WHY IS IT IMPORTANT TO SEEK PROFESSIONAL HELP EARLY?
Studies show that most people struggle with their debt for several years before seeking help. During that time, their debt increases, and they often made decisions that are not in their best interests. This severely limits their options for dealing with their debt problem — particularly non-statutory options, like consolidation loans or simple budget changes that could turn things around. One of the best examples of the kinds of mistakes that people can make before seeking professional help is the cashing in of RRSPs in order to pay off debt. This compromises their future and rarely solves the problem. Most RRSPs are exempt from seizure by your creditors and would not be lost in either a Consumer Proposal or a Bankruptcy.
WHAT IS BANKRUPTCY?
Bankruptcy is a legal process regulated by the Bankruptcy and Insolvency Act. Through a Bankruptcy, you may be released of all of your debts, with a few exceptions. The purpose of the Act is to permit the honest, but unfortunate debtor to be released from debt and have a fresh start. As part of the process, some people may have non-exempt assets that will be sold, and payments to make based on your income level. These are paid to your Trustee for your creditors.
WHAT IS A CONSUMER PROPOSAL?
A Consumer Proposal under the Bankruptcy and Insolvency Act is a formal offer made by you, through a Licensed Insolvency Trustee, to your creditors. You propose to pay part or all of your debt to your creditors over a specific period of time. Unlike a bankruptcy, where your creditors have no choice as to whether or not you go bankrupt, in a proposal your creditors get to vote for or against your proposal. If they vote for it, you can proceed with fulfilling the terms of your proposal. This is done by making payments in the amount outlined in your proposal, to the Trustee, who distributes the money to the creditors. Once you have fulfilled the terms of the proposal you are released from any remaining debt. Proposals vary from person to person, because they are designed on an individual basis to meet the specific needs of each person. At a minimum, a proposal must offer your creditors more money than they would get if you went bankrupt.
ARE ALL DEBTS ERASED IN BANKRUPTCY?
Section 178 of the Bankruptcy and Insolvency Act includes a list of debts NOT erased in bankruptcy. A summary of the more common debts that are not erased are as follows:
- Fines and penalties of the courts (including fines or payments for intentional bodily harm, sexual assault and wrongful death)
- Alimony, maintenance and child support
- Debts resulting from fraud or misrepresentation
- Student loans (if it is less than seven (7) years since you stopped attending school)
HOW MUCH WILL IT COST?
How much will bankruptcy cost?
What a bankruptcy will cost you depends on your income and family size. There are standards set out by the Canadian government with guidelines as to how much a person should pay based on their income and family size. If your income is low your payment could be as low as $175 per month.
How much will Consumer Proposal cost?
The cost of a proposal is determined entirely by what you propose to your creditors. Whatever amount you propose to pay your creditors will be your total cost. Just remember, the creditors must agree to the proposal first, and the proposal must pay the creditors more than they would receive if you went bankrupt.
HOW DO I STOP A GARNISHMENT?
Upon filing either an Assignment in Bankruptcy or a Consumer Proposal under the Bankruptcy and Insolvency Act, there is an immediate “Stay of Proceedings” which prevents creditors from suing you, garnishing your wages, or taking any further collection measures against you. It is important to note that ONLY a Consumer Proposal or a Bankruptcy, filed through a Licensed Insolvency Trustee, can provide this protection. An arrangement made through a credit counselling agency cannot provide a “Stay of Proceedings”.
WHY IS IT IMPORTANT TO SEEK PROFESSIONAL HELP EARLY?
WILL I LOSE MY HOUSE?
Have you ever asked, “Will I lose my house in bankruptcy?”
The answer is, many people do not lose their homes in a proposal or bankruptcy. However, every situation is unique and careful review is needed. Much will depend on the value of the house and the amount owing on it.
Most people do not lose their homes in a proposal or bankruptcy. However, every situation is unique and careful review is needed. Much will depend on the value of the house and the amount owing on it.
For some people, filing a Proposal or Bankruptcy provides a good opportunity to assess their family goals and needs, and to decide whether keeping their home is what they want to do. In situations where there is more owing on the home that it is worth, or where the mortgage payments are just too high to manage, even with all the other debt eliminated, a Proposal or a Bankruptcy would provide the opportunity to get out of the mortgage. In that situation, the shortfall on the mortgage would be erased along with the rest of your debt. It is important to take the time to consider the options because once you have continued mortgage payments, subsequent to filing a Consumer Proposal or a Bankruptcy, you have re-committed to that debt.
WILL I LOSE MY CAR?
DO I HAVE TO TELL MY EMPLOYER IF I GO BANKRUPT?
A FAMILY MEMBER HAS OFFERED TO LEND ME MONEY, IS THIS A GOOD IDEA?
People with significant debt problems often borrow from family and friends, or get family and friends to co-sign for them. You need to understand the problems that this can cause both you and your family members.
If a family member of friend co-signs for you, they are NOT attesting to your good character. They ARE promising to pay the debt if you ever default. Financial institutions only ask for co-signers when they believe there is a good chance that you, yourself, will be unable to repay the debt. If your family member or friend cannot afford to pay the debt for you, they should not co-sign.
Borrowing from family and friends can create both strained relationships, and financial hardship if you are unable to repay the debt. Think of it this way: Would you prefer to let down a bank or credit card company or your family member?
That being said, many people have been greatly helped through tough times through the generosity of family and friends. It is important, though, that both parties — the lender and the debtor — recognize and can manage the risk involved. If they cannot afford to gift you the money, it would be unwise for them to lend you the money.
WHAT CAN I KEEP IN A BANKRUPTCY?
A person who files for bankruptcy in Manitoba is allowed to keep any property that qualifies as exempt under provincial or federal legislation if it has not been given as collateral to a creditor.
Some Typical Manitoba Exemptions:
- Household furnishings, not exceeding a total value of $4,500 (note: this is resale value, not replacement value)
- Tools of the trade, not exceeding a total value of $7,500. This includes:
One motor vehicle not exceeding the value of $3,000, if necessary as a tool of the trade. This includes a vehicle used to get to and from work
- Equity in a home owned by the person who filed for Bankruptcy, to a maximum of $1,500 each, if in joint tenancy, or of $2,500 if not in joint tenancy. Whether or not you would lose your home, however, is not as simple as looking at the equity. Many factors go into that decision. Those would be reviewed with you at an initial meeting with your Trustee.
- Mobile Home: One year living in the home
- Locked-in pension plans and RRSP
- Some life insurance policies
Manitoba Farmers’ Exemptions:
- Animals necessary for the farming operation for 12 months
- Farm machinery and equipment necessary for the ensuing 12 months of operation
- One motor vehicle if required in agricultural operations
- One quarter section of land
Some Typical Ontario Exemptions:
- Household furnishings, not exceeding a total value of $13,150 (note: this is resale value, not replacement value)
- Tools of the trade, not exceeding a total value of $11,300.
- One motor vehicle not exceeding the value of $6,600
- Equity in a home owned by the person who filed for Bankruptcy, to a maximum of $10,000.
- Mobile home: $10,000 if on land that you own, otherwise, no exemption.
- Locked-in pension plans
- The portion of RRSPs that were contributed prior to the past 12 months. Anything contributed in the last 12 months is not exempt.
- Some life insurance policies
Ontario Farmers’ Exemptions:
- Farm tools, not exceeding the value of $29,100
Please contact us for a more detailed list of exemptions. Exemptions vary from one province to another.
HOW LONG AM I BANKRUPT?
In most cases, after a prescribed period of time, you are automatically discharged from the bankruptcy. This means that you are no longer bankrupt, and that you no longer have any legal obligation to pay the debts that were included in the bankruptcy.
The length of a bankruptcy varies depending on the circumstances of the individual.
- First time bankruptcy, with no surplus income according to the national guidelines: 9 months.
- First time bankruptcy with surplus income according to the national guidelines: 21 months.
- Second time bankruptcy with no surplus income obligation according to the national guidelines: 24 months.
- Second time bankruptcy with a surplus income obligation according to the national guidelines: 36 months.
- Third or more time bankruptcy, regardless of surplus income obligations: A person in this situation is not eligible for an automatic discharge, and must attend a court hearing to determine what conditions must be met before the debts are erased.
In all cases, if the person who has filed for bankruptcy does not meet their obligations under the Act, or if a creditor, the Trustee, or the Superintendent of Bankruptcy opposes the discharge, then they are not eligible for an automatic discharge, and must attend a court hearing to determine what conditions must be met in order to receive a discharge.
SHOULD I CASH IN MY RRSPS TO PAY BACK MY CREDITORS?
Cashing in RRSPs is one option your Trustee will review with you. In most cases, it is not the best solution.
HOW DO I KNOW IT IS TIME TO SEEK PROFESSIONAL HELP TO DEAL WITH MY DEBT PROBLEM?
Generally, if one or more of the following things have been happening to you, you need to seek professional help:
- You find you do not have adequate funds in your bank account to pay for necessities, and you are often using your credit card to “tide you over”
- You are borrowing money from family or friends, or from a payday loan service to get you from payday to payday
- You are not paying off, or down, the balance on your credit cards each month, but are just making the minimum payment
- It would take more than a year to pay off all your outstanding debt (except your mortgage)
- Your monthly installment debt payments exceed 20% of your net income
- Creditors are harassing and threatening you
- Utility companies are cutting off services
- You have had cheques bounce or your debit card refused
- Your wages have been garnished
HOW IS MY CREDIT RATING AFFECTED?
Information concerning a Bankruptcy could show up on your file at the credit bureau for a period of six (6) to seven (7) years after your discharge from bankruptcy. If you have been bankrupt before, this period could be extended to as much as 14 years. In the case of a Consumer Proposal, it is generally reported at the credit bureau for three (3) years after the completion of the proposal This only means potential lenders will know you have been bankrupt or filed a proposal. It does not mean they will refuse you credit. It is the lender’s individual credit scoring system that determines access to credit.
Should you wish to improve your credit record after obtaining your discharge from bankruptcy you may wish to talk to your bank or credit union to find out what steps they suggest for you. If you have saved up a down payment, you are borrowing money to purchase something on which the lender can take security, and you have not had credit problems since the bankruptcy, it is unlikely obtaining credit again will be a significant problem.
HOW DO I GO ABOUT FILING A BANKRUPTCY OR PROPOSAL?
The best way to get detailed information about filing an Assignment in Bankruptcy or a Consumer Proposal is to contact us by phone or online and set up an appointment to meet in person. There is no cost for this and there is no obligation to proceed.
At that initial meeting, we will review in detail your financial situation. We can also do this by telephone if you live in a remote community. In-person meetings are held at our Licensed Insolvency Trustee / bankruptcy offices in either Winnipeg, Manitoba or Kenora, Ontario. We will review all options available to you including options other than those offered under the Bankruptcy and Insolvency Act. We will ensure all your questions are answered and that you have a clear understanding of what the various options and processes are.
WHEN IS A CONSUMER PROPOSAL A GOOD OPTION?
A Consumer Proposal is a viable option if you have either a lump sum (from an outside source) to offer your creditors, or a reliable source of income on which you can depend for the entire length of the proposal. If your income fluctuates greatly, or if your current employment is not long-term, a proposal might not be a viable option for you.
If you have read this to the end and still have questions or concerns, please contact a Licensed Insolvency Trustee for a free consultation.