122 – The Different Types of Debt Licensed Insolvency Trustee Deal With

Wayne Kay 00:05
How can a Licensed Insolvency Trustee help you? That’s our topic with the Debt Matters podcast for today where we help Canadians find solutions to their debts with Licensed Insolvency Trustees from right across Canada. 

I’m Wayne Kay and in today’s show – can you declare Bankruptcy when you have income tax debt or what happens to tax debt once you’re discharged? Can you declare Bankruptcy if you owe EI overpayments or anything like that? We’re going to go through a few different scenarios and find out how Licensed Insolvency Trustees can deal with different types of debt.

My guest today is Glenn Steiner with Allan Marshall and Associates Licensed Insolvency Trustee in Alberta. They’ve got offices in Calgary, Edmonton and Red Deer. Thanks for joining me today, Glenn.

Glenn Steiner 00:59
Thank you for having me.

Wayne Kay 01:00
Last time you were on we were talking about Bankruptcy and I think we started off the show to find out what it is that can actually get wiped out when you go through a Bankruptcy. And I thought, well, that would be a great thing for us to really expand on the different types of debt that LITs deal with on a regular basis. So some of the different debts that are out there. What gets wiped out if you go into Bankruptcy?

Glenn Steiner 01:26
Well, generally speaking, pretty much every debt that you have gets wiped out with Bankruptcy. With the exception of debts found under section 178 of the Bankruptcy and Insolvency Act, there are several different sections within section 178.

Any fines imposed by the court, any alimony or child support, those don’t get wiped out. If you have a finding of fraud or embezzlement and misappropriation, those debts don’t get wiped out. There’s a number of debts and if listeners wanted to Google section 178 of the Bankruptcy Insolvency Act, there are several listed there under that section.

Wayne Kay 02:14
Well, I thought we would maybe go through a bunch of different scenarios today on the show. So like credit card debts, regular consumer debts, vehicles debt – that will get wiped out.

Glenn Steiner 02:29
Well, vehicle debts generally speaking, are what they call secured debts. So if I go to the bank and I say I want to buy that 2023 Chevy Malibu and they lend me $40,000 to buy that car. They generally will put a lien on that car. 

And if I do a Bankruptcy, I’m allowed to keep that car as long as I can keep making the payments. So that’s a secured debt. If I can’t afford to make the payments, well then they have the right to seize that car whether I do a Bankruptcy or not. 

Unsecured debts like credit card debts and a line of credit where there’s nothing, no assets attached to that debt, those are debts that will get wiped out in a Bankruptcy.

Wayne Kay 03:16
Okay, now what about something like tax debt? There’s a lot of people that maybe haven’t paid tax for a while or they know if they’ve been in a situation and they have this huge tax bill. Can that get wiped out?

Glenn Steiner 03:30
Income tax debt. That’s a very good subject. So generally speaking, for income tax debt, the general rule is, yes, income tax debt gets wiped out. And as long as you do all of your duties and nobody objects to your discharge, your income tax debt does get wiped out. 

But you may be wondering, well, does that matter regardless of the amount? And the answer to that is yes, it does matter. Under Section 172.1 of the Bankruptcy Insolvency Act, it states that if you’re a significant high tax debtor, you are not entitled to an automatic discharge. If your debts are $200,000 and 75% of that debt is income tax debt, you’re not even entitled to an automatic discharge. 

We have to make an application to court, and the court will want to know why you owe so much income tax debt. So that is one case where if you’re a high tax debtor under Section 172.1 of the Bankruptcy Insolvency Act, that’s something that you need to be aware of. 

If you’ve been out there and you haven’t had the courage to file your tax, it’s best that you come clean, because eventually the taxman will be waiting there. The quicker you get dealt with, the better.

Wayne Kay 05:03
Yes. For some reason, they just don’t ever just lose your number. They can always get a hold of you, and eventually they will find you.

Glenn Steiner 05:10
Exactly.

Wayne Kay 05:12
Now, what about something like – can you declare Bankruptcy if you owe EI over payments? And how is that dealt with?

Glenn Steiner 05:20
Okay, well, that’s an excellent question as well. So people in life temporarily lose their job for seasonal layoffs and things like that, and when they go on EI, they have to report to EI every month. Did you work? And if you did work, how many hours did you work this week and how much did you make? And people make mistakes. We’re all human, we make mistakes. 

So if you were on EI for six months and maybe your pay periods got mixed up in your mind, you were reporting most of your income, but you didn’t report it appropriately. It might end up that when you had your collection of EI over that six months – it turns out that your earnings were in wrong pay periods and you have a $500 overpayment. It was an honest mistake, not a big deal. Those are the debts that will get wiped out, no problem. 

But conversely, if I’m on EI for six months and I’m working every month, and the first question on an EI reporting card says, did you work during this period? And you say no, and you falsely give them information that you know is wrong, and you collected for six months – and let’s suppose you collected $15,000. Well, that’s a debt where you fraudulently misrepresented your situation. Now, EI is in a position where if they wanted to, they could actually criminally charge you. They seldom do.

But if they did charge you criminally and they found a guilt of fraud that would be a debt that would not be released by your Bankruptcy. Generally speaking, what EI does is they give you an administrative penalty and if they just give you an administrative penalty they may try to say that you have to pay it back but generally you don’t. It would be a debt that gets wiped out. They have to have a finding of court to say that it was fraud.

Wayne Kay 07:29
Okay, this is a great topic because in the 125 podcast or so that I’ve done, we’ve never talked about this. So this is a good topic to be touching on, on what is kind of allowed and what is not allowed. And I never really knew that fraud like that would be considered fraud, which obviously it would be.

Glenn Steiner 07:51
Yes, exactly.

Wayne Kay 07:52
Wow, okay, luckily I’ve got some actual scenarios here I want to bring you and see what you think of this. And it’s funny because a lot of the accidents will happen if you’re driving your vehicle. There’s a lot of people that are driving uninsured and so all of a sudden they’re driving without insurance, they get a $3,000 fine.

The government says, well, you caused $20,000 in damage to the other person’s vehicle and so they’re not going to issue you a license until you pay off this debt of maybe, whatever, $300 a month or something. How does that all work?

Glenn Steiner 08:32
Well, that’s an excellent question and in Alberta I recently dealt with this exact scenario not that long ago. So first of all, if you declare Bankruptcy and you got that $3,000 fine for driving without insurance, that is a debt that you’re going to have to pay because fines – remember I talked a little bit about the opening of the show that fines and penalties imposed by the court do not get extinguished by a Bankruptcy discharge. But let’s talk about the $20,000 that the Alberta government says we paid this out to fix this other person’s car.

You’re not getting a driver’s license until you pay this full $20,000 back. We know that you just got out of Bankruptcy, we know you don’t have $20,000 so we’re going to charge you $300 a month until you pay that full $20,000 back. And the guy says, well yeah, but I went through Bankruptcy so I should be debt free. And the Alberta government took the position, no, you owe that money and we’re not going to grant you a driver’s license. Alberta jurisdiction says that we don’t have to give you a driver’s license.

But now we get into this conflict about provincial legislation and federal legislation and generally speaking, federal legislation trumps provincial. And what happened in this case was the guy hired legal counsel and he made the representation that the government is saying he has to pay this. And the trustee in Bankruptcy was arguing this is not a debt found under Section 178 of the Bankruptcy Insolvency Act and therefore it’s unenforceable. 

The government of Alberta should allow him to have a license and he does not have to pay this $300. This went through the courts for a number of years. It finally got settled, believe it or not, at the Supreme Court. And the Supreme Court of Canada said, alberta government, give this guy his license, he’s entitled to it because he got his discharge from Bankruptcy and he got his license.

Wayne Kay 10:48
Wow, what an adventure that would have been.

Glenn Steiner 10:51
Yes. Probably would have been expensive, but it’s good case law, I suppose. And I mean, at the end of the day, if the federal government doesn’t like it and the provincial governments don’t like it. They obviously talk about a debt that they could eventually enact down the road, but as of today, it is not. And it would be a debt that you could get out of.

Wayne Kay 11:15
Yes. Here’s another scenario, and maybe you dealt with this one. Somebody bought a house in Alberta. CMHC insured the mortgage, so they paid $300,000 for the house, put 10,000 down, so the mortgage was $290,000.

Then they end up losing the job. House is foreclosed, they sell the house and they sell it for less. Like there’s a shortfall of $30,000 that the owner still owes. What happens in that situation? And I’m sure that happens all the time, by the way.

Glenn Steiner 11:53
Well, it does. And a lot of people don’t understand how CMHC works. So the government of Canada wanted people to have housing, and the bank said, well, we’re all for that, we’re all about lending out money. But there’s too high of a risk because as we all know, real estate markets go up and down and there’s sometimes some huge swings in the market. The banks don’t want to be out money because if you only put $10,000 down on a $400,000 house, if the market goes down 20% – people will just walk away from their houses.

So the government of Canada created the Canada Mortgage and Housing Corporation to allow banks to lend out money, and they would be insured by the CMHC. So if a bank lends, in your case, your example was they bought a house for $300,000 and they had to lend out $290,000. So they only had $10,000 down the bank. When they foreclosed they were out $30,000. But what really happens is the bank then goes to CMHC and says, CMHC, we sold this house. It was an insured mortgage by you. Pay us our $30,000 shortfall.

That’s what the bank gets. The bank isn’t out any money and CMHC then goes after you, the bankrupt or the individual who had that shortfall. And what they do is they’ll often get a judgment against them. 

Once they get a judgment, the next action that CMHC usually starts to look at is, well, what do they have for a job and what do they have for assets? If they’re working for an employer, often, if they have a $30,000 judgment, they can start to garnish their wages.

So it’s important that you deal with it. Don’t put your head in the sand. If a lawyer is reaching out to you and asking you questions, cooperate. Get a hold of legal counsel. At the end of the day, if you have a CMHC judgment, there’s other insurers out there as well.

Doesn’t matter if it’s CMHC or another company. If they have a judgment against you, you better pay attention. Maybe you may want to contact a Licensed Insolvency Trustee and find out what your options are.

Wayne Kay 14:23
Okay, how about student loans? I’ve seen some incredibly high student loans in the news.

People talking about how high student loan debt is. Is that something that is discharged in a Bankruptcy?

Glenn Steiner 14:37
Well, again, this is a situation where it depends on timing. Under Section 178 of the Bankruptcy Insolvency Act, it says that if you file a Bankruptcy at the date of your Bankruptcy, if you’ve been out of school, your study end date is seven years or longer, your student loans will be discharged. However, if your student loans are not over seven years old, your Bankruptcy has been filed before your seven year period is up. That is a debt that will survive your Bankruptcy, and you would have to continue to pay it after your Bankruptcy.

So what I always say to people is, always contact Canada student loans, and the three key words that you need to remember is ‘study end date’. Find out what they deem as your study end date. Because sometimes people quit before the course is totally done. They might have quit in, say, March of 2016, but the course was technically graduating on June 30 of that year.

Student loans may deem that their study end date is June 30, not when they actually quit. And the key is, it has to be seven years later after study end date. So that’s very key.

Wayne Kay 16:12
Yeah. Boy, you can imagine, you go through all this, get all the debt, and you end up not finishing the program.

Glenn Steiner 16:20
What was crazy, Wayne, is there was a case I was practicing in Calgary, and this person had filed their Bankruptcy on April 27 of that year, and their student loans, student loans came to court and said the study end date was April 30 of seven years prior. 

Actually, it worked out that they were out of school for six years, eleven months, and 26 days. They were four days short of their 7th year anniversary. Had they waited another week, it would have all got discharged from Bankruptcy. It Is very important that people understand that.

Wayne Kay 17:01
Okay, we’re running out of time here. But I do want to mention child support. That isn’t something so you owe your ex spouse, whatever, $10,000, and you’re way behind. That is not dischargeable, is it?

Glenn Steiner 17:16
That’s correct. That’s one thing. Again, that’s a debt found under Section 178 of the Bankruptcy Insolvency Act, and we want parents to pay for their children, make sure that the child’s needs are looked after. That is a debt that is not discharged. You’re correct.

Wayne Kay 17:33
Okay, good. Wow. We got a lot of information there that we covered. Glenn, any final words you want to share with us?

Glenn Steiner 17:41
No. I think at the end of the day, the bottom line is if you’re not sure how a debt will play out in your life, feel free to call a Licensed Insolvency Trustee.

Find out your options, know your rights. There’s certain exemptions under the law. People have this feeling that if they go bankrupt, they lose everything, and that clearly is not the case in Alberta. You’re allowed to have shelter – $40,000 of equity in your home. You can shelter a vehicle for $5,000.

There’s a lot of things that you probably don’t know of. Don’t be scared. An LIT is there to help you. We’re not here to judge you. We’re not here to say, you did all this wrong. You shouldn’t have done this. We’re here to help you and to give you a better future.

Wayne Kay 18:29
Couldn’t have said it better. And that’s why the website is called wecanhelp.ca. Glenn, a pleasure. Thanks very much for your information today.

Glenn Steiner 18:37
Thank you for having me.

Wayne Kay 18:39
My guest today, Glenn Steiner. You can learn more or schedule a free consultation with Allan Marshall and Associates Licensed Insolvency Trustee, through the website wecanhelp.ca. 

And that’s it for another edition of the Debt Matters podcast. Now, make sure you subscribe wherever you get your favorite podcast from. And of course, if you want more information, you can always check out debtmatters.ca. Thanks for listening.