Ted Michalos is a Chartered Accountant, Certified Insolvency Counsellor, and a Licensed Trustee in Bankruptcy in Canada
You might be wondering why an investing site would want an article about bankruptcy in Canada … well, you’d be surprised at how many “investors” do so using borrowed money and how often that leads to serious financial problems.
Bankruptcy law in Canada is built around the premise that “the honest , but unfortunate debtor requires relief from their debts and a fresh start”. The law balances that underlying concept with the needs of the credit granting community to have stable financial markets and a structured approach to dealing with problem accounts.
When considering the solutions available to individuals, trustees generally present five alternative approaches. The approach a person selects depends on their unique circumstances. Briefly, the options include: do nothing, try to restructure or consolidate, credit counseling, a proposal to creditors or personal bankruptcy. Let’s look at each in sequence.
Do nothing – strange as this may sound, there are times when doing nothing makes more sense than doing the wrong thing. When a trustee is explaining this approach the goal is to make sure the debtor appreciates their rights under the law. Collectors can use some very aggressive and ethically questionable tactics when a debt falls into default. Without a knowledge of the law, a debtor can be coerced into doing things (like borrowing money from their 85 year old grandmother to pay off a credit card) that don’t make much sense…
Restructure or consolidate – sometimes people just have the wrong kind of debt. They have the ability to pay, but because they used high interest vehicles to finance their activity they are paying a disproportional amount in interest and service charges. Restructuring involves obtaining a new debt consolidation loan or line of credit, at much more favourable interest terms, so that the high interest debt can be repaid. Unfortunately, since September of 2008 when the financial world fell apart, this solution, while practical in many cases, is rarely available. The banks are not prepared to assume a greater share of a person’s debt (by paying off their other creditors) – they prefer the reduced risk of being owed a lesser amount. It is a foolish strategy because it often drives people to one of the next three options.
Credit Counselling – this is a voluntary program offered and administered by not-for-profit credit counselling agencies. A debtor’s unsecured debts are pooled together (they are not actually paid off) so that the debtor only has to worry about a single monthly payment to the not-for-profit. In most cases, no new interest charges are incurred on the debt while a person is in a credit counseling program. A word of caution – credit counseling is often confused with for-profit debt settlement companies. These companies look and sound like the not-for-profits, but they are quite different animals and should be approached with extreme caution. In many cases, the debt settlement companies charge a fee and then refer the debtor to a trustee in bankruptcy for one of the remaining two option. Debt settlement scams should be avoided; only deal with a licensed professional.
Proposal to creditors – also called a consumer proposal – is a legal remedy available to individuals pursuant to the Bankruptcy and Insolvency Act. It is an offer to settle your unsecured debts for pennies on the dollar. It is called a proposal because you make the offer to your unsecured creditors as a group and a majority of the dollars that you owe must agree to the terms in order for it to be accepted. Until very recently, there were few trustees advancing this alternative to individuals as a reasonable solution to their financial problems (our firm have always been big proponents of consumer proposals so we’ve been ahead of the curve on this issue). On September 18, 2009, amendments were made to Canadian bankruptcy law that have made proposals a much more attractive alternative. You may be wondering why a creditor would accept pennies on the dollar to settle their debt – it’s a valid question. You need to keep in mind that proposals are a direct alternative to bankruptcy. In a bankruptcy, creditors often receive no repayment whatsoever. Pennies on the dollar suddenly becomes much more attractive in comparison to nothing at all…
Bankruptcy – if none of the alternatives I have listed so far are appropriate then individuals in Canada may avail themselves of their rights under the Bankruptcy and Insolvency Act to obtain relief from their debts. A couple of common misconceptions about bankruptcy are that you lose “everything you own” and that it’s free. You don’t lose everything you own – each province has established guidelines for assets (possessions) that may be retained if/when a person files for bankruptcy. It is also not free – the monetary cost to file for bankruptcy is based on the number of person residing in a household and the total income of the household. The higher a person’s income the higher the cost to file for bankruptcy.
Now you know the basics. One aspect of financial difficulty that hasn’t been discussed is recognizing when you (or a friend or family member) may be experiencing serious financial problems.
- If you are defaulting on your debt payments you are probably in trouble.;
- If you are taking advances on a credit card or line of credit to make your payments you are probably in trouble;
- If you are afraid to answer your phone or open your mail then you are probably in trouble; and
- If you facing collection or legal action you are probably in trouble.
If you find yourself in financial difficulty then the best advice we can give is to seek some professional help. You might want to speak to your financial advisor or accountant, you may want to see a not-for-profit credit counselor, or you may want to consider speaking directly to a bankruptcy trustee. Whomever you decide to see, make sure they discuss all of the alternatives listed in this article and compare each to your own situation. Then you can make an informed decision as to which one makes the most sense for you and your family.
This article was written by Ted Michalos, CA, Trustee at Hoyes, Michalos & Associates Inc.
