Canadians are drowning in debt. So professionals who can help manage our “owe-woes” provide a valuable service that’s very much in demand.
Marc Rouleau, CPA, CA, CIRP, is one of them. “It’s really about cash flow,” he says. “Our earnings may be limited, but how we spend them is completely under our control.” In his practice with credit-counselling-and-trustee firm Doyle Salewski Inc. in Ottawa, people learn that it takes no more than 10 minutes every couple of weeks to stay on top of their finances. When they do that, Rouleau says, managing debt becomes easier.
Glynis Bass, CPA, CA, CIRP, is a trustee in bankruptcy with A. Farber and Partners Inc. in Toronto. “The education system needs to step up when it comes to money management,” she says. “Schools can teach financial literacy and help prepare children to better manage money as adults.”
Rouleau and Bass agree that often illness, job losses or changes in family situations can cause money troubles. But most of us live too close to the limits of our pay cheques and credit is just too easy to get. If you owe more than you can reasonably hope to repay and still keep a roof over your head and food on the table, don’t despair. There’s help out there. Here are some of your options.
Debt consolidation is more a debt-managing strategy than an outright solution, Rouleau says. Essentially, you combine all your debts and leverage your assets to reduce the interest you pay on debt. If you qualify, you should add to your existing mortgage, take a second mortgage or get a secured loan from a bank. “It’s the cheapest money but banks will want to mitigate their risk before they lend to you,” Rouleau explains. “They’ll calculate your debt service ratio, which is the amount of your total debt divided by your income. If it’s stable—usually 40 per cent or less—you’ll probably qualify. Otherwise, you may want to try secondary lenders for the financing you need but expect the interest rate to be much higher. The higher the risk, the higher the interest rate.”
A formal consumer proposal is another rung on the debt-management ladder, and Bass always explains this option to her clients. A proposal can provide relief from creditors and is less onerous than bankruptcy. There are legalities, rules and processes, so you’ll need the services of a trustee in bankruptcy who is licensed and regulated by Industry Canada. “Make certain you deal with a qualified trustee and not a fly-by-night shop. Be careful; otherwise you may be throwing good money after bad” says Rouleau.
“The trustees will go through your list of creditors and debts,” says Bass. “They’ll look at your individual circumstances and determine if you have any assets that can be converted to cash. They’ll also evaluate your income and see if payments can be made. But they can’t touch RRSPs that are over 12 months old, and they must allow you to keep a vehicle with a maximum value of just over $5,600 in Ontario.
“The maximum term of a consumer proposal is 60 months. The trustee submits the proposal to the Superintendent of Bankruptcy and gets a court file number. All claims, garnishments and court actions then cease,” she continues. “Interest payments stop and you’re protected from claims against you. A statement of affairs is then sent to all your creditors, and they have 45 days to accept the proposal or request a meeting of the creditors.”
“If a majority of your creditors accept, you pay the agreed amounts to the trustee and they pay your creditors,” says Rouleau. “We make sure that you pay the installments to us. You surrender your credit cards, which are often maxed out and in collection, anyway.”
To avoid debt problems in the future, you need to make sound financial decisions. To do that, you need tools, skills and training. So you’ll also attend two mandatory financial counselling sessions to learn how to budget and rebuild your credit. If there are other related problems like gambling, an appropriate counsellor will be recommended. After you meet all your obligations, you’ll get a certificate of full performance, your debts will be gone, and you’ll have your disposable income back.
If a consumer proposal won’t work, bankruptcy is the solution of last resort. “In certain cases, it’s past the eleventh hour, and people have nothing left they can use to pay creditors,” says Rouleau. “The stress is terrible and it starts affecting their health and the ability to function at work. But you have to remember, you can run, but you can’t hide from your creditors forever.”
“You must disclose everything so a trustee can fully assess the situation and provide the best advice,” says Bass. “We then notify creditors and any proceedings against you are stayed. We do a complete inventory of your assets, write to the holders of your RRSPs and collect any contributions made in the last 12 months. You’ll keep your car, older RRSPs and household goods.”
“We’ll monitor your income for a minimum of seven months and you’ll attend mandatory credit counselling sessions. If you’re single with no dependents and don’t earn more than $2,200 monthly after taxes, you’ll qualify for discharge after nine months, providing this is your first bankruptcy,” explains Rouleau. “Depending on the size of your family, you may be paying the trustee as much 50 per cent of your earnings above $2,200. These payments may increase depending on your income, and the bankruptcy file may be open for an additional 12 months. If this is a second bankruptcy, it could be 36 months of payments.”
“Once your bankruptcy is discharged, the credit bureau will report the bankruptcy for seven more years. But all your unsecured debt will be eliminated, freeing up the cash flow that previously went to service your debts,” says Bass.
Certain debts, like child support, fines, fraud and student loans that are less than seven years old remain yours forever. For a while, you may have to pay higher interest rates when you borrow money. But with a new, better understanding of financial matters and tools to help you stay on track, you’ll soon be back on the path to a sound, independent financial future.
© 2015 Chartered Professional Accountants of Ontario