You’re worried about not being able to pay your debts that have mounted due to either overspending, poor budgeting, a matrimonial separation, illness or perhaps overseas family assistance. Your situation may be exacerbated as a result of a recent loss of employment due to COVID19. It may be clear to you that you will not be able to pay your debts in a reasonable period of time even when you will return to work.
At this point, you may be looking at all your options. You are anxious, stressed and worried. Perhaps you feel that the current uncertainty due to COVID19 will buy you some time to decide how to deal with your debts. There are relief programs in place now to help individuals through the government and lenders. However, in my experience, where debts are looming, this current relief is temporary and is equivalent to “using a band aid on a wound that needs stitches.” Interest will continue to accrue on outstanding debts over the ensuing months.
Here’s what you should consider when reaching out to a licensed insolvency trustee.
Actions of Creditors
Are you receiving calls from your creditors and collection agencies? Have your wages been garnished by either Canada Revenue Agency (CRA) for outstanding income taxes or HST (self-employed individuals) or by your creditors? Has the CRA registered a lien on your property? Are you losing sleep worrying about how to pay your debts? Are your worries affecting your relationships with your family and friends?
If you answered to one or more of these questions and you want a fresh start, here are some steps to help you get started.
Prepare a Monthly Budget
After receiving your income and paying all necessary expenses, how much remains in your bank account? Hopefully you have a surplus, but some people are often just breaking even and sometimes in the negative. If you’re thinking about bankruptcy, you may want to update your budget first to see if you can pay off your debt first. Need help with your budget? The Government of Canada has a great budget planner to help you out.
Making the Decision
If your budget isn’t helping you get out of debt and you think you need professional help, contact a licensed insolvency trustee (LIT) for a free consultation. They’re unbiased and will go over your situation. Through a series of questions such as who do you owe money to? What is your current monthly income and expenses? What assets do you own? What are you up-to-date on your income tax filings? And, what were the reasons that caused your financial difficulties, they can present options to you.
The Options Available to You
The Bankruptcy & Insolvency Act (the “Act”) is a federal statute that provides relief to individuals or companies who are insolvent (unable to pay their debts).
The options available under the act for individuals are bankruptcies and proposals which are filed with a LIT since they’re a court officer.
Both options provide the following:
Protection from legal actions and garnishments by creditors known as a legal stay of proceedings
Forgiveness of unsecured debts upon either the Debtor’s discharge from bankruptcy or completion of a consumer proposal.
Personal bankruptcy is a legal process for an individual who is unable to pay their unsecured debts in full, including outstanding income taxes and business HST but excluding mortgages; leased and financed vehicles. The personal bankruptcy is filed with a LIT, also known as a bankruptcy trustee. Depending on a person’s income and assets, the period that a first-time debtor is bankrupt is either nine or twenty-one months. After that period, most debtors are entitled to an automatic discharge from bankruptcy.
The act provides for a debtor to assign their non-exempt assets to the LIT. Some examples of non-exempt assets would be real property, Tax Free Savings Accounts (TFSA’s), Registered Retirement Savings Plans (RRSPs) with contributions made in the twelve-month period prior to the bankruptcy, Registered Education Savings Plans, and income tax refunds for the year of bankruptcy and any prior years.
A consumer proposal is an alternative option available to Debtors and it is filed with LIT who acts as the administrator to the consumer proposal. The act provides for debtors to file a consumer proposal to its unsecured creditors who are owed less than $250,000. The term of the consumer proposal is five years comprising of either sixty monthly payments or lump sum payments depending on the debtor’s situation.
The difference between a consumer proposal and bankruptcy is that the debtor keeps all their non-exempt assets.
For example, Mary is employed as an administrative assistant in an insurance company. Her net monthly income is $4,000. In addition, Mary receives child tax benefits. She is a single mother of two primary school-aged children. Since the birth of her children, Mary has saved for her children’s education and has contributed to RESPs in the amount of $3,500, net of the available government grants. Mary also has a TFSA valued at $2,500.
Mary has accumulated credit card debt of $30,000 and has an outstanding line of credit of $10,000 for a total debt of $40,000. The reason that Mary has these debts is that she has not received any child support from the children’s father. Between the cost of living, daycare and extra-curricular activities for the children, Mary used her credit cards and lines of credit to supplement her income.
Mary has decided to reach out to a LIT as she can no longer manage her debts. Should she file a bankruptcy, her RESP’s and TFSA would be assigned to the trustee. In other words, she would lose her investments totalling $6,000.
If Mary chose to file a consumer proposal instead, she will retain her investments and offer a five-year monthly proposal to her creditors such that the return (also knows as the dividends paid to creditors) will be greater than in a bankruptcy. The amount that Mary can offer may be between $200 to $250 a month, provided her budget can allow for this. These payments are commonly referred to as the proposal fund. Mary’s creditors have 45 days to vote in favour or against the proposal. Once the proposal is accepted, Mary retains her investments.
If you’re drowning in debt, you still have a few options available to you. The best solution would be to speak with a licensed insolvency trustee who can present you with different scenarios and explain why they may benefit you. Debt and thought of bankruptcy are stressful, but there’s no reason why you have to handle things on your own.
Connect with the Author
Linda Sternis a Senior Manager and Licensed Insolvency Trustee at Crowe Soberman Inc. She has over twenty-five years of experience working in Montreal, Ottawa and Toronto, primarily in consumer insolvency matters consulting with individuals overwhelmed with debt and helping them find solutions that work best for their financial and personal situations.