Top causes of bankruptcy in Canada

Bankruptcy is a legal process where you surrender your assets and make monthly payments to a Licensed Insolvency Trustee, after which your debts are eliminated. A consumer proposal is a formal settlement arrangement to repay a portion of your debts.

If you cannot satisfy your financial obligations (pay your bills as they come due) and don’t have assets to sell that will cover the debt, you are in a state of insolvency. Being insolvent makes you eligible to file bankruptcy (or a consumer proposal) in Canada as long as you owe a minimum of $1,000.

Practically speaking, the average person who files insolvency in Canada owes around $50,000 in unsecured debts. They commonly owe between $20,000 and $30,000.

There are many reasons for bankruptcy in Canada, most of which you will notice are stressful life events that generally lie outside of an individual’s control.

1. Unexpected financial expense

Many people do not have the means to keep healthy savings for a car or housing repair or if a beloved pet requires an emergency vet visit. Easy payday loans or adding to credit card debt is often the short-term answer to these kinds of expenses. But, unfortunately, the borrower soon finds their monthly income can’t cover the monthly payments of these high-interest debt obligations.

2. Student loans

A common cause of insolvency among those aged 27 to 40 is student debt as the cost of tuition increases, and graduates find it hard to secure gainful employment in their field. To be eligible to have your student debt discharged in a bankruptcy or consumer proposal in Canada, you must have been out of school for seven years.

3. Family emergencies

Like the example of needing to take a beloved pet to the veterinarian’s office unexpectedly, other family obligations can contribute to money management problems. Taking care of aging parents or children with high needs may cause caregivers to extend their credit past the point of good financial health.

4. Co-signing

Often, well-meaning family members will co-sign loans or lend personal savings to help out someone they love. This type of financial support can over-extend their safety net and put them at financial risk themselves. Borrowing money for someone else can make you unable to make your monthly payments or deplete your bank accounts so that you are unable to cover your own extra expenses without using even more credit.

5. Job loss or income reduction

In most cases, if you are not working and have no income, there is no need to file bankruptcy. You are what we call ‘creditor proof,’ meaning you have no wages that can be garnished. However, job loss is still a cause of many people filing insolvency as they live on credit while off work. Upon returning to work, they now have more debt, may miss payments, and creditors start calling. Filing bankruptcy (or a consumer proposal) provides creditor protection to prevent your future wages from being garnisheed.

6. Living paycheque to paycheque

Most people who claim bankruptcy are employed. But, holding a job doesn’t mean that your income covers the cost of living expenses. Our average client’s household debt is 50% higher than that of the average household in Ontario.  Much of this debt is accumulated by paying for living expenses like housing, food, and utilities because their income does not cover modest living costs. When you are living paycheque to paycheque, like the average person drowning in debt, you’re tempted to overextend your credit just to survive.

7. Rising cost of living

Inflation and rising interest rates decrease the amount of income available to stay on top of debt repayment. When essential goods cost more, more consumers turn to credit to make ends meet or reduce their debt payments to pay for the rising cost of living. Long-term inflation, combined with a decline in asset values – particularly home equity – due to higher interest rates, increase the level of consumer insolvencies.  Inflation and higher rates drive someone who was previously able to keep up, to live paycheque to paycheque.

8. Illness or medical bills

When someone becomes ill or is recovering from an accident, they may have to take time off work. Sick leave, if you are eligible, still means a reduction in income. And part-time workers or those employed through commission-based work or freelance, are often not eligible for any sick pay to cover illness or medical bills. Many people turn to credit cards to pay for expenses and medical costs.

9. Separation or divorce

Nearly one in four people who declare bankruptcy have recently experienced a separation or divorce. When a couple dissolves, their financial situation drastically changes. Household expenses double, and the now separated couple are no longer sharing their income. As assets get divided, unexpected costs arise, such as furnishing a second home, purchasing another car, or remortgaging the family home. Additionally, where two incomes were paying back both partners’ debt, one spouse may assume responsibility for a higher share of debt repayment. Be aware, though; you are not legally responsible for your spouse’s debts, divorce agreement or not.

10. Spousal or child support

Providing spousal or child support on top of these new household expenses may add further stress to a divorced couple’s finances. Many parents and newly split couples find themselves extending their credit beyond any means of paying it back just to survive this major life change.

11. Tax debt

Insufficient withholding taxes due to a part-time job or RRSP withdrawal and not paying taxes on self-employment income as a form of cash flow are the two most common reasons people file insolvency due to tax debts. Due to the pandemic, we are also likely to see an increase in people filing insolvency for tax liabilities due to CERB and CRB payments they received that they have not yet paid taxes on.

A typical sequence of events that lead to insolvency

When I say that filing bankruptcy is not someone’s fault, the usual next question I receive is, ‘Well then, how does someone go bankrupt? How did they get in this situation in the first place?’

The path to bankruptcy is all too common. Unfortunately, our typical debtor (whom we call Joe Debtor) makes many of the same financial decisions along the way, and these decisions are not necessarily to their benefit.

The following provides an example of the downward spiral leading to personal bankruptcy. It is a composite of many of the stories I hear every week in our professional practice:

• Joe uses his credit card, takes on a car loan, or buys a house with what he thought was an affordable (or at least doable) mortgage. Just like any other Canadian borrower. At first, he keeps up with his payments. Then something happens – an extra expense, loss of income, divorce or another disruptive life event. Something that made it even harder to make ends meet.
• To get by, he uses up what little savings he has. Next, he sells things that he could easily turn into cash to pay his bills.
• He uses his credit cards as cash flow based on the assumption that things will get better if he could only make it through the next couple of months.
• Because he’s using his credit card but still making his minimum payments, he has good credit. This means he can easily qualify at this stage for $5,000, $10,000 or even $50,000 in new credit. Joe is sure things will improve, so he takes on even more debt.
• Things don’t improve, and so now he cashes out his RRSPs or sells any other assets he still has to raise more money to service his debt. If he’s able to do this, he has created a short-term solution with longer-term implications, not the least of which is that he will probably owe the Canada Revenue Agency additional taxes by converting his registered investments into cash.
• Next, he starts looking for loans or lines of credit to consolidate his debt. If he’s fortunate, he might still qualify for a loan at a major financial institution. Unfortunately, most of the banks and other major lenders will not extend Joe any additional credit by this point.
• Joe still feels he can borrow his way out of trouble, so he turns to the higher risk (and therefore higher interest) lenders. They are pleased to extend Joe a consolidating installment loan provided he will agree to 29% to 59% interest on the debt and perhaps pledge his car as security.
• Three or four months later, perhaps longer if Joe is good at juggling his payments, Joe comes to realize that he is in too deep and starts looking for other solutions. He calls our office, obviously distressed because he cannot handle his monthly payments.

What happens when you declare bankruptcy?

In Canada, bankruptcy is handled by a Licensed Insolvency Trustee (LIT). LITs are regulated by the federal government and trained in bankruptcy laws governing both personal bankruptcy and consumer proposals.

A Licensed Insolvency Trustee will first conduct a debt assessment and explain all available options for dealing with problem debt, including credit counselling, a debt consolidation loan, bankruptcy and a consumer proposal.

Then, if bankruptcy looks like the best solution, your trustee will prepare the required documentation to declare bankruptcy. Once these bankruptcy documents are signed, they are transmitted electronically to the Office of the Superintendent of Bankruptcy. 

Once bankrupt, the debtor receives an automatic stay of proceedings. This bankruptcy protection prevents creditors from pursuing further actions to collect on debts included in the bankruptcy.  While bankrupt, your duties involve making monthly payments and handing over any assets not exempt from seizure. Typical bankruptcy exemptions include a low-value vehicle, household furniture, personal belongs and RRSP savings. You are also required to attend two mandatory credit counselling sessions.

Bankruptcy lasts approximately nine months if this is your first bankruptcy and you have no surplus income. A bankrupt who earns above what is known as the surplus income limit will be bankrupt longer and will be required to make additional bankruptcy payments.

It is important to note that bankruptcy does not deal with secured creditors. While bankrupt you must maintain your mortgage and car loan payments if you elect to retain those assets.

Upon completion, if all goes as required, you will receive an absolute discharge and are then no longer obligated to pay back debts to unsecured creditors included in your bankruptcy. Each creditor in your bankruptcy will receive a dividend equivalent to their percentage share of any of the funds paid into your bankruptcy estate.

The fact that you filed bankruptcy will be noted on your credit report and remain for 6 to 7 years from the date of filing. During your credit counselling, your trustee will provide you information on how you can rebuild credit and improve your credit score post-bankruptcy.

Bankruptcy is a fresh start

Part of the narrative that many people tell themselves about their financial health is that they are fully responsible for their debt and any consequences that come from it. While it is important for everyone to manage their incoming and outgoing money, sometimes events happen in our lives that are completely out of our control. Bankruptcy can help correct the financial impact of those events. People of all ages, from someone in their 20s to seniors, take back control of their lives by getting help to declare bankruptcy.

Anyone struggling with debt with any of these symptoms and warning signs should reach out to a trusted and licensed insolvency trustee for advice.

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How much debt is too much debt in your 40s?

From our most recent study, we know that the average debtor in their 40s is filing insolvency to gain debt relief from more than $64,700 in consumer credit. This debt does not include their home mortgage.

Debts the average 40 to 49-year-old wipes out through a bankruptcy or consumer proposal include:

• $17,800 in credit cards, on which they are barely making minimum payments
• $20,000 in bank loans, installment loans, lines of credit and overdrafts
• 2 in 4 walk away from almost $7,400 in payday loan debt
• Many file because they struggle with a high-interest installment loan paying 39% to 59% interest
• 15% typically eliminate an average of $15,100 in student debt
• One-third erase an average of $19,900 in tax debts

Your debt does not have to be that high for it to be a problem or for a bankruptcy or consumer proposal to make sense.

There are common warning signs that you are carrying excessive debt:

1. You have difficulty paying your bills on time
2. Your debt is increasing because you are using an overdraft, a line of credit or taking on new credit like payday loans or cash advances to make ends meet
3. You are only paying the minimum balance on your credit cards and cannot afford more than that
4. You are receiving calls and collection letters from collection agencies.

These are all signs that you should talk with a Licensed Insolvency Trustee about options like a consumer proposal or declaring bankruptcy.

Even worse, this level of debt prevents you from saving for a home, paying down your mortgage, or putting money aside for your retirement.

How long will it take me to recover?

We understand the pressures you are under. You are living paycheque to paycheque, trying to manage your everyday living costs and raise a family. You may want to buy a home or simply keep the home you have. You feel you need credit to survive, and right now, that’s true. You are literally using debt to survive. But that’s not a long-term solution and will only grow worse as you enter your 50s and 60s. A bankruptcy or consumer proposal is meant as a fresh start.

To understand how long the process may take, I’ll review two different insolvency options available to deal with problem debt: a bankruptcy or consumer proposal.

Bankruptcy Relief

How long you will be bankrupt depends on how much you earn and whether you have filed bankruptcy before. 

• For a first time bankrupt with no surplus income, you can complete your bankruptcy in nine months.
• If you earn above the government income threshold, a first-time bankruptcy lasts 21 months.

During that time, you will make monthly payments to the trustee. A basic bankruptcy will cost a minimum of $200 a month. If you have surplus income, you will be required by bankruptcy law to pay more.

The average person filing bankruptcy in their 40s has a monthly after-tax income of just over $2,900 for a family of 2. Based on that income level, he will be required to pay an additional $80 into his bankruptcy each month, and his bankruptcy will last for 21 months. NOTE: This is an example and may not include allowable expenses based on your circumstances. Your trustee will review your income and expenses to give you an estimate of the cost of bankruptcy in your unique situation.

It is possible to get a secured credit card while bankrupt, but otherwise, you will find your access to new credit limited during your bankruptcy proceeding. However, once completed, you can continue to take steps to rebuild your credit score. The credit impact of your bankruptcy will decline over time and is completely removed seven years after your bankruptcy discharge.

Most people in their 40s are earning enough to trigger surplus income payments. Since this can result in high monthly payments, people often choose to file a consumer proposal to avoid this penalty. Based on our data, 4 out of 5 debtors in their 40s file a consumer proposal as an alternative to bankruptcy.

Consumer proposal

A consumer proposal is a negotiated debt settlement agreement between you and your creditors to pay a portion of what you owe, in exchange for which they agree to forgive the remainder of your debts. Your consumer proposal payments are based on how much your creditors will accept and how quickly you wish to pay this settlement.

Generally, creditors expect to receive at least what they would get if you filed bankruptcy. This means the more you make, the more they will expect you to contribute to your proposal. If you have any assets, like equity in your home, they will expect a higher percentage as well.

The maximum a consumer proposal can last is 60 months (five years). You can negotiate your monthly payments based on five years but pay your proposal off sooner if you wish. On average, we have found that most people complete their proposal in 42 months.

So, if your consumer proposal will last five years, when will it be removed from your credit report?  One year later. That is because a consumer proposal is removed the EARLIER of:

• Three years from the date of completion or,
• Six years from the date of filing.

Will filing insolvency affect my ability to own a home?

In 2020, 6% of insolvency filers owned a home at the time they filed. While the remainder were renters, most had the desire to own a home.

Carrying an excessive amount of credit card debt and other unsecured debt makes homeownership difficult. High monthly debt payments may mean you can’t afford to pay your mortgage. If you are not yet a homeowner, too much debt prevents you from saving for a down payment, and your debt-to-income ratio will be too high for any mortgage lender to accept the risk.

In most cases, an existing homeowner will file a consumer proposal to eliminate unsecured debt. Filing a proposal allows you to keep assets like your home equity. A consumer proposal will not usually impact your existing mortgage if you keep your mortgage payments current.

If you wish to buy a home, you should be able to qualify for a mortgage two years after completion, assuming you have established two or more new credit facilities of $2,500 each and you meet any other income and down payment qualifications.

Filing a bankruptcy or consumer proposal is not right for every financial situation. However, if you are carrying a lot of unsecured debt, and this debt is preventing you from taking control of your future, consider talking to a Licensed Insolvency Trustee about these options.

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What happens to marital assets in a divorce?

First, let me explain how bankruptcy law and divorce can affect your marital assets. 

When you file bankruptcy, any assets you own are surrendered to the Licensed Insolvency Trustee to be sold, and the proceeds are then distributed to your creditors to satisfy your debt.

If you file bankruptcy before your divorce or separation is finalized, your assets will no longer be available to divide between spouses in the divorce.

One of the most significant decisions to make in a divorce is if one spouse will be living in the marital home or if it will be sold as part of the process perhaps because the home is too expensive for either spouse to maintain. Filing bankruptcy before the divorce is finalized can limit your ability to control what happens to the property. That’s because, if there is equity, the ownership that belonged to the bankrupt spouse now vests with the trustee.

An alternative can be to file a consumer proposal to protect the filer’s share of any equity.

In a consumer proposal, you keep all your assets. Instead of filing bankruptcy, you negotiate a settlement amount with your creditors to repay a portion of what you owe over a period of up to five years. If you file a consumer proposal the marital home remains yours to be distributed when you divorce. However, you are still required to list any assets you own when you file a consumer proposal. Your creditors may want you to pay more because they feel they are entitled to the value of that equity.

If you have substantial property, the solution may be to wait to file a bankruptcy or consumer proposal until after your divorce or separation. If the property is transferred from one spouse to another as part of a family order, legal separation agreement or formalized divorce degree before filing bankruptcy, the property no longer belongs to the potential bankrupt and is now out of reach of the trustee. The separation agreement must be legitimate and not seen to be done for the sole purpose of hiding assets from your creditors.

What happens to joint debt?

You and your soon to be ex-spouse are not liable for each other’s debts unless you’ve co-signed the debt.  If this happens, they become a joint debt.

In some cases, there will be agreements between divorcing spouses that one will become responsible to maintain the payments on certain marital debt, for example outstanding credit card debt. It’s important to note that while this may have standing in family court, the creditors who are owed the money don’t have to follow a family court order. If your spouse files bankruptcy, even after your divorce is finalized, you could be liable for a joint debt, even though your spouse agreed to pay it. To make sure you are absolved from any liability to repay joint debts, the creditors must agree to remove you from any loan agreement before the other spouse files a bankruptcy or consumer proposal.

A bankruptcy or consumer proposal does not deal with secured debt so it will not affect your mortgage payments if you keep your home, beyond what you agree to in the divorce agreement.

Income, support payments and surplus income

When you file bankruptcy, any income over a certain limit will trigger what is a called a surplus income payment into your bankruptcy to compensate your creditors. If you file bankruptcy before your divorce, your spouse’s income can affect this calculation and increase the cost of your bankruptcy or consumer proposal.

If you file bankruptcy after your divorce, any alimony or child support payments you make can be deducted from your income before surplus is calculated, so in some cases it can be worth waiting until after the divorce for support to be determined.

If you are receiving alimony or child support payments, these payments will be added to your income for bankruptcy purposes.

When should you file a consumer proposal or bankruptcy before divorce?

It is always important to discuss your specific situation with your spouse, Licensed Insolvency Trustee and divorce lawyer, however, here are some reasons why you may want to file bankruptcy before you finalize your divorce:

• You have significant joint debts, and it makes sense for you and your spouse to clear up those debts before finalizing your divorce settlement. It is possible to file a joint bankruptcy or joint consumer proposal to eliminate the unsecured debt for both spouses. It’s also typically less costly to file together as opposed to doing it apart. This could also make life easier for both of you in a very difficult time.
• You are being threatened with a wage garnishment or seizure of assets by your creditors. Filing for bankruptcy or a consumer proposal can stop creditor collection actions, while you work to finalize your divorce.

When should you file for divorce before bankruptcy?

The main reasons to complete your divorce proceedings prior to filing a bankruptcy or consumer proposal is to provide more flexibility in dealing with marital assets. It may make sense to complete your divorce proceedings first if:

• you wish to transfer certain marital assets as part of the equalization process,
• your soon to be ex-spouse earns a much higher income than you do,
• you will be paying high alimony or support payments that could reduce your potential surplus income,
• your personal or emotional situation warrants completing your divorce ahead of any other considerations.

Can couples file bankruptcy together after divorce?

Divorced couples are still allowed to file a joint consumer proposal or joint bankruptcy to get relief from their combined debts. It is not uncommon for separated couples to find themselves no longer able to repay debts they could manage while married. Divorce changed their financial circumstances. Divorce costs can lead to divorce debt and operating two homes can significantly reduce the amount of monthly income available to repay old marital or joint debts.

To determine whether a joint consumer proposal or bankruptcy is the best way to go, both spouses should contact a Licensed Insolvency Trustee to get an assessment of their individual financial obligations.

If you need to file for divorce and bankruptcy, it is very important to talk to a divorce attorney and a Licensed Insolvency Trustee before filing for either one. The decision as to whether to file bankruptcy or divorce first should be made based on what’s best for you at the time. If you need further advice about the timing of your bankruptcy vs your divorce, contact us for a free consultation. We’re here to help.

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That’s a good thing. It ensures that when you file for bankruptcy, or make a proposal to your creditors, you, and all stakeholders are treated fairly. To ensure the integrity of the insolvency process, the OSB mandates a lot of rules that trustees must follow during the bankruptcy process.

Until recently, guidelines required that anyone filing a bankruptcy or consumer proposal meet in-person with a Licensed Insolvency Trustee for an assessment of their situation. Also, specific duties and requirements during a bankruptcy or proposal required the debtor to attend at the trustee’s office in person, including attending any necessary examination and credit counselling.

In order to support the necessary social distancing required by COVID-19, the OSB issued updated guidelines permitting trustees to adopt new practices to allow for phone and online video-conferencing, as well as electronic signatures, when administering a bankruptcy or proposal.

What does that mean for someone struggling with debt?

If you think a bankruptcy or proposal is necessary, as always, you should consult a Licensed Insolvency Trustee directly.

Assessing Your Situation and Bankruptcy Alternatives

The first step will be to arrange a free one-hour initial consultation and assessment by phone or video-chat with one of our licensed professionals. The purpose of this consultation is to talk about your personal situation, explain the options available to you, and make a recommendation as to what solution may be best for you.

At Hoyes Michalos, we never assume you will file bankruptcy. Every situation is unique, and it is essential that we learn about your budget, your debt situation, and your needs to provide the best debt advice available. There is no one-size-fits-all solution for anyone.  We will ask you questions like who do you owe money to, what is your monthly income and expenses, what assets do you have, what are your primary financial concerns right now?

From there we can present some options, including:

• Can you qualify for a debt consolidation loan? This will depend on factors including: the stability of your income, if you have any assets to pledge as collateral, and what your credit score looks like.
• Could you repay all your debts through a debt management plan? Credit counsellors offer a debt consolidation program that can help people with small debt obligations work out a repayment plan with their creditors. To qualify, however, you must be able to afford to repay 100% of your debts plus the 10% fee charged by the credit counselling agency.
• If neither of these options is viable, we will discuss a debt settlement through a consumer proposal. A consumer proposal is a negotiated debt restructuring program that allows you to offer to pay a portion of what you owe, and your creditors forgive the remaining balance. Settlements can be paid out over up to five years. To qualify, you will need enough income to support your proposal payments.
• Only after these debt relief options have been explored, will we consider personal bankruptcy as an alternative.

This consultation may be supplemented by email discussions and further chats to answer any questions you may have and to collect the documentation necessary to prepare your bankruptcy documents.

Once your documents are prepared, we will send you a copy of your documents by email and arrange a video-conference to review these documents with you.  This meeting is to ensure that you fully understand the terms of the bankruptcy or consumer proposal, answer any further questions you may have, and ensure that the information provided is accurate. If you are ready to proceed, you will sign these documents digitally via HelloSign.

Once you sign your documents, Hoyes Michalos electronically submits these forms to the government and the court. This begins your insolvency proceeding and your stay of proceedings, which prevents creditors from pursuing you.

Duties During Bankruptcy Including Credit Counselling Sessions

Even payments are arranged electronically. We offer a pre-authorized payment plan which can be arranged to fit your income schedule.

During your bankruptcy, you will be required to attend two credit counselling sessions. These sessions will be conducted by video-conferencing as well and can be arranged at a time that fits your schedule. 

Currently, to ensure social distancing, any examinations and creditors’ meetings, while rare, are also conducted by phone or video.

Rest assured, when you contact Hoyes Michalos, the level of service we provide has not changed. While we can certainly take advantage of online tools like video-conferencing and electronic signatures, our mission remains the same:

We believe that financial problems can happen to anyone, at any time.

Our mission is to help you get back on track so that you can get on with your life.

Our vision is to be known throughout Ontario as the most knowledgeable and trustworthy insolvency professionals to help you build a successful plan to become debt free.

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Bankruptcy examinations are rare – occurring in roughly 1 out of every 300 personal bankruptcies. Most are scheduled ‘at random’ by the Official Receiver, although debtors with exceedingly high levels of debt may have a higher chance of being chosen.

Purpose of a bankruptcy examination by the Official Receiver

An examination is like a form of deposition. You can be questioned, under oath, about aspects before and during your bankruptcy.

The purpose of the examination is twofold:

1. To allow the Official Receiver to directly ask questions to a debtor or bankrupt about
   • the causes of your financial difficulty
   • your financial history
   • specific debts, assets and transactions before you declared bankruptcy.
2. To allow the Official Receiver to monitor overall insolvency activity in Canada such as
   • Watching for trends in the industry like increased use of payday loans, or new lenders in the marketplace
   • Ask questions about the debtor’s experience before meeting with an LIT
   • Ask questions about the debtor’s experience in meetings with the LIT

Where does the examination take place?

Examinations are conducted in person by an Official Receiver, usually in a government office, although they may also be booked immediately prior to a creditors’ meeting in commercial or highly contentious files.

Attending any meeting during bankruptcy is one of the duties of a bankrupt. Failing to attend an examination will result in an opposition to a bankrupt’s discharge – so if one is schedule make plans to attend.

Examination by the LIT or creditors

The Bankruptcy & Insolvency Act also has provisions for a Licensed Insolvency Trustee or creditor to examine persons under oath.

These forms of examinations are exceedingly rare and are generally restricted to complex bankruptcies or situations where the trustee or creditors suspects the bankrupt has not made full disclosure of all assets or dealings with the bankrupt’s assets prior to the bankruptcy.

If a creditor believes there is a basis for an examination and one has not been called by the trustee or Official Receiver, a creditor has the right, under section 163(2) of the Bankruptcy & Insolvency Act to apply to the court for an order to examine the debtor, the trustee or any other inspector or creditor.

While you may be understandably nervous about being questioned about your financial affairs prior to bankruptcy, if you have been honest in your filing you have nothing to be worried about. Most examinations of our clients fall under the “randomly selected” reason, almost always due to VERY high debt and result in no further investigation or actions.

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A meeting of creditors’ is required:

• In a summary bankruptcy or consumer proposal, if at least 25% of your creditors, based on the dollar value of their claims, ask for a meeting;
• If requested by the Official Receiver (the representative of the Office of the Superintendent of Bankruptcy);
• In an ordinary administration bankruptcy (required if your realizable assets are worth more than $15,000), business bankruptcy or Division I proposal.

The Official Receiver can also require you meet for an Examination under Oath. While still rare, an examination occurs in roughly 1 out of every 300 personal bankruptcies.

Who can call a creditor’s meeting?

A meeting can be called by your creditors (at least 25% needed), the Official Receiver or the trustee.

Most creditors understand the bankruptcy process and will allow it to play out as filed. However, there are circumstances where your creditors may want to ask you more questions:

• A creditor believes you acted fraudulently in obtaining credit, or selling assets before bankruptcy;
• You owe significant monies to Canada Revenue Agency;
• A creditor has questions regarding the income, assets or other debt obligations you declared in your bankruptcy documents.

Most creditor meetings in summary administrations (most bankruptcies in Canada) are called by related parties, or legal counsel, who expect by doing so they may find additional recoveries.

If a first meeting is required, it must be held within 21 days following the date of filing.

What is the purpose of the First Meeting of Creditors?

The Bankruptcy and Insolvency Act  (BIA) specifies the purpose of the first creditors’ meeting:

• To consider the affairs of the bankrupt;
• To affirm the appointment of the trustee or substitute another trustee;
• To appoint inspectors of the estate;
• For the creditors to give directions to the trustee with regards to the administration of the estate.

What happens at a Meeting of Creditors?

The meeting of creditors is usually held at your trustee’s office but can be held at another location. The trustee attends to provide information regarding the administration of the estate.  If attending the Official Receiver acts as chairman otherwise he will assign his duties to the trustee.

Before the meeting, your trustee will prepare a preliminary report about your assets and liabilities, the causes of your bankruptcy, estimated realizations and details of any reviewable transactions. This report will be presented to the creditors by the trustee.

Creditors may ask you further questions relating to your financial status and activities leading up to your bankruptcy.  They may ask about expenses you claimed to reduce surplus income.

As the bankrupt, you are required to attend and answer questions truthfully. Failure to attend the meeting, without a valid reason such as sickness, is an offense under the Act and can impact your bankruptcy discharge. You can request not to answer questions or provide information that does not bear on your bankruptcy filing.

If you are required to provide further documentation your trustee will advise you before the meeting and can adjourn the meeting for another date if needed.

In a consumer proposal, the meeting of creditors is where the creditors have an opportunity to vote to accept or reject your proposal terms.  If no meeting is required, the proposal is automatically approved. Learn more about how voting on a consumer proposal works.

Most examinations of our clients fall under the “randomly selected” reason, almost always due to VERY high debt and result in no further investigation or actions.

What is the trustee’s role at the meeting?

Your trustee’s role is as an officer of the court and middle-man to ensure that the process is fair and equitable to all parties.

It is not necessary to engage a lawyer, although you can if you feel you need legal advice, but it is important to understand that the trustee does not represent you. Your trustee will, however, guide you through process.

The trustee, if acting as chair of the meeting, will ensure all creditors have filed a valid proof of claim and are entitled to vote. They will present their report to creditors and answer questions regarding the administration of the estate.

Most people who file bankruptcy do not need to meet with their creditors. If a meeting is requested, don’t panic. Attend the meeting, answer questions honestly and you will find the process easier than you might expect.

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In this guide, I explain what will happen when you declare bankruptcy, how much it might cost, and what your recovery after bankruptcy may look like. I hope this information can help you decide if filing for bankruptcy is the right solution for you to clear your debts

How does bankruptcy work?

Bankruptcy in Canada is a legal process, legislated under the Bankruptcy and Insolvency Act (BIA). If you owe at least $1,000, reside or have assets in Canada and are insolvent (you can no longer pay your debts), you may file for bankruptcy.

When you file bankruptcy in Canada you assign non-essential assets and surplus income to your creditors in exchange for which your debts are released.

A bankruptcy can only be filed with a Licensed Insolvency Trustee. An LIT is a federally regulated debt professional, licensed to administer both bankruptcies and consumer proposals in Canada.  As an officer of the court, the trustee’s role is to ensure that all bankruptcy laws are applied equally and fairly to both the debtor and creditors.

One of the advantages of bankruptcy is that it is a legal proceeding. If creditors are taking you to court or garnisheeing your wages, bankruptcy law provides a mechanism to stop these types of aggressive collection actions.

What will happen when you declare bankruptcy?

Before bankruptcy

Prior to filing, a Licensed Insolvency Trustee is required to perform a debt assessment to see if bankruptcy is the right solution for you.

During this free consultation, the trustee will gain an understanding of your financial situation, including learning the causes of money stress in your life. They will ask questions about your income, assets (what you own), and debts (the people you owe money to). This information helps them review all possible debt relief options with you and prepare the necessary documents if you decide to go bankrupt.

If you cannot afford to repay your debts in full, the trustee may recommend bankruptcy, but they might also suggest you consider filing a consumer proposal as an alternative to bankruptcy if this makes more sense for you financially.

Signing a bankruptcy petition

To file for bankruptcy protection, you sign various bankruptcy forms, including an “Assignment” and a “Statement of Affairs”. In your bankruptcy assignment, you state that you are handing over your property to the Licensed Insolvency Trustee for the benefit of your creditors. The statement of affairs is a list of all your assets and liabilities.

You will also be required to answer several questions about your situation including details about your family, work, and disposition of assets before bankruptcy.  It is an offence under the Bankruptcy & Insolvency Act to sell or hide assets from your creditors when you know you intend to go bankrupt.

With the advent of COVID-19 and the required social distancing, it is now possible to file bankruptcy online by video-conference and electronic signature. However, you must still file with a trustee in the province where you live or where most of your assets are if you live outside of Canada.

Creditor protection

Once your bankruptcy documents have been e-filed with the government and the bankruptcy court, you are legally bankrupt.

Upon declaring bankruptcy, you get immediate legal protection from your creditors through an automatic stay of proceedings. This stay is one of the advantages of personal bankruptcy since it legally prohibits your creditors from pursuing any further legal action to collect. Bankruptcy stops a wage garnishment, lawsuits, and collection activity.

Once you declare bankruptcy your trustee will contact your creditors and deal with your debts, so you no longer have to. You stop making payments to your creditors as soon as you file. Within 5 days, your trustee will send a notice of the bankruptcy to your creditors along with a proof of claim form. If you have accounts in collection, you simply tell the debt collector you are bankrupt, and the calls should stop. If a collection agency continues to harass you, talk with your trustee about speaking directly with the agent.

Surrendering assets

When you declare bankruptcy, you are required to surrender any non-exempt assets to the Licensed Insolvency Trustee who has a duty to realize on those assets for the benefit of your creditors. Your trustee will sell any assets for fair market value and the monies will be set aside in a trust account for distribution to your creditors. You can avoid the sale of an asset by arranging to pay the trustee the value of any equity in the property. Payments can be made over the length of your bankruptcy.

It’s essential to know you do not lose all your assets. There are provincial and federal bankruptcy exemptions that allow you to keep most personal property including:

• Personal items and household goods
• A single vehicle worth less than the provincial exception limit
• RRSP and pension savings (except for some recent contributions)
• Tools you need to work

 Another asset that must be realized on is tax refunds up to and including the year you file bankruptcy.

While not an asset, you are also required to stop using and surrender all credit cards once you file bankruptcy.

Duties during bankruptcy

During your bankruptcy, you have several primary duties. You will be required to:

• make your monthly bankruptcy payments
• attend two credit counselling sessions
• file monthly income and expense reports with your trustee

The credit counselling sessions are very beneficial to your financial recovery. They are designed to give you money management tools to help you budget, save and make better borrowing choices. These sessions also provide you with information on how to rebuild your credit after bankruptcy.

You may also be required to attend a meeting during bankruptcy. This does not happen in all personal bankruptcies but it is important for you to know that your creditors can request a creditors’ meeting during which they can ask questions about your financial affairs and can provide further directions to the trustee.  The Official Receiver, a representative of the Office of the Superintendent of Bankruptcy (OSB), can also request an examination of a bankrupt, which they do occasionally.  Most examinations are randomly chosen and uneventful.

Discharge

Upon completion of your bankruptcy, you receive a Certificate of Discharge. A bankruptcy discharge means that you are no longer obligated to pay your debts owing to creditors included in your bankruptcy.

There are 5 types of bankruptcy discharge:

• automatic (the most common)
• absolute (if a court hearing is required)
• conditional (you have additional duties)
• suspended (absolute but effective at a later date)
• refused

The key to obtaining an automatic or absolute discharge is to complete your duties as required during your bankruptcy.

After your bankruptcy, creditors will receive a proportional distribution of bankruptcy funds from your bankruptcy payments and realization from the sale of any assets that were surrendered. Any remaining debt owing is forgiven.

What not to do before filing bankruptcy

If you are considering bankruptcy, there are certain things you should not do before filing.

• Don’t max out your credit cards and lines of credit or take on new debt just before filing.
• Do not sell or transfer any assets to someone else with the intent to hide them from your creditors.
• Don’t omit creditors from your creditors’ list thinking you can keep that debt or pay them separately.
• Don’t make a preferential payment to or pay off any single creditor at the expense of your other creditors.
• Don’t hide information about a potential future inheritance, bonus, or windfall.
• Don’t forget to tell your trustee if you have filed a bankruptcy or consumer proposal before.

Activities like this will affect the advice you are given by the trustee, at best, and if viewed as fraudulent, could jeopardize your bankruptcy discharge. Your trustee is required to ask a series of general questions to review past transactions like these, so avoid these reviewable actions and be honest with your trustee in your disclosure.

Does bankruptcy clear all debts?

Bankruptcy eliminates most unsecured debts. People often file bankruptcy because they are no longer able to keep up with the minimum payments on their credit cards or may be struggling in a cycle of payday loans. However, bankruptcy discharges a wide range of legal obligations including:

• credit card debt
• unsecured lines of credit and bank loans
• financial company and installment loans
• unpaid bills
• interest and penalties
• accounts in collection
• judgments and lawsuits
• government obligations including tax debts and student loans if you have been out of school for 7 years.

There are however a few debts not discharged by bankruptcy include family responsibility arrears (child support and alimony payments), court fines, traffic tickets and debts due to fraud.

An unsecured creditor is required to file a proof of claim to be eligible to receive a dividend from your bankruptcy estate. However, even if they do not file a claim, unsecured debts included in your bankruptcy that exist at the date of bankruptcy are erased.

Bankruptcy also does not affect a secured creditor. As long as you keep up with your mortgage or car loan payment, you can continue to keep that asset. If you miss payments, bankruptcy does not prevent secured creditors from enforcing their rights to foreclose on your home or repossess your vehicle. If there is equity in any property beyond any exemption limit, for example substantial equity in your home, your trustee can provide you with options to keep your house or car if you can afford the monthly payments. 

How much does it cost to file for bankruptcy?

The base contribution fee to file bankruptcy in Canada is $1,800 for a first-time bankrupt. This pays for the trustee’s time, filing fees, and counselling fees.

Your specific bankruptcy costs are determined by the assets you own and your income.

• You are required to surrender or ‘buy back’ any assets that are not exempt from seizure by the trustee
• You may be required to make additional surplus income payments if your income is over the government-set threshold
• You will lose any tax refunds up to and including the year you filed

How long will I be bankrupt?

The length of time you will be bankrupt and are required to make bankruptcy payments is determined by your income and if you have declared bankruptcy before.

• A first bankruptcy with no surplus income lasts 9 months. Surplus income will extend your bankruptcy to 21 months.
• A second bankruptcy with no surplus income lasts 24 months. This is extended to 36 months if you have surplus income.
• A third bankruptcy can only be discharged after a court hearing.

Most personal bankruptcies in Canada involve no surplus income and last for nine months. This is because someone with high surplus income would find it more advantageous to file a consumer proposal as an alternative to making high monthly bankruptcy payments.

How does filing bankruptcy affect you?

How does bankruptcy affect my credit rating?

Bankruptcy will remain on your credit report for 6 years after discharge. Bankruptcy can affect how future lenders view your creditworthiness, but this impact is temporary. While your credit score will drop immediately after filing, you can often get a secured credit card while bankrupt. This will be reported on your credit report as new, and positive, credit history. After your bankruptcy, you can apply for additional credit lines and you will see a slow and steady improvement in your score.

Bankruptcy also has the advantage of ridding you of debts that are causing your current financial hardship. Falling behind on payments and having past due bills sent to a collection agency if you can’t repay your bills will also negatively affect your credit score and can be hard to overcome without bankruptcy if your debts are large.

The purpose of filing bankruptcy is to gain a fresh financial start. Eliminating debt means you can begin the process of rebuilding your credit after bankruptcy and create a stronger financial future. If you take the right steps to rebuild, you will see your score rebound.

Will bankruptcy affect my spouse?

In most cases, no. If your debts are not shared (your wife has not co-signed or is not a co-borrower) you can file bankruptcy with no impact on your spouse. Your bankruptcy does not affect your spouses credit report.

If you have joint debts (both names are on the debt) you may want to discuss filing a joint bankruptcy or proposal with your trustee.

Who will know I filed for bankruptcy?

Bankruptcy is a legal process and your documents are filed with the federal government, specifically the Office of the Superintendent of Bankruptcy. People can search the government records, but they must first know the name of a person to search and must pay a fee before any information is provided.

Your creditors will also be notified that you filed for bankruptcy.

A creditor is an individual or business that is owed money by the debtor. There are two major types of creditors: secured and unsecured. A secured creditor is one that holds a right or claim against the debtor’s property. An unsecured creditor does not have a direct claim on the debtor’s property.

A creditor must file a proof of claim to participate in any dividend distribution from your bankruptcy. They can also request a creditors’ meeting to review the affairs of the bankrupt, although this rarely happens in most personal bankruptcies in Canada. The creditor’s role also includes informing the trustee of any irregularities before or during the bankruptcy filing.

Your employer is not notified that you filed bankruptcy unless you have a wage garnishment. In that case, your trustee will notify the payroll department to ask them to stop taking money from your pay.

The OSB will also notify the credit bureau when you file including the date of filing and type of proceeding (a bankruptcy or consumer proposal). They update the credit reporting agencies at the end of your bankruptcy with the date of discharge.

Other than that, there is no public advertising or publication that you filed a bankruptcy in Canada.

How do I claim or declare bankruptcy?

Before you file, the trustee will review all your debt relief options so you can decide if bankruptcy is right for you.

The trustee will ask questions about your income, assets, and debts (who you owe). If you cannot afford to repay your debts in full, the trustee may recommend bankruptcy, but they might also suggest you consider filing a consumer proposal as an alternative to bankruptcy if this makes more sense for your financial situation.

If you are considering bankruptcy, talk with a Licensed Insolvency Trustee today.

The post How Bankruptcy Works for Debtors and Creditors in Canada appeared first on Hoyes, Michalos & Associates Inc..

Requirements to file bankruptcy when living outside Canada

Canadian bankruptcy law states that you can declare bankruptcy in Canada if:

1. You have conducted business in Canada in the past year, or
2. You have been a resident of Canada within the past year, or
3. The majority of your assets are in Canada.

Practically, this can be interpreted fairly broadly. For example, you may have a mailing address in Canada, you may have assets in storage in Canada, or you may still be employed by a Canadian company but working abroad.

Logistically, to file bankruptcy in Canada when living in a foreign country, you will need to:

• Provide a Canadian address for reporting purposes.
• Meet, in person, with a Licensed Insolvency Trustee at least once prior to filing. An initial assessment can be completed over the phone however one face-to-face meeting is required under bankruptcy law to complete the assessment process and obtain your signature on all filing documents.
• Attend, in person, two required counselling sessions.
• Attend any creditor meeting or discharge hearing that is requested, although these are rare. You must commit to returning to Canada when required to complete any bankruptcy duties.
• Declare all of your assets, including those outside of Canada. It’s important to note that your Trustee is legally required to realize on your assets, regardless of whether or not they are in Canada, and sell them for the benefit of your Canadian creditors although logistically the trustee may or may not choose to do so if realization is unlikely.
• Report all of your debts, including monies owed in and outside of Canada. You may have to file bankruptcy in Canada to deal with Canadian debts, and file bankruptcy in the US to deal with US debts.  If you do, it is best to coordinate the filing between both countries.

Read More: Filing for Bankruptcy in Canada

Once you’ve signed up for either bankruptcy or a consumer proposal, you can remain living the United States or other foreign country, although you will likely be required to maintain a bank account in Canada to make your necessary payments.

And, contrary to popular belief, you will not be stopped at the Canadian border upon entering just because you have unpaid Canadian debts.

What Happens if You Don’t File?

Can Canadian creditors sue you in a foreign country?

The first question is should you file bankruptcy in Canada when you live outside Canada, or can you just ignore your Canadian debts?

Canadian creditors and collection agencies can, and will, continue to call you to collect on overdue debts, assuming they can find you.

Suing you from a foreign country can be a little more complicated. Your Canadian creditor must first sue you in Canada; then they have to bring that lawsuit over to the United States (or other foreign jurisdiction) to get the foreign court to certify the suit, after which they can pursue you for collection where you live. Not surprisingly, this is a costly process requiring an understanding of foreign collection laws and the engagement of lawyers from another country, so it is rarely done.

Your Canadian creditor can file a lawsuit in Canada, and if you do not, or are unable to defend that suit, they can obtain a judgment against you, even for old debts.  To avoid a judgment or lawsuit, it’s best to deal with your debts by speaking to a Licensed Insolvency Trustee early about your options.

Do Canadian debts show on a US creditor report?

Although there are credit reporting companies that operate in both Canada and the US, like Equifax, your Canadian debts do not get reported to US credit bureaus and vice-versa. There is no cross-border reporting between credit bureaus at present. That means, while you may have a low credit score in Canada, it’s certainly possible for you to build and obtain credit in another country. However, your Canadian debts will negatively impact your Canadian credit score, which is something to consider if you plan to return to Canada.

If you intend to return to Canada, have significant Canadian debts, or wish to stop harassing credit calls, it may make sense to eliminate those debts by filing bankruptcy in Canada. Rebecca generally recommends filing for bankruptcy before you move if possible. This reduces the number of trips to Canada to deal with the insolvency process and reduces the complications of dealing with cross-border issues.

For more detailed information on how to file for bankruptcy on Canadian debt if you live outside of Canada tune in to today’s podcast or read the completed transcription below or feel free to contact one of our Licensed Insolvency Trustees.

Additional Resources

• What happens if you stop paying your debts?
• Ontario Limitations Act and old debts
• Rebecca Martyn Twitter – @rlmartyn

FULL TRANSCRIPT – Show 216 Should You File Bankruptcy in Canada if Living Abroad?

Doug Hoyes:     A few weeks ago I got a phone call from Rebecca Martyn, and she told me that in the past week she had received four calls from people who used to live in Canada and now they live in the U.S. and they have Canadian debts that they can’t pay and they want to know what are their options.

Rebecca and I talked about the exact opposite issue back on episode number 123, which aired in January 2017, that show was about what happens if you live in Canada but have U.S. debts. I’ll put a link to that episode in the show notes over at hoyes.com.

So if we’re getting calls about it it must be an issue, so today we’ll get some practical advice on how to deal with Canadian debt if you live outside of Canada, can you just default on it, ignore it or do you need to go bankrupt, that’s out topic today. Rebecca Martyn, welcome back. Since it’s been over a year and a half since you’ve been on the show, please tell the listeners what Hoyes Michalos office you run and how long you’ve been with us.

Rebecca Martyn:    I run the Windsor office and I just celebrated my 15^th anniversary with Hoyes Michalos.

Doug Hoyes:          Fifteen years with Hoyes Michalos. So there you go, Rebecca’s been doing this a while, she knows what she’s talking about. So this issue of Canadian and U.S. debt is something that you see frequently because of course Windsor is a border city, just across the river from Detroit. Did I say Detroit right, there?

Rebecca Martyn:    Yes, you did.

Doug Hoyes:          It’s not Detroit. So I mean you can literally stand in downtown Windsor and see the skyline over the Detroit River, see the skyline of downtown Detroit, so I assume it’s very common or not unusual for you to see people who either work in Canada or the U.S. while living in the other country. So that’s a common thing you see?

Rebecca Martyn:    Yeah, it’s quite common. There’s two things that happen, either the person lives in Windsor, works in the U.S., and inevitably what can happen is you meet someone who lives in the U.S., you decide then to pull up stakes in Canada and just settle in Detroit or some place outside of Detroit.

Doug Hoyes:          Excellent. So let’s go through a bunch of questions here and you can tell us how to deal with debt when you’re in that situation. So let’s say I’m a Canadian, I’ve incurred some debt in Canada, you know, credit cards, bank loans, whatever, and now I live in the United States, so I mean the obvious option in my mind is I just ignore it.

So if I ignore it what will happen, so how easy is it for a Canadian creditor, a Canadian bank for example, to collect money from me if I live in the United States?

Rebecca Martyn:    It’s not easy. I mean they can call you, they can harass you, but what they have to do is they have to sue you in Canada and then they have to bring that lawsuit over to the U.S. and then get the U.S. court to certify that lawsuit, and at that point then they can pursue you. So yes, it can be done, but it’s expensive so it’s not something that I see very often, in fact I’ve only seen it once.

Doug Hoyes:          Okay, so very unusual to do that. It’s very easy to sue someone in Canada if you’re in Canada because if I’m the big bank I’ve got a lawyer who goes to that court in Windsor, you know, every two days, so suing people is easy, but to go to Michigan or Delaware, wherever the person’s living, completely different situation. So and – so okay, ignoring it means they might sue me but you say that’s a very unusual circumstance, how is that going to affect my credit report?

Rebecca Martyn:    It won’t, there’s no cross-border reporting between Equifax Canada and Equifax U.S.

Doug Hoyes:          So my Canadian debts are on my Canadian Equifax or TransUnion report, my U.S. debts are on in effect a completely separate report?

Rebecca Martyn:    That’s correct.

Doug Hoyes:          Even though it still says Equifax or TransUnion, there’s no cross-merging of it. So and I believe I did a show on that last year about some guys who were using blockchain to coordinate credit so that it’ll actually be something that becomes a world-wide thing, but at the moment that’s not the case. So if I was to just ignore my debts, so I’m a Canadian now living in the U.S., I could just ignore them and it’s not going to show up on my Canadian – well it’ll show up on my Canadian credit report but I’m not living there anymore.

Rebecca Martyn:    Right.

Doug Hoyes:          So I guess a big part of it is am I coming back or not.

Rebecca Martyn:    Right. Well part of it is that yes you’re coming back, and I think the other part is most people don’t just want to ignore it, they want to deal with it somehow because even though it’s going to be hard to sue them, they’re still going to call you. So what do you have to do to get those maybe five or six phone calls a day, which does happen, those five or six phone calls a day stopped.

Doug Hoyes:          Yeah and anybody who has debts in Canada knows that, if you don’t pay then the robo-dialer is calling you every hour or every two hours, if you don’t pick up it just calls you again.

So okay, so if I just ignore it, if I’m going to live in the U.S. for an extended period of time, meh, I’m not going to be able get credit in Canada because I guess my credit report in Canada’s going to look lousy, but I am still going to be getting phone calls if they know my U.S. phone number, I guess if I brought my cell phone with me or if they can track me down.

So there is certainly the nuisance factor, and obviously if I ever plan to come back to Canada, if I’ve ignored my Canadian debts, well by the time I come back to Canada –

Rebecca Martyn:    They’re waiting for you.

Doug Hoyes:          Yeah, it’s going to be a mess. So if I’m going to be away for a long time, the Limitations Act in Ontario says you have to sue someone within two years of when they stopped paying. So if I’m going to be gone for a long time and they don’t sue me before I get back, I guess they’re not going to be able to get a judgement against me when I get back, but my credit report’s going to look lousy.

Rebecca Martyn:    Right. Well and the issue too is even though it’s been two years, they serve – they serve the notice on you they’re suing you, you don’t defend yourself, they’re still going to get judgement against you. So you have to be able to come back, file that statement of defence saying it’s been over two years. So it can be done, but it’s still a lot of work.

Doug Hoyes:          Yeah, valid point. So okay, so what you’re saying is – okay, let’s take the scenario that I actually want to deal with it then, I don’t want to just put my head in the sand, I may be coming back to Canada or I’d just like to deal with it, I don’t want to have to deal with phone calls, you know, anything like that, so what are my options then?

Rebecca Martyn:    So your options are essentially the same as if you were living in Canada. You can deal with a credit counsellor to try to file a debt management plan, which can be done online. You can just try to negotiate with the creditors on your own, so you might have a certain amount of money stashed aside in the U.S. that you’re able to settle your debts for so many cents on the dollar. There’s some logistical issues but you can still do bankruptcy, you can still do a consumer proposal.

Doug Hoyes:          Okay, so let’s talk about the bankruptcy and the consumer proposal then. So what does the law say about who can file a bankruptcy in Canada?

Rebecca Martyn:    The wording states you have to have resided for the past year in Canada or carry on business in Canada or where – your locality is considered where your assets are.

Doug Hoyes:          So reside or carry on business in Canada –

Rebecca Martyn:    Correct –

Doug Hoyes:          Within the last year. So if I’ve lived in the United States for three years, I would not necessarily be eligible to file a bankruptcy in Canada today?

Rebecca Martyn:    True, but then you go to that second part, where you have assets located. So if you live in Ohio let’s say but you still have a Windsor address maybe for mailing purposes, maybe you have something in storage, technically you are still allowed to file and the OS – the Office of the Superintendent of Bankruptcy has been allowing it.

Doug Hoyes:          Okay. So if I want – let’s go through that then. So I decide, you know what, I want to file bankruptcy or a consumer proposal, either one in that scenario, so if I have a post office box or, you know, maybe my mother still lives here and I come and visit her three times a month and, you know, I’ve been using her address for years, living at her house or whatever, then I could still legally file a bankruptcy or consumer proposal?

Rebecca Martyn:    Yeah, absolutely.

Doug Hoyes:          And when you do a bankruptcy filing, you’ve got to put the person’s address on it –

Rebecca Martyn:    Right –

Doug Hoyes:          That gets sent into the system, it has to be a Canadian address?

Rebecca Martyn:    Right.

Doug Hoyes:          So that’s really the key then, I have to have –

Rebecca Martyn:    That’s exactly it.

Doug Hoyes:          Okay. I have to have a Canadian address that I can put on the paperwork, so assuming I can do that, then I’m good to go. Now, whether you should actually file a bankruptcy or consumer proposal, that’s not the topic for this show, that’s – well in fact let’s talk about that because I know what the rules are, I’m a licensed insolvency trustee, so are you, the rule is before you can file a bankruptcy or consumer proposal you have to meet in person with a licensed insolvency trustee to be assessed.

Rebecca Martyn:    Right.

Doug Hoyes:          How can I do that if I’m in the United States?

Rebecca Martyn:    You drive.

Doug Hoyes:          You come here?

Rebecca Martyn:    Yeah, you come here, it’s as easy that and the people that I see mostly are within an easy driving distance, Michigan, like you said, it’s five minutes away from the office, Ohio is only an hour away. So the most recent person I met, she actually was from Ohio. She had lived in Windsor back in 2009, she got a job in the U.S., met her partner, decided to get married, pulled up stakes in Windsor, moved to Ohio.

Now working in Ohio, everything is going great, about six months ago she lost her job, she hasn’t been able to find another one, creditor calls are overwhelming and that was one of the four people that contacted me that week which led to this podcast, she calls up, “What can I do”. We go through all the options, we talked on the phone for quite a while, she was coming to Windsor anyway, so we met, we met in person and she decided to file for bankruptcy.

Doug Hoyes:          So get in your car, get on an airplane, whatever it is, come to see you. So you have to come and meet with you to be assessed and then obviously to file the paperwork.

Rebecca Martyn:    Right.

Doug Hoyes:          We all know that there are two credit counselling sessions, what are now called BIA, Bankruptcy and Insolvency Act counselling sessions that are part of the process whether it’s a bankruptcy or consumer proposal, and those are traditionally done in person as well.

Rebecca Martyn:    Correct.

Doug Hoyes:          So, and then there could also be other requirements, there could be a creditor meeting for example, that’s a highly unusual circumstance in a proposal but it could happen, there could be a discharge hearing. So there may be other occasions where you need to return to Canada to deal with those in person meetings.

Rebecca Martyn:    Right. So as long as the person’s prepared to commit to having to come back whenever is needed then it’s not an issue.

Doug Hoyes:          And so is that a common thing, like do you see – I mean obviously this particular person you’re talking about was a very recent case, is it something you would encounter one or two times a year, more than that, less than that?

Rebecca Martyn:    More than that, but it seems – like you said, it seems to come kind of in waves. There was maybe a month where I hadn’t heard from anyone, and then in a week literally I heard from four people.

Doug Hoyes:          Got you.

Rebecca Martyn:    So I’m not sure if things just came back on some creditor’s radar or what the situation was.

Doug Hoyes:          Well I know it’s very common for creditors to sell their old accounts, and I’m not going to mention names on this podcast because I don’t – I don’t need to be sued over all this, but I know that there is a collection agency in particular that has been in effect buying up old accounts.

So the cell phone company, “Here’s all our accounts for the last 10 years that we haven’t been able to collect”, and in some cases they’re actually fairly big numbers, I was looking at one this morning that was $10,000.

So I’m pretty sure the cell phone bill probably only started off as a thousand or two, but you add interest for 10 years it becomes a really big number, so now the collection agency has got a hold of it, they’re now pursuing the person, well they may be pursuing you in the U.S. or wherever you are, that may be the reason why the calls come in waves, it’s like, yeah, all of a sudden they bought all these old accounts and now they’re coming, so that could happen.

Okay, so we’ve talked about the scenario where I have Canadian debts, I’m a Canadian, I’m now living in the U.S., I’d like to deal with my Canadian debts through a bankruptcy or proposal. Now, in the story you just told, this particular person has been in the U.S. for a number of years so there is the possibility that she has also incurred debt in the U.S.

Rebecca Martyn:    Right.

Doug Hoyes:          Is it possible – or how do you handle that, I’ve got debt in both Canada and the U.S., so if I go bankrupt in Canada does it deal with my U.S. debts?

Rebecca Martyn:    Yes and no. If you were in Canada –

Doug Hoyes:          Yes and no?

Rebecca Martyn:    Yeah, that’s a problem.

Doug Hoyes:          Okay, that’s a good answer.

Rebecca Martyn:    So yes, in Canada, if you were living in Canada and had assets in Canada the U.S. creditors cannot pursue you in Canada, but if you have assets and income in the U.S. the U.S. creditors can still pursue you there. So yes, you’d probably have to file bankruptcy both in Canada to deal with your Canadian debts and in the U.S. to deal with your U.S. debts.

Doug Hoyes:          If I have them in both places. So okay, so I’ve got a couple of Visa cards in both places, I can’t pay any of them, I go bankrupt in Canada, would I list both my Canadian and U.S. credit cards on the paperwork?

Rebecca Martyn:    Yes, you would.

Doug Hoyes:          But the U.S. creditors are going to go, “Well we don’t care, it’s Canada, that’s a whole different country”, you know.

Rebecca Martyn:    That’s exactly it, yeah.

Doug Hoyes:          It’s, “We don’t care”, and vice versa it’s the same.

Rebecca Martyn:    Yeah.

Doug Hoyes:          I list my – you know, on my Canadian bankruptcy I list my U.S. debts, on my U.S. debts I list my Canadian debts, the other country doesn’t care, “We don’t care, it’s not our department, all we care about is our stuff”. So even if it’s a Visa in both locations it doesn’t matter, a totally separate thing. So I go bankrupt in Canada, we notify the people I owe people money to in the U.S., but they don’t care –

Rebecca Martyn:    Right –

Doug Hoyes:          So if I’m living in the U.S., they could still do whatever they do in the U.S., phone me, take me to court, sue me, whatever –

Rebecca Martyn:    Correct –

Doug Hoyes:          For the U.S. debts. So that’s why it may be necessary to do a U.S. filing as well.

Rebecca Martyn:    Correct, yes.

Doug Hoyes:          And have you ever seen that happen?

Rebecca Martyn:    A few times I have.

Doug Hoyes:          The U.S. system is completely different than the Canadian system, we’re not going to do a podcast on that, but in general they have to find a lawyer in the U.S. to deal with their bankruptcy?

Rebecca Martyn:    Right.

Doug Hoyes:          Is it as simple as that. Well of course it’s more complicated than that, but in Canada all bankruptcies and consumer proposals are done by licensed insolvency trustees. In fact there’s a rule that says you cannot be a practicing lawyer and a licensed insolvency trustee at the same time, I think that’s a fantastic rule, I think that’s awesome.

In the U.S. there’s no such thing as a licensed insolvency trustee, all bankruptcies are done by lawyers and they don’t have consumer proposals, they have something different, I forget what it is, Chapter 11, Chapter 13, whatever it is. I think it’s called a Chapter 13 wage earner plan. So if you got U.S. debts, find yourself a U.S. attorney I guess is the short answer?

Rebecca Martyn:    That’s right.

Doug Hoyes:          Okay. So it is possible, and would you then do the filing at the same time, like they’d come in and see you on Monday and then go see their U.S. attorney on Tuesday or does it matter?

Rebecca Martyn:    I’m not sure it matters, but I mean there has to be some kind of coordination because when you file for bankruptcy in Canada you have to list all of your debts regardless of where they are and all of your assets regardless of where they are.

If you have no assets you probably can do them simultaneously, if you have assets then you have to do some coordination because then it’s a case of okay, do those assets belong to your Canadian creditors, do they belong to your U.S. creditors, do they belong to both. So you have to work out some logistical issues with the U.S. attorney.

Doug Hoyes:          Well that sounds like it gets pretty complicated.

Rebecca Martyn:    That could get complicated.

Doug Hoyes:          So you’re the trustee of the person in Canada and he says, “Oh yeah, I own a house in Michigan” –

Rebecca Martyn:    Right –

Doug Hoyes:          Well you now own a house in Michigan.

Rebecca Martyn:    Potentially, yes.

Doug Hoyes:          Because assets, it doesn’t matter where they are, you still want to realize on them for the benefit of the creditors. Now of course it’s not a simple matter for you to sell someone’s house in a foreign country, but in theory that’s an asset, but of course the U.S. bankruptcy process will also say, “Hey, wait a minute, we have first dibs on that”. So it sounds to me like that’s a case where if you’ve got debts in both places you’re really going to have to do some coordination, you’re going to have to talk to experts in both countries to sort that out.

Rebecca Martyn:    That’s right.

Doug Hoyes:          That does not sound like a simple matter. The vast majority of people you’re dealing with though do not have millions of dollars in assets, that’s the whole reason that they’ve got some financial difficulties.

Rebecca Martyn:    Exactly.

Doug Hoyes:          Okay, excellent. So any final advice you’d like to give us, any final words, you know, for someone who’s listening to this who has – you know, is living in the U.S. and has Canadian debts, what’s your overall advice?

Rebecca Martyn:    I mean the best-case situation would be that if you’re planning on severing your ties with one country and moving to the other, have – try to leave debt free, or as minimal debt as possible that you can deal with it if something negative happens, and we talk about this, it’s always on your podcast, having a plan to deal with unexpected circumstances.

So should you be moving to a foreign country when you have $50,000, $60,000 in debt, you know, maybe not. So maybe try to take care of that first, get it down to something more manageable or at least deal with it at that time, so start making a plan with your creditors at that point before it gets to the situation where you have to look at bankruptcy or a proposal, dealing with cross-border issues, it’s just going to complicate everything for you.

Doug Hoyes:          Yeah and I think that’s a very good point, I got a bunch of debt, well why not deal with it now before I move because it’s very rare that you move on two days notice.

Rebecca Martyn:    Correct.

Doug Hoyes:          It’s not kind of how it works, I assume there’s paperwork you got to have and –?

Rebecca Martyn:    Yeah, yeah –

Doug Hoyes:          I don’t know how that all works right, there’s paperwork right, there’s always paperwork. So I know I’ve got this job offer, I’m going to be moving to the States in a few months, great, get a proposal up and running now.

Rebecca Martyn:    Right.

Doug Hoyes:          And so if I start my proposal now and I move to the U.S., it just keeps on going, right?

Rebecca Martyn:    That’s exactly it.

Doug Hoyes:          So you get the payments out of their Canadian bank account, we just set it up pre-authorized payment –

Rebecca Martyn:    Yeah –

Doug Hoyes:          So, so long as they’ve got a way to put money in their Canadian bank account –

Rebecca Martyn:    Yeah –

Doug Hoyes:          It’s easy.

Rebecca Martyn:    It’s very easy.

Doug Hoyes:          Very easy. So I think that’s really good advice, get it dealt with before you move and then it’s dead simple. Now, are there any issues with crossing the border when I have debt? So if I’ve got a bunch of debt and I just, you know, move to the States and then I come back to visit my relatives here, are they going to stop me at the border because I’ve got all this debt?

Rebecca Martyn:    You know, you’d be surprised the number of people that actually ask me that question.

Doug Hoyes:          I know, I get asked it all the time.

Rebecca Martyn:    And no, there’s no concern about being stopped at the border because you owe credit card debt or lines of credit.

Doug Hoyes:          And now why is that, because I know with the new cannabis legislation that we’ve got coming in, there was something in the news back in, I don’t know when it was, August or September that said that – you know, some U.S. border guard was interviewed and he said, “Oh yeah, if you’re an investor in cannabis companies we’re not going to let you into the U.S.”, that was the quote. How they would know you’re an investor I don’t know, but that was a thing. So when the border guard is checking, and you cross the border all the time right –

Rebecca Martyn:    Mm-hmm –

Doug Hoyes:          They’re not calling up your credit report?

Rebecca Martyn:    They’re not calling up your credit report, they’re calling up your passport number or your NEXUS number to see what your travel habits are. They’re asking you questions about what you brought back, they’re not asking you about your debt.

Doug Hoyes:          And they can check your criminal record I assume?

Rebecca Martyn:    Yeah.

Doug Hoyes:          So if you’re a murderer then, yeah, maybe there’s an issue, but credit has nothing to do with it.

Rebecca Martyn:    Nothing, nothing to do with it.

Doug Hoyes:          The border doesn’t care if you owe the bank money or not.

Rebecca Martyn:    Right.

Doug Hoyes:          So okay, and I think that’s – you’re right, and I get asked that question all the time and I’m not in a border town, you are, and I think that’s a very important thing for people to realize, that the border is looking for criminal activity, if you owe money to somebody that’s not a criminal thing, that’s a business thing, you just owe money, not a big deal at all.

So that would be an argument in favour of, yeah, move, don’t worry about it, but obviously we talked about all the reasons – other reasons why it is a good thing to deal with. Okay, so deal with it before you go and have a plan, that’s the general advice that you’ve got.

Rebecca Martyn:    Yeah, that’s exactly it.

Doug Hoyes:          Excellent. So if people have questions because they’re either living in the U.S. and they’ve got Canadian debt, or they’re living in Canada and they’ve got U.S. debt, or they’re considering moving or something, what’s the best way to get in touch with you?

Rebecca Martyn:    They can reach us at our website, hoyes.com and then you can find a link there how to contact me.

Doug Hoyes:          And it’s Rebecca Martyn, M-A-R-T-Y-N.

Rebecca Martyn:    That’s right, with a Y, Martyn with a Y.

Doug Hoyes:          Don’t spell it with an I, that’s not good. So excellent, I think that’s a great way to end it. Rebecca, thanks for being here.

Rebecca Martyn:    Thanks for having me.

Doug Hoyes:          That’s our show for today. As always, the show notes with links to everything we discussed today and a full transcript can be found at hoyes.com, that’s h-o-y-e-s.com and as Rebecca just said, if you got questions about American and Canadian debts, you can contact Rebecca to ask her questions through the links at hoyes.com, and I’ll even put links in the show notes to Rebecca’s Twitter feed if you want to follow her there.

I’ve got lots more great guests coming up so don’t miss an episode, subscribe to the audio version of Debt Free in 30 on iTunes or wherever you get your podcasts, and the video version can be found on our Debt Free in 30 YouTube channel. So until next week, thanks for listening. I’m Doug Hoyes, that was Debt Free in 30.

The post Should You File Bankruptcy in Canada if Living Abroad? appeared first on Hoyes, Michalos & Associates Inc..

Can you switch from a consumer proposal to bankruptcy?

The short answer is yes but it’s important to explore why, and whether this is the right solution. Cancelling a consumer proposal is as important a decision as filing was the first time. Presumably you originally chose to file a consumer proposal because it was the right answer at the time.

If you can’t keep up with your proposal payments due to a change in circumstances, you have three options:

1. You can reschedule, postpone or defer up to two payments. If your cash flow problem during the proposal is temporary, this might be enough. However, if you fall three months behind on your payments, your proposal is automatically annulled. This means that your proposal is cancelled and your creditors can pursue you for the full amount plus interest.
2. You can amend the terms of your original proposal. It is not uncommon for life to change while in a proposal. You may have switched to a lower paying job or become divorced for example, putting a permanent strain on your finances. It is possible in this case to submit a new amended proposal to your creditors to lower your monthly payment for the remaining term of the proposal.  However, this is a risky strategy, because if the creditors reject your proposed amendment the proposal is automatically annulled.
3. You can switch and file bankruptcy. If you are no longer able to make your proposal payments, switching to bankruptcy may be your best option. It is possible to include in your bankruptcy new debt incurred since the start of your proposal, and your trustee can explain this option in more detail.

Can you switch from a bankruptcy to a consumer proposal?

Conversely it is also possible to file a consumer proposal when currently bankrupt. Again the reasons for doing so are often a change in circumstances. You may have received an unexpected promotion with a pay increase that will generate additional surplus income payments in your bankruptcy. Or you may expect to come into a windfall because of an inheritance.  No matter the reason, any additional income or monies you come into while bankrupt become a potential asset of the estate while bankrupt.

As before, you have several options when your circumstances change while bankrupt:

1. You can continue with your bankruptcy and make any required new surplus income payments.
2. You can file a consumer proposal while bankrupt. If you decide to file a consumer proposal you will need to meet with your trustee to determine what terms to offer your creditors.  When filing a consumer proposal, you must disclose your current situation, so if your income has increased, or you are expecting to receive a lump sum of money, you must disclose that to the creditors, which will impact what they will want to receive in a proposal. They will still expect to receive their share of what they would be getting if you were to complete your bankruptcy. However, with a proposal you can keep whatever assets you may inherit or can extend the payment terms of surplus income is the issue.

Can I switch Licensed Insolvency Trustees?

If you are in the middle of a bankruptcy or a consumer proposal, no, you cannot switch trustees during either procedure.

If you filed a bankruptcy or proposal with another Licensed Insolvency Trustee, it is very common to switch to a different trustee for your second filing.

The post Can You Switch Between Bankruptcy and Consumer Proposal? appeared first on Hoyes, Michalos & Associates Inc..

The only reason why you would have to appear in bankruptcy court is if your bankruptcy could not be automatically discharged, which happen if you did not pay surplus income, did not provide tax information from your Trustee, or did not complete your required counselling sessions. On today’s show, we outline exactly what you can expect from bankruptcy court should you ever have to appear. And remember, if you file with a Trustee from Hoyes Michalos, you will never have to go to court alone.

To tell us more about the bankruptcy court process, I am joined once again by Richard Howell, a bankruptcy lawyer with Clark Farb Fiksel in Toronto and Scott Schaefer, our Trustee at the Hoyes Michalos Kitchener office.

Do I need a lawyer to appear in bankruptcy court?

First let me explain that Licensed Insolvency Trustees (previously called bankruptcy trustees) are not bankruptcy lawyers.  An LIT is an officer of the court who administers bankruptcies and proposals under the Bankruptcy and Insolvency Act. You do not need a bankruptcy lawyer to file a bankruptcy, but you may need a lawyer if you attend bankruptcy court.

According to Richard, you typically do not need a bankruptcy lawyer if your bankruptcy was not discharged because of missed surplus income payments, or not completing your credit counselling sessions. These matters you can deal with beforehand with your Trustee. However, there are specific situations in which you may benefit from legal counsel:

Well, the classic one is transferring an asset at a time when you were insolvent. If you’re a second or third time bankrupt, or if you’re a tax-driven bankrupt under the bankruptcy act, then you better have a lawyer because a lot of things can happen.

In the Bankruptcy and Insolvency Act, sub-section 172.1 sub (1), if you owe more than $200,000 in personal income tax debt and that personal income tax debt represents 75% or more of your total unsecured debt, your bankruptcy will not be eligible for automatic discharge. What’s more, you will likely face Canada Revenue Agency’s lawyers in court, in which case, having your own protection to share your side of the story is a good idea.

How do I prepare for bankruptcy court?

First and foremost: be who you are. When it comes to your dress, you don’t need to deviate from what you would normally wear:

If you’re a labourer and don’t have a suit, just be who you are. The court doesn’t take a lot of note of how you’re dressed, but it’s always a good idea to put your best foot forward.

In bankruptcy court, the judge is called a registrar in bankruptcy and you don’t have to overthink how to address them either, as a simple “ma’am” or “sir” will do. Another important point to note is to arrive well in advance, at least an hour:

You never know what the traffic is going to be like. Most courts are in a downtown community so there’s going to be a parking issue. You’ve got to go through security, because all the courthouses now have ample security so you’re going to have to go through the security system.

Scott Schaefer details how Hoyes Michalos Trustees handle the entire process:

1. You will know at least 3 or more months in advance of your court hearing.
   

   We’re going to meet when we know we have to go to court to get their discharge, and we’ll have talked about it before if that ever gets to that point, we we’ll know well in advance as we move through the process on that.

2. We prepare in advance so that the actual hearing is simple and straightforward. For example, if you’re in a situation where you still owe $1000 but are unable to pay it before your automatic discharge period, our Trustees will help you prepare terms for conditional discharge to present at your hearing:
   

   We’re using the court hearing at that point as a tool, a tool to help that individual get their discharge. They couldn’t afford to pay it in full so the tool now is the court is going to allow us and agree to a term to get their discharge conditionally upon that condition being met, which is the payments, so it allows us to spread out those payments a bit longer than we would otherwise have been able to.

3. As mentioned earlier, Hoyes Michalos Trustees always appear in court for a discharge hearing.
   

   One of the biggest things is that they can locate us, because at Hoyes Michalos we attend all court hearings, so they can find us beforehand, we’ll set them at ease again where we’re going, what’s going to happen, at what point they’ll be called up… we’ll go through it one more time of what’s going to happen so that’s definitely reducing the stress for the person.

Bankruptcy is about giving the honest, but unfortunate debtor a fresh financial start, helping them through the process and a fair and equal treatment of all the creditors:

At the end of the day the courts want to grant discharges, that is what the process is about. Sometimes there’s terms and conditions they have to meet in order to facilitate those three principles, but at the end of the day this is about getting their discharge, so we’ve got to make sure we agree on getting the duties completed and moving forward to getting that discharge.

To learn more details from Richard and Scott about what you can expect at a bankruptcy hearing, tune in to today’s podcast or read the complete transcription below.

Resources Mentioned in the Show

Creditor Opposition to Bankruptcy Discharge

FULL TRANSCRIPT – Show 202 What Happens in Bankruptcy Court?

Doug Hoyes:              Today we are going to talk about bankruptcy court. Why? Two reasons: First, we’ve never talked about bankruptcy court here on Debt Free in 30, and second, a lot of people who are considering filing bankruptcy are worried that they will have to go to bankruptcy court, and that makes them nervous about seeking relief from their debts. So, let me alleviate those fears by starting with this fact.

In the vast majority of cases you don’t need to go to bankruptcy court. If you go bankrupt and you complete all of your duties, and if no one objects, you are automatically discharged after the required period of time has elapsed. I’ll over-simplify this a bit: But if this is your first bankruptcy and you complete all of your duties and no one objects, and if you have no surplus income, you are eligible to be automatically discharged in nine months.

If you are a first-time bankrupt with surplus income you are eligible to be automatically discharged in 21 months, again assuming you complete all of your duties and no one objects. In a second bankruptcy you can be automatically discharged in 24 months if you have no surplus income, or 36 months if you have surplus income, which is why many people choose to avoid a second bankruptcy by filing a consumer proposal, but you get the point. In most cases you are automatically discharged so no court appearances required.

It’s only if you don’t get an automatic discharge that you are required to appear in bankruptcy court to get your discharge [from] bankruptcy. So why would you not get an automatic discharge, and do you need a lawyer if you’re going to bankruptcy court to get your discharge? Those are two questions I asked Richard Howell, an insolvency lawyer with Clark Farb Fiksel in Toronto. I started by asking him to give me some common reasons why your discharge would be opposed. Here’s his answer:

Richard Howell:         Well, first of all, if you’re going to court it’s because you didn’t do something you were supposed to, or you did do something you’re not supposed to. Typically, you may not have paid surplus income; you may not have done your counselling; you may not have provided tax information to the trustee. Those are the basics. There are more exotic ones, for want of a better word. You may have transferred the house to your spouse six months before bankruptcy; that will be attacked. You may have had any number- you may have objections from creditors for any number of reasons; a lot of them aren’t valid. So unless it’s a fairly simple matter you better at least talk to a lawyer, and if it’s one of the more serious matters, you better hire one.

Doug Hoyes:              So let’s talk about that then. When do I need a lawyer going to bankruptcy court? So you’ve given some examples, and I guess there’s really two reasons why you’re in bankruptcy court. One is, like you said, you didn’t do something you were supposed to do. You also alluded to the fact that, well, it’s possible that one of your creditors is objecting, and it may not even be something valid, they just might be, you know, having a bad day and mad at you. So even though you’ve done everything you’re supposed to, you still find yourself in court. Under what circumstances is a lawyer not really that necessary, and under what circumstances, as you say, should you at the very least have a phone conversation with one before appearing in court?

Richard Howell:         Well, typically, on the surplus income issues and on the lack of counselling you can fix that beforehand with a trustee that will get the opposition withdrawn, although you’ll still have to go to court if you didn’t get your auto discharge.

Doug Hoyes:              Right, and so a typical example, I mean credit counselling being the obvious one, there are certain time periods that it has to be done in; if you haven’t done it in the time frame – and certainly if you haven’t done it by the time your automatic discharge period comes up – you’re not eligible for an automatic discharge; the trustee has to make an application to court for your discharge. If you can get it fixed, in other words do your counselling before court, then it’s a relatively simple matter. We go to court, you say to the judge, “Yeah, I’m sorry I was late but it’s done now”, and the trustee says, “Yep, we’re cool” and they sign off and we’re done, so no need for a lawyer there. Surplus income being the other one where, okay, I was supposed to pay a certain amount of money, I wasn’t able to get it paid within the time frame, but now it is paid, so again, you go to court and get it done.

Those are examples where a lawyer is not really necessary. What would be some examples, though, where, yeah you know what, you might want to get some help?

Richard Howell:         Well, the classic one is transferring an asset at a time when you were insolvent. If you’re a second or third time bankrupt, or if you’re a tax-driven bankrupt under the bankruptcy act, then you better have a lawyer because a lot of things can happen. Another example that happens fairly often is you may have a creditor that alleges you’ve committed fraud. That’s not something the bankruptcy court will try on a discharge, so that’s not going to be decided at the discharge hearing, but you better have somebody around to protect you.

Doug Hoyes:              So something outside the box, perhaps, is a good idea, and, you know, a tax-driven bankruptcy – and we won’t go into the specifics; I’ll put some links in the show notes – but if your total debt is- your total tax debt is over a certain amount and it represents a significant portion of your total debt, then that’s a tax-driven bankruptcy, you’re not eligible for an automatic discharge, the court has to sign off on it.

And in that case, as the trustee, if I’m in court, I’m going to say to the judge, “Well, here’s the facts, this is what the numbers are, that’s why we’re here”. It’s not really my position to tell the court, “Well, here’s what I think you should do” because in a lot of those cases Revenue Canada is going to be there as well. Is that accurate?

Richard Howell:         Yeah, if you’re tax-driven and they’ve opposed, they will be sending the Department of Justice lawyers to argue what you should have to pay to get out of bankruptcy.

Doug Hoyes:              And it will be a high number, probably, if they’re going to be showing up.

Richard Howell:         Yeah, there’s a tendency … The low number tends to be 10% of the debt. The high number: Well, I’ve had bankrupts started to pay half a million dollars as a condition to getting out of bankruptcy.

Doug Hoyes:              That’s Richard Howell, an insolvency lawyer, talking about tax-driven bankruptcies. As I said, I’ll put links in the show notes at Hoyes dot com, but the section we are referring to is sub-section 172.1 sub (1) of the Bankruptcy and Insolvency Act, and that section says that a bankrupt is not eligible for an automatic discharge and must have a discharge hearing in bankruptcy court if, at the time they filed for bankruptcy, they owed $200,000 or more in personal income tax debt, and that personal income tax debt represents 75% or more of their total unsecured debt.

Again, we’re talking about special circumstances here. If you owe less than $200,000 to CRA, you do not automatically have to go to court. And, as Richard Howell says, CRA’s lawyers from the Department of Justice will likely also be in court if they are opposing your discharge because it’s a tax-driven bankruptcy, and they will likely request that the court order you to make additional payments to get your discharge, which is why having your own lawyer to give your side of the story to the court may be a good idea.

So, to summarize, in the vast majority of cases if you go bankrupt you are not required to go to bankruptcy court; you get an automatic discharge and you’re done. However, if you don’t complete your duties, or if you are a tax-driven bankruptcy, or if a creditor objects, you are required to go to court. So, let’s say that for whatever reason you are required to attend a discharge hearing in bankruptcy court, what should you expect? How do you prepare? I asked Richard Howell a basic question: What should you wear? Here’s his answer:

Richard Howell:         Be who you are. You know, if you are used to wearing a suit to church or something, wear it. If you’re a labourer and don’t have a suit, just be who you are. The court doesn’t take a lot of note of how you’re dressed, but it’s always a good idea to put your best foot forward.

Doug Hoyes:              Okay, wear a clean shirt kind of a thing, but don’t try to be someone who you’re not.

Richard Howell:         Well, as Johnny Cash says, “At least get out your cleanest dirty shirt”.

Doug Hoyes:              There you go, hey. Well, it kind of makes sense. If I’m a labourer, why am I showing up in a fancy suit, that seems kind of out of character. If I’m an accountant or a lawyer, well okay, it’s not so unusual I guess, so —

Richard Howell:         Yeah, the gold chains are not a good thing to wear.

Doug Hoyes:              Yeah, a lot of jewellery probably doesn’t go over well. And other than that, you know, show up on time I guess. Is that really what it comes down to?

Richard Howell:         Yeah, you show up on time you won’t get reached on time because there’s going to be 20 or 25 other bankrupts on the docket, and it depends, the court can go through them awfully quickly if they’re consent matters. If you get one that takes 15 or 20 minutes it sort of stalls the proceedings.

Doug Hoyes:              And in Toronto the morning session typically starts- is it 10 o’clock in the morning?

Richard Howell:         10 o’clock, yeah.

Doug Hoyes:              And is there an afternoon session, typically, as well?

Richard Howell:         No, they go through- they haven’t split them. There was a consideration of doing that, but no, generally speaking, the court will finish by 12:30 or 1:00, 98% of the time.

Doug Hoyes:              So if you have a court time of 10 o’clock everyone has a court time of 10 o’clock, and, as you say, if there’s 20 or 30 people on the docket, well your time might come up at 10 o’clock, it might be 11, it might be 12, it could even be one o’clock I guess, so be there early and wait your turn is how it works.

Richard Howell:         Yeah, quite so.

Doug Hoyes:              Okay. And is there anything you should do or shouldn’t do in court, so for example – and I’m speaking specifically about Toronto Court here, but I think this would apply to bankruptcy courts across the country – how am I supposed to address the judge? What am I supposed to say?

Richard Howell:         Well, I’ve heard- first of all the judge isn’t a judge, the judge is technically a registrar in bankruptcy that is kind of like a judge but has restricted powers as to what they can do, but the registrars in Toronto are masters of the Superior Court as well, and they like to be referred to as ‘Master’. Now, over my many years I’ve heard judicial officials referred to as ‘Your Highness’, ‘Your Lordship’, ‘Your Worship’, right down the scale.

Doug Hoyes:              You don’t recommend that, though.

Richard Howell:         No. It used to be fun calling them ‘Your Lordship’ for the judges, but that doesn’t happen anymore. And if you forget, ‘Sir’ or ‘Ma’am’.

Doug Hoyes:              Pretty simple, and we’re recording this in the spring of 2018, and obviously it’s a podcast so people may be listening to this at some point in the future. At the moment the two registrars in the Toronto Court are both female, so obviously you’d be referring to them as either Master or Ma’am, I guess. I guess the simplest advice would be, if you are there with a lawyer, or if your trustee is there, ask them, you know, “What am I supposed to do, what’s the plan here?”

Richard Howell:         Well exactly, and you’re going to get to see a few of these before your case as a general rule, so you can probably get a little more comfortable realizing that the court’s understanding and they’re not going to give you a rough time if you don’t deserve a rough time.

Doug Hoyes:              Yeah. And is it typical that they go through the docket in chronological order, or is that not typical?

Richard Howell:         Well, first of all, they take the adjournments, then typically they’ll take- the first trustee on the list may have about ten matters scattered, so they’ll take the first trustee on the list and do their ten matters, unless they’re going to be a long time, in which case they take other matters in front. So she has, or they have, a certain discretion as to how they do things. Consent matters tend to get heard earlier as well.

Doug Hoyes:              Got you. And the times I’ve been in court, if there are going to be five or six different trustees there and we’ve each got a few matters, it’s not unusual for us to sort of chat beforehand and say, well, what do you have, what do you have? And if I say, well, I’ve got three people and they’re all creditor oppositions, I guess I’ll go at the end, let’s get the court room cleared out as much as possible because some things- most matters are pretty quick, but some can take a lot longer. So like you say, if we’re just adjourning it or we’ve both agreed on what it is, it’s just having the judge sign off, then it will go.

So you want to be there on time and you want to just keep your eyes open and your ears open for when your name gets called and be ready to go.

Richard Howell:         Yeah, and speak to your trustee beforehand, whoever the rep from your trustee is make contact, let him know you’re there.

Doug Hoyes:              That’s good advice. Speak to your trustee beforehand. How does that work? To find out, I’ve asked Scott Schaefer to join me back here in Kitchener in the Debt Free in 30 studio.

Scott is a Licensed Insolvency Trustee and over the last decade and a half or so Scott has appeared in bankruptcy court as the trustee on hundreds of files. So, Scott, how does it work? What’s the process? Rick Howell says to talk to your trustee before court starts. How do you do it here at Hoyes Michalos?

Scott Schaefer:           Well, we talk to people. The bankruptcy is a process, and if we’re going to court we’re going for a discharge hearing, so we’re going to get their discharge is what the ultimate goal is. So with that in mind, as we work through the process, if we are ending up having to go to court, we want to meet with the person, we want to work with the person, we want to be prepared for the court hearing, because it doesn’t happen in all the cases, it happens rarely.

Doug Hoyes:              So how far in advance do we know when a court hearing is going to happen?

Scott Schaefer:           Several months.

Doug Hoyes:              Several months, okay.

Scott Schaefer:           At least three, if not more months.

Doug Hoyes:              Okay. So I know that three months from now, four months from now, there’s going to be a court discharge hearing; when are you going to meet with the person involved?

Scott Schaefer:           We would have probably met with the person several times. We’re definitely going to meet right before the court hearing just to double-check things. We’re going to meet when we know we have to go to court to get their discharge, and we’ll have talked about it before if that ever gets to that point, we we’ll know well in advance as we move through the process on that.

Doug Hoyes:              And obviously the goal is to get everything done so that by the time we get to court there’s really nothing to do. So if the issue was I owed a bunch of money, you know I had surplus income and I haven’t paid it, or whatever … And I’m not going to over-complicate this by talking about mediation and all the other ways that we deal with that, but let’s just say that we’ve got a situation where the person owes $1,000 and hasn’t been able to pay it before the end of their automatic discharge period, it’s five months before court is going to happen, you meet with the guy and he says, hey look, I can give you a couple of hundred bucks a month.

Scott Schaefer:           Correct. We’re using the court hearing at that point as a tool, a tool to help that individual get their discharge. They couldn’t afford to pay it in full so the tool now is the court is going to allow us and agree to a term to get their discharge conditionally upon that condition being met, which is the payments, so it allows us to spread out those payments a bit longer than we would otherwise have been able to.

Doug Hoyes:              So if everything gets done before court happens, then it’s pretty easy: You go to court and say to the judge, everything is done.

Scott Schaefer:           Correct, we go and we ask for an absolute order of discharge, so we can —

Doug Hoyes:              Absolute order, okay, which means everything done. Now, you had mentioned a conditional order, so that would be a case where everything isn’t done, but we’re getting close, so maybe we go to court and there’s still, you know, a couple of thousand dollars still to pay and the guy can afford to pay a couple of hundred bucks a month, so you would say to the court: Can you give him a discharge conditional on him paying $200.00 a month for ten months?

Scott Schaefer:           Correct. I would have already met with the individual. We probably would have worked out payment terms to say, you know what, let’s pay $200.00 a month for the next five months, we’ll sign a consent to condition, meaning we’re both agreeing to those terms. I will present those to the courts to say we’ve already come to terms with the payment plan, we would like a condition order be granted upon those terms.

Doug Hoyes:              So you agree with the bankrupt on whatever the terms are: $200.00 for five months, $200.00 for ten months, whatever he can do. He agrees, and so then when you’re going to court, really you’re getting the court to already rubber stamp what we’ve all agreed to; it’s pretty simple at that point.

Scott Schaefer:           They’ve just given us more time to make those payments, so it’s a helpful tool.

Doug Hoyes:              A helpful tool again. Okay, so that’s what happens before court. Let’s assume now today is court day.

Scott Schaefer:           Okay.

Doug Hoyes:              So, you do most of your work in the Kitchener court. I know you’ve been in both London and Toronto before. In Toronto court discharge hearings are typically at 10 o’clock in the morning – how does it work in Kitchener?

Scott Schaefer:           Yeah, so if it’s a trustee’s request for the court hearing, because we needed more time or there was outstanding duties it’s at 1 o’clock. If it’s a creditor opposition, meaning the creditors would like a review of it, then it’s at ten in the morning.

Doug Hoyes:              So it will either be at 10 o’clock or 1 o’clock, and so let’s say it’s 1 o’clock, which is when the typical ones would be, when should someone arrive at court?

Scott Schaefer:           I always like to tell people to be an hour beforehand; you never know what the traffic is going to be like. Most courts are in a downtown community so there’s going to be a parking issue. You’ve got to go through security, because all the courthouses now have ample security so you’re going to have to go through the security system. You’re going to have to find the courthouse so you’re going to have to ask the front desk what court you’re in, so you just want to have some time so you don’t feel rushed, you don’t want to feel pressure going into it.

Doug Hoyes:              And we don’t know in advance what room you’re going to be in in the courthouse. We know where the courthouse is, it doesn’t move around, but because the registrar, or deputy registrar, is only there once every couple of months – in Kitchener at least – they could be in a different courtroom each time.

Scott Schaefer:           Yeah, they schedule a [base from] what else is going on in the court, so it does float around in different rooms.

Doug Hoyes:              And what’s security like at the court?

Scott Schaefer:           It’s like going through airport security. You go through, you’ve got to empty out your pockets, you’ve got to go through an x-ray or the scanning machines, and just like going through at the airport.

Doug Hoyes:              And it has nothing to do with bankruptcy court, this is a court that also has, you know, murder trials and everything else, so as a result there’s heightened security, so even though your matter isn’t particularly contentious, you’re in a court building so get there early, it gets you time to find a place to park, get through —

Scott Schaefer:           And one of the biggest things is then they can locate us, because at Hoyes Michalos we attend all court hearings, so they can find us beforehand, we’ll set them at ease again where we’re going, what’s going to happen, at what point they’ll be called up, and just give them a little bit … we’ll go through it one more time of what’s going to happen so that that’s definitely reducing the stress for the person.

Doug Hoyes:              So I find the court, I get there, I go through security, I find out what room it’s in, I look at the board, or I ask someone. I go up to room whatever and there’s going to be a whole bunch of people milling around because at the 1 o’clock session there could be how many people on the docket?

Scott Schaefer:           Oh, could be 50 or 60 people.

Doug Hoyes:              So there’s a lot of different people who are getting their discharge that day, so a lot of people milling around, so they know that Scott Schaefer is my trustee, I go I find him, and you say no problem, I’ll tick my book here to make sure I know you’re here.

Scott Schaefer:           Yeah.

Doug Hoyes:              And then when court starts, what happens?

Scott Schaefer:           We all go into the courthouse. At that point you want to make sure you’re not wearing a hat and your cellphone is off as the courts frown upon that, but at that point you have a seat and you wait for your name to be called. The trustee will have already checked in to say we’re present, and then the trustees will be called up in different orders to deal with their matters in blocks, kind of chunks.

Doug Hoyes:              Yeah, and so typically, as Rick Howell said, there may be some consent matters that can be dealt with really quickly, otherwise I guess if, you know, Hoyes Michalos has 20 different people on the docket that would be unusual, but if we had a lot of people then it may be, well, we’re going first or second, and we’d go through all of our people at once.

Scott Schaefer:           Correct.

Doug Hoyes:              And so you’d just be up there saying, okay, Your Honour, we’d like to do the next person next, you’d wave to them and they’d come up, say their piece, and go on to the next one.

Scott Schaefer:           Yeah, and if we’re on consent the judge will just ask at that point, or the registrar or master will ask, you know, do we agree with that? In general there’s not a lot of questions asked. If it’s multiple time bankruptcy there will be some questions asked, but generally it’s a very straightforward process.

Doug Hoyes:              And you said that the Hoyes Michalos process is to always appear in court for a discharge hearing.

Scott Schaefer:           Correct.

Doug Hoyes:              Have you ever been to court where other trustees aren’t there?

Scott Schaefer:           Multiple times. There are several different trustee firms that do not attend these court hearings to facilitate it.

Doug Hoyes:              And so that’s got to be pretty confusing for the bankrupt then.

Scott Schaefer:           Confusing, stressful, anxious, you name it, I’m sure it’s all there.

Doug Hoyes:              Because they’ve never been to court before, and okay, where am I supposed to stand and what am I supposed to do, and when does my turn come up?

Scott Schaefer:           And we are in a court, and I [say] to people, remember that this is about a discharge hearing so it’s a hearing to get somebody’s discharge. The discharge will happen at some point, it’s just a matter of having to use a court to do that. So yes, we use the [word court] and we’ve seen lots of TV shows where courts are involved, and it could be scary, but at the end of the day this is about getting somebody’s discharge.

Doug Hoyes:              And that’s what it’s all about. So what advice do you have then for people who have a court discharge hearing scheduled, you know, what do you tell them? Is it as simple as that, that this is about resolving your duties and getting on with it?

Scott Schaefer:           Bankruptcy is about giving the [unintelligible 00:22:16] a fresh start, helping them through the process, and a fair and equal treatment of all the creditors. So at the end of the day the courts want to grant discharges, that is what the process is about. Sometimes there’s terms and conditions they have to meet in order to facilitate those three principles, but at the end of the day this is about getting their discharge, so we’ve got to make sure we agree on getting the duties completed and moving forward to getting that discharge, which is where it’s all about that fresh start.

Doug Hoyes:              Excellent. Well I think that’s great advice. The court wants to give you your discharge; they’re not trying to trip you up or anything, they would like this to be done just as much as you do.

Scott Schaefer:           Yeah, the court has four options. They can absolutely discharge you. They can give you a conditional order or discharge, which means there’s a condition that has to be met. They can suspend your discharge, which is where somebody has been a multiple time bankruptcy. Sometimes they add a period of time before they’re able to get their discharge, so there’s a time penalty. And there is also the option to refuse the discharge, which in my lifetime I’ve never seen a refusal, and that would be for maybe a fifth time bankruptcy, or something very unusual where there would have been criminal activities involved or otherwise.

Doug Hoyes:              But otherwise it should go according to plan. Excellent, Scott thanks very much for being here.

Scott Schaefer:           Thanks for having me.

Doug Hoyes:              That’s some great advice. So here’s the quick summary. In most bankruptcy cases an appearance in court is not required. If you complete your duties on time you are automatically discharged, but if you don’t complete your duties on time, or if someone objects, a discharge hearing in bankruptcy court is required, and my number one piece of advice – and I think Scott would agree – is to meet with your trustee before you go to court. That’s standard practise here at Hoyes Michalos. You should know what to expect before getting to court, and, ideally, you and your trustee will have worked out a game plan to deal with any issues that may arise.

That’s our show for today. A full transcript of today’s show and links to Section 172 of the Bankruptcy and Insolvency Act – which talks about tax-driven bankruptcy – and a link to an article on creditor oppositions, can be found at Hoyes dot com, that’s h-o-y-e-s dot-com. Thanks for listening. Until next week, I’m Doug Hoyes and that was Debt Free in 30.

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