1 – Bankruptcy During Covid-19

Wayne 0:00

Well hi and welcome to the Debt Matters podcast, a place where you can get answers to your financial problems from Licensed Insolvency Trustees from across Canada.

I’m Wayne Kay. And if you’re lying awake at night stressed about what you’re going to do about your debt or if you dread answering the phone because of those bill collectors, this show is for you.

So what’s a Licensed Insolvency Trustee? Licensed Insolvency Trustees are federally regulated professionals who provide advice and services to individuals and businesses with debt problems. LIT’s help people make informed choices to deal with their financial difficulties.

So during our COVID pandemic, it’s been a tough and tumble ride. The economic effects on Canadians have varied wildly. Recent stats are saying many Canadians have seen significant growth in their wealth in the last year. But on the opposite side, we also see Canadians who are struggling financially because of job losses. And for many their entire worlds have been turned upside down.

Even with financial support from the CERB many Canadians have fallen through the economic cracks. More than a million Canadians remain underemployed or unemployed, while millions more are adjusting to working from home. And I think in the next year, we’re truly going to feel the impact of this pandemic. So once again, that is why we created the debt matters podcast. My guest today is Derek Chase from Derek Chase & Associates in Campbell River BC. Derek, thanks for being here.

Derek Chase 1:30
Thanks very much, Wayne. It’s a pleasure to be here.

Wayne 1:32
Derek, as I was talking about those troubles that Canadians are going through, you’re nodding your head and saying, Yeah, we’re seeing a real divide nowadays.

Derek Chase 1:41
I would agree totally with that, you know, when you were speaking, the image that came to my mind was thought of a roller coaster. I mean, there’s been so many dramatic changes and announcements every week. And with things going this way in that way. It really has affected people from coast to coast dramatically. And I think now more than ever, people need to be aware of what the law is and how they can utilize that to help in their own situations.

Wayne 2:10
Well, I think this is where the show is so critically important, especially with you, and other LIT’s – maybe you can explain a little bit more of the importance of an LIT as opposed to just, you know, going to the corner store and saying I need a loan to put all my stuff together

Derek Chase 2:28
Get the facts, I think is hugely important before you make any big decision. And if you’re relying just on a friend’s comments from their past experience, or rushing off to get perhaps a loan with a super high interest rate, you might be making some steps that you wish you hadn’t taken. And again, with big decisions, certainly when I make a big decision, I want to do the research. I want to gain facts, get all the background that I can and then feel confident moving forward with making a choice with what to do.

Wayne 3:08
And I think a lot of people like when they hear insolvency trustee or they hear the word bankruptcy, it terrifies them, just really freaks them out.

Derek Chase 3:17
I think more so in the past and then the present. But I always look at the use of bankruptcy as just another tool in the toolbox. It’s a financial tool that allows people to reset and in different circumstances. And it’s one of several options that we would go over with an individual and explore as to whether that tool would fit their setting and enable them to have a brighter financial future.

Wayne 3:47
And it wasn’t until I started working with LIT’s that I actually got to understand how this whole thing worked and realizing how how many Canadians don’t realize the resource that you are to to many of them.

And it starts with a free consultation. We’ll talk about that later on. So what do you think are some of the options like the people who are going through a tough time right now financially? Maybe their debt is now out of control? Maybe they’ve lost a loved one, tragically, maybe they’ve lost their jobs? Maybe they’re, you know, on the verge of losing their homes? What are some of the options that Canadians have?

Derek Chase 4:26
Well, some of the options that I think you want to steer away from initially, if you are facing a debt situation, would be to liquidate assets that you might not have to. For example, an RSP is something that a creditor can’t necessarily force you to do something with. But if you rushed out and liquidated that, not only would you lose that asset, you would create another tax liability on the redemption. Or perhaps you go to a friend or family member and try to get a large loan and get them to cosign. And, that might not be the best setting, either. So exploring your options – talking to a trustee. A trustee will just analyze your situation, assess it and provide you with a ton of feedback as to different ways you could go. So it’s important to, to gain that understanding.

Wayne 5:24
It’s funny that you bring up that – touching the RSPs, because I have actually had friends who’ve gotten into a little bit of debt, and they’re quite concerned about it. And they’re worried that it’s growing. And they’ve said, Well, I guess I’m going to start to cash in some RSPs and bring this down. And I’ve said, Well, no, that’s a terrible idea. You don’t want to be doing that. Can you expand a little bit more on what you said – that it’s the tax implication. But you don’t want to use that to pay off your debt and then not have anything. What are your thoughts?

Derek Chase 5:55
Well, an RSP is really designed for a person’s retirement. And several years ago, the government recognized that there was an imbalance between those people who might have pensions and paying money into a pension, which is exempt from creditors, versus those people that didn’t have a pension.

So they brought in a change to the federal law, which allowed for a person to contribute to an RSP and that contribution to be exempt from creditors. But there are certain safeguards to that, for example, any contributions to a RSP, within the 12 months preceding a filing of a consumer proposal or a bankruptcy is not exempt from creditors. But that’s the background. It is just to make a level playing field across Canada, for people with pensions versus people who don’t have pensions, and definitely a mistake to cash it out – just to deal with that, before you know all of your options.

Wayne 6:55
At what point should people reach out to get help with their debt?

Derek Chase 7:01
Well, that’s a good question. Everyone’s got a little bit different tolerance for dealing with that. Sometimes we talk to people who are owing between $5,000 and $10,000, and they’re extremely uncomfortable, and they’re unable to just have a functioning monthly budget. And in those situations that 5 or $10,000, might as well be Mount Everest. I mean, they just can’t get over that.

And I think if it’s on your mind a lot, if you’re getting calls from collectors, if your monthly budget is just not working, if your debt just isn’t moving, and you’re just servicing a high interest rate, – those are those are some indicators that you should be reaching out. And again, trying to discover the facts, just some of the options that might be able to get you to break through that negative momentum.

Wayne 7:57
How does this whole process start? So what happens? Somebody just calls you and says, Okay, I think I need some help. I’ve heard from friends that maybe you can help me out. Can you kind of walk us through what it looks like?

Derek Chase 8:12
Well, historically, it starts with a phone call. We’d get a phone call, someone would inquire and ask for a meeting. We would meet with them and go through their situation. Now we’ve morphed a little bit more towards an online setting where we deal with either emails or zoom meetings, or that type of thing.

But it initially starts with a meeting, and virtually any trustee across Canada would provide a free initial assessment. So it’s certainly something to take advantage of – to find out that information for free. Especially if someone’s trying to pressure you to sign or do something, or commit to a big payment that you’re not comfortable with. Whether that’s a bank or somewhere else – take advantage of that free consultation and make the call or email. Any trustee in Canada would be glad to give you some information about how to deal with your situation.

Wayne 9:13
And I know that when you talk to somebody for the first time, often they say okay, here’s somebody who actually understands what I’m going through. They actually have some ideas about what to do. They see hope for the first time and that’s the hard part for a lot of people – they lose hope, because they’re, as you said, they’re crushing under this debt. And it’s difficult to deal with for a lot of people. So there’s kind of a joy that happens after that initial call if you could say joy regarding debt.

Derek Chase 9:42
Well, yeah, that’s true. I don’t know if it would be absolute joy, but I’ve certainly heard the phrase, I’m already feeling the stress leave me. Yeah, that’s it. Once people discover that there’s a pathway to walk that can get them to the other side of this predicament that they’re in.

I mean, so much stress, so much lost sleep, just thinking, what am I going to do next? How am I going to deal with this? How am I going to meet my bills next month? So once you start to find out information, I think that leads to stress release, and you can put a plan in place or you know that there’s federally approved processes.

It’s the government of Canada’s Parliament saying, we know that sometimes people get into a pickle. And there needs to be a way out of that. Can you imagine if there wasn’t that available? It would just be horrible. So yeah, there are countries that look at the Canadian system, and recognize that it’s a good one. So Licensed Insolvency Trustees are well equipped. And I know my colleagues would share those sentiments that we try to give good, honest advice, and then go from there.

Wayne 10:58
That’s great advice. Let’s talk a little bit more about some of the different options if somebody is in debt. Now there’s the big one – bankruptcy and there’s also consumer proposals. Can you explain some of what those are?

Derek Chase 11:10
Well, both of those are federally regulated options. And the consumer proposal option is a lot like it sounds, it’s you’re making an offer, or a proposal generally to your unsecured creditors to repay back a portion of the debt over time.

And the really positive thing about a consumer proposal is that there’s a stay of proceedings, the same as in a bankruptcy filing. And that simply means that collectors or creditors stop collecting from you. And you don’t pay them directly. So essentially, you’re trying to come to an agreement or an offer, where you can pay back some money that really fits your budget over time.

So perhaps a person’s gone to try and get a consolidation loan from a bank or credit union. And they just don’t qualify – just don’t check off all the boxes. Well, a consumer proposal is that logical next step, because it’s designed such that it will be a consolidation loan – in a sense that the payment fits your budget, and still allows you to make the future months livable, and workable.

So it’s become very popular. And as of now, it’s, it’s more popular, or there’s more filings through a consumer proposal across Canada, then there are bankruptcies. So it’s really become a win-win for both the people owing money and the creditors who end up recovering a little bit more than in a bankruptcy setting. So they’re, they’re happy with it as well.

Wayne 12:39
And what about bankruptcy? What does that mean in this day and age?

Derek Chase 12:44
Well, bankruptcy is appropriate in certain circumstances. It gives a person relief from their debt. It’s a legal process like a consumer proposal, but in a bankruptcy setting, you’re getting that stay of proceedings, and then you’re traveling down a pathway to get what’s called a discharge from bankruptcy.

That takes different lengths of time, depending upon your income situation. And if you’ve had a prior bankruptcy filing maybe a couple decades ago – but it still will get you to the other side of the mountain. I like to use the analogy that both a consumer proposal and a bankruptcy are just two different roads to get you around the mountain. But both of them are going to get you there.

Wayne 13:36
Some of the immediate questions people might have if they’re listening to the show, and they’re freaking out over their debt – they start worrying when they hear bankruptcy, consumer proposals,

Some of the things that maybe pop into their mind – can they keep their car? Can they keep their house? What about the tools that they need? So let’s break that down. So how does that affect your house?

Derek Chase 13:56
How it affects your house – that’s a whole other podcast on itself right there, Wayne. It’s some analysis that needs to go into the question of keeping the house. But I think it’s worthwhile understanding a little bit of the background of why you can keep stuff.

And that is, the federal government wants or has put these provisions in place to allow the honest but unfortunate person a fresh start. And so you can’t really get a fresh start if you lose all your stuff. If you have tools and you’re a carpenter and you go through a consumer proposal or a bankruptcy filing and they’re all taken from you, you can’t continue to earn a living.

So the federal government has put law into place which allows each province to set its own exemptions for what a person can keep when they proceed through a consumer proposal or a bankruptcy filing. In BC, those exemptions are going to be a little bit different than Alberta or Nova Scotia. And I can only speak to the BC exemptions. There are some federal exemptions such as the RSP that we touched on a few minutes ago.

In British Columbia, as far as the house goes, we have to take a look at how much value is in that house. And value being the amount of the fair market value less what the mortgage balances. But there is an exemption for equity in your principal residence of $9,000. And in the lower mainland, that would be $12,000. So small adjustment there. And what that means is, a creditor can’t force you to do anything with at least $9,000 from your house, and that principal residence could be, freestanding house, a condo, or a fifth wheel. There’s all sorts of things that people will live in – could be a boat if you’re along the coast here. So it’s allowed – it’s a provision to allow you to try and maintain a residence. And so $9,000 is the amount that we’re normally dealing with there.

Wayne 16:14
Okay, I love that idea. So we will do another show on that in depth. But so you do get to keep your car, your house and your tools.

Derek Chase 16:21
For the vast majority of time, I would say yes to tools of the trade – there’s an exemption for tools of the trade of $10,000. People might think, $10,000, I’ve got way more tools than that – I’ve been accumulating these tools to be a mechanic or a carpenter for a long time.

But what we’re looking at when we talk about $10,000, is what that market value is today. You know, could you go and sell those tools for, for $10,000 or, or less today, right. And although those tools might be incredibly valuable to the tradesman or tradesperson, to the general public, often they’re worth not very much. So $10,000 can go a long way in keeping your tools of the trade.

That same sort of analysis applies to a vehicle. You’re allowed to keep the vehicle up to $5,000 in value. And nobody’s really in the business of taking vehicles. So even if the value of the vehicle crept up over that $5,000 and was more like $7,000, then oftentimes, the person would still retain that $7,000 vehicle, but they would have to account for that $2,000 and make that available to their creditors over time.

In other settings, where a motor vehicle has a loan against it, again, we get back into that setting where we’re doing an analysis of what’s the market value of the vehicle less the secured car loan against that. And so if the value was $13,000, on the vehicle, and the loan balance was $10,000, the equity there the value would be $3,000. And the exemption of $5,000. would allow you to keep your vehicle so long as you continue to service the secured car loan.

Wayne 18:19
Okay, so many different options for people to look at. And obviously, it’s not just a cut and dry yes or no answer. It’s up to each individual and what you analyze from each person. We’re running out of time for our very first episode. What would you like to end with? What is your final advice for us?

Derek Chase 18:37
Well, I think sometimes people feel that they’re in trouble with their finances – they’ve got a lot of debt, and that maybe that cartoon image comes to mind where the person standing there naked in a barrel, and they’re in big trouble. That’s simply not the case.

Wayne 18:54
I think that’s a perfect place for us to wrap up the show. And Derek, thank you very much for all the information. If people want more information about Derek Chase, you can go to bankruptcytrusteebc.ca.

And that’s it. For our first episode of the Debt Matters podcast. Make sure you subscribe to the Debt Matters podcast on Google, Apple, Spotify, or wherever you love to grab your podcasts. And of course get more information at debtmatters.ca to learn more about where to find podcasts, subscription details, and a lot more. Thanks for listening.