12 – How Bankruptcies and Consumer Proposals Work in Canada

Wayne  0:04  

Time for another edition of the Debt Matters podcast where we help Canadians find solutions to their debt with Licensed Insolvency Trustees from across Canada. I’m Wayne Kay, and in today’s show we’re going to be discussing what steps need to be taken during Bankruptcy and or Consumer Proposals and what the difference is between each of them. 

Joining me I’ve got Mark Marshall from Allan Marshall & Associates Licensed Insolvency Trustee in New Brunswick, St. John office. Mark, thanks for being here.

Mark Marshall  0:32  

Yes, thanks for having me. And I’ll just point out I’m in the St. John office, but we have offices with Allan Marshall & Associates all over Atlantic Canada and Moncton, St. John, Fredericton, Halifax and Dartmouth and Truro –  just just put a little plug

Wayne  0:47  

Terrific. So lots of options, because each little area is a little bit different I think when it comes to the exact specifics for bankruptcies or Consumer Proposals, correct?

Mark Marshall  0:59  

Yes, there’s small little differences – just in regards to provincial legislation, but generally, the Bankruptcy and Insolvency Act, which with, Bankruptcies and Proposals are administered under its federal legislation. So, most of the same rules apply across the country.

Wayne  1:15  

Oh, okay. Perfect. Let’s jump into it. Today I want to find out the difference between a Bankruptcy and a Proposal because Bankruptcies have been around for a long time, Proposals relatively new in the last 20 plus years or so. So what is the difference between the two of them?

Mark Marshall  1:31  

It’s probably easier for me to start with what’s similar. Let’s just start with both of them provide protection. Both of them implement a Stay of Proceedings, which stops your creditors from being able to call or bug or collect. 

And then the difference between them is that in a Bankruptcy, you’re taking your assets, and you’re surrendering them to the Trustee. So in theory, you’re surrendering your assets, your liabilities to the Trustee. The role of the trustee is to liquidate any assets that can be liquidated, sold, and apply the funds from the sale of those assets towards the debt. 

Now without scaring everybody – there are exemptions. You’re allowed household furniture, your personal belongings, up to a certain value depending on the province. You’re allowed a motor vehicle that you own outright, depending on the province as well. And then you have to remember that secured assets don’t vest with the trustee either. So, a house that’s going to have a full mortgage on it, or a car that’s brand new, that you’re making a vehicle payment doesn’t come to the Trustee. 

I’m not trying to scare people off the top. But with a Proposal, there’s no vesting of assets, so nothing comes to the Trustee. Often what you’re doing is you’re making a plan or proposal – a lot of times a monthly payment to your creditors. They have the right to vote on it and make a decision. They can vote yay or nay. And that would be the biggest difference. 

The other difference is just the mark on your credit rating. A Bankruptcy generally lands on your credit rating for six years from the date you finish it, whereas a Proposal lands on your credit rating for three years from the date you finish it.

Wayne  3:03  

Okay, and your credit rating. When you’re in this situation do you really have to stress about it that much or not?

Mark Marshall  3:10  

No, I don’t think you do. I think you have got to look at it from a perspective. What plan makes the most sense for you? So you’re deciding as to whether or not a Bankruptcy or a Proposal makes sense. Ultimately, you’ll meet with a Licensed Insolvency Trustee. They’ll review your options, make a determination based on your circumstances in terms of what you have in front of you, what you have for assets, what you have for available income, what your debt load is, and then strive to make an offer to creditors – especially in a Proposal, generally to propose you’re trying to yield a bigger return to your creditors than they would yield in a Bankruptcy – because otherwise they’re not going to vote in favor.

Wayne  3:49  

So is there a magic number? When it comes to people you deal with? Is it $20,000, $80,000, $150,000 of debt?

Mark Marshall  4:02  

Well, to qualify for Consumer Proposal, you have to owe less than $250,000, excluding your principal residence. If your house is worth $400,000, for example, that does not work into the overall equation. If your debt load is under the $250,000 threshold, then you qualify to do a Consumer Proposal. 

So generally, it’s unsecured debt, but the secured debt can work in that equation as well. Because when you’re talking about excluding your principal residence – if you had your principal residence, and then you also let’s say owned an apartment building – whether it’s successful apartment building or upside down in terms of the income coming in, and that’s what’s causing the stress –  if that apartment building is on top of your unsecured debts throwing you over that $250,000 threshold that you wouldn’t qualify for a Consumer Proposal,

Wayne  4:55  

Right. So the reason I was bringing that up was- if we were to say it’s $100,000 dollars in debt – then you have to make the decision whether it’s Bankruptcy or a Consumer Proposal. This is where you obviously have – do you make the decision? Or does the person coming in to see you make the decision? Who ultimately has to choose what’s going to happen?

Mark Marshall  5:17  

I think it’s a decision that’s made with our office or with myself personally, it’s a decision that we make together. What I would do is – I look at your income, what you can afford to offer your creditors. And then ultimately, what you’re looking at when you’re making your offer is to determine, Okay, what kind of yield would your creditors receive. If they ultimately voted your Proposal down, and they were looking at a Bankruptcy –  well, if they’re going to get, let’s say, $10,000, in a Bankruptcy, if you offered them a proposal of $9,000, they’re not going to take it. 

So one factor we’re looking at is to make sure that you’re giving them a bigger return than they would receive if they voted you down and left you with no other option, but to do a Bankruptcy. And then the creditors never come back and say that they’re looking for a certain dollar amount. 

The more you can offer them, the more likely they are to vote in favor of it. 

So I don’t often look necessarily at the full debt load, I look at what an individual can afford to do. Because there’s no sense in offering a proposal that’s going to leave you cash strapped every month and leave you in the same position that you’re in when you come in the door. So it has to make sense from a cash flow for your family. And so again, it’s ultimately up to the creditors to decide as to whether or not they’re going to agree to your offer. But I think that you have to make that offer based on what’s going to make your life comfortable.

Wayne  6:40  

I think this is one of the first times we’ve actually dove into this topic of – what can an individual expect with that initial consultation with a Licensed Insolvency Trustee? What does that look like? And how do you look at it? 

So I’m glad that you brought up these key points. Sometimes the Bankruptcy, let’s say if it is $100,000, and the person may only get $10,000?. And then with a Proposal, you can say, Okay, well, we can maybe do $18,000. So then the debtor says, okay, let’s go with the Proposal.

Mark Marshall  7:13  

Yea. So what would happen is you come in, you do your assessment with the Trustee, review the options. The assessment would consist of the Trustee determining what you have for assets, what you’ve got for income, looking at dependents, looking at your cash flow, whether you’ve got childcare expenses that are coming into the household, and then you’re looking at the debt threshold. And then you’re making the determination based on cash flow, what you can afford to do. 

So let’s say, in your example, you offered $18,000. A Consumer Proposal can be stretched out over a 60 month period, five years. What you’re doing, and that is, you’re saying, let’s offer $300 a month for 60 months. And so you will make that offer to your creditors. So in a Consumer Proposal, the creditors received the offer, they have 45 days to make a decision, yes or no. They ultimately will decide – you need 51% of them to vote in favor of it to get it to pass. 

So again, what the creditors are often doing, they’re comparing apples to oranges, right off the get go. They’re saying, Okay, what do we get? And if we force this individual, leave them with no other option but to do a Bankruptcy if we vote this down. So what’s our return going to be? Yes, we’re getting more money than what we would get. They often love to say, okay, is the individual maximizing the term of the proposal? So in our example, yes they’re 60 months. 

If you offer a 24 month proposal, a lot of times your creditors are going to come back and see if you can make a payment for 24 months, you can do it for 60. So they’re looking for a maximum term, and then they’re reviewing your cash flow to say, Look, is there any more wiggle room here? Can we squeeze these individuals for any more money? And again, if you’re covering your bare bones and your basis, a lot of times the creditors are going to look at and say, No, this makes sense. Let’s consider this. 

And so they vote in favor of the proposal, and then it’s ratified by the court, and it’s deemed to be a new contract, it’s accepted. And then what you’re required to do then is just make the payment on a month to month basis. There’s no reporting of income on a month to month basis, you’re just making the payment. 

And then you’re required to go to counseling sessions, throughout the term with the Licensed Insolvency Trustee to make sure that budgetary issues are addressed and make sure you’re going in the right direction in terms of what you’re doing with your money. Also to make sure you understand the risks of using credit in the future. Ultimately, the process is set up to protect you as a debtor – so you’re understanding what you’re doing and also to protect creditors that potentially may, lend money to you again at some point.

Wayne  9:49  

Oh, that’s really interesting to know that that’s how they go about doing it. I also love the fact that you have to go through some counseling when it comes to your money, because I would assume that when you don’t have the money to pay a debt – all of a sudden, – life happens, right? We all know that life happens. And all of a sudden, your car breaks down or the fridge dies, you end up having to buy this thing. And all of a sudden, you can end up backwards again very quickly.

Mark Marshall  10:20  

Yes, it doesn’t take long. So you have got to get yourself into a new mind frame and establish an emergency fund. I find that for most debtors, the biggest adjustment in a Proposal, or even in a Bankruptcy is that they like the idea that they’re on a plan to get rid of the debt, that they’re on the right course. 

But the biggest struggle for them is not having that line of credit or that credit card to fall back on in the event of an emergency because they’re used to it. If the car breaks down – okay, we’ll just put it on a credit card this month, and then we’ll deal with it. And then when you’re in a Proposal or Bankruptcy, you don’t have that access to that credit. So you have to recognize where you’re spending your money, and you have to take the steps to establish an emergency fund, because we all need it.

Wayne  11:10  

And that’s something we should all learn right from grade 12 on.

Mark Marshall  11:14  

Absolutely.

Wayne  11:15  

Wouldn’t it be great if we all understood this? 

Mark Marshall  11:18  

Yes. I always tell people, the same story is that I was in university, and I was studying business. I had gotten a $500 credit card. And like every student, you use it a little bit, and you don’t – if you don’t have the cash to pay it, I can still remember my mother saying to me, she said, Mark, have you made your credit card payment this month? And I said, No, I don’t have any money, can’t do it. And she said, You don’t realize, the effect that will have on your credit. So I rustled up the cash, and I got to pay it. 

And then it was that moment that Aha, okay – because nobody reads the terms of their credit cards, very few people understand that you’re required to make at least a minimum payment every month. They’ll just use it because it’s quick and easy and inaccessible, and then they’ll attempt to try and pay it when they can afford to. But again, if you’re making a payment one month, and then missing two months worth of payments, your credit is going down, down, down.

Wayne  12:19  

But let’s talk about one more positive point here: that once you come up with the Bankruptcy plan, or the Proposal, something positive happens, and that is that the creditors stop calling.

Mark Marshall  12:33  

Yes, they do. They’ll stop calling the minute you file it because the Stay of Proceedings restricts them from doing it. And if you ended up in a Bankruptcy or ended up in a Proposal – the phone calls stop the action or the calls are directed towards the Trustee until they have the information to make their assessment and they’re no longer calling you’re touching base with you. So again, that takes the pressure off people. And taking that pressure off, kind of gives you a chance to assess and say, okay, what have we been doing? What can we do to save some money and start moving  in the right direction?

Wayne  13:09  

And you’ve talked a lot about families and how the families will budget. And this also helps families and relationships, once you have that plan. You’ve seen this in your office, maybe you can give some examples of what people have said to you after they realize there is a plan and there is hope for them getting out of that debt.

Mark Marshall  13:27  

Well, everybody’s situation is different. But people –  there’s always lots of positive feedback where people will say, look, I should have called you earlier. That’s the bottom line. That’s the number one thing you’ll always hear – I should have called you earlier, I was afraid to pick up the phone, I was afraid to call. 

And again, my advice to everybody or anyone that’s listening is if you’re struggling or you’re having financial issues, don’t be afraid to pick up the phone. You call a Licensed Insolvency Trustee. They will give you some advice, you’re not bound by anything. Picking up the phone and saying, look, here’s what’s going on. Can I have a chat with somebody? Again, you’re not committed – you’re not all of a sudden in Bankruptcy. You’re not all of a sudden in a Proposal. You’re getting some information, you’re getting some advice, and then ultimately, you can make a decision. And again, the more knowledge the more power. 

Wayne  14:13  

Absolutely perfect. Final words you want to share with us regarding this?

Mark Marshall  14:18  

I would just say to people, again, look, if you’re struggling or you have any financial concerns, just just touch base with a Licensed Insolvency Trustee. Insolvency trustees are governed by the federal government through Industry Canada. We are licensed to provide financial advice. We’re bound by the courts or an officer of the court. So we’re not using sales tactics to get people through the door. We’re there to help Canadians and provide them with advice to get themselves out of the stress and from an insolvency position to a solvency position.

Wayne  14:54  

Yes, terrific. Mark, we will chat again. I thank you very much for being on the show today. 

Mark Marshall  15:00  

Thank you very much.

Wayne  15:00  

You got it and to schedule a free consultation with Allan Marshall & Associates Licensed Insolvency Trustees, you can go to the website, wecanhelp.ca. And that’s it for today’s Debt Matters podcast. Make sure you subscribe wherever you get your favorite podcasts from and of course, if you want some more information you can always check out our website debtmatters.ca. Thanks very much for listening.