Plain bad luck can force people to hit the wall financially. They may think that filing for personal bankruptcy is the only way out – but it isn’t.
People hit the wall financially for a variety of reasons. Sometimes it’s through carelessness but even more often it’s a case of plain bad luck.
“The vast majority of people I meet with aren’t shopaholics,” said Douglas Hoyes, a licensed insolvency trustee and partner at Hoyes, Michalos and Associates in Toronto.
“They are people who have had some hiccup in their life, lost their job, got divorced, (had a) medical issue. And when people are living paycheque to paycheque, that can create real strains.”
Some people will choose personal bankruptcy. But more people are opting for the consumer proposal route, where the insolvency trustee can negotiate a payback of some of your debts.
So, what is bankruptcy and what is the alternative?
Personal bankruptcy is governed by federal legislation and going this route means your unsecured debts are eliminated – you won’t be getting any more calls from collection agencies, wage garnishments will stop and there will be no threats of lawsuits.
However, there is a price to be paid. For starters, you will lose all your assets that are not exempt with the proceeds going to creditors.
“You’re going to pay something during your bankruptcy and … the more you make, the more you pay,” Hoyes explained.
“There is this concept called surplus income (where) the government sets out, based on the number of people in your family, what you’re allowed to earn. If you earn over that, you pay extra. So, if you are a high-income earner, a bankruptcy will cost more than if you’re a low-income earner.”
Exemptions vary from province to province and include food and heating fuel, clothing, furniture, the tools of your trade. You may also keep your leased car – as long as you keep up the payments – as well as your house, but only if you have little or no equity.
It will depend on the individual situation, and in a bankruptcy proceeding, the question of house or car ownership can be moot.
“Most people, by the time they get to the bankruptcy stage, have already liquidated everything,” observed Hoyes.
In terms of the impact on your credit report, he adds, the note stating that you filed bankruptcy stays there for six years after you’re discharged.
“The minimum bankruptcy period is nine months, so the minimum your note would be on your credit report would be almost seven years.”
The bankruptcy process is fairly straightforward, and there are rules that set out what you have to pay based on your income and what assets you will lose.
At the same time, more and more people are opting for the consumer proposal route. A big reason for this, according to Hoyes, is changes in the federal bankruptcy legislation that went into effect in 2009, which made the bankruptcy process more expensive for some.
For example, you now have to pay more if your income is over a certain amount.
“It used to be that if I made $3,000 a month, well, maybe I would be bankrupt for nine months. Now, if I’m a single guy, I will be bankrupt for an extra year (or) 21 months.”
The big attraction of having an insolvency trustee navigate a consumer proposal is that you have room to negotiate a settlement with your debtors. However, your cash flow must still be sufficiently healthy to allow you to make a serious offer.
“Some creditors will only accept a proposal if there are minimum cents on the dollar being offered,” said Hoyes.
You might think that creditors would be happy getting something more in a proposal than they would have got in a bankruptcy filing, but there are limits. Your bank might think that getting a cheque for $4 from you every month is just not worth it.
“So a proposal makes sense if we can offer a suitable cents on the dollar and you can also afford it,” he said.
“If we can’t, then bankruptcy becomes the default position.”