124 – What Happens When You Go Bankrupt in Canada

Wayne Kay 00:04
What happens when you go bankrupt in Canada? That is our topic today on 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 coming up in today’s show, we’re going to talk about, what does it look like when you go bankrupt? Will you lose your paycheque? Is somebody going to show up at your house? Do you have to go to court? Will you be able to keep your vehicle? 

We’re going to talk about that and more today with Derek Chase from Chase & Associates Licensed Insolvency Trustee serving Vancouver Island Sunshine Coast to BC and the BC north coast. Thanks for being here, Derek.

Derek Chase 00:46
You’re welcome, Wayne. It’s a great day to talk about finances.

Wayne Kay 00:50
Finances and what to do when you get into a bad financial situation. The numbers are coming out and they’re quite high when it comes to the amount of debt that Canadians are carrying. And I’m sure there’s going to be a lot of people that are going to get to a point where there’s no way they’re going to be able to make the payments that seem to be adding up and continuing to grow. That leaves a couple of options for us. You want to mention the two options?

Derek Chase 01:18
Yes. I would agree that the momentum of inflation, pushing the cost of living, higher and higher interest rates is causing a lot of grief for people that we’re talking with. And if they’re carrying too much debt, then there are a couple of federal options that can provide relief. 

One is called a Consumer Proposal, which requires payments typically over a number of years. And the other is a Bankruptcy filing, which can sometimes be the fastest, least expensive way to reorganize your debt.

Wayne Kay 01:50
And we’ve been working on this with this show for people not to be scared of the word Bankruptcy because for some reason they still hear the word Bankruptcy and they tense right up.

Derek Chase 02:02
Yes, it’s true. I think that’s just a natural thing that’s happened over time, but we deal with it every day, so we get used to it. But in reality, it’s really just a tool to deal with the problem. And just like if you’d need a screwdriver or a wrench to fix something, Bankruptcy protection is a tool to help fix your finances.

And it’s federal law available coast to coast. So Parliament has said, hey, this is okay. If, when you get into a spot, a financial pickle that you just can’t solve, well, we’ve got this federal law that can help. So it’s a good thing to know about and it’s certainly part of life.

 It’s good that it’s there, in my opinion, because what if it wasn’t? If it wasn’t there, then people would be stuck in that situation forever and it would be ugly.

Wayne Kay 02:55
Yes, no kidding. So when it comes to Bankruptcy, there’s some general questions that people have, and oftentimes they wait longer than they really should because of all these fearful questions that they have. 

And that’s the one thing you know we’ve talked many times before that. You’ve said that people have always said, I wish I’d been here sooner, I wish I’d got here earlier. So will they lose their paycheque?

Derek Chase 03:23
Yes, I think there’s just general reluctance to explore this topic. People like to try and hang on and solve things themselves. But there’s a lot of power when you have good information. And I think having that information allows you to make well informed choices and it eliminates a lot of the fear that can be involved in you’re having financial difficulties. So a question that we often get is, what happens to my paycheque? Will I lose it? Will you take it? How will I live? 

You don’t lose your paycheque when you do a Bankruptcy filing. It’s very much life’s going to continue on in the sense that you get your normal paycheque deposited. There’s a requirement or a duty to report what your monthly income is during the Bankruptcy period, but you don’t lose control of that paycheque.

In fact, when a Bankruptcy filing starts, your paycheque is protected. No one is allowed to garnish that. You should have more confidence that that paycheque is going to be yours to just pay monthly living expenses.So you don’t lose your paycheque and you can have confidence that the paycheque is going to be there and no one’s going to sort of grab it while you’re sleeping.

Wayne Kay 04:46
Okay, well, that’s good to know because you do get that question a lot. Is anybody going to show up at the front door?

Derek Chase 04:54
Yes, that’s another question that we hear from time to time. And people are concerned about privacy and losing their couch and just the image of the person walking around naked in a barrel.

That’s simply not the case. Each province has the ability to set what’s called exemptions for what people can keep or shield from creditors when they get Bankruptcy protection. So it does vary from province to province. 

In British Columbia, there is an exemption for household furniture and appliances of $4,000 per person, which goes a long way because you’re really looking at the value of those assets more at a garage sale value, not what you paid for them. So it can go a long way in exempting things, but the whole process doesn’t involve somebody coming to your house to do an inventory of that.

It’s the individual’s duty to disclose what their assets are. So disclosing what you have in your house is part of the process. And it’s quite normal to have just the daily things for operating a house, such as kitchen table and a couch and a TV and that sort of normal stuff. And in our experience, the exemption tends to allow people to keep those assets.

Wayne Kay 06:19
Okay, what about people probably wondering how this actually happens. Do they have to go before a court to do the Bankruptcy?

Derek Chase 06:29
Yes, that’s by far and away the exception in a Bankruptcy process. There can be court matters in a Bankruptcy, and that typically is if something is either quite complicated or if a creditor objects, which is very rare again, or if a person doesn’t do what is referred to as their duties. And in order for a Bankruptcy to run smoothly and for a person to get discharged automatically, there’s a variety of duties or things a person has to do. 

I mentioned earlier about reporting monthly income. So if for whatever reason a person decided, I’m not going to file that report or I forgot to do that report, well, then our office as Trustee would have to prevent their automatic discharge and schedule a court discharge hearing. 

So there’s the possibility, I guess, of having a matter heard at court. But it’s very low. Like I’d say, over 95% of people have a Bankruptcy that runs very smoothly and get this automatic discharge, which is like the finish line somewhere down the track, either nine months or 21 months usually, depending on what their income levels are.

Wayne Kay 07:49
And you’ve done this so many times, LITs take care of all of these pieces that need to go into filing the Bankruptcy. It’s all done right through your office.

Derek Chase 08:01
That’s right. And we spend a lot of time just talking with people and making sure they understand how the process unfolds, and understand what their duties are. Then in my opinion, it’s not all that difficult to comply with your duties and stay on track to have an automatic discharge. Which means the possibility of going to court is super low.

Wayne Kay 08:26
Right.

Derek Chase 08:26
So it’s not that hard really.

Wayne Kay 08:29
That brings up the point. What do people say once they’ve gone through it? What’s their reactions?

Derek Chase 08:36
They’re generally pretty darn happy, I think, when it’s finished. And as long as you take advantage of the whole chance to reorganize and build in some of the new disciplines, you might have learned. 

We do hear from people down the road that some people have said, that was the best thing I’ve ever done. It got me going in a direction that I would never have thought of. I would say the predominant feeling is that they’re thankful for the chance to reset their finances and it was a good thing.

There are some instances where people might have said, oh, I didn’t really owe that much money, I was 20 years old, I wish I hadn’t done it. That’s out there as well. But I would say the majority is more that they’re glad that they don’t have to be stuck with all the debts that they had.

Wayne Kay 09:31
Vehicle questions come up a lot. People wonder are they going to lose their vehicles? They need them for work. Can you tell us about how that works?

Derek Chase 09:42
Yes, that is a touchy one as well. People are often quite tied to their vehicle emotionally. And for work wise, there’s different scenarios there. If you own your vehicle outright, there is no vehicle loan involved. Then again, we circle back to that exemption item I mentioned, which in British Columbia you’ve got an exemption for a vehicle of $5,000 in value. If your vehicle is worth more than that, it doesn’t necessarily mean you lose it.

It just means you might have to account for the difference between the fair market value and that $5,000 exemption. The exemption can sometimes be greater for a vehicle if it’s your work truck, for example. If it’s a van that you’re using for your work, then there is an exemption called a tool of the trade that can get it up to $10,000. So that’s when a vehicle is free and clear, that’s the sort of analysis that we’re looking at. But what if there’s a vehicle loan?

In our experience, the common situation is, there’s more owing on that vehicle loan than what the vehicle is worth. So when you think of it that way, you couldn’t sell that vehicle, pay off the loan, and have money left over. And so from our view, there’s no equity or value there. And then the individual would have the choice of either continuing to pay that vehicle loan, which is called a secured creditor, in order to keep the vehicle, they would have to continue to service that vehicle loan. Or secondly, if they didn’t want to keep the vehicle, they would simply stop making the payment.

And again, there’s some differences between the provinces on that concept, but in British Columbia that’s commonly referred to as seize or sue. So if the person didn’t want their vehicle, they stopped paying their vehicle loan and it was repossessed, then the lender couldn’t do anything else to them because they’d seized the vehicle.

Wayne Kay 11:47
Right. And they’re under Bankruptcy protection at that point.

Derek Chase 11:52
Yes, you wouldn’t have to necessarily be in a Bankruptcy setting to stop paying on your vehicle. We’ve talked to people that their only debt has been this giant vehicle loan and they just can’t deal with it. So the answer there is to simply stop making the payment and then the repossession would extinguish the loan. Which really, I should try and be more clear on that. It’s got to be a personal use vehicle, not a business use vehicle.

Wayne Kay 12:21
Okay.

Derek Chase 12:22
But in general, if you’re wanting to get relief from your debts and you need that vehicle, I would say people, yes, you can keep your vehicle because you’re either going to be continuing to pay the vehicle loan or the vehicle is going to be exempt, or there potentially could be a small amount of non exempt equity in that vehicle that would have to be paid into a Bankruptcy. But no one’s really in the business of going, aha, I’m going to take your vehicle.

Derek Chase 12:56
In fact, the worst thing that we do is to have a surprise. So we really try and talk that one through.

Wayne Kay 13:02
Okay, let’s dive into this question of what’s life going to be like in the month after a Bankruptcy starts.

Derek Chase 13:09
Yes, I think that’s an important question to look at because when you start looking at your finances and you start looking at your financial options. It’s important to say what the future months are going to look like as far as cash flow goes. 

And quite often when we’re chatting with people and we’re kind of going over their situation and providing them with information and they’re telling us what their debts are and how much they’re paying per month. Sometimes they’re paying a heck of a lot of money per month on credit cards and payday loans and that sort of thing.

The month after a Bankruptcy starts, I would say it would be pretty darn peaceful in comparison because all those payments to unsecured creditors will stop if you are having collection action like people phoning or threatening to take you to court. That stops with something called a Stay of Proceedings. 

So all of a sudden you don’t have all those payments you are making, you don’t have this collection pressure looming over you and really it should just be peace and quiet and hopefully, ideally, money to deal with just regular stuff like cost of food and telephone bill and regular monthly living expenses. 

But I do think it is important to ask that question and project it out because some debt consolidation options might be still pressing you right to the limit of your paycheque and there’s no wiggle room there. So you do want to forecast what the monthly budget looks with whatever option you might be exploring because you do want to have some breathing room, otherwise you’re going to be just circling back around into more grief.

Wayne Kay 14:57
So when they do the initial consultation, they reach out to you and your team and they do their first free initial consultation. Is that something that you look at as well and say, well, if you did this, this is kind of how life would look, or if you did this option, this is how life would look.

Derek Chase 15:14
We do that. We do provide some financial feedback and say if you go this way, you’re looking at roughly monthly payments of X amount of dollars. Or if you go this other way, you potentially change the timing and the payment amount, and then you can take that number and plug it into your monthly budget.

Because ultimately, that monthly budget has to work. And if you’re just running it at a break even budget or a deficit budget, that’s not sustainable. You have to create some room in your future budget so that there’s more money than month. Otherwise it’s just silly really. So that’s the whole purpose. 

But in general, I would say after a Bankruptcy starts, blood pressure is going to be better and life’s going to be better in the sense that there’s just not all that pressure on your shoulders.

Wayne Kay 16:10
And that means relationships are going to be better too, I’m assuming.

Derek Chase 16:14
Yes, I’m hoping so.

Wayne Kay 16:16
No kidding. That’s a lot off their shoulders. Well, that’s great information. Anything else we need to know?

Derek Chase 16:22
I’d say there’s lots of exemptions that allow you to keep assets when you get protection through a Bankruptcy filing. There’s nobody going to be coming and rifling through your closet or your dresser drawers and don’t have to go to court. So it’s a Canadian option that’s designed to help the honest person get a fresh start with their finances. So it’s good to know about.

Wayne Kay 16:47
Absolutely. Derek, always a pleasure. Thanks very much for your time today.

Derek Chase 16:51
You’re more than welcome, Wayne.

Wayne Kay 16:53
Well, my guest today, Derek Chase, and if you want to learn more, schedule that free consultation that we were talking about with Chase & Associates Licensed Insolvency Trustee, well, you can go to their website Bankruptcytrusteebc.ca.

That’s it for today’s Debt Matters podcast. Now, if you know somebody who’s going through a bad financial situation and wants to learn more about Bankruptcy or more about dealing with Licensed Insolvency Trustees, please send them this podcast and make sure you subscribe wherever you do get your favorite podcast from. And of course, you can always check out our website at debtmatters.ca. Thanks for listening.