Debt Decisions: when no option is a good one
In this time of increasing interest rates, it is getting harder and harder to keep up with monthly payments. Consumer Proposals are a great place to start negotiating with the people you owe money to, can reduce how much you owe, and this free conversation is a great way to learn about the best options for you.
Today we take an in-depth look at the Consumer Proposal and Bankruptcy options offered by Licensed Insolvency Trustees (LITs); a summary of the costs, effects and the process.
Today we are featuring our second of three blog post destigmatizing bankruptcy written by Crystal Buhler, Licensed Insolvency Trustee with C. Buhler & Associates Ltd. (www.Debtfreenorth.com).
When faced with a financial circumstance that you can’t solve on your own, despite your best efforts to decrease your spending, increase your income, and adjust your lifestyle, it’s time to seek professional help. The best choice is the one you make once you are fully informed about all the different alternatives.
A Licensed Insolvency Trustee (“LIT”), previously called a “Bankruptcy Trustee”, is Canada’s only federally regulated professional, trained to provide debt advice and debt-reducing financial services to people and businesses in financial trouble.
LITs administer government-regulated insolvency proceedings, such as Consumer Proposals and Bankruptcies, and are the only professionals in Canada who are able to do so. For individuals who are in significant financial difficulty, these options may be the best solution. To discover if these might be the right option for you and how your assets and income would be affected, you can speak with a Licensed Insolvency Trustee during a free initial consultation.
When meeting with those in financial trouble, Licensed Insolvency Trustees are required to explain all of the pertinent financial options, not just bankruptcies and proposals. Licensed Insolvency Trustees are familiar with all types of financial options such as consolidation loans, lines of credit, credit cards, and mortgages. If there are no viable options other than a consumer proposal or filing bankruptcy to reduce your debt, a Licensed Insolvency Trustee will explain what these processes can do for you, and how they would help you settle your debt.
Option 1 – Consumer Proposal
In this process, your Licensed Insolvency Trustee (LIT) will work with you to develop an offer to pay creditors a percentage of what is owed to them, extend the time you have to pay off the debts or both. A consumer proposal is a formal, legally binding process that is administered by an LIT, that cannot exceed five years. Payments are made through your LIT, and your LIT distributes your money to each of your creditors, according to the terms of your proposal. Your LIT is permitted to withhold a portion of each payment for their fees, and the fee amounts are set by law.
In a Consumer Proposal, your responsibilities are to:
Give your LIT a complete list of all of your assets and debts;
Attend the first meeting of creditors, if a meeting is required (see below);
Pay either a lump sum or periodic payments to your LIT according to the terms of your proposal;
Adhere to any other conditions in the proposal;
·Attend two financial counselling sessions (in person, by video conference or by other means as necessary);
Advise your LIT in writing of any changes in your situation (including your contact information); and.
Generally assist your LIT in administering the proposal, where required.
Do my creditors have to accept my consumer proposal?
Once the proposal is filed, creditors have 45 days to provide your LIT with their vote on whether they accept or reject your proposal.
If no meeting is required by the legislation LITs follow, the proposal will be deemed to have been accepted by the creditors, and ALL creditors are bound by the terms of the proposal. Only a small percentage of proposals require a meeting or changes to the terms.
If a meeting of creditors is required, every creditor is entitled to one vote per dollar they are owed. The vote is decided by a simple majority based on dollar value (i.e., 50% plus 1).
Once your proposal is accepted by creditors, the Office of the Superintendent of Bankruptcy (OSB), or certain other parties, have 15 days to request that Court review the proposal. If no such request is made, the proposal will be deemed to have been approved.
If your consumer proposal is not accepted, you are not automatically bankrupt, but you may choose to investigate this option with your LIT.
What if I can’t make the payments on my consumer proposal?
If you are making periodic (ie monthly) payments and you miss payments totalling the equivalent of three periodic payments, the proposal will be deemed annulled. This means you no longer have an agreement with your creditors, and your creditors will be able to collect the money you owe them. A consumer proposal that has been deemed annulled may only be revived under certain conditions.
How will a consumer proposal affect my credit rating?
A consumer proposal is purged from your credit report three (3) years from the date of the final payment or six (6) years from the date filed, whichever occurs first.
What about after my consumer proposal? What do I do then?
Once you satisfy the conditions of your consumer proposal, you will be legally released from the debts included in the proposal. Even if your creditors were only paid a portion of what you owed, you will not be required to pay anything further on these debts.
Once you have fulfilled the terms of your consumer proposal, you will receive a “certificate of full performance.” To ensure your credit record is updated, send a copy of this document to the major credit-reporting agencies.
Option 2 – Filing Bankruptcy
You will work together with your LIT to prepare the paperwork required to file a bankruptcy, and the Trustee will take care of the filing process for you. After the bankruptcy has started, your LIT will liquidate (sell) any of your assets that are not exempted from the process. Certain assets are exempted by provincial or federal law and are excluded from this sale. The LIT will hold any money raised in trust for distribution to your creditors.
In some instances, you may consider buying back the equity in any assets you wish to keep, for example, a car or a home. If you are reasonably able to make payments, your LIT may consider this option.
After you declare bankruptcy, the LIT will notify your creditors about your bankruptcy. Usually, they tell your creditors electronically, and often even on the same day that you file your bankruptcy.
As part of your bankruptcy, you will be required to attend two financial counselling sessions. The Office of the Superintendent of Bankruptcy (“OSB”), the federal department that oversees bankruptcies in Canada, has set out prescribed curriculum that a Certified Financial Counsellor is required to discuss with you. Counselling is mandatory in every bankruptcy in Canada; it is meant to assist you with moving forward without the financial weight you previously felt. It is intended to help you make smart financial decisions and learn how to set financial goals.
Sisterly advice: we don't get enough education on finances in our lives. These counselling sessions are a great opportunity to get personalized advice!
Each month during the bankruptcy process, you must submit evidence of your income to the LIT. Based on your income, you may be required to make payments to your LIT. These are called “surplus income” payments. Using the materials you submit, the LIT calculates your surplus income, and can advise you how much you are required to pay. Surplus income is the part of your earnings that exceeds a number set by the OSB. The larger your family, the higher the income Standard used.
Once you have completed your duties, you will be discharged from bankruptcy. A discharge releases you from your obligation to pay the debts you had at the time of bankruptcy. However, there are certain types of debts that are excluded by law, such as alimony & child support payments, student loans where you ceased attending school less than seven years ago, court-ordered fines or penalties, and debts arising from fraud. Please note this list is not exhaustive, and is set by the Bankruptcy and Insolvency Act.
The timing of your discharge depends on a number of factors, including whether this is your first bankruptcy, and whether you are required to make surplus income payments.
If this is your first bankruptcy and you are not required to make surplus income payments, you will be eligible for an automatic discharge from bankruptcy in 9 months. If you are required to pay surplus income, your bankruptcy will extend to 21 months.
If this is your second bankruptcy and you are not required to make surplus income payments, you will be eligible for an automatic discharge from bankruptcy in 24 months. If you are required to pay surplus income, your bankruptcy will extend to 36 months.
Your discharge from bankruptcy will happen automatically if:
The discharge is not opposed by the LIT, a creditor or the OSB;
You have completed all your duties (mandatory financial counselling sessions, completed monthly income and expense reports and provided details to file income taxes); and,
This is your 1st or 2nd bankruptcy.
For those bankruptcies where the discharge is opposed, or for those who have filed bankruptcy for the 3rd time (or more), a Court hearing of the discharge will be required. You can consult with your LIT if a Court hearing becomes necessary in your bankruptcy.
Most Importantly, Find an LIT you can work with
As you can see, there are many details to consider, and many ways in which filing either a Consumer Proposal or Bankruptcy can impact you. Find a Trustee that you can work with, who understands your goals in seeking to restructure your finances, and who you can communicate with. Be sure to ask questions when you don’t understand, review the materials they provide to you, and keep copies of any materials you send to your Trustee for your own records. Understand that the Trustee works for both you and your creditors – ensuring all parties follow the rules and negotiating a successful outcome for all.
We'll have our third post from Crystal next week! In the meantime, you can follow Untangle Money over on Instagram, Pinterest and LinkedIn to see more content about women and money, personal finances and planning for your financial future. You can also check out our other blog posts here!
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