The treatment of debts is similar for both bankruptcy or consumer proposal in Canada, so while I mention bankruptcy below, the same principle applies to paying bills before making a proposal to creditors.

Unsecured creditors

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As a general rule, you can stop making payments to unsecured creditors or on debts included in your bankruptcy shortly before filing. So it’s safe to stop paying debts like credit cards or payday loans and avoid calls regarding collection accounts while preparing to file.

However, do not think this means you can stop paying your unsecured debts months before filing. An unsecured creditor won’t wait long for you to file before taking further action like seeking a wage garnishment.

Debt consultants often advise you to stop making payments months before completing a debt settlement or consumer proposal. This is not a good idea. Defaulting on payments if you do not eventually declare bankruptcy can have significant negative financial consequences. Your total debt will increase due to missed payments and additional interest charges. As I said, creditors may also send your account to collections, report defaults to the credit bureaus, and take legal action to enforce collection if they can. If you don’t file, you will have higher debt levels, and your credit score will fall.

Credit card debts

While you can stop making your minimum credit card payments if you know you will be filing bankruptcy, you should also stop putting new charges on those accounts. Taking on debts with the intent not to pay them back is a fraud. This is just one thing you should not do before filing bankruptcy.

If you know you will file imminently, do not take out a cash advance on your line of credit or credit cards, and stop using your cards for new purchases. Doing so could jeopardize your bankruptcy discharge and may lead to criminal charges if considered fraud. Your creditors can demand that you pay back that money even if your other debts are forgiven through bankruptcy.

Secured creditors

Bankruptcy does not deal with secured loans like a mortgage or car loan, and bankruptcy protection does not stop a secured creditor from repossessing your car or home if you are behind on payments.

That means you must keep up with your secured debt payments if you want to keep those assets.

If you are surrendering a leased or financed vehicle as part of your bankruptcy or proposal, you can contact the lender to arrange to return the car and stop making monthly payments. It’s a good idea to keep insurance on the vehicle until your auto lender picks up the vehicle.

Alimony and child support

Not all debts are dischargeable in bankruptcy or consumer proposal in Canada. Family support debts cannot be forgiven by filing bankruptcy. If you file, you will need to keep up with your monthly alimony and support payments and catch up on any arrears.

Student loans

Student loan debt is another complicated area to discuss with your trustee before filing. Private student loans, such as student credit card or line of credit, are unsecured debts. You can stop making monthly payments if you intend to file bankruptcy, and these debts will be discharged in your bankruptcy.

Canada or government student loans, however, have a waiting period. If you have not been out of school for seven years, these student loans will remain after bankruptcy. Due to the stay of proceedings provided in a bankruptcy, you can stop making payments while bankrupt (or in a consumer proposal), but interest will still accrue. In addition, Canada Student Loans may report these as late payments on your credit report. You will be required to continue payments upon completion of your proceeding.

Utility and other bills

Ongoing bill payments are a situation to be considered on a case-by-case basis. Technically utility arrears including hydro, gas, internet, cell phones and other recurring monthly payments are unsecured debt and, as such, can be wiped out when you file bankruptcy. However, some utilities will also shut off your services for arrears and may ask for a large deposit to reinstate your account.

If you need ongoing services, you will want to maintain monthly payments. When it comes to your cell phone or internet, talk with your trustee to determine the best course of action based on your situation. While Rogers or Bell will not generally cancel your service if you are up to date at the time you file, if you are significantly in arrears or want to choose a cheaper plan, it may make sense to stop paying and include those debts in your bankruptcy.

After filing

As soon as you file bankruptcy, you should immediately stop making payments to any of the unsecured creditors included in your bankruptcy. If your creditors contact you, let them know you have filed bankruptcy and give them the name of your Licensed Insolvency Trustee.

Speak with a Licensed Insolvency Trustee

If you are struggling with debt and considering bankruptcy, talk with your trustee about which debts you can safely stop paying and when. If you are certain you will file, it may make sense to stop paying your creditors and save money for necessary expenses like your rent, mortgage and living costs. If you are not sure you will file, continue to make minimum payments to avoid any further damage to your finances.

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1. Personal budgeting. Make a budget and pay off debts on your own.
2. Debt consolidation loan. Apply for a new loan to pay off multiple smaller debts.
3. Credit counselling. Work with a credit counsellor to arrange a repayment plan.
4. Debt settlement. Talk with your creditors to reduce interest or make a payment offer.
5. Consumer proposal. Make a legally binding debt settlement with your creditors to pay back less than you owe.

In this post, I’m going to review these different approaches to debt reduction.

DIY debt solutions

It’s possible to reduce your debt on your own if you are not already living paycheque to paycheque, and you can find ways to reduce your expenses drastically enough to funnel additional money towards debt repayment. The best place to start is with a list of your debts. You can use our free excel debt repayment worksheet as a start.

Next, you need to decide which debts to pay off first. There are two popular debt repayment methods to consider.

Avalanche method

With the avalanche method of debt repayment, you pay off your debts from the highest to the lowest interest rate. This is my preferred method of paying down debt. Paying off high-rate credit cards and payday loans first reduces the amount of money you are wasting on interest faster, allowing you to get out of debt soon.

Snowball method

The snowball method involves paying off debts from the smallest amount owing to the largest balance owing. The motivation of paying off some debts can help keep you on track with your goal to become debt free. If you have a series of very small debts, the snowball method can also help you get these payments out of the way, making managing your bills a little easier in future months.

The key to budgeting your way out of debt is to stop using your credit cards and lines of credit to pay for things. You want your balances to go down, which means you must stop putting new charges on these accounts. Use cash to pay for expenses while you pay off your credit cards.

Negotiating with your creditors

I generally advise against using a for-profit debt settlement company. These agencies do not have a good success rate and can do more harm to your credit than good.

However, there is nothing harmful in picking up the phone and negotiating with your creditors on your own. You can ask for more time to pay your debt, an interest rate reduction or even ask if they will accept less than the full amount due in exchange for erasing the rest of what you owe.

Here are some quick tips if you are going to negotiate with creditors on your own:

• Write down what you want to offer upfront
• Make sure you can afford what you offer
• Getting any deal in writing before you make a payment

Debt consolidation loan

A debt consolidation loan is a loan used to pay off multiple smaller debts. It allows you to combine multiple payments into one smaller monthly payment, generally at a lower interest rate and spread over a longer period of time. Of course, debt consolidation doesn’t reduce your debt unless you can pay more towards the principal each month.

To qualify for a debt consolidation loan, you will need to have a reasonable credit rating, sufficient income to support the monthly payments, and possibly some assets to pledge as collateral in case you default on the payments.

And that is the big risk with a debt consolidation loan. If you default on a secured debt consolidation loan, you may lose your car, house or other assets.

Credit counselling

A credit counsellor can negotiate a repayment plan where you pay your debts in full but at a reduced interest rate. This is called a “Debt Management Plan” and works well if you can repay your debts in full.

A credit counselling program will cost an additional 10% of what you owe. So if you repay $12,000 in debts through a debt management program, your total cost will be $13,200. 

The advantage of working with a credit counsellor is that they can set you up on a monthly payment program and help keep you on track with your payments. They cannot, however, negotiate a deal to pay back less than you owe.

A debt management plan will affect your credit rating, as any debts included in the program will be marked as included in a repayment program (R7).

Consumer proposal

A consumer proposal is a legally binding settlement between a debtor and a creditor. It typically involves the debtor making one monthly payment, on an agreed-upon settlement amount, over a period of no more than five years. At the end of the proposal period, the debtor is then released of any remaining balances, which may be left from their original amount of debt.

A consumer proposal is an option if you can’t pay your bills anymore. In other words, if you cannot pay back your debts in full, on your own or with the help of a credit counsellor, then a consumer proposal can provide needed debt relief.

A consumer proposal is a bankruptcy alternative that can eliminate more than credit card debt. As a government debt relief program, a consumer proposal can deal with tax debts, student loans, payday loans, and other unsecured debt.

As with a debt management plan, a consumer proposal is a repayment plan that will appear on your credit report as an R7.

Bottom Line

If you are struggling with debt, talk with a Licensed Insolvency Trustee early about your financial situation. Trustees are trained and licensed to discuss all ways out of debt, not just a consumer proposal or bankruptcy.

What you do not want to do is sell off assets, liquidate your RRSP or jeopardize other assets with a new loan. Discussing options like a consumer proposal with a Licensed Insolvency Trustee can ensure you preserve these assets while you eliminate your debt.

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However, bankruptcy is a legal process, and your conduct before filing will be under review. There are some things that you should never do before filing for bankruptcy. Some of these mistakes may be considered offences under the Bankruptcy & Insolvency Act and can jeopardize your ability to obtain your bankruptcy discharge. Others are just not a good idea financially.

At the same time, if you are considering bankruptcy as an option to help you get out of debt, there are specific steps you can take before declaring bankruptcy that can make the bankruptcy process run smoother. In the second half of this article, I’ll provide some tips on what you should do before filing.

Mistakes to avoid before filing bankruptcy

Don’t max out your credit cards

One question your trustee will ask as part of their assessment is if you used your credit cards or lines of credit for any purchases or cash advances three months before filing. Using your card in the usual sense, to buy groceries for example, is not likely a concern. However, maxing out your credit cards right before filing with the intent not to pay them back, can be a problem.

A creditor can object to your discharge if you make unusual or excessive transactions, like running up your credit cards to buy things, prior to declaring bankruptcy.

Avoid new loans right before filing

It’s not unusual for someone struggling with debt payments to consider getting a new loan before filing to keep afloat. However, your trustee will ask if you applied for and received any new loans or credit right before your bankruptcy proceeding.

Borrowing money you know you can’t repay or you know will be forgiven when you file bankruptcy might be considered fraud. Any debts you take on fraudulently are not included in your bankruptcy. This means you would have to repay those creditors in full after your bankruptcy.

Don’t repay one creditor in preference to another

If you owe money to a friend, family member, or employer, you might be tempted to pay off those debts before declaring for bankruptcy. Many people see these as a moral obligation, but you should avoid paying creditors selectively.

Paying one creditor over another shortly before filing bankruptcy is known as a preferential payment. Your trustee can request preferential payments be set aside and may sue the person you paid to get the money back so the funds can be distributed equally among all your creditors.

Your trustee will ask about extra or full payouts you’ve made to ordinary creditors in the three months before filing but can look back as far as one year for preference payments to related individuals.

Don’t conceal assets, income or debts

Bankruptcy is a legal process, and you will be required to provide accurate information to your trustee. One of the bankruptcy documents you will sign is a Statement of Affairs, which is simply a list of the things you own, who you owe money to, and your monthly budget. You are signing this statement under oath under penalty of perjury if you lie.  It is submitted to the bankruptcy court, and a copy is sent to your creditors.

Making a false entry or hiding assets is an offence under the Bankruptcy & Insolvency Act and the Criminal Code. Your discharge may be affected, and penalties can include criminal conviction and possibly imprisonment for fraud.

Any funds you receive while bankrupt are part of your bankruptcy estate. You are required to disclose if you expect to receive future income, including an inheritance, bonus at work, or tax refund.  This is not the case for a consumer proposal, where future income is yours to keep.

Don’t transfer or sell property fraudulently

When you file bankruptcy, you surrender your assets in exchange for the forgiveness of your debts. It is not a good idea to transfer, sell or move assets out of your name to avoid having them seized as part of your bankruptcy.

Prior to filing, your trustee will ask if you sold, transferred or disposed of any assets within the last five years. This would include selling or transferring real estate or vehicles or cashing in RRSPs, life insurance, stocks, and bonds.

If you dispose or transfer assets to hide them from your creditors, you might be denied a discharge and maybe even be subject to criminal penalties.

If you have sold any of your assets before filing for bankruptcy because you needed funds or your expenses such as rent, utilities, or food, that is acceptable. Still, be prepared to explain all your transactions, including how you used any money and provide supporting documentation when needed.

Avoid selling assets or cashing in savings to pay off debts

It is not unusual for someone to sell off certain assets or cash in savings to stay afloat while dealing with hefty debt payments. While liquidating some assets to make regular monthly debt payments may not be illegal or may not affect your bankruptcy, it’s not necessarily a good idea for you financially.

For example, in Canada, most pensions, including RRSPs, are exempt from seizure in bankruptcy. It is not a good idea to cash in your retirement savings only to find it does not solve your debt problem. Similarly, it may not be a good idea to sell off assets to partially pay off debts if it still means you need to file bankruptcy.  An alternative may be to consider using the value of these assets to make a consumer proposal to creditors to repay what you can afford while preserving your assets for your future.

Don’t ignore collection actions

Filing bankruptcy provides protection from creditor actions. While you may have been dealing with collection calls for several months, your creditors may soon escalate their collection activity to suing you in court and obtaining an order to garnish your wages or freeze your bank account.

While bankruptcy protection can stop collection actions, like a wage garnishment, it cannot stop secured creditors from repossessing your car or foreclosing on your home if you are behind on your payments. However, declaring bankruptcy sooner can improve your cash flow, so you are able to maintain payments on your car loan or mortgage to avoid these actions.

If you owe money to the Canada Revenue Agency, they can act to freeze your bank account, garnish your wages or attach a lien against your property without first going to court. While personal bankruptcy can stop a wage garnishment or lawsuit, it cannot reverse a lien once one has been registered.

It is possible to stop making payments to creditors included in your bankruptcy if you are certain you will be filing bankruptcy. However, you must keep up with your mortgage or car loan payment if you intend to keep those assets.

What happens if you commit a bankruptcy offence?

When you go bankrupt, your trustee will review your financial situation before and during your bankruptcy. Bankruptcy law provides your creditors with the right to request a creditors’ meeting at which they can ask questions about your conduct before bankruptcy. You may also be subject to an examination by the Official Receiver as part of your personal bankruptcy duties. With all this possible oversight, you can see that it is not a good idea to attempt to circumvent the bankruptcy process.

If you are found to have committed an offence under the Bankruptcy & Insolvency Act, you will unlikely be eligible for an automatic discharge. You may have to attend bankruptcy court, at which time the court can issue an absolute discharge, conditional discharge requiring you to pay more, for example, suspend your discharge until a future date or refuse your discharge entirely.

If severe enough, penalties, including imprisonment, can be imposed by the criminal courts.

What to do to prepare to file bankruptcy

Now let’s look at what you should do before bankruptcy, so the process goes smoothly, and you can start getting back on track as soon as possible.

Find a Licensed Insolvency Trustee. You do not need to pay for a referral. Most reputable trustees will offer a free consultation, and you should not have to pay any fees until you sign your bankruptcy documents. Make sure that you feel comfortable talking with and asking your trustee questions, mostly because you are going to have conversations about very personal issues.

When you meet with your trustee:

• Discuss other debt relief options, including taking out a loan to consolidate your debt or filing a consumer proposal.
• Get copies of your credit report to ensure that you include each creditor in the information you provide to the trustee.
• Make a list of your assets. Bankruptcy forms group together some categories, which means that you won’t be required to list every piece of clothing or household item you own. For items that are more expensive, such as vehicles and real estate, it’s always a good idea to have them appraised so you can determine the value of the property as accurately as possible.
• Your trustee will help you build a budget by looking at your income and expenses. They’ll use this information to help you assess alternatives to bankruptcy and, if you file a consumer proposal, determine what settlement payments you might wish to offer to your creditors.

One of the most critical steps a Licensed Insolvency Trustee will likely advise will be to open a new bank account before you file. If you have an account with the bank where you also have debts, your bank may take money from that account to satisfy unpaid debts. This is known as your bank’s right of offset. Additionally, if your creditors have a wage garnishment in progress, opening a new account ensures that your funds are protected. Even though your stay begins as soon as you file, your creditors and banks will take a few days to process this information in their systems.

Once you have agreed with your trustee to proceed with filing bankruptcy, you will need to complete the appropriate forms using the information you have already gathered about your creditors and assets. Your Licensed Insolvency Trustee will prepare the initial paperwork and review the process with you before you sign.

Once signed and filed with the government, your bankruptcy begins, as does your fresh start.

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Information needed when declaring bankruptcy

At the start of you bankruptcy, you will need to:

Be honest – The first and most important of declaring bankruptcy in Ontario is to be honest with your trustee.  Help the trustee better understand your situation by being honest about your circumstances.  The more information you provide the trustee, the better advice we can give you with respect to your options and how the bankruptcy process will work for you.

Essential information – you will need to provide details on:

• Your assets
• Your debts
• Your income
• What caused your financial difficulty
• Recent sales and/or transfers of assets

Credit cards – You will be required to stop using your credit cards as all credit cards in your possession (even ones with a zero balance) have to be surrendered to the trustee once you declare bankruptcy.

Paperwork – If the trustee requests them to process your bankruptcy, provide documents, such as; House Appraisals, Mortgage Statements, Vehicle Ownerships, Pay Stubs, Investment Policy Statements, Bank Statements, Tax Returns, Court Documents, Balance Sheets & Profit Statements (if you’re a business owner).

What are your duties during bankruptcy

The most important duties you’ll do during the actual bankruptcy process are:

• Report income – During the time you are bankrupt, you are required to submit an income and expense report to the trustee each month and provide proof of your income by submitting pay stubs or a bank statement.  Good budgeting will help you track your income and expenses to avoid overspending in the future.
• Make payments – How much your bankruptcy will cost will be explained to you by your trustee.  The amount of surplus income you may be required to pay during the bankruptcy will be calculated by the trustee and will be based on the income reports you submit.  The amount you’ll be required to pay can be based on:
  • Your income
  • Certain types of expenses
  • Your family size
  • Your assets
• Taxes – A bankruptcy trustee is required to file your tax return for the calendar year you filed the bankruptcy in.  Your trustee will explain what information is required from you in order to allow the trustee to file this return on your behalf.  Certain tax debts can be included in a bankruptcy, but if you become eligible for a refund, the refund is paid to the bankruptcy estate.
• Counselling – During the bankruptcy you’ll have to attend two credit counselling sessions.  The purpose of the counselling session is to provide you with useful information on:
  • Money Management.
  • Budgeting.
  • Shopping / Spending Habits.
  • Recognizing the danger signals of getting into debt.
  • Credit Re-building.
  • Referrals to other types of services / counselling if appropriate.
• Co-operate – Not only is it required, but it is a good idea to co-operate with the trustee in the administration of the bankruptcy estate.  Make sure the trustee knows how to contact you by keeping the trustee up to date with changes to your address, phone number and email.  It’s also prudent to keep a copy of all your bankruptcy documentation too.

For more information about your duties after declaring bankruptcy in Ontario watch our short video:

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The following duties are rare and don’t happen in every bankruptcy, however you may also be called upon to:

• Attend a creditors meeting or examination.
• Assist the trustee with the sale/disposal of an asset.
• Inspect the claims of the creditors.
• Attend bankruptcy court.
• Inform the trustee if you believe a creditor is filing a fraudulent claim against you.

If you complete your duties and payments in a timely fashion and there’s no objections raised, you may be eligible to receive an “Automatic” discharge from bankruptcy.

You could be eligible for an automatic discharge:

• First time Bankrupts – After 9 months
• Second time Bankrupts – After 24 months

If you’re considering filing for personal bankruptcy, give our trustees 30 minutes of your time and get started with a personal consultation. We have convenient locations throughout Southern Ontario and we provide expert advice on all your debt management options.  Call us at 1-866-747-0660 to ask a question or book an appointment today.

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Bankruptcy and travel: When do you need to be in Canada?

During your bankruptcy or consumer proposal filing, there are times where you will need to be in Canada to complete certain bankruptcy duties including attending meetings. These meetings include:

1. Credit Counselling Sessions – You must successfully complete two credit counselling sessions in order to be discharged from bankruptcy or complete consumer proposal. In these sessions, you will learn about useful life skills like money management, budgeting, and general financial management. These two sessions can be scheduled around your travel plans within specified periods.
2. Meeting of Creditors – While a meeting of creditors is very rare in a personal bankruptcy, it is more common in a consumer proposal. In this meeting, your creditors or the Official Receiver may request this meeting after you have filed, and you must attend. Your Trustee will be asked to prepare a report about your assets and liabilities and creditors may ask you questions about your financial affairs. You would receive ample notice before this meeting takes place (roughly 3 weeks), so you would be able to arrange travel plans accordingly.
3. Examination – Another event that may take place during your bankruptcy filing is an examination under oath. Again, this is a rare occurrence but one that mandates your physical attendance. The Official Receiver may send you a notice to appear and answer questions about the causes of your bankruptcy, conduct, disposition of property, and the nature of your debts. An examination occurs rarely and often the bankrupt is selected at random.
4. Discharge Hearing – While most bankruptcies have an automatic bankruptcy discharge at the end of the 9-month period, there are certain cases in which the bankrupt is not discharged automatically: when mandatory duties are not completed, when personal tax debt is $200,000 or more and represents 75% or more of your total debts, and when it’s your third bankruptcy filing. In these cases, you would have to appear in bankruptcy court to explain your situation in order to be discharged.

In all cases, you would be notified well in advance of mandatory events so that you can plan any extended travels accordingly. You should also notify your Trustee if you are planning to leave Canada for more than three weeks. In general, if you are just travelling for work or vacation, your Trustee does not need to know.

Can I move outside of Ontario or Outside of Canada while in a bankruptcy?

Yes, you may move outside of the province or country while in a bankruptcy or consumer proposal as long as you can complete your duties. In addition to the mandatory meetings we mentioned earlier for which you would need to be physically present, there are also other required duties that you need to complete while you are in a filing in order to be successfully discharged.

These duties are:

• Making all required payments in a proposal or bankruptcy, including surplus income
• Reporting your monthly income and expenses and any changes to your Trustee

As long as you are completing all of your required duties and you appear for mandatory meetings, where you live during your bankruptcy or proposal filing will not matter.

Does bankruptcy affect a passport application?

 No. Filing for bankruptcy does not have any impact on a passport application. The Bankruptcy & Insolvency Act does not prohibit application or renewal for a passport and there is nothing in the application process which even requires you to disclose that you are bankrupt.

Can I file bankruptcy from outside of Canada?

To file for bankruptcy or a consumer proposal, the process begins with a consultation with a Licensed Insolvency Trustee to review all your options for debt relief. The assessment must be completed in-person. Therefore, if you live abroad, you would have to travel back to Canada to meet with a Trustee. You would also need to be present to sign necessary paperwork to get your filing started.

Another important point to understand is that it is very hard for unsecured creditors in Canada to successfully pursue you while you are living outside of the country. If you are considering Canadian bankruptcy while living abroad, there must be a compelling reason to file. Such a reason may be that you have to return to Canada for a year on a temporary work term and would need to deal with your debts. We explain in greater detail the process for filing bankruptcy while living abroad.

If you are experiencing financial trouble but are concerned about debt relief options impeding your ability to travel, don’t worry. A bankruptcy or consumer proposal will not have any negative impact on your routine. In fact, at Hoyes Michalos, our Trustees will do everything they can to accommodate your schedule. Contact a Licensed Insolvency Trustee today to review your options for free.

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