Debt problems can happen to anyone. Even when you are careful about your spending, a sudden life event such as an illness, a marital breakup or a job loss can unexpectedly lead to a downward spiral of uncontrollable debt. Seeking professional help from one of our credit counsellors is the first step. If your debt cannot be managed through budgeting, an asset sale, a bank loan, home refinancing or a debt consolidation plan, then the Bankruptcy and Insolvency Act allows most honest, but unfortunate, debtors two ways to legally walk away from them: A Consumer Proposal or a Bankruptcy.
The LIT: Licensed Insolvency Trustee
To proceed with either option you will first require the services of a Licensed Insolvency Trustee. An LIT is trained, qualified and experienced to review your financial state of affairs. They can advise you on the available options for your situation. They operate under a license issued and regulated by the OSB (Office of the Superintendent of Bankruptcy).
While they represent your creditors, they protect your rights as a consumer and shield you from abuse. They mediate on your behalf to negotiate the terms of the consumer proposal or bankruptcy with your creditors. Their fees vary depending on the type of service you require. However, the federal government regulates these rates.
If you find yourself in the unfortunate situation of requiring such services, be very wary of unregulated “debt consultants”. You will be very vulnerable at this time. There will be no shortage of individuals or companies offering quick resolution of your debt problems. They will charge you a fee for services without the legal authority to help you under these circumstances.
An LIT is the only professional authorized to administer consumer proposals or bankruptcy proceedings under the Bankruptcy and Insolvency Act.
Our agency has developed good working relationships with LIT’s across Ontario. We can recommend one if both yourself and your credit counsellor deem a consumer proposal or bankruptcy suitable.
Consumer Proposals
A consumer proposal is the right choice if your consolidated debts, excluding mortgages and financed assets, are less than $250,000. With your permission, we will transfer your file to an LIT who will meet with you to understand your entire financial landscape. From there, your LIT will act as the Administrator of your consumer proposal and will work with you to prepare a suitable proposal for your creditors. Generally, creditors receive a lot less under a consumer proposal compared to a debt consolidation plan. All consumer proposals are payable over a maximum 5 year term.
Your Administrator will officially file this proposal, along with a report of your circumstances, with the OSB. Your creditors have 45 days to accept or reject the proposal. Once accepted, you begin making payments to the Administrator who in turn, distributes the funds to your creditors in accordance with the terms of the proposal.
If however, your creditors do not accept the terms, your Administrator will work with you to reach consensus with them. Where an agreement cannot be reached, your Administrator will present you with alternative options, including filing for a bankruptcy.
Why file a consumer proposal instead of a bankruptcy
The main reason why you want to file a consumer proposal over a bankruptcy are your assets. Under a consumer proposal, you get to keep them as long as you follow the terms of the proposal. These include your savings, investments, home and car.
Once your consumer proposal is accepted and filed, many of the unpleasant actions taken by your creditors go away. Wage garnishments stop immediately as do collection calls. In addition, creditors will withdraw any legal actions or law suits they started against you.
Consumer Proposals and your Credit Rating
As long as you abide with the terms of the consumer proposal, the law releases you from your debts with the exception of certain debts, such as child and spousal support arrears, some student loans and court fines. However, you must understand that consumer proposals impact your credit rating. They will remain on your credit bureau record for the term of the proposal plus an additional three years.
Everyone who files a consumer proposal is required to attend two counselling sessions which we can book with our certified credit counsellors. At these sessions, your counsellor will advise you on budgeting skills and immediate steps you can take to rebuild your credit for the long term.
Also, filing a consumer proposal places your name in the public records at the OSB. It remains accessible to anyone through the Access to Information Act.
Division 1 Proposal
If your debts are greater than $250,000, your LIT may present you with the option of a Division 1 Proposal. It works similarly to a consumer proposal. However, if your creditors do not accept the proposal or an amendment, then you will automatically be bankrupt.
Bankruptcy
Your LIT will only recommend a bankruptcy filing as the last resort after they find no other solutions for your debt problems. They will prepare the necessary paperwork for you to review and sign. The papers will be filed with the Official Receiver at the OSB. You may need to attend a meeting with creditors or an examination under oath at the OSB.
Under a bankruptcy, your creditors would receive a lot less than they would through a debt consolidation plan, a consumer proposal or a Division 1 proposal.
Similar to Consumer Proposals, wage garnishments, collection calls and legal actions by creditors stop after you have declared bankruptcy. Henceforth, the creditors would deal directly with your LIT and not you. And under a bankruptcy, you would also need to attend two mandatory counselling sessions.
Possession of Assets
After declaring bankruptcy, LITs begin the process to recover funds for the creditors from your non-exempt assets.
In this part of the process, your LIT will look at your specific situation to see what is practical. For example, if the non-exempt portion of your home value is 50%, they cannot sell half your house without the consent of the other owner.
The OSB excludes certain assets from liquidation in bankruptcies. Examples include household goods, clothing, tools of your trade, vehicles, etc. Your LIT will review a full list of these exemptions with you.
Surplus income
Your LIT will also review your household income to determine your surplus income. This amount is considered over and above what a family requires to reasonably live on in accordance with Standards set by the OSB. It is dependent on the size of your family as well as your household income.
Your surplus income is paid to the LIT in the form of monthly payments for 21 months for a first time bankruptcy and 36 months for a second.
The OSB provides mediation services should you disagree with the amount of the surplus income.
The Bankruptcy Discharge
A Bankruptcy Discharge releases you legally from all obligations to repay the debts you had incurred prior to declaring bankruptcy. However, the law does not allow you to walk away from some types of debts. They include alimony and child support arrears, fines or penalties imposed by the court system as well as some student loans.
A bankruptcy discharge can take 9 months or more to obtain from the date of the filing. You will receive this official discharge as long as your LIT and creditors do not oppose it, you have no surplus income to pay and you do not refuse or neglect the counselling sessions. The OSB also provides mediation services for creditor oppositions to your discharge.
Bankruptcy – not an ongoing lifeline
The intent of the Bankruptcy and Insolvency Act is to offer a relief for individuals who have hit very unfortunate financial circumstances. It provides debt relief but also long term financial literacy and remediation to help you become credit worthy over time and debt free for the rest of your life. It is not an avenue available for you to habitually walk away from your debt repayment obligations.
Declaring bankruptcy will place your name in the public records at the OSB. And it also impacts your credit rating. The OSB will inform credit bureaus of your bankruptcy. Depending on the province, this information will remain on their files for six or seven years after your discharge for a first bankruptcy. They will treat you much more harshly if you declare a second bankruptcy. Re-establishing credit will be very difficult, leaving you limited in many ways.
The best way to avoid a bankruptcy is to contact us for credit counselling well before it becomes a serious problem. We can help!