obligation or they fall behind on paying that money for their employees.

And another common example, so there’s a couple of things there that are related to businesses, but as somebody as a sole proprietor so not incorporated, but then there’s another part that is a little bit unique where somebody who is – they operate their business through a corporation. Sometimes people don’t realize that even for the corporate accounts, like the corporate HST account or the corporate payroll account, they can be reassessed personally by the Canada Revenue Agency in their capacity as the director. So often times people will incorporate to protect themselves from certain debts but there are some such as a corporate payroll or HST account that can basically pierce and can come after you personally as well.

Doug Hoyes: Yeah, so there’s a lot of different ways you can end up owing taxes and obviously unpaid income taxes being the most common one. And you talked about people who are self-employed or who owned a business which is not incorporated, it’s the same thing as being self-employed. So, when we look at our numbers about 9% of our clients are self-employed at the time they file their consumer proposal or bankruptcy and many of them were self-employed prior to that. And then ended up getting a regular job and had to file bankruptcy.

And of those that are self-employed, about two thirds have unpaid taxes. It’s a very common issue for someone who’s self-employed. On average those tax debtors owe almost $52,000 to CRA and their tax liability makes up almost half about 46% of their total debt. So, my question for you Ian is why is it so common for someone who is self-employed to find themselves so deep in debt with Revenue Canada?

Ian Martin: Right, right and that is, it’s really a variety of factors. But then also I think you’ve said it, I think it’s a very common scenario that we see.

Doug Hoyes: Well, give me a scenario.

Ian Martin: So, here’s a typical scenario. Somebody who – we see a lot people work in a lot of different work in different, let’s say construction sub trades within the housing industry. We see a lot of people who are drywallers, roofers framers, where they’re not employees. So, we’re seeing a little while ago – as an employee of yours, you’re required to hold certain amounts. So, if you’re self-employed subcontractor there’s nobody who is withholding tax amounts and paying it to the Canada Revenue Agency on your behalf.

So, I see a lot of subcontractors who number one, they don’t realize that, they don’t realize that maybe they didn’t realize it at the start. And so maybe they fell behind for a couple of years. But then in the meantime life today for the typical person, it’s pretty expensive. So, imagine, you know, a common example a young guy who maybe gets into say the roofing industry and he’s trying to pay his bills but maybe he’s got a couple of credit cards, he’s getting that credit card statement every month showing him the high interest. So if he had to prioritize, he pays that.

So, with the taxes and the Canada Revenue Agency, it’s the kind of thing where it can kind of creep up on you slowly over time where they don’t send you a bill monthly, if you don’t file your taxes for one year it’s not like they’re right on you. Sometimes it can take many years before people really realize or they perceive how bad it really is.

Doug Hoyes: Yeah and if you were an employee before and never had to worry about taxes and now all of a sudden, like you say you’re not getting a statement every month you kind of forget that there is this liability building up and then finally you get the taxes filed and it ends up being a huge number. Well, we know that according to Statistics Canada there were 2.8 million people who were self-employed workers in Canada in 2016.

So, obviously it’s easier administratively to be an employee because as you said your employer takes an amount for your taxes right off your paycheque and sends it to CRA for you. When you’re self-employed you’re responsible for making those payments yourself. So, in your experience why would anyone go through the hassle of being self-employed? It’s obviously easier to be an employee, why go through the hassle of being self-employed?

Ian Martin: And even there, like all things there’s a variety of considerations. Some people they want to be their own boss. They don’t want to work for somebody else, they feel empowered to not be answerable to somebody else. But it brings with it certain risks. And so I guess in that way you’re saying it’s a choice, it’s a choice.

But a lot of the scenarios we see, like the scenario awhile ago with, you know, people within construction sub trades, often it’s not by choice. Often there’s a lot of situations or people for all intents and purposes probably should be treated as an employee and take away some of that risk with, you know, taxes and HST and I’ll say WSIB as well.

But the way the industry is set up is the company doesn’t want to do that. So, if you want to work then you have to be a subcontractor but then there’s lots of other people as well, again it’s not by choice. Like maybe somebody’s been working at a factory for years and years and years and it got shut down, and got laid off and they’re looking for some other job opportunity that’s just not there. Even though it’s probably not the optimal time, some people do cease that to be their own boss, to try something different because there weren’t a lot of other appealing choices at the time.

Doug Hoyes: Yeah and you’re right, there’s a lot of other industries where you don’t have any choice. I mean a lot of truck drivers for example, hey you want to be our own truck driver or lease your own truck, you’re self-employed and that’s just the way it is.

Ian Martin: And what’s that doing, it’s downloading a lot of the administrational, all the costs and all the risks from the big company down to the individual who maybe isn’t property equip to handle all those challenges.

Doug Hoyes: Yeah I mean your employer kicks in for CPP and when you’re self-employed you’re paying your potion and their portion as well as doing all the administrative stuff. So, yeah it’s a big issue.

Now I don’t want to make this all about self-employed because not everybody who owes money to the CRA are self-employed. What else would give rise to someone owing money to Revenue Canada other than being self-employed?

Ian Martin: Right. And you say that and I think of two common scenarios right away. And even generally speaking when I meet with somebody who has tax issues, this is a big part of what I like to explore and whether it’s from being self-employed or other reasons we’ll talk about in a second. And for me that’s really, really important so that people indentify that and are able to make some changes going forward.

So, in answer to your question Doug, sometimes the way of the world today, especially younger generations, a lot of people are finding challenge, finding full-time permanent work. Maybe they’re able to kind of piece together, piece together a couple of different jobs in trying to secure full-time hours. The risk with that – so, even if you’re an employee now, again you’re an employee two different places, each employer’s required by law to withhold certain amounts.

But maybe the second job, the smaller hours, maybe they’re not aware of the first job. And maybe they’re following all the rules properly but they don’t take enough tax off. So, when you do your tax return at the end of the year, the amount of tax that you’re required to pay is based on your total income for the year. So, basically there wasn’t enough tax coming off the second job. That’s a very, very common scenario.

Doug Hoyes: Yeah you’ve got two jobs, they both think you’re in the 20% tax bracket so they’re taking 20% off. But when you add them together you’re in the 30% tax bracket, they didn’t take enough off and you end up owing more.

Ian Martin: Yeah or even more so sometimes people have like a very small second job that might not be very much money at all. They think it’s not a big deal but if the income is low enough maybe that second employer isn’t taking any tax off at all.

Doug Hoyes: But when you add it to the first one you’ve got to pay tax at your total rate.

Ian Martin: Exactly.

Doug Hoyes: So yeah, there’s lots of reasons why people would get into debt. And we see that same scenario with people on a pension too.

Ian Martin: Yeah that’s exactly what I was going to say. It’s very similar. Like when you – maybe people have multiple pensions, maybe they’re still working a part-time job and especially when money gets tight. If, you know, life is expensive. Maybe they have some other debts like a credit card or line of credit they’re trying to pay. It’s really hard to volunteer – even if you recognize the issue is that there’s not enough tax coming off. We call that being taken off at sores. It’s really hard to make that decision to voluntarily have someone take extra tax off when in the here and now you’re struggling.

Doug Hoyes: I need that money.

Ian Martin: I’m going to throw out another scenario we’ve talked about many times before. And this where again people that we see all the time every day where they’re struggling with their debt payments and they look at the investments they’ve accumulated all the time. They’ll look at something like their RRSP. And so it’s not a great decision but it’s understandable that people still start pulling money out of their RRSP trying to keep up with their minimum payments.

But right there again you’ve got another source of income that is taxable when you take it out. There’s legal minimums that the different, you know, that the bank or the insurance, basically where the investment is held, there’s restrictions or regulations on how much the minimum taxes are supposed to take out. But that’s where similar to a second job in hindsight it wasn’t enough tax.

Doug Hoyes: Yeah, so if I take $3,000 out of my RRSP they’re going to take, what 10% out.

Ian Martin: Right, 10%, $300.

Doug Hoyes: And if I did that every week or every month, at the end of the year I’ve taken out $30,000 or $50,000 or whatever. They should have been taking off 20, 30, 40, 50%.

Ian Martin: Right so that extra 20 or 30% that didn’t get taken off right away, at the end of the year you get that bill. But again, like we were saying before for someone who is pulling that money out, trying to keep up with their monthly payments, even if they understand what we’ve just talked about it’s really hard to make that conscious decision to have the bank take off more tax because you feel like you need it right now.

Doug Hoyes: Which is why you’re taking the money out, so, lots of different ways you can get into trouble with Revenue Canada. So, I want to spend the rest of the show giving practical advice. You’ve been a professional accountant for 20 years, you’ve worked for a big accounting firm, you spent a few years at CRA and now you’re a Licensed Insolvency Trustee with Hoyes Michalos. So, let’s give our listeners a bunch of practical tips they can use to deal with taxes. Now I ask most of my guests for one practical tip at the end of the show but from you I want ten practical tips.

Ian Martin: A lot pressure.

Doug Hoyes: A lot of pressure on dealing with CRA and avoiding tax problems and dealing with tax debts if they happen. So, I’m going to throw some stuff out here and I want you tell me what you think. So, tip number one, I think the most obvious tip and I can think of this one myself, is file your taxes on time. So, why does that matter either if I’m owing money or getting a refund, why does it matter to get them filed on time?

Ian Martin: Right and so I want to make sure we’re clear on the wording here. So, when you file your tax return, it’s the tax return is the information, it’s a document that you file to the government that says here’s my summary from last year. And then from that there’s calculated either refund, meaning they’re going to give you some money back or you have a balance owing saying I’ve got more I need to pay. So, in the situation of having a balance owing if it’s not filed on time or the amount owing isn’t paid by the April 30th deadline there’s penalties. There’s an automatic penalty for late filing and interest starts to accrue right away based on that date.

Doug Hoyes: And there’s two different things, penalties and interest.

Ian Martin: Correct, correct, two different things. There’s like a onetime hit. I’m drawing a blank on the amount. But there’s a onetime hit and then you keep accruing every month until that amount is paid. So, that can grow significantly over time. I mean we’ve seen lots of examples of people who it kind of festers in the background for years and years and years they show us their tax bill of $50,000 and almost half of it is penalties and interest.

Doug Hoyes: Yeah you can easily double the amount. So, if you don’t get your taxes filed on time you get hit with a penalty. If you owe money you’re also paying interest on that.

Ian Martin: Right.

Doug Hoyes: And of course if you’re getting a refund, you’re not getting a refund if you don’t file your taxes.

Ian Martin: Right, exactly. So, if you do have a refund file so you can get – they’re giving you your money back so you might as well do that and that money can do all sorts of different things. But also the taxman isn’t going to pay you interest. They’ll charge you interest if you owe the taxman but they’re not going to give you interest.

Doug Hoyes: They’re charge you interest if you owe them but if it’s a refund too bad you didn’t file on time, we’re not giving you interest.

Ian Martin: Right.

Doug Hoyes: So it’s a double whammy. Okay so tip number two, if I don’t expect to owe taxes is there any point in filing them.

Ian Martin: Right and I see that on a regular basis as well.

Doug Hoyes: I mean I’m not getting charged a penalty for not filing if I don’t owe.

Ian Martin: Right and that’s where fundamentally some people will say well, I know I always get a refund, I’m going to get around too. I mean yes sure, I can get a little bit of money but I don’t –

Doug Hoyes: I’ve got pay H&R Block 50 bucks to file my return.

Ian Martin: Right, it’s a pain in the butt and it’s going to cost me money to do it but I know I won’t owe money so I’m not incurring any kind of cost. But especially for people who have fairly modest incomes, they are different benefits that you will receive based on your tax information.

So, common examples would be in Ontario we have The Ontario Trillium Benefit that gets paid monthly. The GST, HST credit that gets paid every three months and a big one for a lot of our clientele is, it’s now called The Canada Child Benefit, formally the Canada Child Tax Benefit. So, the government will not determine your eligibility or the amount until you have your tax information filed. So, even if you don’t owe money you want to get that information to you so that maybe they will give you other money back.

Doug Hoyes: So, I could have five kids if I don’t file my taxes I’m not getting my child tax credits or anything.

Ian Martin: Right. Yeah, if once they use the past year’s information, it’s starts the new payments in July. And then if they don’t have your information in a couple of months they just cut it off until you show them the result.

Doug Hoyes: Yeah and I remember meeting with a guy who was pretty sure he owed a lot money because he’d been self-employed in the past, he always owed taxes and Revenue Canada was sending him these letters that said well, you haven’t filed your taxes but we’re assessing you, we’re guessing that you probably owe the same as you owed in previous years. So, because you owed $20,000 in the previous years, for the last three years that you haven’t filed your taxes we’re assessing you for the same $20,000 times three years plus the penalties, plus the interest, he owed a huge amount of money.

And I said to him well, okay are these numbers right? And he said I don’t know, I’m not an accountant, I have no idea. And I said well, file your taxes, let’s find out. And it turned out that his – he was self-employed for another year, lost money, didn’t have any income at all and then he became an employee for a couple of years. The taxes were being taken off. So, when he filed his taxes, instead of owing this huge amount of money, he actually got a small refund back.

Ian Martin: Yeah I know exactly what you’re referring to. I can think of lots of, well, maybe not lots of examples, but enough examples of people who are – if the taxman is kind of lying in the background and they’re all quiet and all of a sudden they wake up and they’re sending you these notices saying you owe 50, $60,000, I mean I can think of a lot of examples where the person gets their taxes filed and they owe literally nothing. Yeah they’re thinking they need to come see us and file bankruptcy and it turns out they owe literally nothing and then they start getting money back from the government. So, that’s again, not too common but a great way to help people.

Doug Hoyes: And if you’ve got kids and they hadn’t given you your child related benefits for a year or two there could be a big catch up.

Ian Martin: Yeah for sure.

Doug Hoyes: So get your taxes done and I realize once you file your taxes and you do owe money then Revenue Canada’s going to be pursuing you for it but at least they’re pursuing you for something you actually owe rather than something you fear that they might owe, so, okay back to the tips now.

Ian Martin: We took a bit of a tangent there.

Doug Hoyes: That’s right, we went on a tangent. So, let’s not – let’s pick up the pace here and give our listeners lots of practical advice here. So, tip number three, most employees get a tax refund every year. So, what’s your advice for an employed person who’s in the opposite situation and somehow is owning taxes every year? What should be going through their minds?

Ian Martin: Right. And I guess in a way we kind of addressed that a little while ago. Fundamentally you want to look at it and understand why is it that I owe this tax every year? So that the two kind of scenarios we talked about a few minutes ago was maybe I’m working a second job without enough tax coming off, maybe I pulled money out of an RRSP and there wasn’t enough tax coming off so that would be the first step, assess why is it that I owe taxes ever year?

And even though it might be fairly second nature for you and I without background, sometimes people – it’s too much. So maybe it makes sense to speak to other – if you have a tax preparer, usually they should be able to break that down for you to be able to give you advice. But if it’s one of those reasons like that ultimately it’s making sure that from a second job for example that you talk to the employer and you voluntarily have extra tax taken off because again, like we said before sometimes it’s very difficult if money is tight to voluntarily have an extra $50, $100 coming off each month but you’re either going to pay for it now or pay for it later.

Doug Hoyes: With interest. Yeah and you gave two examples there. One was a onetime thing, okay I cashed out the rest of my RSP, well I’m not going to have that same issue next year. So, I don’t have to be having extra tax taken off next year.

Ian Martin: Right, exactly.

Doug Hoyes: But if I have two jobs and I’m going to continue having two jobs then yes, making a plan to have extra taken off so that you don’t end up owing kind of makes sense.

Ian Martin: Right. You identify that that is a recurring risk and you take steps to stop that from happening every single year.

Doug Hoyes: And don’t let it happen again. Okay so tip number four, income taxes and you already mentioned this, for most people are due April 30th. So, I want you to explain the difference between when a self-employed person file their taxes an when everyone else does and what’s your advice to ensure they don’t end up with a big tax bill when they file?

Ian Martin: Right and I think I was making the distinction earlier about the difference between a return and a refund. I mean with a lot of people use those words interchangeably where they don’t mean the same thing. So, I remember the tax return is the document saying here’s my income information from last year where from that you calculate whether you have a refund or a balance owing.

So, for a self-employed person they’re allowed to file their return, again the information by June 15th so that’s later than the normal deadline that you and I would have as employees for April 30th. The catch is if there’s an amount owing on that return the amount was still due by April 30th so a lot of times people fall into the trap, they just think oh I can file my taxes on June 15th, they don’t realize that they had to pay the bill by April 30th.

And again if we’re seeing people who are self-employed, that means that there’s some issues that have been going on where they haven’t been making voluntary payments, they call them installments. If somebody hasn’t been making voluntary payments throughout the year then that’s a situation where most likely they will be owing money that had to be paid by April 30th even if the return could be filed later.

Doug Hoyes: So that’s a key point. There’s two different dates, the taxes for everybody though are due April 30th, it doesn’t matter who you are.

Ian Martin: Yes.

Doug Hoyes: So, okay tip number five them related to that should you use a tax professional to do your taxes or should you just do them yourself.

Ian Martin: Yeah and I guess my answer to that is, maybe, it depends. Maybe for somebody who is self-employed, who, you know, works really hard, probably works really long hours and is probably really good at his or her particular trade but the bookkeeping, the tax return, stuff like that, maybe it’s not their forte or maybe they just don’t have the time just from a practical sense. Maybe they don’t have the time to invest to be competent enough at that.

If that’s the case it makes a ton of sense to have a bookkeeper helping you either monthly or every three months with preparing things like your HST returns, your payroll returns if you have employees and then also assisting you with your end of year tax returns. And again it’s a challenge if money’s tight. Sometimes it’s difficult to voluntarily pay someone else for something when you say you can do it yourself. But I think you need to really have a reasonable assessment of the circumstance and say well if I haven’t been able to do this for the last three yrs, five year, 10 years, what is going to be different for this year? Am I going to be able to get over the hump and do these things for myself or does it make sense to spend a few hundred bucks to have someone assist me with this?

Doug Hoyes: Yeah, I mean we can all change the oil in our car ourselves but is it worth it? Evaluate your own individual circumstances and see.

Ian Martin: Yeah and even for an individual who – I mean as an accountant, as a tax professional, as, you know, the kind of background I have, I mean I would never pay somebody to do my taxes because they’re not that complicated and I don’t feel overwhelmed by it. But for a lot of people even when it’s a straightforward return, they feel so overwhelmed when they hear income taxes and they see, you know, they see the tax return and all these line numbers and it just can get very, very overwhelming.

So, this is where me going to lots of different, you know, high volume tax preparation companies I think is a pretty good business for those places. We’re not going to name names but even like a fairly simple tax return if you go to a big company is easily $60, $70, $80 or more where I mean maybe there’s a benefit going to a place like that to make sure that your, you know, the return is proper that you’re claiming all the normal things that you’re entitled to.

But if that’s the case, if you’re paying something like that every single year for a tax preparer to literally punch in a couple of slips to a tax program, there’s inexpensive tax software, I mean there’s software that is free of charge that can really walk you through how to do things simply. So, I get it, I get it that it can be overwhelming but maybe investing a couple of years cost and then understanding it enough so you don’t have to pay that money every year. I mean that’s probably a good balance.

Doug Hoyes: Yeah if your situation is the same every year you can probably figure it out every year. If there’s changes then maybe it does make sense.

Ian Martin: Right. If there’s a change then maybe it makes sense to have a professional confirm okay, how does this change, factor into my taxes this year?

Doug Hoyes: Sure, have someone that knows what they’re doing. So, okay so tip number six I want to lower the taxes I pay and I want to get a refund so what’s the most common way to do that? How can I pay less taxes?

Ian Martin: Right so the simple, we’ve referred to this already in different ways, in an RRSP. So, it’s a Registered Retirement Savings Plan and the benefit of doing that when you put money into an RRSP you get a deduction. So, what that means is if I put $5,000 into this kind of investment I don’t have to pay tax on $5,000 of my income. So, it really – when you calculate at the end of your year on doing your return how much tax you have to pay for the year it can significantly lower it.

And this is one of the examples of how the federal government, they’ll have different programs worked into, you know, the federal tax system or other systems to effectively provide inducements trying to incur certain kinds of behaviour. So, whether it’s Mr. Trudeau or future administration, they’d much rather have us if possible take money now and save it for the future so that down the road people aren’t struggling, people aren’t as reliant on different social services, so, trying to think ahead. So, they’re trying to motive us to think ahead.

Doug Hoyes: Right. So, whether an RSP makes sense or not of course depends on your situation, what your tax rate is if you’ve got other debts maybe the money should be going towards that. Again, it’s something to think about and again, it’s based on your own personal situation.

So, okay we talked about, you know, paying down debt. Let’s go to the last three tips and since this is Debt Free in 30 let’s talk about debt. So, I want to make the last three tips ways to deal with Revenue Canada Debt, CRA debt. So, tip number eight what’s the first option to consider if you find yourself owing money to CRA?

Ian Martin: Well, I’d say that just whether it’s Canada Revenue or any debt that the goal should be to try to pay it in full and that means looking at your expenses, is there a way to reduce expenses? Is there some way to utilize your other assets? Maybe you’re a homeowner where you can borrow against the equity that you built up.

Some of that – it can be challenging though with the government because they’re not on you every month or even every year, the challenge there is that that amount that they’re looking for once they wake up the amount that they’re looking for sometimes it’s just simply too much to be able to work out through a monthly payment plan or maybe even if you do have a house maybe the amount with all the interest and penalties far exceeds the equity that you’ve built up over the time frame.

So, ideally you’re able to work it out. People, you remember this, you get feedback from people all the time when they’re trying to speak with CRA collectors. Like any large organization it can be really inconsistent in terms of the treatment people receive. Sometimes people encounter collectors who are really reasonable and take a bit of a sympathetic ear to a tough situation. And other times simply not, other times it’s very much, you know, we need the money by this time or else. So, that’s – that can be the challenges. Like if it grows over three or four years then all of a sudden you’ve got the bloodhounds on you, are you going to be able to come up with, you know, 50, $60,000 in a couple of months to get them off your back?

Doug Hoyes: Well, and they’ve got the power obviously to do things like freeze bank accounts, put a lien on your house and garnish your wages. So, if you’re at the point where that’s happening then that’s clearly not something you can just discuss with them and try to work it out. So, okay so tip number nine then, the average person on the street assumes that even if you go bankrupt that doesn’t eliminate your tax debt. Now I know that’s not true. Explain how a bankruptcy can deal with tax debt.

Ian Martin: In the vast majority of situations a tax debt is treated like any other debt. Like a credit card, a line of credit, a payday loan.

Doug Hoyes: Right, so it’s pretty simple.

Ian Martin: Right, in most situations, so, typically like those that debts are what we call unsecured debts where they don’t have any kind of lien registered against an asset. So, a form of a secured debt would be something like a mortgage or a car loan where a bankruptcy does not remove that lien from the related asset.

So you said this a moment ago that one of the powers that the Canada Revenue Agency has if the tax debts kind of fester for too long and they don’t get dealt with, if you’re a homeowner they have the power without your consent to register a lien against your home. So, if things are getting to that point where there’s negotiation going on, there’s threats they’ve already frozen your bank account, it’s not very hard for them to figure out through the resource that they have available that you have property in your name. So, without your consent they could register a lien against your property.

And then if you subsequently go bankrupt it doesn’t automatically remove that lien. So, the idea fundamentally is I go bankrupt, I complete my bankruptcy, I’m discharged from bankruptcy, it released me from my unsecured debts. But if the government proceeded to do that lien before you did the bankruptcy, they’re not unsecured anymore, they’re secured against your property and the bankruptcy does not automatically remove that secured debt.

Doug Hoyes: Yeah so it’s not something you want to leave until they get to that point. But the key point that is taxes are included in a bankruptcy just like other debts. There are some special rules that may kick in in very unusual cases but obviously you can give your office a call.

Ian Martin: Right and that’s when we’re talking to people we want to make sure we understand the details, make sure if some of those were situations do apply, we address that before we jump the gun on situations.

Doug Hoyes: Which is what we do with every debt, I mean there special rule that apply for student loans and things like that.

Ian Martin: Exactly.

Doug Hoyes: So, okay so that’s simple enough. So, tip number 10, final tip of the day. So, if I can’t make a deal with Revenue Canada because I owe too much and I don’t want to go bankrupt maybe because as you described I own a house or something that has some equity in it. And I don’t want to just do nothing because I’m afraid they can garnishee my wages or put a lien on my house then, you know, tip number 10 what’s another option that deals with tax debt, and I’m setting you up here because I know the answer to this.

Ian Martin: Yes, I see where we’re going.

Doug Hoyes: But what’s another option that deals with tax debt but doesn’t have the downside and the risks of all the other options.

Ian Martin: Right. So, what you’re referring to is a consumer proposal.

Doug Hoyes: That’s exactly right, a consumer proposal is what I’m referring to.

Ian Martin: Thank you. You kind of lobbed that right up there for me Doug.

Doug Hoyes: A nice soft ball.

Ian Martin: So, but right there that’s where again for any kind of consultation I’m doing with somebody it’s really what we’ve described here where what the first part is what is the situation? Is there a way for you to pay back the debts? And if the answer is no then in most situations it’s not realistic to just ignore the debt. Tax debts don’t just go away, credit card debts don’t just go away. So, then if the debts are too much but you need to do something to protect what you still do have in terms of your assets and your wages most times the conversation starts to focus on whether a bankruptcy or a consumer proposal would be the better option for you.

So, a consumer proposal fundamentally is where we’re acting as the administrator, the truest, the licensed trustee is acting as the administrator of the proposal. And we’re trying to effectively broker a fair deal between the two sides. We have the person who owes the tax debt, there’s the Canada Revenue Agency who is owed the money. But a proposal can include tax debts, it can obviously include other debts like credit cards, lines of credit. So, just like in bankruptcy a consumer proposal can be an effective way to deal with the tax debts.

Doug Hoyes: So in your experience does Revenue Canada play ball in a consumer proposal? And you’re exactly right, a consumer proposal’s a deal. Everybody you owe money to has to – they get a vote in the proposal. And it’s – again, we’re oversimplifying because there are different types of proposals but generally speaking it’s majority rules. So, if you owe $100,000 of 50,001 vote in favour then the proposal goes through. So if Revenue Canada, CRA is the biggest creditor, or one of the largest creditors, what are the chances that they’re going to say yes to the proposal?

Ian Martin: Well, in my experience and you said I’ve worked here for about eight and a half years now, and I really feel like there’s been a change in the climate, specifically with Canada Revenue Agency over that time. So, there were sometimes where – fundamentally they take it on a case-by-case basis, so that’s number one. We’ve seen by a lot of the big banks it’s just very structured, very regimented, you get to hit their targets in terms of how much money they want back.

Canada Revenue Agency is very case-by-case. So, I don’t discourage people from doing a proposal if it’s taxes but we need to be prepared for a few more questions than if it was straightforward bank debt. So you should have, it’s usually not face to face anymore but usually there’s at least a couple of calls like either in person or a phone call to review the details of the proposal. And if they’re satisfied that it’s provided them a fair rate or return, they’re satisfied that it’s providing a better rate of return prepared to if a person of a bankruptcy, which is fundamentally what the proposal’s about, right?

Doug Hoyes: That’s the key.

Ian Martin: And they’re satisfied that you can afford the payments that you’re offering and that you’ll be a good tax citizen moving forward, that you’re not at risk of having a reoccurring tax debts. It’s been a long time since I had a real issue getting the Canada Revenue Agency onboard with a proposal.

Doug Hoyes: So if makes sense then there’s a very good chance we can get them to agree to it. Well excellent, thanks Ian. That’s a great way to end it. You gave us 10 great tips. So, what’s your final piece of advice then before we close the show?

Ian Martin: Well, I think it’s basically don’t ignore it. I mean if you’re to the point where you know that there is a tax issue going on, don’t just ignore it. The challenge that we talked about before is that taxes can kind of grow kind of in the background silently, quietly. But once they wake up, once the collectors are coming after you, sometimes they can be too late to try to work it out on your own. So, if possible try to be proactive. But if you are to the point where it is too late then certainly me, you, our colleagues, this is what we’re trained to do, sort through the situation and find the right answer for that particular person in front of us.

Doug Hoyes: Absolutely. Yeah it’s kind of like the elephant. It’s sleeping for awhile but then when it wakes up, it tramples everything in its path.

Ian Martin: I prefer a hibernating bear.

Doug Hoyes: Hibernating bear. There we go, that’s a better way to put it. But you’re right, tax debts and most other debts aren’t just going to go away on their own and certainly with tax debts there is no statute of limitations that makes them go away. So, it’s something you’ve got to deal with. So, Ian great thanks very much. That’s great advice. Thanks for being here.

Ian Martin: Thank you Doug.

Doug Hoyes: You can find more about how to deal with tax debts on hoyes.com. Ian and the whole Hoyes Michalos team of course offer no charge consultation so if you have tax debt or any other kind of debt by all means give us a call.

That’s our show for today. Full show notes including a full transcript and links to everything we discussed today can be found on our website at hoyes.com that’s h-o-y-e-s-dot-com. Thanks for listening and if you know anyone who has tax debts please share a link to this show with them. Until next week, I’m Doug Hoyes. That was Debt Free in 30.

Self-Employed and Considering a Consumer Proposal? 5 Things You Need to Know

Woman thinking about a consumer proposal

Are you self-employed and struggling with debt? A consumer proposal may be a good option for you. It’s a legal debt relief process intended for individuals who can’t pay the full amount of their debts, but don’t want to file bankruptcy.

Awareness of consumer proposals has grown significantly in recent years as more and more people understand the benefits of a consumer proposal. Listed below are five things you should know if you’re self-employed and you’re considering a consumer proposal.

#1 – Don’t Assume That You Won’t Qualify For a Consumer Proposal

Suppose that you have a friend, co-worker or family member who filed a consumer proposal and speaks very positively about how it helped get his or her debts under control. You, however, are self-employed. You are in business for yourself. But, does that mean that you are ineligible to file a consumer (ie. non-business) proposal? Not necessarily.

Assuming that you can’t pay your debts in full by selling assets like your house or investments, the biggest eligibility consideration is tied to the amount of your debt. You’re eligible to file a consumer proposal if your consumer debt is more than $1,000 but less than $250,000. Consumer debt is defined as all debt except those debts that are secured against your residence. Huh – what does that mean? Add up all your debts, except for the mortgage if you have a house. If the total is less than $250,000, you are eligible to file a consumer proposal.

Listen to our podcast: Self Employed: Dealing with Business Debts

A consumer proposal is an effective means to gain control over virtually all kinds of unsecured debt, including amounts owed to Canada Revenue Agency. To ensure that you are eligible and to identify if there are any limitations, make sure that you disclose all of your debts to your licensed insolvency trustee.

Keep in mind that you are required to maintain payments on secured debts if you want to keep the related asset. Common examples of a secured debt are mortgages and car loans. Self-employed individuals may also have secured loans for tools or other specialized machinery and equipment.

#2 – You Can Continue to Be Self-Employed, But Should You?

A common concern is if you are permitted to be self-employed after filing a consumer proposal. The simple answer is yes. There are no legal restrictions that bar you from being self-employed if you file a consumer proposal.

The more important question is if you should continue to be self-employed. Some people look back in hindsight and realize that they would have made more money if they worked for somebody else as an employee, with far less stress and risk involved. It is important to take a step back and assess the overall viability of your business. Is there a chance for growth? Are there opportunities to reduce costs?

Filing a consumer proposal is about achieving a fresh start from debt problems. There is a high risk of future debt problems if you don’t see the business generating enough income to maintain your lifestyle, even without the full burden of the past debts. On the other hand, some people only need a chance to restructure the debts so that their business can take a significant leap forward in terms of growth and profitability.

#3 – Your Assets Are Protected

Some people who are self-employed don’t have significant tangible assets. For others, there are specialized assets that are integral to making money. Creditors are blocked from seizing your assets after filing a consumer proposal due to the stay of proceedings provided by a consumer proposal.

Compare a consumer proposal to bankruptcy: bankruptcy can mean having to surrender some of your assets to be liquidated, with the funds going back to your creditors for partial compensation of the debt. With a consumer proposal, you are not required to relinquish any assets.

Think of it as a settlement of the debt, where the creditors will most times agree to it if they see you are offering to pay back more than if you had filed bankruptcy. That’s how the payment amounts for a consumer proposal are determined. You get to retain your assets, but it’s viewed as a fair deal for both sides considering the alternative (ie. bankruptcy).

#4 – There Will Still Be Peaks and Valleys

Most people who are self-employed do not have guaranteed income that is paid on a consistent, regular basis. Hustle is the name of the game to make sure you have enough work in the pipeline. Filing a consumer proposal obviously does not change this.

The nice part about a consumer proposal is that the debts are dealt with via one monthly payment. There’s no need to juggle the Canada Revenue Agency along with multiple credit cards and lines of credit. There is also some flexibility with respect to the payments. If you have a down month, you can make a reduced payment or skip it altogether with no immediate consequences. The key is that you don’t get behind by three months. If that happens, the consumer proposal is annulled and you are back to square one.

In the past, you would have relied on credit to get through the valleys. Access to credit will be limited after filing a consumer proposal. You may have viewed credit as a security blanket, but it wasn’t necessarily a good thing. Limited credit will really force you to manage your cash flow closely.

#5 – Beware The Tax Man

Finally, we come to money owing to the Canada Revenue Agency. The CRA. The Tax Man.

When somebody tells me they are self-employed, my immediate concern is how much is owed to the CRA. Even though banks grant more credit than they should, there is no credit application process with the CRA. You don’t get pre-approved for credit (read: debt) with the government. And, the numbers can snowball out of control very quickly, especially when you add in the penalties and interest.

Luckily, CRA debts can be included in a consumer proposal. Full disclosure: it can sometimes be difficult to get the CRA on board with a consumer proposal when they are the largest creditor, even if it is a “fair deal” compared to bankruptcy.

One of the concerns I’ve heard from the CRA in the past, is the risk of future tax debts. They will often want to see the changes you’ve made to guard against new debt problems. This could mean having a professional bookkeeper help you with some of the paperwork and make your GST/HST payments on a more frequent basis. In my mind, these would be very positive changes to make since it is also in your interest to avoid further tax debts since they can’t be added to a proposal that has already been filed.

Ultimately, to determine if a consumer proposal is right for you, I recommend meeting with a licensed insolvency trustee. They can offer professional, honest advice to help you get back on your feet. Plus, the first meeting is free.