How much can you afford?

Never make a debt settlement offer for more than you can afford to pay. Any debt settlement arrangement is a legal agreement. If you fail to meet the terms of this agreement, any deal can become null and void. The starting point in determining a settlement percentage or offer is to review your budget and determine a monthly amount you can afford to pay.

If you are working with a Licensed Insolvency Trustee to settle debts through a consumer proposal, part of the process is to review your financial situation, including your income and expenses, to ensure you can afford your proposal payments.

Lump-sum vs payment plan

You can offer to make a lump sum settlement or suggest a payment plan. Creditors will generally accept a lower payout percentage with a lump sum arrangement than if you are making payments over several months or years.

If you are settling directly with a debt collector, plan to have the debt paid off in about two to three years.

Most proposals are for larger dollar amounts, generally above $10,000, which means payment plans are for longer periods – usually three to five years, with five years being the maximum.

Debt collection settlement percentage

When you are in arrears on debt payments, your account can be sent to collections. Initially, this may be your creditor’s internal collections department, but as the debt ages, it can be referred to a collection agency. Once your debt has been transferred to a third-party collection agency, you must deal with the debt collector and not your original creditor.

If you only have one or two accounts in arrears, you can try to negotiate a debt settlement on your own.

Negotiating with original creditors

If the account is still with your original creditor, they may not want to negotiate with you for less than what is owed. Original creditors generally won’t accept an offer of less than 70% to 90% of the balance owing unless the offer is made through a formal debt settlement program.

For example, if you have a large credit card debt and are struggling with payments, your credit card provider is unlikely to agree to write off some of the debt voluntarily.

You may be able to work with your creditor to freeze interest or lower the interest rate, but generally, original creditors will not negotiate a reduction of the principal owing unless you are several months behind on payments. And by that point, your account is likely with a debt collector.

Dealing with a collection agency

A collection agency, acting on behalf of a creditor, may be willing to accept up to 50% of the debt as a settlement offer.

Collection agencies earn a commission on the amount offered but also keep their business with their different creditor clients by achieving higher repayment settlements. Some creditors set limits on the reduction percentage a collection agency is authorized to approve.

What percentage a debt collector will accept depends on how much financial hardship you are experiencing, how much debt you owe and how old the debt is.

Here are some factors a debt collector will consider before they accept or decline your offer.

• How much is your income? If you are not working or have a limited income, a debt collector may be willing to settle for less. If, however, you have an income that can be garnisheed, there is less incentive for the collector to take a lower deal. Certain income cannot be garnished, including pension and ODSP income, so use this knowledge if appropriate when negotiating.
• How much debt do you owe? If you owe a small amount, a creditor will likely be more willing to negotiate as it would be too costly for them to take you to court. The more you owe, the more willing a creditor or debt collector will be to go to court to get a judgment and a garnishment order, so negotiating a settlement will become harder.
• How old is your debt? If the debt is about a year old, creditors are more likely to want 70%-80% of the debt repaid. However, a collection agent is usually willing to accept less for older debt. If the debt is beyond the statute of limitation period a debt collector may be willing to discount the debt owing by 50% or more.
• What type of debt do you owe? Certain debts can only be compromised in a consumer proposal, including monies owing to the Canada Revenue Agency for tax debts and Canada student loans. The CRA will not settle with you directly for any tax owing. They may agree to a one- or two-year payment plan and may forgive some penalties and interest, but you cannot settle tax debt except through a Licensed Insolvency Trustee.
• Assets you own. If you own property or other assets the creditor is aware of, they will be less likely to negotiate a settlement as they will want you to use your assets to repay your debts. If you have secured debts, like a car loan, your lender has the right to seize these assets to recover any amount owing.
• Active garnishment. If a creditor has already garnished your wages, they won’t want to negotiate a settlement for less. At that point, you will need to file a consumer proposal or bankruptcy to stop the garnishment if you can’t repay the full debt.

When your debt is sold

A debt buyer is a company that purchases debt, usually old, from a creditor for pennies on the dollar. A debt buyer may be willing to accept a significant reduction in the amount owing, often less than 50%.

How to make an offer

If your debt is old, small, and you have a good explanation about why you can’t pay, begin with an offer of between 20% and 30% of the outstanding balance and see what they say. Be prepared for a counter-offer. Understand your position, including how much you can afford to repay and know your rights when dealing with collection calls. 

Keep track of what is offered and get any agreement in writing before making any payments.

Is it better to pay in full or offer a settlement?

Missed payments remain on your credit report for six years from the date of your last payment or acknowledgement of the debt. A settlement offer can improve your score because you are now making payments on settled debts again. However, if you have not been making payments for 4 or 5 years, consider that the debt will fall off your report shortly if you do nothing. It may be better to ignore the calls and never pay a collection agency.

Clearing up that debt through a consumer proposal can also improve your credit rating if you have significant debt. While a note that you filed a proposal will appear on your credit report for up to six years, reducing your debt will help you rebuild your score since continued high debt utilization can harm your credit score long term.

How can you reduce debt by 70% to 80%?

If you have one or two small debts and room in your budget, you may be able to work directly with your creditors to arrange a settlement plan. However, if you have multiple creditors or your budget isn’t big enough to pay off your debts, you need additional debt relief.

One option is to negotiate a settlement through a consumer proposal arrangement.

A consumer proposal is a legislated debt settlement. It is an offer that is fair and reasonable to your creditors and affordable to you. Depending on your circumstances, a consumer proposal can offer up to an 80% reduction in your debt.

Your settlement offer in a consumer proposal will depend on your income and the value of any assets you owe. When negotiating a consumer proposal, your trustee will calculate what your creditors might receive if you were to file bankruptcy. Because a consumer proposal is paid out over time, creditors will expect to receive slightly more than they would get in a bankruptcy. Generally, consumer proposal offers of between 20% and 50% of your outstanding debt balances are the norm.

A consumer proposal differs from a debt management plan through a credit counsellor in that you can settle debts for less than you owe. Credit counselling requires that you repay your debts in full. A consumer proposal allows you to avoid bankruptcy yet repay less than you owe. In a consumer proposal, you keep your assets. After your proposal payments are completed, the remaining debt is forgiven, and you are debt-free.

There is also an immediate stay of proceedings when you file a consumer proposal, so your creditors cannot contact you or sue you without leave of the court.

A consumer proposal deals with all your unsecured creditors, including government debt and student loans and binds all creditors to the same settlement offer. Once the majority of your creditors accept your proposal, all unsecured creditors are bound by the same terms.

If you have a lot of debt, a consumer proposal is a great option to help you get out of debt sooner. You get a fresh start and rebuild your finances by dealing with your total debt load.

Debt settlement companies

What about a debt settlement company or debt consultant? A for-profit debt settlement company offers two types of settlement services; however, each can lead to unnecessary costs.

Debt settlement companies may offer to negotiate with creditors on your behalf, but most charge significant fees regardless of your ability to pay.

Informal debt settlement companies can only ask creditors to participate voluntarily. You will still receive collection calls during this process as the creditors won’t wait, and creditors can still take you to court and have your wages garnished. Creditors are not required to deal with the debt settlement company, and they often won’t.

We also caution against working with debt consultants who offer to help you file a consumer proposal. Again, they charge you high extra fees and cannot, despite what they claim, get a better deal than you can when working directly with a trustee.

When contacting a professional for help, check out their accreditation. Ask what formal credentials the individual providing any financial counselling or debt management services has, and only work with a Licensed Insolvency Trustee when discussing a consumer proposal.

Get professional debt advice

If you are struggling with debt, the best place to start is with a reputable Licensed Insolvency Trustee. We are licensed by the government and are the only people who can help you file a consumer proposal or a bankruptcy. When you call, we review all your options and help you find the right debt solution to deal with your debt. Contact us today for a free consultation.

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What debts does someone in their 30s filing insolvency eliminate?

So, who does file bankruptcy in their 30s? Based on our data, the average 30-something filing insolvency owes more than $55,000 in non-mortgage debt.

• 88% are in trouble with credit cards
• 41% turn to high-cost payday loans for cash
• 30% are still repaying student loans
• 42% have a secured car loan or lease
• 33% owe taxes to CRA

The average monthly take-home income of a client in their 30s is $2,700. If in a 2-parent household, the average household income is $4,300. The problem is that most of their income is used for debt repayment.

How can you afford to pay for rent or a mortgage, keep up with living costs and save money if half of your income is used up to pay interest? You can’t. What happens if you continue down this path is that your debt will continue to grow as you use more and more credit to balance your budget.

Will bankruptcy ruin your credit?

Filing a bankruptcy or consumer proposal will lower your credit score initially. How much depends on your starting point. If you are behind on payments, your score is already low and bankruptcy will not have much more of an impact.

Even if your credit score is high, you may not be able to access more credit because any new lender will look at your entire financial situation and consider your debt-to-income ratio to be too high.

Any impact of declaring bankruptcy on your credit is temporary and you can begin the process of rebuilding your credit even while bankrupt.

What will happen to my student loans?

If you have been out of school for seven years, student loan debt can be eliminated through a bankruptcy or consumer proposal.

Roughly one-third of insolvencies for those 30 to 39 involve student debt. In your 30s there is a high chance that you have been out of school long enough to wipe out your remaining student debt through an insolvency proceeding. If you are a year or two away, talk with a Licensed Insolvency Trustee about the option of waiting to file versus filing now to eliminate other unsecured debt that may be affecting your ability to manage your student loan payments.

If you are planning on returning to school, please advise your trustee. Filing a bankruptcy or consumer proposal can impact your ability to obtain future student loans.

Will bankruptcy affect my partner or family?

We know that, among those who file a bankruptcy or proposal in their 30s:

• 36% are married or in a common-law relationship
• 14% are separated or divorced
• 22% are single parents

Being concerned about the impact of bankruptcy on your spouse is understandable.

If your debts are yours alone and your spouse has not co-signed those debts, then your bankruptcy does not affect your spouse’s debts or credit rating. If, however, you have joint debts and you file insolvency to eliminate your responsibility to pay back those debts, the lender will look to the co-signer to collect.

Divorce or separation is a contributing cause to almost 1 in 7 insolvencies for those in their 30s. Where two partners were paying debts on a combined income, that income may now be stretched further due to support payments and double the living costs. It is worth talking to a trustee about whether to file bankruptcy before or after divorce if you are in the midst of both.

Some other things to consider:

• Bankruptcy does not eliminate child support or alimony payments
• Spouses can file a joint bankruptcy or joint consumer proposal for co-signed debts
• You cannot eliminate your obligation for co-signed or joint debt through a divorce or separation agreement. Your lender must agree to remove one spouse from their contractual obligation to repay the debt.

What to do before filing bankruptcy

If you plan to file a bankruptcy or consumer proposal, you can stop paying your credit cards and other unsecured debts while your paperwork is being finalized. This is not something you want to do months before, or if you are uncertain about filing.

If you plan to keep your financed vehicle or home, you can do so as long as you maintain your payments. If you want to get out from an expensive car loan or lease, you can do so by voluntarily surrendering your vehicle and prior to filing bankruptcy.

We also generally recommend you open a new bank account prior to filing. This is especially important if you owe money where you bank. Filing insolvency will not stop your bank from using their legal right of offset to take money from your account if you owe them money. It’s also a good way to ensure that automatic payments on debts to be forgiven in your bankruptcy or proposal do not go through before the creditor processes any notice of your filing.

If you would like to learn more about how a bankruptcy or consumer proposal works, talk with a Licensed Insolvency Trustee today.

The post Who’s Filing Bankruptcy in Their 30s and Why? appeared first on Hoyes, Michalos & Associates Inc..

Debt management plans and debt settlement are two of the most common debt solutions for Canadians struggling with debt. Both these options offer help when you are dealing with overwhelming debt, but they both come with advantages and disadvantages.

This guide compares the pros and cons of going for a debt management plan through a credit counsellor or with a debt settlement by working with a Licensed Insolvency Trustee.

Debt management plans

A debt management plan, also called DMP for short, is an assisted repayment plan intended mostly for credit card debt and overdue bills. You enroll in a debt management plan with a credit counselling agency. A credit counsellor will review your budget and set up a monthly payment schedule to help you catch up on payment arrears and repay all your debts.

A debt management plan is also called a debt consolidation plan, but it is not a debt consolidation loan. You do not get a new loan to pay off existing creditors. Instead, you make one single monthly payment to the credit counselling agency who distributes your payments to the creditors included in your program until your debt is paid off.

A credit counselling agency can help you negotiate to reduce interest charges, but they can’t settle your debt for less than you owe.

Debt settlement

Unlike in the case of debt management plans, opting for a debt settlement solution means that you won’t have to pay off all the money you owe, and your monthly payments are also likely to be much lower than in the case of a debt management plan.

Debt settlement is the route of choice for people who cannot afford to pay their debts in full. They need a company to negotiate on their behalf with creditors to pay less than they owe but what they can afford.

There are two main ways to get debt relief through debt settlement in Canada. You can go through a for-profit agency or opt for a consumer proposal.

In general, we recommend avoiding for-profit debt settlement companies. Their success rate is less than 10%, and a majority of their clients pay fees and leave before ever settling with creditors. Fees can run several thousands of dollars on top of any settlement agreement, and with such a high failure rate, for-profit agencies can leave you worse off financially than when you started.

A consumer proposal is a debt settlement program filed with a Licensed Insolvency Trustee. Most creditors prefer to settle debts through a consumer proposal. Proposals are an increasingly popular route for debtors to deal with debt and avoid bankruptcy.

Debt settlement through a Licensed Insolvency Trustee is typically a good option for consumers who have a sizeable amount of unsecured debt that isn’t backed by any collateral. Debt proposal settlements work for debts like credit card bills, payday loans, even government debts like taxes and student loans, but does not work for secured debts like your mortgage or car loan.

Essential similarities and differences

Both options allow you to avoid bankruptcy, but the outcomes are different.

Debt management plans are a suitable solution for consumers who can afford to repay their debts but need help organizing them in a single monthly payment. On the other hand, debt settlement is a solution designed to forgive or erase some of the debt because the debtor cannot pay back everything they owe.

A debt management plan is more costly. You are required to repay 100% of what you owe plus a 10% fee to the credit counselling agency. When you settle debts through a Licensed Insolvency Trustee, you pay a percentage of what you owe – usually as low as 35% of your total debt, but the actual amount depends on your financial situation. There are no additional fees when you work with a trustee.

Both deal with unsecured debt, although a Licensed Insolvency Trustee can settle a broader range of debts than can be dealt with through a debt management plan. If you owe money to a variety of creditors, a debt management plan is not a good option because DMP programs are voluntary; creditors can’t be forced to participate. Credit counselling agencies are not allowed to deal with the government on behalf of individuals, so if you owe a tax debt, you can’t rely on a DMP. Most payday loan companies won’t work with credit counselling agencies, and a debt management plan can’t deal with more complicated debts like Court-ordered judgments.

Both programs will leave a similar mark on your credit report.

Common advantages

Both a credit counsellor and Licensed Insolvency Trustee provide solutions when you can no longer pay back debt on your own. There are some common advantages to working with an accredited professional when looking for debt help:

• You make a single monthly payment, which is easier to manage
• Both can stop collection calls from creditors enrolled in the program
• Debts included in the plan will be gone when you finish the plan
• You get ongoing budget counselling and financial repair advice no matter which program you choose

Disadvantages of a debt management plan

There is no one-size-fits-all solution when choosing a way out of debt. A debt management plan will not work for everyone as there are some disadvantages of a DMP over debt settlement:

• Your debts will not be written off and must be repaid in full
• Creditors can’t be compelled to participate, and they may still contact you asking for immediate payment
• While you can pick and choose debts to include, it can still leave you with troublesome debts if you leave a creditor out or they won’t participate
• If you have a lot of debt, payments can still be expensive because you must pay back all your debts, plus a fee.

Drawbacks of debt settlement

While a consumer proposal allows you to repay your debts in less time and avoid bankruptcy, it’s not for everyone.

• You are required to include all unsecured debt in a consumer proposal; you can’t leave any creditors out.
• You will be required to surrender your credit cards, although you may be able to qualify for a new secured credit card shortly after starting the program.
• You must be insolvent to file. This means you can’t afford to repay your debts on your own or don’t have enough assets, like equity in your home, to refinance.

What happens to your credit report?

Both a debt management plan and consumer proposal are considered programs that help people who cannot repay their debts on their own. Both programs will affect your credit.

No matter which program you choose, a note will appear in the public records section of your credit report, and the debts included in your program will receive an R7 rating.

There are minor differences in how a consumer proposal and DMP affect your report, but generally, both are removed from your credit report 2-3 years from the date of completion or six years from the date of filing, whichever is first.

Working with a Licensed Insolvency Trustee

To submit a consumer proposal to your creditors, you need to contact a Licensed Insolvency Trustee and complete a legally binding process. The trustee will assess your financial situation and develop a proposal, which is essentially an offer to pay a percentage of your debts to your creditors.

No payments or fees are required until the proposal is filed with the government, and you receive full protection from the creditors. Once filed, your trustee can stop a wage garnishment and will notify your creditors so they stop calling you.

Consumer proposals have terms that cannot exceed five years. You make the payments through the trustee, who pays the creditors on your behalf. Unlike in the case of bankruptcy, you won’t have to surrender your assets, and you won’t be asked to report your monthly income and expenses.

There are advantages of settling debt through a Licensed Insolvency Trustee.

• Avoid bankruptcy
• Get relief from overwhelming debts
• Repay your debts in less time
• Get creditor protection

Bottom Line

Both debt management plans and debt settlement via a Licensed Insolvency Trustee can help you deal with debt.

If you have the necessary income to continue to pay your debts, a debt management plan might be the right option for you. However, if you’re looking for debt relief because you can’t pay back everything you own, talk with a Licensed Insolvency Trustee about how a consumer proposal can improve your financial situation.

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No matter the reason you’re in debt—whether it’s due to job loss, reduced income, or the rising costs of raising a family—you can achieve financial freedom. If you need help to become debt free, in this guide to debt relief I’d like to help you understand how Canada’s debt relief programs work.

What is debt relief?

Read Transcript

Debt relief relies on the principle that if you are genuinely struggling with debt, creditors should not require you to repay more than you can afford or remain in debt for life. Debt relief allows you to negotiate with your creditors and settle your debt for less than you owe.

A debt relief company (in most cases, a Licensed Insolvency Trustee or LIT) works with your creditors to negotiate a debt settlement arrangement. You stop making payments to your creditors and make payments through the program. Upon completion, your debts are forgiven.

Pros and cons of debt relief

Debt relief is meant for those who have a large amount of debt that is not secured by property or other collateral. If you are struggling with your monthly debt payments or juggling one debt against another, debt relief may be a good way for you to reduce your debt.

To help you consider, here are the most common advantages and disadvantages of debt relief:

Pros

• Most of your debt is forgiven
• Interest is frozen
• Payments fit even the tightest budget
• You keep your assets
• You get out of debt without filing bankruptcy
• You will be debt free, usually in 3 to 5 years
• You get financial counselling to help you with the recovery process

Cons

• Debt relief will impact your credit score for a while, and you will need to take active steps to rebuild after the program is complete.
• Not all debt settlement programs are created equal. Depending on the program you enroll in, there may be additional fees especially if you work with a non-licensed debt consultant.
• Some of your creditors may not agree to negotiate, which can impact the outcome. There are programs which I’ll explain below that require all creditors to participate as long as the majority agree.

Debt relief vs debt consolidation

While debt relief is a way to settle your debt for less, debt consolidation is a way of taking the debts you owe and restructuring that debt to make your payments easier to manage financially.

With debt consolidation, you apply for a new loan and use the proceeds to pay off multiple small loans. Combining your loans into one bill is easier to manage and can help make debt repayment more affordable.

Debt consolidation loans come with lower interest rates, and you can spread your payments out over a more extended period.

With debt consolidation, you:

• Lower interest rates so you save money
• Get one, consolidated lower monthly payment
• Can get out of debt sooner
• May improve your credit score

Debt consolidation may work for you if you have debt stemming from multiple credit cards, but there are some downsides.

A debt consolidation loan doesn’t eliminate your debt; it just provides a better repayment option. Many people fail to factor in the risks of debt consolidation when considering taking on another loan.

You also need good enough credit to apply and be approved for a debt consolidation loan. Homeowners could use the equity in their homes to consolidate debts by refinancing or taking on a second mortgage. However, if you do not have any property to offer as security, an unsecured consolidation loan is out of reach for many.

And while debt consolidation may seem better for your credit than debt relief, it can hurt your credit just as badly if you take on more debt afterwards.

Will creditors forgive the debt?

Under certain conditions, most credit card companies and other creditors, even the Canada Revenue Agency, will entertain the idea of settling a debt for less than what is owed.

If a debt is very old, a creditor’s ability to sue is prohibited by limitation laws. If this is the only debt you have, you can likely negotiate a debt settlement in exchange for the debt collector’s full release directly.

If you have a lot of debt, creditors may settle if they think the alternative is for you to file for bankruptcy. In a bankruptcy, your debts are erased once you receive your bankruptcy discharge. If creditors believe they will receive less in bankruptcy than the debt settlement offer you propose, they will be inclined to take the deal.

How much are creditors willing to accept through a debt relief program?

As part of the debt relief process, you must submit a statement of your income and expenses along with a full list of any assets you own. This information helps a creditor review the reasonableness of your debt settlement proposal. They will consider how much they think you could afford versus how much they might receive if you filed bankruptcy. Creditors will expect to receive a little more than the bankruptcy option. They may also have set policies about the percentage of the debt they wish to recover. In most cases, an acceptable minimum settlement offer is around 30 cents on the dollar. If your income is higher or you have some valuable assets, you will need to offer more.

Will creditors take legal action if I choose debt relief?

Your creditors’ rights to send your account to collection or sue during debt relief depends on the type of program you choose.

An informal debt settlement, without sanction by the court, does lead to the risk that your creditors may sue. If you stop making payments without some form of legislated protection, creditors will do what they need to enforce the collection of what you owe. This is one of the most significant risks in working with an unlicensed debt settlement company.

If you need creditor protection, you can file for debt relief through a consumer proposal. A proposal has the strength of the Bankruptcy & Insolvency Act behind it to provide a stay of proceeding to stop a lawsuit, wage garnishment and collection calls.

What kind of debts are suited to debt relief?

Debt relief programs are good for settling unsecured debt, such as:

• Personal loans
• Credit cards
• Lines of credit
• Collections and overdue bills
• Payday loans
• Tax debt
• Small business debts

If you need debt relief from student loans, income taxes, HST or payroll withholding taxes, then you will need to choose a debt relief program that can include those debts. In Canada, only a consumer proposal can deal with government debts. A consumer proposal, because it is a federally regulated debt settlement program, does have the ability to settle debt owed to the Canada Revenue Agency so is also a good option if you need tax debt relief.

One type of debt not suited to debt relief is secured debt. You cannot settle your mortgage, home equity line of credit or vehicle loan through a debt relief program. The good side of this is that if you file for debt relief, that means your mortgage lender or car loan provider cannot pull the loan. If you can continue to make your monthly payments, secured debts are not affected by a debt relief program.

How debt relief can affect your credit score

How you manage your debt, good or bad, will affect your credit report.

Using too much available credit will lower your credit score. If you continue to max out your credit cards and carry very high balances, your score will never improve. Credit utilization rates above 50% have a significant negative impact on your credit score, and credit specialists recommend utilization rates below 30% for the best scores. Most people considering debt relief, carry very high balances.

Another risk of a heavy debt load is missed payments. Missing payments is one of the worst things you can do for your credit score. Late payments remain on your report for seven years, so the longer you postpone dealing with your debt, the longer your score will stay low.

When considering debt relief, you want to weigh the benefits of settling your debt against the temporary hit to your credit by enrolling in a debt relief program.

A debt relief program will remain on your credit report for six years. That is true for both a debt management plan (credit counselling) or a consumer proposal.

If you’re suffocating under debt and having trouble making payments, you likely already have poor or bad credit.  Sometimes the best action is to eliminate problem debt so you can build a whole new credit history.

If you determine that a debt relief program is right for you, you shouldn’t put it off. The sooner you settle your debts, the quicker your score will improve.  Part of the debt relief process will involve giving you the information and tools you need to rebuild your credit. With a better score and an improved debt-to-income ratio, you’ll have greater access to better interest rates on new credit.

What are the different personal debt relief programs?

Your financial problems are unique to you, so it’s essential to find a debt relief program that best fits your needs.

Credit counselling

When a non-profit credit counsellor summarizes your debts and prepares a repayment plan, this is called credit counselling. When working with a credit counsellor, they will develop a debt management plan (DMP), enabling you to repay your debt over time, usually five years.

Your credit counsellor takes your DMP to your creditors and presents it to them for approval. Individual creditors can opt-in or out of the program. If accepted, you’ll make one monthly payment to the counselling agency. 

Credit counselling cannot settle debts for less than the full amount. However, your creditors will sometimes lower your interest rate, providing you with enough financial relief to pay off your debts.

Debt settlement

When settling debt, you try to get creditors to agree to accept a lower portion of your debt. 

You can try to negotiate a lump sum debt settlement on your own if you have the cash available. However, if you need a payment plan or your debts are large, it’s best to work with a Licensed Insolvency Trustee to file a consumer proposal.

Always know the credentials of the consultant you are working with. There are debt relief companies advertising consumer proposals, yet they are not licensed to provide that service. Before signing any contract or making any payments, ensure that you have met with a Licensed Insolvency Trustee for a full debt assessment.

Consumer proposal

The only government debt relief program in Canada is a consumer proposal. It is a formal, legally binding agreement that addresses all your unsecured debts.

A Licensed Insolvency Trustee facilitates the consumer proposal process, including helping you negotiate payment terms. You make a single monthly payment to your LIT, and then they pay each of your creditors. Upon completion, your debts go away.

Consumer proposals explained

Consumer proposals are the most popular debt relief option available to Canadians struggling with severe debt. The consumer proposal process is both safe and easy.

First, the Licensed Insolvency Trustee will help you prepare your offer then file your consumer proposal with the Office of the Superintendent of Bankruptcy (OSB).

Once filed, you stop making scheduled payments directly to your creditors. If your creditors are garnishing your wages for repayment, they must stop. 

Then, the LIT will send the proposal to each of your creditors. The documents will include your settlement percentage, repayment plan and an overview of your financial situation and the causes of your financial difficulties.

Creditors have 45 days to respond by either accepting or rejecting the proposal. Their decision can be made before or at the meeting of creditors if one is scheduled.

Each creditor has votes equal to the total dollar value of the proven claims they submit to the trustee. If more than 50% of these votes accept the proposal, it is approved and binding on all unsecured creditors.

If your proposal is accepted, you will:

• be responsible for paying your agreed lump sum or periodic payments to the LIT
• retain your assets (contingent upon making payments to your secured creditors)
• attend two required financial counselling sessions

If your proposal is not accepted, you have the right to:

• make changes and resubmit it
• consider another debt relief option for solving your financial problems
• file for bankruptcy

Your debts will be regarded as forgiven if you meet the proposal conditions in full. 

If you miss payments or your last payment is over three months past due, however, the proposal will be deemed annulled. At this time, unless an amendment to the proposal has been filed, your creditors can take legal action to collect the money you owe them. Only the court can order otherwise. Under certain conditions, the court can revive annulled consumer proposals.

For a successful consumer proposal, you want to work with a trustee experienced in negotiating a deal that works for both creditors and debtors. You want a deal your creditors will accept, but debt relief payments you can afford.

Getting relief through a licensed professional

It’s vital that you only go to an accredited professional for financial advice about dealing with your debt. If you’re not careful, you can end up paying exorbitant fees to a non-reputable company.

It is best to consult with a Licensed Insolvency Trustee to discuss your financial situation. Licensed Insolvency Trustees are federally regulated debt professionals. They provide advice and debt solution services to individuals and businesses with debt problems.

Why should you consider consulting with a Licensed Insolvency Trustee?

• An LIT will explain each debt relief option’s pros and cons and how they may help you overcome your money problems.
• The government only authorizes LITs to administer government-regulated insolvency proceedings (such as consumer proposals and bankruptcies) that allow you to dig out of debt. 
• They will directly deal with creditors on your behalf once a proposal or bankruptcy is filed. They can also keep unsecured creditors from initiating or continuing any legal proceedings against you.
• If you decide to move forward with a consumer proposal, your LIT will work with you to develop a proposal to satisfy your creditors and one that fits your budget.

When you choose to work with an LIT, you know you’re getting advice from a qualified professional. Licensed Insolvency Trustees have demonstrated knowledge, experience, and skills to receive a license from the Office of the Superintendent of Bankruptcy (OSB).

Due to OSB oversight, LITs are subject to federal standards of practice, including a Code of Ethics for Trustees. If you’re unsatisfied with an LIT’s services or have a disagreement you cannot solve, you are free to file a complaint with the OSB.

The federal government also regulates the fees charged by LITs for consumer insolvencies. Trustees do not charge for the initial consultation, collection of information and preparation of the plan. Their fees are covered from the payments you make to your creditors and are payable only after the proposal is filed.

Gain your financial freedom

If you’ve been relying on your credit cards and other debt as a financial lifeline and it’s beginning to catch up with you, it’s time to look into unsecured debt relief options. 

Hoyes Michalos & Associates is here to help you. We will explain all of the debt relief options available to you and find a solution you can afford.

Contact us today to schedule a completely free consultation with no obligations.

The post How Does Debt Relief Work? appeared first on Hoyes, Michalos & Associates Inc..

Penalties are levied on an unfiled tax return at a rate of 5% of the tax owing plus 1% for each month the return is late, up to a maximum of 12 months. If you repeatedly fail to report your income, CRA can charge additional penalties of up to 10% of your unreported income or 50% of the taxes owing. Interest is compounded daily at a prescribed rate on both the penalty and any unpaid taxes.

Once you file your returns and receive an assessment, you may apply for relief through the CRA taxpayer relief program. There are, however, certain conditions that must be met for the reviewer to grant your request. It’s also important to understand that these provisions only deal with penalties and interest, not your underlying tax obligation.

When might my tax interest or penalties be waived?

The CRA states that you may be granted relief from interest or penalties if the following situations have prevented you from meeting your tax obligations:

• Financial hardship or inability to pay
• Extraordinary circumstances like a natural disaster or medical condition
• Errors or actions by the CRA that lead to interest or penalties

What constitutes financial hardship or extraordinary circumstances?

When the cause behind the interest and penalties is taxpayer generated, the CRA will not easily give up their right to collect what it views as sanctions for negligent behaviour. Part of the reason is that they want to discourage the late filing of income tax returns and late payments from continuing in the future.

However, CRA recognizes that there are extenuating circumstances, events beyond your control or conditions where leaving the charges intact would cause undue hardship.

Examples of financial hardship would include:

• loss of employment with ongoing hardship
• times where the interest charge is a significant portion of the taxes owing
• where paying taxes would limit your ability to pay for necessities like food and housing

Examples of extraordinary circumstances could include:

• a disaster such as a flood or fire
• postal strike
• serious illness or accident
• death in the immediate family causing severe mental distress

CRA recognizes that unusual circumstances can negatively impact a person’s ability to both file and pay their taxes on time. Knowing this, CRA proactively extended the filing and payment due date for individuals during COVID-19 to September 30, 2020. Penalties and interest will not be charged until this date.

Making an application and form RC4288

If you feel that you qualify under one of these scenarios, the CRA will require that you fully disclose your situation and the reason behind your request.

You will be required to complete the Request for Taxpayer Relief form RC4288 available on the Canada Revenue Agency website or through your CRA My Account.

If applying for financial hardship, CRA will also require you to make a detailed disclosure of your finances to assess the validity of your claim. A financial hardship application requires the completion of form RC376 Taxpayer Relief Request – Statement of Income and Expenses and Assets and Liabilities for Individuals.

It is possible to write a letter clearly marked Taxpayer Relief and sending it by mail to a designated office. Your letter must have all the necessary information required in the above forms, and you should attach all supporting documents.

Is there a deadline for requesting taxpayer penalty or interest relief?

You have ten years from the end of the calendar year in which the tax year ended to make a request to the CRA for tax relief.

For example: To be eligible for consideration, a request filed during the 2020 calendar year must deal with an issue related to the taxpayer’s 2010 and later tax years. An application relating to a taxpayer’s 2009 and any previous tax year is not eligible for consideration.

What happens after I’ve submitted a Request for Tax Relief?

Your application will be reviewed by an individual at the CRA or a committee of CRA personnel who will prepare a report for consideration by the designated official assigned to your case. When the review is underway, you may be contacted concerning any missing information or if any clarification of specific points is needed.

The following factors can impact the CRA’s decision:

• Your past record of filing returns and paying on time
• Your efforts when working with CRA to deal with tax issues
• How timely you were in dealing with any omission or delay

The report will include an opinion on whether or not granting relief is warranted. The designated official will have the final say on whether to approve, partially approve, or deny your request.

What do I do if my request for tax relief is not approved?

If your request is only partially approved or denied, you can request a second administrative review. A second review request should include the following information:

• The reasons for your disagreement with the CRA’s decision, e.g., some of the relevant information was not considered or were misinterpreted
• Any relevant new facts, documents, or correspondence

To be fair and maintain impartiality, the second review will not be conducted by the CRA officials involved in the first review and decision. If the second review fails to change the outcome, and you feel that discretion was not adequately exercised during the second review, you can apply to the Federal Court for a judicial review of the CRA decision. This must be done within 30 days of the date you received the second review decision from the CRA.

What if I need relief from my underlying tax obligation?

As I mentioned at the start, the CRA Taxpayer Relief Provision can only waive penalties and interest. CRA representatives have no discretion to reduce the taxes owing as assessed based on your income tax return.

If you don’t qualify for this program, or if relief of interest and penalties is not enough to solve your tax debt problem, there is another solution. CRA will settle taxes through a consumer proposal. Hoyes Michalos can help you negotiate a reduction in your tax debt liability and create an affordable payment plan. As an option of last resort, CRA debt is dischargeable in a bankruptcy.

The post CRA Taxpayer Relief Program: Do You Qualify? appeared first on Hoyes, Michalos & Associates Inc..

There are many reasons why people carry debt beyond their 50s, and into their 60s and even 70s. It’s unrealistic to think it’s as simple as seniors living beyond their means. Many traditional industries have posted declining employment that has affected older workers – think of big layoffs like that of GM in Oshawa and cuts to government and media jobs. An unexpected reduction in income is hard to absorb overnight. Others are dealing with the dual financial challenge of putting their children through school or returning home to live with the financial burden of caring for aging parents. Once retired, a fixed income takes its toll, unable to keep up with both debt payments and living costs.

Do you have a debt problem?

Here are some debt warning signs that you may need to speak with a professional to get your debts under control:

1. Your debt balances are growing as you continue to use debt to make ends meet.
2. You are only making minimum payments on credit card balances.
3. You rely on a line of credit to pay the mortgage, rent, or make bill payments.
4. You are thinking of cashing in your RRSP to pay down debt

What happens when you don’t pay?

If you stop making monthly payments against credit card debts, utility bills, or any loan, your creditors can take several steps to collect.

Collection calls are the first step. Many seniors find it stressful having a debt collector continue to call and send collection notices. Calls from debt collectors can create added stress if you are also dealing with medical or family issues.

Missed payments will lead to a negative mark on your credit report. Delinquent accounts in your credit history can lead to higher interest rates on new credit or when renewing a mortgage, and you could find any new credit application denied.

Can creditors garnish my pension?

In most cases, no. However, once your pension is deposited in your bank account, your funds can be at risk. If you owe money where you bank, your bank can seize the funds directly from your account and apply them to your unpaid credit card or bank loan.  There are other exceptions as well to when creditors can garnish pension income with the most common being CRA for unpaid taxes.

Avoid making poor borrowing choices

Seniors carry the highest credit card balances of any age group we help, many with balances of $10,000 or more. More than half carry balances over $30,000. This is credit card debt build up over a lifetime. If you have balances on more than one credit card, are using one credit card to live while making minimum payments on the other, it is time to consider the options at the bottom of the article for debt relief.

Seniors are also increasingly turning to payday loans. The problem is if this month’s retirement income isn’t enough to pay the bills, taking out a payday loan isn’t the solution. Having to pay back that loan out of your next pension cheque puts you at a loss the following month.

Pre-retirement debtors should think carefully before taking out a debt consolidation loan to consolidate credit card and other debts. A Home Equity Line of Credit (HELOC) may be attractive as payments are interest-only and as a result are quite low. Beware, however, that if you fail to make any refinanced mortgage payment, you are putting your home at risk. Make sure such a solution deals with all your consumer debt and that you can afford the monthly payments. In any debt consolidation scenario, don’t let your credit card balances grow again.

Similarly, there has been a rise in reverse mortgages which raises concerns about the number of seniors tapping into their home equity to pay for living costs.

How can seniors get help with paying down debt?

If you are struggling with debt, the first step is to talk with a regulated debt professional like a Licensed Insolvency Trustee. Your trustee will review several possible debt solutions with you, including:

Doing nothing. If you have no assets and your only income is pension income which cannot be garnished, you can tell most creditors ‘I can’t pay’ and do nothing. As mentioned, there are a few exceptions like CRA, but if you can deal with the calls, this can be a good choice if your income is limited.

Work out a payment plan with a credit counsellor. Non-profit credit counsellors can help you arrange a plan to repay everything you owe over a period of up to five years. They might even be able to stop interest charges. If you are on a reduced income and you owe simple debts like credit card debt with small balances, consider talking with a credit counsellor.

Consider government debt relief programs that can help seniors. The final solution may be to consider talking with a Licensed Insolvency Trustee about government debt relief programs for seniors.

If you own a home and have some equity, but not enough to refinance, you could make a proposal to your creditors through a government debt relief program called a consumer proposal.

A consumer proposal is also an option for those who have a higher pension income or additional income from employment or outside assets.

If you are on a fixed income and have little in assets, you might consider filing bankruptcy to stop collection calls; however not all seniors should file bankruptcy.

Be careful not to drain your RRSP for debt repayment

If you have money set aside for retirement in an RRSP, RIF or pension plan, talk with a Licensed Insolvency Trustee about your options before using those funds to pay off debt. Most registered retirement plans are protected in a bankruptcy or consumer proposal in Canada.  We caution people against draining their retirement nest egg if this only partially solves your debt problem.

Get a free consultation

If you are a senior with debt you can’t afford to repay, contact us for a free consultation. You may be surprised to know that almost one-third of the people we help are over the age of 50.  You are not alone. Contact us for help today.

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The post Debt relief for seniors. What are your options? appeared first on Hoyes, Michalos & Associates Inc..

• Are you barely making the monthly minimum payments on your debts?
• Are your debt balances increasing because you borrow more each month to pay bills?
• Are you missing payments or borrowing from payday loan companies because your existing debts cost too much?

If you answered yes to any of these questions you are a likely candidate for debt forgiveness.

What is debt forgiveness and what options are available?

Debt forgiveness is the partial or total reduction in the amount you owe. Creditors agree to cancel part or all of your financial obligation in exchange for a new payment plan.

If you have a lot of debt and are seeking debt forgiveness you have probably determined that you cannot budget your way out of debt. You may have been denied or determined you do not qualify for a debt consolidation loan. Both options can help you manage your debt, but they do not reduce the total amount you are required to repay.

There are only three reliable debt forgiveness programs in Canada that provide some form of payment forgiveness.

Debt Management Plan

A debt management plan, or DMP, is technically not a debt forgiveness program. It is a repayment plan. It does provide interest relief, but you must repay the full amount of the principal owing.

Calculating your payments in a DMP is easy: you take the total amount of your current debts to be included in the plan and divide them by the number of years to repay. If you can afford to, your credit counsellor may recommend a three-year plan. If you cannot afford that much, they may recommend you stretch those payments over a period of up to five years.

Debt management plans, offered through not-for-profit credit counselling agencies in Canada, can deal with simple consumer debt like credit card debt, bank loans and bill payments. A DMP cannot help if you have student debt, tax debt or payday loans.

Participation by your creditors is also voluntary. If one creditor does not want to write-off a portion of your debt, they can opt out. This is why payday loan companies typically do not agree to join the program.

Consumer Proposal

The only formal, legal, debt forgiveness program available in Canada is a consumer proposal.

A consumer proposal is a debt settlement program governed by the Bankruptcy & Insolvency Act and administered by Licensed Insolvency Trustees.

Your trustee will meet with you to determine how much you can afford to repay. With this information, they will help you negotiate a settlement offer with your creditors. While your exact payment will depend on what you own, how much you make and even who your creditors are, settlement discounts of up to 80% of the total amount owing are not uncommon.

Find out what your payments might be. Try our debt forgiveness options calculator.

A consumer proposal is binding on all unsecured creditors. It results in the elimination of most unsecured debt including payday loans.

Student debt forgiveness

If you are struggling with student loan debt, begin with the government’s Repayment Assistance Program. If this is not enough, or you have other unsecured debts, a consumer proposal is a viable option for student loans. Student debts are forgiven if you have been out of school for 7 years.

Tax debt forgiveness

Even Revenue Canada must abide by the terms of an accepted proposal which means it does eliminate CRA tax debts like HST, source deductions and income tax.

Secured debts

Secured debts, like your mortgage or car loan, are not included in a consumer proposal. Most people opt to continue their payments and keep their home or car. If, however, you determine that you cannot afford your vehicle payments, for example, you can surrender your vehicle and any shortfall will be forgiven as part of the proposal.

Personal Bankruptcy

If you cannot afford to make an offer to your creditors to repay part of your debt, you may need to consider filing bankruptcy. In a bankruptcy, your creditors forgive or write-off your debts, in exchange for which you surrender non-exempt assets and make monthly payments based on your income.

Do I have to include any cancelled debts written off on my income tax? No. This only applies to corporations in Canada. Your personal debts are forgiven as part of a bankruptcy or proposal and you have a fresh start.

Should I worry about my credit report?

All debt forgiveness programs in Canada will appear on your credit report.

Both a DMP and a consumer proposal will appear on your credit report as an R7 repayment plan and will remain on your report for 3 years after completion. A bankruptcy will appear as an R9 and will remain for 6 years after discharge.

However, if you answered yes to the three questions at the top of this post you likely do not have good credit anyway. Even if you have a good credit score today because you haven’t missed a minimum payment, you can’t borrow any more because you have too much debt now. A debt forgiveness program allows you to reset the clock so you can improve your budget, save money and rebuild a better credit history for tomorrow.

Be wary of questionable debt forgiveness providers

Debt settlement companies have largely disappeared in Canada due to changes in regulations in recent years.

There are, however, companies advertising government debt relief programs who are not regulated to do so. They promise to help you through the process and charge a significant fee up front to collect information.

Never pay an up-front fee for any debt forgiveness program. Licensed Insolvency Trustees across Canada offer unlimited free, no-obligation consultations.

What to do next

If you are having trouble keeping up with your debt payments, know that ignoring the problem and borrowing more money isn’t the solution. Contact a local Licensed Insolvency Trustee today. We’ll help you explore your debt forgiveness options so you can become debt free.

The post How to Get Debt Forgiveness in Canada appeared first on Hoyes, Michalos & Associates Inc..

One in six insolvencies in Canada involved someone looking for student debt forgiveness.

Why?

Because after years of struggling, many graduates are no longer able to keep up with their student loan payments. Student loan borrowers who file insolvency still carry an outstanding loan balance of almost $15,000 after years of making payments.

Graduates are finding it difficult to obtain long-term, sustainable positions in their chosen career path that pay enough to keep up with their student loan debt obligations. Add in the fact that many are trying to raise a family, make mortgage payments, and pay off credit card debt, and it’s not surprising that so many seek financial aid to help them repay their student debt.

In this guide to student loan forgiveness, we outline what you need to know about:

• Which student debt relief options only defer payments, and which options result in student loan forgiveness;
• How and when to negotiate new payment arrangements;
• How you can take advantage of government repayment assistance programs to change the term of your loan or apply for repayment assistance;
• How the Bankruptcy & Insolvency Act can eliminate student loan debt;
• How the seven-year rule works in a bankruptcy or consumer proposal.

Read Transcript

Government payment relief programs for Canada Student Loans and OSAP

The Government of Canada offers two different repayment programs that provide varying levels of benefit including reduction in your monthly payments, interest relief, payment deferrals, and outright loan forgiveness depending on the severity of your financial situation. OSAP loan forgiveness is integrated with Canada Student Loan programs making application for payment assistance easier for Ontario students. Other provincial student loans are also integrated. Check with your provincial student loan office.

Revision of terms

The standard maximum repayment period for Canada Student Loans is 114 months or 9.5 years. If you are experiencing a temporary reduction in income but can afford to repay your loans in full, you can contact Canada Student Loan office to extend the amortization period up to 174 months or 14.5 years.

How revision of terms works:

Under the Revision of Terms program you can negotiate lower payment terms that work within your budget. If you need more time to pay you can:

• Temporarily extend the term of your loan. This will reduce your monthly payment making it more affordable. At the end of the six-month period, your student loan payments will return to the principal plus interest payments in your original Consolidated Loan Agreement.
• Permanently extend the repayment time to decrease your monthly payments meaning you are paying your loan off over a longer period.
• For a maximum of 12 months during the life of your student loans you can apply to make interest only payments.

Each of these options will mean you pay your student debt in full, with interest. Lengthening the term of your loan, even for a short while, will result in you paying more interest in total on your debt.

Repayment Assistance Plan

If you are struggling to keep up with your student loan payments, you may want to consider payment relief through the Ontario or National Student Loan Repayment Assistance Plan. 

Under the RAP program you may receive interest relief or debt reduction (forgiveness), depending on the severity of your financial situation and your income level.

Zero Payment / Complete Payment Deferral Based on Income – the federal government allows for a relief from payments for individuals earning below a certain income threshold. For example, an individual earning less than $25,000 is not required to repay their student debt until their income exceeds this amount.

Repayment Assistance – if your income exceeds the Family Income Thresholds for Zero Payment, you may be eligible for a reduction in your monthly payment.

• During the first 10 years the government provides interest relief by subsidizing the interest costs on your student debt.
• After 10 years, if you still qualify, they may subsidize some of the principal payments as well.

Who qualifies for the RAP program? To be eligible under the Canada Repayment Assistance Program you must reside in Canada, be out of school for at least six months and you cannot already be in default on your student loans. Those with a permanent disability can qualify for consideration of disability-related expenses when determining financial eligibility. It is also important to be aware of various provincial student loan relief programs. In Ontario, OSAP debt is administered through Canada Student Loans so the above apply to graduates needing student debt help. If your loans were issued by PEI or Manitoba you will need to apply through your provincial student financial assistance office.

OSAP and student debt forgiveness under the Bankruptcy & Insolvency Act

Government guaranteed student debt is eligible for discharge and forgiveness under the Bankruptcy & Insolvency Act under certain conditions.

What is the seven-year rule?

The import date to know is the “date you ceased to become a student” or “end of study date”. This is not the same as your loan year or the last year you took out your student loans. It is this date that the government will use to determine eligibility for the discharge of your student debt under the BIA. You can verify your end of study date by calling 1-888-815-4514 for Canada Student Loans or 1-807-343-7260 for Ontario Student Loans.

Financial hardship – the 5 year rule

You can apply to the court to have your student debt discharged in a bankruptcy or proposal as early as five years after your end of study date if you can show that repaying your student loans will cause “undue financial hardship”.

You can be eligible under the hardship provision if you can show the court you acted in good faith in using and repaying those debts is causing, and will continue to cause severe financial difficulty.

There are many court cases discussing the considerations of “good faith”. Talk to your Licensed Insolvency Trustee if you think this is a viable option for you.

Newer student loans

Both a bankruptcy and consumer proposal should still be explored even if your student loans do not meet the seven-year rule if you have significant other unsecured debts like credit card debts. Obtaining a discharge of these debts can make student loan repayment easier.

Private student loan debt forgiveness options

Private loans, from a bank, parent or other financial institution, are repaid directly to your lender. They might include a student line of credit, student credit card or overdraft. Any term revisions must be negotiated with your student loan provider.

Private student loans are just like any other unsecured debt. There are no special rules or study period limitations to qualify for of loan forgiveness.  Any credit card debts, lines of credit or bank loans you used to fund the tuition fees and other costs of your education can be discharged in a bankruptcy or proposal with no limitations or waiting period. Read our article for more on repaying private student debt.

Student loan debt advice from a licensed insolvency trustee

Licensed Insolvency Trustees are the only government regulated experts on debt management and the only professional able to eliminate your student debt through a bankruptcy or proposal.  An LIT will review your specific situation to determine if you qualify for student relief and what option is best for you.

Discover how we can help you eliminate your student debt. Contact a Hoyes Michalos trustee in your area for a free consultation.

The post Guide to Student Debt Forgiveness appeared first on Hoyes, Michalos & Associates Inc..

On today’s podcast, we dive deeper into what financial hardship for student loans is and how it works with Richard Howell, a bankruptcy lawyer with Clark Farb Fiksel in Toronto.

Do I Qualify for Financial Hardship?

There is a special provision (Section 178 (1) (1.1) of the Bankruptcy & Insolvency Act for those interested) that allows the court can order that the seven year rule be lowered to five years as long as the applicant meets 2 conditions to qualify for financial hardship:

• The bankrupt has acted in good faith, and
• The bankrupt has and will continue to experience financial difficulty to such an extent that the bankrupt will be unable to pay the student loan.

In simple terms, these requirements mean that you have “tried your best” to make payments on the loan, but due to your circumstances you have been unable to do so, and as a result would suffer continued hardship if your student loan is not eliminated.

A Licensed Insolvency Trustee alone cannot make this judgement. You must make an application to court.

Once you have filed your hardship application, the court has three options: the court can either grant the application, which means the student loans are discharged completely; or they can deny the application, which means the student loans are there in their entire amount; or they can adjourn the applications [and review the application again in the future].

What Would be Considered Financial Hardship?

If your income is well above average, it will be very difficult to prove hardship.

However, if you are a single parent, with children, living on a moderate income, and also carry a $20,000 student loan, and you’ve been out of school for over five years, you may be a candidate for hardship relief.

Another common example would be someone who has an education in an area where they have been unable to find a job, so they have no ability to repay the loan.

If you were unable to complete your education through no fault of your own, you may be eligible for relief.  For example, if the private vocational institution you attended went out of business before you could graduate (and it has happened), you can’t get a job in your field because you couldn’t graduate, so you may be a candidate for relief.

What’s the Process to Apply to Court for Hardship Relief?

The first step is to talk to your trustee.  They can help you confirm that you meet the basic requirements (including the five year rule).  They can then advise you on how to proceed.

It is possible to make an application to court yourself, but your chances of success are generally increased if you are represented by an experienced lawyer.  However, lawyers charge fees, and depending on the complexity of your case lawyers costs could be in the same range as what you paid in your bankruptcy (although most will accept payments over time), so the cost is a consideration.

Resources Mentioned in the Show

• Student Debt and Bankruptcy
• What Happens in Bankruptcy Court?
• Richard Howell

FULL TRANSCRIPT SHOW 210 – What is Financial Hardship for Student Loans?

Doug Hoyes:          It’s the month of September, students are back in school and at this time of the year our thoughts turn to student loans. It’s a sad reality in Canada that a significant number of students are only able to pay for postsecondary education with the help of student loans. And if you graduate and immediately get a high paying job, you can pay back your student loan and all is good. But what happens if you can’t find a job that pays you enough to pay your living expenses and pay back your student loan, then what?

Unlike with most other debts you can’t simply go bankrupt to eliminate your student loans because we have a rule in Canada that says that government guaranteed student loans are only automatically discharged in a bankruptcy or consumer proposal if you have ceased to be a student for over seven years at the time you file your bankruptcy or consumer proposal.

To clarify, it’s not seven years from when you got the loan; it’s seven years from when you cease to be a student. So that’s seven years from when you graduated or seven years from when you left school. Let me emphasis another point. When I refer to student loans not being dischargeable in bankruptcy, I’m referring to government guaranteed student loans, which would include loans made under the Canada Student Loans Act or provincial programs like OSAP.

My guest on today’s show will make a comment on this a bit later. There are big banks that offer student lines of credit, often for professionals like doctors. That’s not what we’re talking about here. Those bank loans are not government guaranteed loans so they are not considered student loans in a bankruptcy so they are eligible to be discharged just like any other unsecured debt.

So what can you do if you’ve been out of school for less than seven years and you have student loans that you are having trouble paying? The first step is to do your research and see if there are any deferral or interest forgiveness programs that you may be eligible for. Obviously, if you have the ability to repay your loans that’s what you should do. Another option if you have a lot of other debts is to file a bankruptcy or consumer proposal to deal with your other debts, which may free up enough cash to allow you to service your un-dischargeable student loans.

There is one other option and it’s a very special case. Section 178 Sub 1 Sub 1.1 of the bankruptcy and insolvency act contains what we licensed insolvency trustees refer to as the hardship provision. And it says that if you go bankrupt and have a student loan and you have ceased to be a student for five years or more, you can apply to bankruptcy court to have your student loan discharged. There are two conditions, the bankrupt has acted in good faith and the bankrupt will continue to experience financial difficulty to such an extent that the bankrupt will be unable to pay the student loan. What does acted in good faith mean? That’s a tricky question. A common interpretation is that you have tried to make payments on the loan but if you have financial hardship that may not be possible.

So what is hardship and what is good faith? Those are the first two questions I asked Richard Howell, a bankruptcy lawyer with Clark Farb Fiksel in Toronto. He was a previous guest on this podcast where he talked about bankruptcy court where he has many years of experience. So here is an example he gave of a typical student loan hardship situation.

Richard Howell:     Typically it may be a single mother for example that has no possibility of ever paying the loan and just will never have sufficient income to even make a dent. One of the factors in the act is whether they’ve made any payments on the loan, which seems to be I don’t know if a bit silly is too strong but if they could make payments on the loan they wouldn’t be court on a hardship application.

Doug Hoyes:          Yeah that’s kind of a –

Richard Howell:     Oxymoron.

Doug Hoyes:          Yeah it doesn’t really make sense.          So, okay so let’s say then I went bankrupt and at the time I went bankrupt my student loan was five years old. Obviously if it was more than seven years old I don’t need to go to court because it’s going to be automatically discharged so there’s this two year window between five years and seven years when this hardship rule kicks in. And I know when someone comes in to meet with me I say to them well, if we’re at year number six now you go bankrupt today your loan, student loan, isn’t automatically discharged why not just wait another year to get past the seven year mark? But in a lot of cases no, I’ve got a bunch of other debts, my wages are about to be garnisheed, I have to do this now.

So we go ahead and file the bankruptcy and then okay, you know what, student loans were a big number, I would like to go to court and see if I can get the student loan either reduced or eliminated. So, what would be the process? I guess the starting point would be well, let’s talk to a lawyer who knows how to do this. If someone comes in to see you, to talk about whether or not they should make a hardship application how would the discussion go, what kind of questions would you be asking, what would you want to know?

Richard Howell:     Well, typically when the phone if they’re going to come in to see me I’ll ask a couple of qualifying questions so we won’t waste everybody’s time. How much are you making? If you’re making 50 or 60,000 a year don’t bother coming because you’re not going to get the relief. Except, well I guess there’s an exception to everything but it’s going to be highly, highly unlikely. The people that typically come in may have got a degree in computer programming’s a good example and they’ve been working for the last 12 years as a pizza delivery man because there’s no jobs. They’ve got a couple of kids and a wife and they can’t make ends meet. They’re a good candidate. Or as a single mother with a couple of kids and making minimum wage, they’re a good candidate.

Doug Hoyes:          So the qualifying questions, the first one would be how much are you making, what kind of income are you earning? What would be the second qualifying question you’d be asking?

Richard Howell:     Well just the timing on the loans, do you fit into the five-year period?

Doug Hoyes:          Just to make sure that it qualifies. So if I phone you up and say hi, Richard, I’m a doctor. I make $200,000 a year, I’ve got $300,000 worth of student loans because of all the degrees and everything I’ve got and it’s a lot of money and I can’t pay it you’re going to say to me, in terms of a hardship application I don’t have much chance, is that correct?

Richard Howell:     Yeah, although apropos, the doctors normally have a loan from a particular bank, which will remain nameless, that is effectively a student loan. It’s typically 100 or $150,000. The bank in question attempted to characterize the loan as a student loan and try and prevent the bankruptcy applying. The court said nothing doing, that was a credit decision for the bank, it’s not the public’s money, get out of here bank.

Doug Hoyes:          And we won’t say what the name of the bank is but you can email me and I’ll tell you what their three initials are if you want to know more. And so yes, you’re making a key point and that is we’re talking about government guaranteed student loans. So if you go to the bank and get a student line of credit, which is what this particular one is called, then no, that doesn’t go under these rules, that’s just like getting a Visa card. It’s a loan that the bank granted to you on the basis that they figure well, once you’re a doctor you’ll be able to pay it back so the bank then could not go back to court and say oh, yeah this falls under the same student loan rules. So, that’s again why you’re asking these two qualifying questions then.

Richard Howell:     Exactly but let’s be careful not to mix a student line of credit guaranteed by her majesty with the bank’s student line of credit that’s not guaranteed.

Doug Hoyes:          Got you. So, I mean I gave the example of OSAP earlier obviously that is a loan directly from a government agency, it is also possible to have a student loan from a regular bank but if it’s guaranteed by the government then it would fall under the rules we’re talking about.

Richard Howell:     Exactly.

Doug Hoyes:          That’s the key point then. So okay, the bankrupt phones you up and you have a discussion on the phone and they say I have an education but I have not been able to get a job in my field maybe, you know, I’m a computer programmer but I know a bunch of languages they don’t use anymore because now everything’s all apps on a phone and that’s not my area of expertise so I have not been able to earn considerable income as a result of my education. I’ve got, you know, a family, I’ve got expenses, I’m a single parent, something like that. And so you say OK you’re probably someone that would qualify for this process.

So then the next step I assume I come in and meet with you in person and obviously, you know, you’re a lawyer you don’t do this for free, there’s a fee to be charged. And if someone wants to know what that fee is give you a call because every situation is going to be different I assume. Some cases are simple, some cases are more complex. So they come in to see you, what types of things are you going to want to know, what happens next?

Richard Howell:     Well, I’m going to want whatever bankruptcy documents they’ve got. I’m likely going to have to go to the bankruptcy office and have the file brought in from Cooksville where they store them so that I can see everything in the file. The court’s going to want everything in the file when we go in any event. I’m going to want to see their tax information of the last few years, returns, notices of assessment. And I’m going to want a statement of income and expense on a monthly basis showing where the shortfall is and that they are actually suffering hardship.

Doug Hoyes:          And then from there you prepare a bunch of paperwork I guess.

Richard Howell:     Yeah it’s a reasonably simple affidavit. It covers the basis and then we put the affidavit in with what’s called a motion record, we serve the trustee and any opposing creditors and oh, of course her majesty probably in both capacities if they’ve got a federal loan and a provincial loan, finding where you serve her majesty’s always a little bit of a challenge. We think we’ve got it nailed at the moment but times change.

Doug Hoyes:          I know, it’s always difficult for us too as to who’s got carriage of this? Because obviously the loan happened many years ago and so it may be a different address, different department whatever. So you prepare all this paperwork, send it out to the student loans people, the trustee, any other creditors that may be interested in the matter and then it’s going to take a period of time before the actual court appearance happens, right?

Richard Howell:     Well, you have to serve with 10 days notice. From the time you mail it, it has to be at least 10 days prior to court. The practicalities are the Ontario Student Loans are last time I did one of these are situated in Thunder Bay. And typically they get the mail, they look at it at some stage of the game, probably late. And the day before the hearing you get a call from the student loan lawyers in Toronto who say we need an adjournment. So of course you give it to them so you get kicked another couple of weeks. But it does mean two attendances at court and a little more messing around.

Doug Hoyes:          Yeah and with Toronto court it’s not like fast food place where you can just go in and get an appointment, things are scheduled in advance, it takes time to get there, right?

Richard Howell:     Well it’s reasonable. We can get a motion date for example, maybe three to four weeks out is –

Doug Hoyes:          And obviously it would depend on the time of the year. Over the Christmas break it’ll take a little longer, and over the summer perhaps if there’s vacations and whatnot. But generally it can be done reasonably quickly is what you’re saying. So, then on the appointed day you go to court, you would have the bankrupt with you I assume?

Richard Howell:     Not as a rule. It’s – I sort of like to have them around in case there’s questions but it’s not strictly necessary.

Doug Hoyes:          Okay. And so, I mean I guess if it was me and this was a big deal I would want to be there too just in case the judge wants to why aren’t you working or whatever? Obviously you’ve got this all in your motion material and your affidavit and everything but I guess as a backstop it’s nice to have them there. And so you then at the appointed time appear in court, you present your arguments, obviously a lot of it is in writing already.

And what is the typical response of the student loans people? Because obviously they’re the only ones who are going to object to this, no one else really is interested. I mean as a trustee on the case I don’t really have an opinion one way or another. I would obviously like the bankruptcy to get a break and everything but the court doesn’t really care what I think in this particular case, it’s not really up to me. What typically are the student loans people doing? In other words are they very often showing up in court and banging on the table and trying to argue the motion or is it more likely that they’ll say yeah, we understand this probably is a hardship case and they don’t argue it?

Richard Howell:     I think it’s fair to say they’re typically atypical.

Doug Hoyes:          Okay, so there is no rhyme or – there is no obvious thing that’s going to happen.

Richard Howell:     No, the spectrum is if it’s meritorious, righteous application they’ll look at it and say yeah, this person can’t pay, we’re not fighting this. They’ll send you a letter saying her majesty does not oppose.

Doug Hoyes:          In which case you go to court and you stand up and say I’ve got a letter saying her majesty doesn’t oppose and it’s pretty much a done deal at that point I would think.

Richard Howell:     Yes, expect her majesty can be of two minds of course. Her majesty in Ontario can have a different opinion than her majesty Ottawa.

Doug Hoyes:          Got you. So the feds may object, the provincial may not in which case then the court has a decision to make.

Richard Howell:     Yeah, pretty much or you end up with the council in court for the objector and you make a deal before court.

Doug Hoyes:          So explain to me making a deal before court then. So the court hearing is I don’t know it’s at 10:00 in the morning, it’s at 2:00 in the afternoon, whatever it is. And you all know who’s on the docket beforehand and so is it the kind of thing literally on the courthouse steps. You pull a person aside and say look, here’s what I’m going for, what do you think? Is that how it is or is done on the phone in advance, what typically would happen?

Richard Howell:     Well, it depends I know the council for the – well, I know the council for the province who’s normally the same one. And I can phone her ahead of time, not too far ahead of time because they just delivered the file to her 15 minutes before the hearing. But subject to that we can usually kind of come to an agreement beforehand. With the feds if they’re coming down the lawyer from justice gets the file, well if it’s a 10:00 hearing normally it’s 9:30 for the first time to look at it. That’s a bit cynical but also true.

Doug Hoyes:          Well, I’ve certainly been in court where in exactly the situation you’re describing and the judge, the register, the master, says to the opposing creditor’s lawyer okay what do you want to do? Last week we had a case, it was very similar to this and there was a lot more money and no one was here and they say well, I don’t know, I don’t assign the cases to myself I just got the file, you say, yesterday or 15 minutes ago. So, in that scenario then you’re going to try to get them on the phone in advance. But if that’s not possible then like literally just before the hearing then you kind of pull them aside and see what can be done?

Richard Howell:     Yeah, you make your deal if you can and if not tough it out. I haven’t toughed out many. One of the ones I remember is it was before a registrar [Nette] as he then was. And my guy was saying that oh, he couldn’t get a job and yadda, yadda and that he was driving a taxi and the registrar said let me see the driver’s licence. And so he handed him up the driver’s licences and the registrar Nette knew such things and he said to me yeah, your client has a commercial long distance trucker licence here, get out of here effectively.

Doug Hoyes:          Yeah, so he can get a job making good money so that’s what he should do.

Richard Howell:     Precisely.

Doug Hoyes:          So is it fair to say that in most cases that you’ve been involved with because you’ve in effect, you know, I don’t want to use the word pre-screen, but you’ve asked questions beforehand and so you know the chances of success are reasonably good before you take on the case that in most cases the court in your experiences amenable to this type of hardship application?

Richard Howell:     Yes, although technically the court has to either wipe the loan out or not, they can’t make a deal and say pay half or pay some percentage of the loan.

Doug Hoyes:          So it’s almost like arbitration in baseball, well I say this, you say that and they’ve got to pick one.

Richard Howell:     Yes. But that being said there have been occasions on which something’s been worked out and I’m not going to give you the particulars.

Doug Hoyes:          And I think the kind of message there is ultimately the court can do what the court wants to do. I mean that’s why there’s a court.

Richard Howell:     Well, no it’s normally done at the let’s make a deal level.

Doug Hoyes:          I see and the court either doesn’t object to it or blesses it or whatever.

Richard Howell:     If council are happy.

Doug Hoyes:          The court is happy.

Richard Howell:     Yeah.

Doug Hoyes:          So I guess the message there then is that if you are, you know, going to have a lawyer going to court for a hardship application it’s good to have someone with some experience and the ideal scenario is work something out in advance with the opposing creditor if there is one so that you can go to court and get the deal done. That’s generally the better option.

Richard Howell:     Exactly. And just an aside as far as lawyers and costs are concerned my old mentor once said if you want nice fresh oats you have to pay the price. If you’re satisfied with oats that have already been through the horse it’s a lot cheaper.

Doug Hoyes:          It’s a lot cheaper. So, yeah and I guess this is kind of the trick in a hardship application, that the whole point of going to court because I can’t pay my student loan is because I don’t have the income to do it. And so, you know, do I have the money to hire a lawyer to go and do this? I assume in most cases, I mean obviously you’re going to get something upfront if you’re going to be showing up court and everything. But is it fairly typically that you’re going to put the debtor on some kind of payment plan if they can’t pay for it all upfront?

Richard Howell:     Yeah, it comes with the territory, something’s got to be worked out. It depends on what the clients got. Normally something can be worked out.

Doug Hoyes:          Got you. So that’s obviously the answer then, sit down with the lawyer upfront, find out what kind of makes sense and go from there. Excellent, well I think that’s a good way to end it. So in simple terms this is a provision of the act that’s there but as you’ve said it’s not a very common thing, I mean it only applies to people who have a student loan, they’ve gone bankrupt and it’s between five and seven years on the clock, which is obviously a limited number of people, most people are going to wait till after the seven years. I mean if you can get through five years you can get through seven. But for a certain number of people this is a viable option.

Richard Howell:     Yeah, for the other people that can’t pay the loan [no hope] they’re not going to get the hardship relief. The only other possibility is a second bankruptcy or consumer proposal. It seems kind of sad that the student loan comes to that at the end of the road.

Doug Hoyes:          So you would complete your first bankruptcy, which maybe is completed in year five or six after you’ve left school. And then it might be that after year seven then at that point maybe the only debt you’ve still got is the student loans and at that point then it’s either a bankruptcy or a consumer proposal to deal with it.

Richard Howell:     Yes and if there is a possibility depending on the amount of the loan that students loans will come in and ask that there be a condition of your discharge, that you pay a chunk of the loan, it’s remote. But I haven’t actually seen it done to defeat a student loan.

Doug Hoyes:          But it could happen. I guess that’s kind of the message in a bankruptcy, that any creditor has the ability to object to your bankruptcy ending. That’s just how the process works.

Richard Howell:     Yeah, exactly.

Doug Hoyes:          Excellent. Well, I think that’s a good way to end it thank you very much Richard. That was our discussion about student loan hardship applications, thanks very much.

Richard Howell:     My pleasure.

Doug Hoyes:          That was my conversation with Richard Howell about student loans and the hardship provisions. And I agree with is comment that this situation is kind of sad. When I went to university, over 30 years ago, it was possible to get a summer job where you could earn enough to cover your tuition and books. If your parents helped out with living costs or you got a part-time job while you were in school, you could easily graduate with no student loans.

Today it is virtually impossible to find a summer job that pays enough to cover your education costs. So if you don’t get help from parents or scholarships and grants you have no choice but to get a student loan. If you can’t find a good job when you leave school, student loans become a big financial burden. I know that over 15% of people who file a bankruptcy or consumer proposal with my firm, Hoyes Michalos, owe money on student loans at the time they file. And they owe around $14,000 on student loans when they file. That’s a big number. I’ve advocated for more fair student loan rules for many years and I’ll keep doing so. But for now, if you have student loans you can’t pay, you do have options.

As I said at the start of the podcast if you have a lot of other debts it may make sense to file a consumer proposal or bankruptcy to deal with those debts. So even if your student loan is too new to be dischargeable, dealing with the other debts may free up enough cash to allow you to service the student loan.

As Richard Howell said on the podcasts, if you have no choice but to file now it is possible to file again after you reach the seven year mark. And, as we discussed today, a hardship application may be an option after five years. What’s the best option? Every case is different. So your best option is to talk to a licensed insolvency trustee. The only debt professionals licensed by the federal government and by law there are no upfront fees.

That’s our show for today. Full details on student loans and the student loan hardship rules and a full transcript of today’s show can be found at hoyes.com. Until next week, I’m Doug Hoyes, thanks for listening. That was Debt Free in 30.

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What exactly is debt settlement?

Debt settlement is an offer you make to your creditors to have your debt considered paid in full for payment of less than you owe. Your creditors agree to settle for pennies on the dollar because otherwise, they may see nothing or far less than that.

How much will creditors settle for?

This depends on many factors including how big the debt is, how old it is and how far in default you might be. Creditors will accept a settlement that involves less than you owe if they think they have no option.  If your account is in good standing, and you have no late payments, you are less likely to be able to negotiate a reduction directly with your creditor. You may, however, be able to negotiate an interest rate reduction which can help you repay your debt sooner.

A word of caution: we never recommend that you stop paying your debts when negotiating with creditors. If you’ve recently stopped making payments, your creditor will not likely be in a mood to accept a settlement offer early.

How much will debt collectors settle for?

If your debt is old, or in collections, you have a stronger negotiating position to put forward a settlement amount.

On older debt in collections you can expect to achieve a settlement rate of anywhere between 30% to 50% of the debt.  On newer debts you may have to offer up to 70%.

Ultimately, the debt settlement percentage collection agents are willing to accept will depend on what they know about your income, how large the debt is and whether they feel they will be able to sue to collect more. 

Lump sum or repayment plan?

Generally, you can negotiate a better settlement offer if you can provide a lump sum payment. However, don’t discount the benefit of asking for a repayment plan.  It may be better for you financially to negotiate a payment over time for a larger amount if you can’t come up with all the money up front.

How to negotiate debt settlement on your own

Successful negotiation involves many steps, all of which you should follow to ensure that you arrange both the best amount and can complete the settlement deal.

1. Determine how much you can afford. Review your budget and see how much you can realistically pay off. Determine if you have enough money to offer a lump sum amount or if you want to ask for a payment plan.
2. Write down your ‘story’. You want to have the details of why you are experiencing hardship, and why you need to settle your debts, prepared before you make any phone calls. It’s important that you stick to the truth and stay on script during your conversation. You don’t need to disclose embarrassing personal details, but you do need to provide enough information to convey a sense of need. For example, you may say “I was sick and couldn’t work and fell behind, I’m back at work now but need some help catching up”. To get the best deal, your creditors need to know there is a downside. If it’s feasible, you might mention that you are considering filing bankruptcy or making a formal consumer proposal. Again, be honest. If you are only trying to settle one old debt, this may be an idle threat so don’t use it.
3. Stay calm and know your rights. When you do call, it’s essential that you stay calm and don’t let the creditor or debt collector throw you off. The debt collector’s goal is to collect as much money as they can, but they are not allowed to issue threats or speak harshly. Before you even make that call, educate yourself on your rights when it comes to dealing with collection agencies, so you know what is allowed and when they are stepping over the line.
4. Clarify and write everything down. During the conversation ask questions. If they say they are going to sue you, ask if and when they will be notifying you. Make sure you fully understand the deal you have both agreed to, confirm this more than once and write down critical points during the conversation. Don’t be afraid to ask them to repeat themselves so you can take notes.
5. Make sure you are dealing with the right person. Confirm that the person you are talking to has the right, and authority, to make a settlement offer. It’s always best to speak directly with your creditors if you can but if you account has already been sent to collections you may need to deal with the collection agency.
6. Don’t be afraid to hang up. If things are not going well, feel free to end the conversation. If you can’t get a workable agreement, it’s time to explore your other debt settlement options.
7. Get it in writing. Once you have agreed to a settlement amount and payment terms, confirm everything in writing. Send an email right away outlining what you have agreed to. Have them send a confirmation back and any paperwork necessary to formalize the offer. Confirm how and when you will be making your payments.
8. Make your agreed payments. After you have your settlement agreement in writing make sure you complete all your agreed upon payments. If you miss payments your deal could be null and void; your creditor will pursue you for the full amount and possible additional costs as well.

While it is possible to negotiate with your creditors on your own, it’s not always the best choice. If you have significant debt or are having trouble with multiple creditors, contact us to talk with a licensed professional about legal debt settlement options before you begin. Consultations are free and can help you avoid the lengthy process, and stress, of trying to make calls on your own if they are not likely to be successful.

The post Can I Negotiate a Debt Settlement on My Own? appeared first on Hoyes, Michalos & Associates Inc..