124 – Consumer Proposal vs. Bankruptcy: Making the Right Decision for Your Financial Future

Wayne Kay 00:04
Consumer Proposals versus a Bankruptcy, which is the right decision for your financial future? That’s 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 in today’s show, we’re going to talk about which is better for you, Bankruptcy or a Consumer Proposal. What are the things that the Licensed Insolvency Trustee has to consider to pick the right option for you?

What is the information that you need to share and are there some circumstances where you know you shouldn’t do one or the other?

To help us with this, Julie Drane from Allan Marshall & Associates is my guest today. She’s a Licensed Insolvency Trustee from Victoria, British Columbia. Hi, Julie.

Julie Drane 00:55
Thank you for having me, Wayne.

Wayne Kay 00:56
That’s always a pleasure. And we love diving into talking about the horrible things like Bankruptcies and what you can do when you’re in debt and you’re stressed out and you’re feeling sick and it’s affecting everything in your life, your family, your relationships.

Julie Drane 01:12
Right.

Wayne Kay 01:12
How am I doing with that? Am I painting an accurate picture?

Julie Drane 01:16
I believe you are absolutely painting an accurate picture, Wayne.

Wayne Kay 01:20
It truly does affect everything, doesn’t it, in somebody’s life when they’re just in a really bad financial place?

Julie Drane 01:26
It does. It affects sleep, mental health, and you’re right – family, friends, relationships, work, relationship. Yes, your work, everything.

Wayne Kay 01:35
Well, you’re going to dive in and explain some of the differences regarding Consumer Proposals and Bankruptcies. If somebody is in this bad financial situation, can you explain?

Because Bankruptcy used to be the only solution until, I don’t know, the last, I don’t know how many years. But then all of a sudden, Consumer Proposals came about. What’s the difference?

Julie Drane 02:03
The major difference between a Bankruptcy and a Consumer Proposal is that in a Bankruptcy, all of the individual’s assets vest with the Trustee. So what that means is we look at them all.

Okay, you’ve got some household furnishings – in each province, there’s a different, what we call exemption for how much of that you can have. You’ve got some clothing. In some provinces, there’s some exemptions for a little bit of house equity. And that we review all of that. We say, okay, yeah, this belongs to you. No, this belongs to the bank.

Then if neither of those two apply, then it essentially comes to the Trustee in a proposal that does not happen. So we review the assets and we take them into account. But an individual in a proposal is free to do with their assets as they see fit. The other major difference is income reporting or one of the other major differences is income reporting.

In a Bankruptcy, you do have to report, in a proposal you do not. If someone wants what we’ll call certainty of outcome – I want to know how much I am going to pay every month. That’s a proposal.

So basically we send the proposal out to the creditors. The creditors vote. We get the majority in dollar value to say yes, and the proposal passes. Creditors can’t change their minds in six months and say they want more money.

Wayne Kay 03:26
I just want to ask one quick little question regarding that. So typically I’m going to just grab a number. I owe $15,000 in debt. I have no hope of getting out of that. You then go to the creditors and say, okay, we’re going to give you $8,000. And then they vote yes or no. And then you figure out what the number is. Correct. That’s kind of how it works.

Julie Drane 03:48
Yes.

Wayne Kay 03:49
Simple form.

Julie Drane 03:51
Yes.

Wayne Kay 03:51
Okay, so that was the Consumer Proposal. And then what does that Bankruptcy look like?

Julie Drane 03:56
The difference is the Bankruptcy income reporting. Depending on the level of income, your payments can change throughout the process. If you win the lottery or get an inheritance during a Bankruptcy, that comes to the Trustee. And we do not encourage gambling in any way, shape or form.

Tax refunds vest as an asset with the trustee, even for prior years. Some people have disability tax credits from prior years. Even if the returns are filed after the discharge, those refunds as an asset would come to the trustee. In both the Bankruptcy and the proposal, there is a possibility for court, but proposals, it’s extremely, extremely rare for that to happen.

And we usually know that within the first 60 days, but I’ve only ever had it happen once in a long time. I won’t tell you how long for Consumer Proposals. It just doesn’t. It’s a possibility, but it doesn’t happen. Examinations can also be conducted in proposals by the superintendent of Bankruptcy.

But again, it is very rare. So you see more of those in a Bankruptcy than in a Consumer Proposal.

Wayne Kay 05:09
Are you finding one that’s more popular these days or one that’s better to deal with debts?

Julie Drane 05:14
The proposal is definitely more popular because of the flexibility. So you can prepay it, and you know what the payments are.

The possibilities of going to court are slim to none. I think the biggest thing is just knowing what that payment is going to be.

Wayne Kay 05:30
What kind of things does the LIT really consider when picking out which is the better option for somebody?

Julie Drane 05:36
Well, we can’t tell anybody. We can tell them what we see, what we think based on our experience, what we recommend.

But when we’re looking at what might be the best option, whether legislative or non legislative, we look at assets, liabilities, depending on the level, but usually not.

And we also look at the net monthly income after what we call non discretionary expenses, things like childcare, child support, medical expenses, if someone’s self-employed and they’re operating as a sole proprietor, business expenses, that sort of thing.

Then we look at their household expenses as well. It’s like, okay, if you’re over the threshold for income, which would mean their payment would be higher either in a Bankruptcy or proposal, but your household expenses are more than what you bring in, there wouldn’t be a viable proposal because you don’t have the means to pay it.

Wayne Kay 06:29
Right.

Julie Drane 06:31
Big assets, income and expenses. Sometimes we can help people to budget so that they can fit the proposal payment in. Actually, most of the time we could do that.

Wayne Kay 06:40
I was going to say that’s a major thing. Just learning how to budget, because a lot of people don’t pay attention to where the money is going.

Julie Drane 06:47
No. One of the downsides of having less cash, I find for myself personally, is if I went to the grocery store with $20 in my hand, I would count up how much because I didn’t want to be embarrassed. Now we just go to the till, and as long as the card doesn’t beep, we don’t look at it. So basically, we nickel and dime ourselves. So it’s $5 here at Tim Hortons and it’s $10 at McDonald’s.

And I don’t even know anymore. But I think that’s what a lot of people really don’t know. Because when we ask them and they go through their expenses, we go, well, that makes no sense because you’ve got this huge chunk of money at the end of the month. Let’s go back to your bank statements, because we do want to put you in a better position.

Because if we put together this proposal that says you can pay this great sum of money, well, it turned out that there was this big expense that we forgot about, or there’s something that needs to be adjusted.

We want to know that so that we are putting somebody in a better position, and that is part of it, as well as trying to help people both in a Bankruptcy and in a proposal to get that budget under control, know where their money is coming, get a plan going forward.

Wayne Kay 07:54
Do people ever worry about their credit rating after? I would assume they do. And is one better or worse for having that restored credit rating?

Julie Drane 08:04
At the end of the day, if it’s a first Bankruptcy versus a Consumer Proposal, it’s approximately the same. The Bankruptcy reports, as what’s called an R9 rating for six years after the date of discharge. So a first Bankruptcy is either 9 months or 21 months long, depending on the level of income.

And so you’re looking at seven to eight years. The proposal, the maximum period of time for a Consumer Proposal is five years of payments. So if the person does take the full five years to pay, it sits on as an R9. It does say Bankruptcy proposal, and then for two to three years after that, depending on the credit report and which province you live in. It will report as an R7 as a settlement.

I’ve talked to banks over the years and I asked, does it make any difference?
Or if they go to something more informal as a settlement, do you care? And they said, no, if they are not paying in the normal course, they’re going to be affected for a second time Bankruptcy because it sits on the bureau for a substantially longer period of time.

So 14 years from discharge? Yes, definitely the proposal would be better than that because it’s going to be off in a maximum of eight years. But just because that stuff is sitting on there in a proposal while you’re in it, you can start to rebuild, or at the end of your Bankruptcy doesn’t mean you can’t start to borrow money after to start to rebuild your credit.

I think that’s a big misconception –  that you can borrow money basically at any time. It’s how much do you want to pay to get that money? And just making sure that you’re going to be able to pay that money back. But yes, the credit report is definitely severely affected.

So people say, well, I don’t want to affect my credit. I said, well, then the only way not to affect it is to pay in accordance with the original terms.

Wayne Kay 09:53
Right. If you can pay more, can you pay it off faster?

Julie Drane 09:58
In a proposal, yes. In a Bankruptcy, no.

Wayne Kay 10:00
Okay, got you. And there are certain circumstances where it’s just like you look at it and you go, absolutely there’s no way you’re going to be able to do it with the proposal, or there’s absolutely no way you should do it with the Bankruptcy.

Julie Drane 10:13
Yes, sometimes it’s because of a large asset. So someone’s got a whole lot of equity, particularly in real estate.

In that case, then we would try and help them to go back to their bank or find a mortgage broker, something like that. Or we have some people who are what we call judgment proof. So somebody who is on a disability or pensions, CPP, OAS, most private pensions, the only creditor who can get at that stuff is Canada revenue. So if those people only owe credit cards, payday loans, lines, any unsecured product, and we look at their budget and go, look, there’s really nothing that we can do. Even on a reduced fee, there’s nothing we can do.

Then we just suggest to them, they change their bank account, they change their phone number. Some of those people will come back, they’ll save up the money, or they’ll come back and something slightly changed in it, or a family member has been willing to help them out.

But there are some people where the best option for them is to do absolutely nothing. Refinance or in some cases a credit counseling proposal. If it’s just a budgeting issue, that would be when they have a small amount of debt. Rather than getting a full blown insolvency there, we would send it over to a reputable credit counselor.

Wayne Kay 11:38
Okay, good to know. And I joined the Community Futures organization as a board of directors. And that was actually one of the questions on there –  was about Bankruptcy. So what’s that deal that I can’t be a board of directors if I have a Bankruptcy?

Julie Drane 11:56
That is correct. Not even on a volunteer board. So if you want to stay on a volunteer board, a proposal is the only option. That does not have to do with the Bankruptcy and Insolvency act, that has to do with the Corporations act. So if you wanted to do that instead of a Bankruptcy, you’d file a proposal. The other time that I’m aware of, and I’m not professing to be an expert, is when somebody is trying to sponsor someone into the country.

I always recommend people go to their office to speak with them, because the last time we heard Bankruptcy, you could not sponsor or continue to sponsor, but proposals weren’t an issue. But I always tell people just to be sure, double check, because you don’t want to run into a problem with immigration and most employers, there’s not an enforceable clause that would say that if you file the Bankruptcy or a proposal that you’d be terminated.

I think I’ve seen one and I just sent her to a lawyer. But in Canada there are professions where if you are in an insolvency, you do have to let your governing body know. Lawyers, people with things like mutual funds, licenses and stuff like that.

And then sometimes there’s some governance around and reporting they have to do. But if there’s ever any question on that, we always encourage them to go back, make sure that they understand the potential repercussions on the employment side or on their licensing side before they proceed.

Wayne Kay 13:24
Julie, one thing I’m really learning from you is that it’s really important to share as much information about the situation that somebody’s in as possible. Really give too much information because there’s so many factors to this.

Julie Drane 13:40
And something that the individual might not think is relevant could really change the way that we would try to provide them advice and guidance.

Wayne Kay 13:52
All right, we’ve covered a lot of information here. Final thoughts. Anything else we need to know regarding this?

Julie Drane 13:59
I think that pretty much covers it. But if anybody ever has any questions or not sure they listen to our podcast, by all means, call us.

We’re always willing to help. We’re always willing to answer as many questions as we can. And, yeah, that’s it.

Wayne Kay 14:18
It’s as simple as that.

Julie Drane 14:19
I got nothing else.

Wayne Kay 14:20
You can always help. And I love that. That’s like the name of the website. Wecanhelp.ca. It’s brilliant.

Julie, thank you so much. It’s always a pleasure.

Julie Drane 14:31
Thank you, Wayne.

Wayne Kay 14:33
Well, my guest today, Julie Drane from Allan Marshall & Associates, and if you want more information, you want to find out about that free consultation she’s talking about –  the website again, wecanhelp.ca.

And that’s it for the Debt Matters podcast. Now, if you know somebody going through this situation, please share this podcast with them. We want to help as many Canadians as we can. Make sure you subscribe wherever you get your favorite podcast from. And of course, you can always check out debtmatters.ca. Thanks for listening.