121 – What Causes Bankruptcy and What Are Its Consequences

Wayne Kay 00:04
Bankruptcy and its consequences. That’s our discussion today on the Debt Matters podcast. We’re going to help Canadians find solutions to their debt with Licensed Insolvency Trustees from across Canada.

I’m Wayne Kay. Coming up, we’re going to talk about the personal factors or predispositions that may cause a Bankruptcy. What are societal factors or conditions that can cause Bankruptcy? Are there other major causes of personal Bankruptcy that maybe we haven’t thought about?

You’re going to learn about this and a lot more with my guest today, Bonnie Hooley from LCTaylor Licensed Insolvency Trustee from Winnipeg, Manitoba.

Hi, Bonnie.

Bonnie Hooley 00:44
Hi, Wayne. Thanks for having me.

Wayne Kay 00:45
Oh, it’s always a pleasure. And this is going to be great because I’ve talked with a lot of people in the financial world about that b word, Bankruptcy and what causes it these days? I don’t know. Is it different than what it used to be, or has it kind of been the same since all of time on Bankruptcy issues?

Bonnie Hooley 01:03
I would say it’s been the same since credit has been more available. I mean, many years ago, it was extremely rare for you to be able to get credit. And so, clearly in those days, causes of Bankruptcy would have been bigger things.

But since credit has been readily available to the public, I think the causes of Bankruptcy have sort of been the same, at least in the 30 years that I’ve been doing this.

Wayne Kay 01:29
Illness, breakups, sports, I heard was in there, too.

Bonnie Hooley 01:36
You heard sports? Yes, that would be a fairly new one. I guess I would have put that under, like, overextension of credit or overspending. Relationship breakup is a pretty big one. Change in your family size can sometimes be one change in your job, unemployment, reckless spending.

So there’s all kinds of things that come into play. A lot of people like to think that this could never happen to me if I just did everything right. Unfortunately, in my experience, it can hit anybody, no matter how well prepared they are. If you just have the perfect storm hit you.

I was trying to think, is there a way to guarantee you would never end up bankrupt? And I think the only way to guarantee you would never end up bankrupt is if you had no credit at all, which would include no mortgage and no car loan. But as soon as you have credit, there’s always a slight risk that you could run into trouble with it.

Wayne Kay 02:31
Right. Well, I’m glad you brought that up, because bad things happen to nice people all the time.

Bonnie Hooley 02:36
Yes, I know that sometimes if you’re a financial advisor, it kind of crushes you. The first time I had one file Bankruptcy, I’m thinking, no, I get it. Unless you understand it can happen to anybody, you’re going to be playing the judgment game. So because of who I see, I see everybody. People that tried, people that didn’t try. And clearly the people that tried and did everything, as I would quote, unquote, ‘right’.

There’s less of those that end up bankrupt. And the people that are irresponsible and recognize it a little too late are probably more common. But there’s no Bankruptcy gene, that says you’re going to end up bankrupt. Or because my father did and my father’s father did, that doesn’t mean you’ll end up bankrupt. Just, it depends on the circumstances.

On that note, it kind of does make me smile. When we do have second and third generations bringing in their family, I’m kind of like, well, at least you know where to get the help, right? It’s just too bad that you weren’t able to avoid us all together.

Wayne Kay 03:38
So when you talk about personal factors or predispositions, are there any that do cause Bankruptcy?

Bonnie Hooley 03:45
No, no, there are no predispositions to Bankruptcy. I put that out there because I think people think, oh, well, it wouldn’t happen to me. Well, that would mean there’s a predisposition and there isn’t a predisposition. And societal factors as well. You can’t say that a societal factor caused a Bankruptcy. Like, oh, unemployment is crazy high, so of course I had to go bankrupt.

Or inflation was crazy, so of course I had to go bankrupt. Well, those would be contributing factors. If those caused Bankruptcy in themselves, then every time inflation went crazy, everybody would be bankrupt. Or every time someone lost their job, they would always be bankrupt.

So those are factors that definitely push people over the edge. And when they come together, it can make a perfect storm, but in themselves, they can’t be the cause of the Bankruptcy.

Wayne Kay 04:38
Well, so you’ve taken away the predisposition, societal factors, the conditions. What is causing Bankruptcy?

Bonnie Hooley 04:46
I would think the number one, at least these days, that I’m seeing, are relationship breakups. And that’s, in my opinion, one of the hardest ones to protect yourself against because you can’t live like your relationship, it’s going to end.

And when you’re in a relationship, there are benefits to the shared resources. And unfortunately, though, when you’re used to having shared resources, then when the relationship ends, it does put the family in a big financial blow. So that would be one of the bigger ones that I would see. Another would be job loss, for sure.

For people that are self employed, a lot of them, the major causes would be non payment of income tax. It’s so easy when you’re self-employed and having to put away the taxes yourself, to say, well, I’ll put it in the bank account and I’ll pay it at the end of the year. And then as soon as something major happens in your business, you go, well, just borrow from that fund a little bit and then you’re on the slippery slope. And so many small businesses that fail, it’s usually because they started with a bit of non payment of income tax.

Wayne Kay 05:54
Well, that’s not good. But there’s a big lesson when you start your business.

Sadly, you don’t have to do too much homework in order to make sure. Well, this is from now on, how you have to take care of the finances and the bookkeeping.

Bonnie Hooley 06:11
Yes. And a lot of people that are really good at their skills. A carpenter could be fantastic. A carpenter isn’t always great at the books.

So when someone does file that was self employed, I strongly recommend that each month they actually send a payment off to CRA, just like we have to do when you’re paid by T4, because then the money is gone, it’s out of sight, out of mind, and at least it’ll make a huge dent towards covering the taxes at the end of the year.

Or maybe it’ll cover it fully and you’ll get a small refund, but at least you won’t owe, or you won’t owe as much because it’s gone. So that’s, for self employed people, a really big thing, because it is a big trap. There are going to be unexpected expenses when you’re self employed, and you’re going to want to dip into the only fund that’s available, which is the taxes you haven’t sent off to CRA yet.

Wayne Kay 07:04
Okay. And you know how I mentioned sports at the beginning when we started chatting? I am in a huge hockey town, and it’s all about hockey, and it’s all about giving the kids the greatest advantage. And there’s a lot of parents here that send their kids off to these hockey academies, and when they’re 14 years of age, they’re moving to another city, playing along.

And those academies are $40, $50,000, which I just found out about this year that they’re paying 50 grand to send their kids to play hockey in these academies. And it’s two, three years that they’re in there. And then if they have two kids, that’s a huge chunk of money that if they don’t have that set aside and who’s got an extra $200,000 sitting in your bank when you’re raising kids? I don’t think very many people do.

Bonnie Hooley 07:51
I’m sure they’re all hoping that they’re going to be the next big player. And if you’re not a hockey family, you’re not aware of the expenses. Because I do know that some people, when they start to get into hockey, even just the beginning stuff with getting the equipment and the skates and the sticks and everything else, it’s like a massive expense.

Not $50,000 massive, but I would think it’s one of their bigger budget items other than their mortgage. And so if your kids are interested in playing hockey, which we all encourage Canadian kids to do, then you have to really budget for that, because that could absolutely throw a family over the edge financially.

Wayne Kay 08:33
Any other ones that we can think of that do have causes of personal Bankruptcy?

Bonnie Hooley 08:40
Well, irresponsibility, nobody likes to talk about that, but irresponsibility can happen at any income level. So lots of people who make a lot of money aren’t paying attention to where they’re spending their money. And so that can creep up on them and they can suddenly realize, like, whoa, I’m in way over my head. And if I paid attention, there’s no reason I had to get this way. The lower income people who are irresponsible, they usually get hit faster because they don’t have as much wiggle room to catch up on it.

So at any income level, you always have to pay attention to your spending because irresponsibility with your finances can cause financial trouble. A lot of people, when they start getting into credit or they’re younger and they’re not experienced, they get behind and then they have the mess and then they’re ashamed to get it cleaned.

If you know, talk to an expert, talk to LCTaylor and company, talk to a Trustee, a Licensed Insolvency Trustee, because we can help you get back on track so you don’t have to carry the mistakes that you made for the rest of your life. There’s things under the act to help you help honest and unfortunate debtors get back on their feet. But irresponsibility is a cause that nobody likes to talk about, but it still is a cause of Bankruptcy, and a pretty big one.

Wayne Kay 10:05
But Bonie, when they come into your office and they sit there and they just go, I admit it. I was irresponsible. I did some dumb things financially. You don’t then say, well, get out. We’re not going to help you because it was your fault. There’s still, even if things have gone sideways and you were involved in it, it’s okay to reach out because there’s no judgment, right?

Bonnie Hooley 10:26
Because talking to the Trustee is one of the most responsible things they’re doing. Hiding from their creditors, pretending that this isn’t there, ignoring it, making it go away – it’s just continuing their responsibility. But facing up to it and saying, okay, I’m in a mess, let’s get back on our feet. And I’m always glad to help people because the sooner you come, the more options there are for helping you. And if I can help you avoid a Bankruptcy, I’m going to do everything I can to do that.

And so to me, judgment isn’t a part of it because, as I mentioned right at the beginning, Bankruptcy can happen to anybody. And so just because your cause of Bankruptcy may have been irresponsibility, doesn’t mean that you should be shunned. I mean, people get sick because of irresponsibility and we don’t shun them. We don’t shun a cancer patient because they smoked. But smoking can cause cancer.

So it’s just like financial trouble. We’re not going to look at what caused it. I mean, we are – in the sense of helping you to avoid it again in the future. But we’re not playing a blame game. We’re here to help people, not to make their situation worse. What I find is most people blame themselves way more than anybody else would.

Wayne Kay 11:40
I could see that. We know. So it’s okay. Anything else, when it comes to personal blame on why we’re doing this?

Bonnie Hooley 11:49
I guess not with regard to personal blame, but I do want to sort of address the cause of the Bankruptcy. So one of the factors that happens when you file an assignment is that there is a required counseling session. And in that session it’s to look at what got me here.

And so the reason for that is that if you do have a cause of Bankruptcy, that can be helped, like a gambling addiction, irresponsibility, other addictions, or if it’s bad budgeting, then we can give you some tools to help you in the future so that at least you’ll have a leg up on others – so that you can potentially avoid a second Bankruptcy when those perfect storms hit you or when you do get hit by many of the factors that can push you over the edge. So we don’t have a cure for avoiding Bankruptcy, but we definitely can help you to not see us again if possible.

Wayne Kay 12:51
Right. Identify what went wrong and try to correct that.

Bonnie Hooley 12:55
Absolutely.

Wayne Kay 12:56
Okay. Life tweaking. You mentioned when we were talking about causes and income tax and people who are self employed. Is there a difference between personal Bankruptcy and business Bankruptcy or is it similar for cause?

Bonnie Hooley 13:12
It depends on the size of the business. So if it’s a small self employed business, the person basically is the business. So the causes of Bankruptcy that would cause someone to personally file Bankruptcy may also cause them to file their business Bankruptcy.

In addition, they may have industry factors that come into play. Like in Winnipeg this year, we’ve had almost no snow. You know, if you’re in the snow clearing business and relying on that as your major source of income, aside from being a small business self employed – the environmental conditions can push you over the edge a little quicker.

Now, if you’re a corporation, those would basically have different causes for their Bankruptcy. Some of them could be similar. If you don’t have proper people looking after the books, then irresponsibility. If you are the manager and you’re irresponsible with the corporate funds, that can push you into a Bankruptcy as well.

But if you’re a fairly large corporation like Air Canada or something, then you’re going to be looking at more industry things that can affect your business. And those aren’t things that we’d really get into, into this podcast right now, because those are few and far between and they get boring. They’re the kind of things accountants would want to talk about.

Wayne Kay 14:35
Oh yes, we don’t want that.

Bonnie Hooley 14:38
We’re boring them enough. Wayne.

Wayne Kay 14:40
Oh no, this is good stuff. I love this because you get to learn. You get to learn it’s okay to make a mistake and you learn more from those mistakes. And yes, we wish it wouldn’t have happened. We wish things went well and everybody had savings, but we don’t.

We’re Canadians and we’ve seen a big change in our country in the last four years for sure. We’re definitely seeing a divide, we’re seeing record debt being carried by people. And it’s really weird looking.

I look at hotel costs or things like that – going to go somewhere for a vacation. And if you’re going to go somewhere like Vancouver, it’s $400 – $500 a night. And I think, well, if Canadians are having such a tough time, who has this much money to be spending on these vacations and getaways so we’re really seeing a divide. Do you notice?

Bonnie Hooley 15:37
I mean, if you’re good with budgeting and you’re saving and doing everything proper, you probably haven’t been able to keep up with inflation. And the Vancouver one is a good example. The downtown Vancouver hotel for one night in May right now is $850.

And I’m just like, wow, you can take a whole vacation for that, depending on where you’re going. Especially in little old Manitoba, nobody budgeted for those kinds of increases when they were planning their vacation saying, okay, next year we’re going to do this. You didn’t plan that the price for the room would go up two, three, four times. So those inflation things – yes, for people who are planning a vacation might mean, oh, I can’t take that vacation.

But if you’re trying to buy groceries or you’re required to send your kids things like for hockey, those expenses are things you didn’t have time to budget for and your salary did not increase at the rate of. You know, those things are really pushing people over the edge.

And we have seen an increase in the number of people filing Bankruptcy in Canada and in Manitoba. And it’s because even though people have done everything right, these little factors start to come together and make a perfect storm and they start to encroach and people hang on for a while, but then you eventually get pushed over the edge.

So again, in those situations, if you’re starting to feel the crunch, talk to a Licensed Insolvency Trustee. Because if there’s something we can do or recommend prior to this situation being so dire that you have to file an assignment of some know, we’re absolutely going to be able to point that out because that’s what we’re trained to do.

Wayne Kay 17:17
I think that’s perfect. That’s exactly what we needed to hear. Bonnie, any final words you want to share?

Bonnie Hooley 17:23
No, just enjoy the weather, because Manitoba and Canada, we always have changing weather. And if you live in Manitoba, you can get four seasons in a week this year.

Wayne Kay 17:32
That’s great. Thank you so much for your time. It’s always a pleasure.

Bonnie Hooley 17:35
All right, take care. See you again, Wayne.

Wayne Kay 17:37
You bet, Bonnie. And once again, if you want to get a free consultation or you want to learn more about Bonnie Hooley and the team at LCTaylor Licensed Insolvency Trustee, go to the website lctaylor.com.

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