The economic fallout from the COVID-19 pandemic has affected everyone. Many Canadians are carrying more debt than they can handle and are exploring all the options that may be available to them.
In today’s podcast, Licensed Insolvency Trustee, Jillian Taylor-Mancusi, looks at two of the most popular debt relief options. She explains the difference between filing a Consumer Proposal and Bankruptcy.
In this episode Jillian talks about at what point you may need to consider either one and answers some of the most frequently asked questions:
- How does a Consumer Proposal differ from a debt consolidation loan?
- If I have equity in my home should I file a Consumer Proposal or a Bankruptcy?
- How do I get a Stay of Proceedings that will stop wage garnishment and all other collection activity?
- Who do I turn to for advice and what is the first step I should take?
Licensed Insolvency Trustees are federally regulated and approved by the Canadian government. They are the ones that will give you honest advice about all the options available to you. This podcast is a great starting point to get the facts from an experienced debt expert before you make any decisions.
Read the Transcript
Welcome to 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 diving into the difference between Consumer Proposals and Bankruptcies, and which one might be the best for you.
My guest today Jillian Taylor-Mancusi from LCTaylor in Winnipeg. Hi there, Julian. Thanks very much for being here.
Hi, Wayne. Thank you for having me.
Now, these are new words, Consumer Proposals. Everybody’s familiar with the word Bankruptcy. At what point do you start even considering Consumer Proposals, Bankruptcies, etc.
Jillian Taylor-Mancusi 0:44
The Bankruptcy Insolvency Act is federal legislation, and it’s divided up into a bunch of sections. A couple of those sections are Consumer Proposals and Bankruptcies.
When you’re having financial difficulty, you can’t pay your debts as they become due and you’re not really sure where to turn, you’re going to come talk to a Trustee, and we’re going to explain the differences between a Consumer Proposal and Bankruptcy.
Basically, a Consumer Proposal is a debt repayment plan where you offer to pay the creditors back either in full or a percentage of what is owed to them. So what you do is you come up with this repayment plan together with the Trustee. That can either be done with a lump sum, or a repayment plan that lasts up to five years.
Now, what you do is you propose this to your creditors, and they have an opportunity to vote on whether or not they accept it. If they are accepted it is legally binding on them. If they vote against it, we’ll call a creditors meeting and try to negotiate something else. Now, the key with a Consumer Proposal is your creditors are going to vote for it. And they’re going to want to make sure that it’s something that’s better for them than a Bankruptcy would be because it’s going to last longer. And it’s going to take a little bit more time for them to process payments and things like that.
We’ve also heard of the term consolidation. This is different than that, right?
Jillian Taylor-Mancusi 2:01
Consolidation is normally something that you would go to your bank and see if you could get a consolidation loan to pay it back. A Consumer Proposal isn’t a loan, it’s a repayment plan. You can offer to pay the whole amount back, or you can offer to pay a percentage of the amount back
This is actually legislated that this can actually happen where you’ll pay 10% 20% 30% of the debt and your creditors are okay with that?
Jillian Taylor-Mancusi 2:34
Right, exactly. So you’re going to come up with this proposal plan, that’s going to be paying back 10,20,30,40 50%, and your creditors vote on whether or not that’s a good deal for them. Generally, when we’re putting a proposal together, we’ll kind of gear it around that 20 cents on the dollar mark.
So 20%. Okay. And does it have to be that somebody is really deep in debt? Or how do you figure out when’s the time to actually consider doing a Consumer Proposal
Jillian Taylor-Mancusi 3:02
With a Consumer Proposal, and with a Bankruptcy for that matter, you have to technically owe $1,000 and the installment. This could be most people walking down the street, but they don’t necessarily need to file. Who files and when they file is really personal to that person. Because how much somebody can afford to carry in debt really varies from person to person. Someone could have $5,000 worth of debt, and find that unmanageable where somebody else can have $100,000 worth of debt, and still find a way to manage. So it’s really individual.
Right? And but the stress is the same for somebody who’s $5,000 in debt, and they don’t have that money coming in that can be just so scary.
Jillian Taylor-Mancusi 3:47
Right? Exactly. It could be $5,000, it could be a million dollars, it doesn’t matter.
A lot of times it just feels like there’s nothing you can do. So this isn’t something you do though on your own. You can’t say, okay, I’m in debt, I’m in trouble, I’m not going to see a way to pay this, I’m going to do my own Consumer Proposal. This is where you reach out to an LIT?
Jillian Taylor-Mancusi 4:05
Exactly. And only an LIT can file a Consumer Proposal, because there’s other things that go along with it, such as a Stay of Proceedings, for example. So what a Stay of Proceedings does is it stays any actions against you. What that means is that nobody can sue you, garnish your wages or take any other collection practices against you. And that’s only something that an LIT can put forward.
That happens. So people get in debt, stop making their payments, and all of a sudden, they can garnish your wages.
Jillian Taylor-Mancusi 4:33
If you’re finding yourself in financial difficulty and can’t pay your debts – eventually what’s going to happen is your creditors are going to take you to court. And once they get a judgment against you, which is pretty easy for them to get if you owe them the money. You go to court and the judge asks you if you owe the money, they get a judgment against you. If they do, then once they get that judgment, then they can go back to court and get a garnishment order. With a garnishment order they can garnish up to 30% of your gross wages. So once that happens, you don’t have too many options left.
Wow. And so at that point, you can still do the Consumer Proposal and that stops all that. Okay, good to know. And how long does a Consumer Proposal last? You said you could pay that immediately. Or you could also pay it for a year or up to five years?
Jillian Taylor-Mancusi 5:23
So if you say, for example, you had a rich uncle that wanted to fund your proposal, and you can do it in one basket or lump sum proposal, great. Otherwise, it has to be done within five years.
Is that a good idea? Or should you slowly build it – to make the payments to show that you’re good with making payments? Or does it not even make a difference regarding credit, but as far as your credit rating goes?
Jillian Taylor-Mancusi 5:45
While you’re in the proposal, it’s going to show up as an R9, which is going to be the same as a Bankruptcy, your judgment and garnishment. Once you’ve completed the proposal, though, it’s going to bump up to an R7, which is a debt settlement. And it’s going to stay there for three years after you finish the proposal. So if you pay it all off in one lump sum, then it’s only going to be on there for three years longer. Or if you wait the five years, then you have the five years plus the three years.
Gotcha. Okay, now, are we ready to dive into bankruptcies and what that is all about?
Jillian Taylor-Mancusi 6:16
When you file an assignment Bankruptcy, what you’re doing is you’re signing over everything that you own and have a right to earn interest into the Trustee. What the Trustee does is they open up a trust account. Any money that comes in under your name gets put into that trust account.
So for example, an income tax refund and sometimes GST cheques – those will come to the Trustee. Every month, you’re required to make a monthly payment – if you have something called surplus income. And that’s a calculation that’s determined by the government based on the superintendent standards.
Then we start looking at assets. And this is where it’s important to look at the assets. When you’re comparing whether or not you want to file a Bankruptcy or a Consumer Proposal. So for example, if you have equity in your house. It means if you’re going to sell it, once you pay the real estate agent, the lawyer and all the other fees that come out to sell a house, will there be any money left over? If the answer is yes, then the equity is going to come to the Trustee for the benefit of your creditors.
Now, if there is equity in your house, that’s when you might want to look at something like a Consumer Proposal because one of the big differences between a Consumer Proposal and a Bankruptcy is that the assets don’t vest in the Trustee. So what that means is where in the Bankruptcy, the Trustee might look at selling your house to get that equity out. In the Consumer Proposal, the Trustee is going to make sure that the same amount of money is flowing through your proposal, as would flow through in the Bankruptcy. But you continue to make the mortgage payments and stay in the house.
So with a Bankruptcy, do you automatically lose your house?
Jillian Taylor-Mancusi 8:03
Not automatically. It depends whether or not there’s any equity in it.
And I let’s say you do have equity, let’s say you’re halfway but all of a sudden somebody gets sick, you can’t work – bills start going up, you get into an incredible amount of debt. You don’t want to be doing a Bankruptcy at that point. You want to do a proposal, right? So I guess it’s really individual cases.
Jillian Taylor-Mancusi 8:28
Right, exactly. That’s why it’s so important to make sure that you take that first step and talk to the LIT because they can look at your situation and give you the options. So, if you have that house with a lot of equity, maybe the Consumer Proposal is something that you can afford to make the payments every month and keep the house. But sometimes it’s better to walk away from the house and let the Trustee sell it for the creditors. And then you get the opportunity to start over.
So I thought you could maintain your personal residence and you could keep a vehicle and maybe tools of the trade whatever it is that you’re doing. Is that case by case as well?
Jillian Taylor-Mancusi 9:06
Each province has different exemptions that apply to people who are looking at Bankruptcy, for example. So everyone is slightly different. So for example, in Manitoba, the tools of the trade allow for $7,500 worth of tools of the trade and that includes a vehicle not worth more than $3,000 – if it’s to get to and from work or for work itself.
So you can have that exemption in those tools of the trade. Unfortunately, I don’t know the exemptions for the rest of the provinces because they don’t practice there. But another exemption in Manitoba are things like your RRSPs. Those are exempt from seizure by the Trustee. There’s an exemption for property of either $2,500 or $3,000, depending on whether or not it’s in joint title. So there are exemptions. It just depends on whether or not you exceed those exemptions.
I think what’s really important here with what we’re discussing is that you can’t really listen to a friend from another province. We’re all connected all across the country, right? And then they say – well, here’s what I did. And this is my wisdom to you. And you should do this, this, and this because I’m learning from you that each province is different.
Jillian Taylor-Mancusi 10:13
Right. Don’t listen to other people and go by what they’ve done, because it could be very different in the province that you’re in.
Absolutely no, that really is a big thing. Because where do we learn from, right? If we’re in trouble, who we hear from friends and friends will give you some advice, but many of them may not have ever been in your situation.
So how do you listen to the advice they have? And if they were to tell you, you mentioned RRSPs can’t be touched during a Bankruptcy? What if they said, Well, maybe sell off some of your RRSPs to pay off your debt? That would be a terrible thing to do. So I think it’s important as well that we mentioned that the first meeting with a Licensed Insolvency Trustee is free.
Jillian Taylor-Mancusi 10:53
Exactly. So we can meet with you either in person or by telephone. But the best advice you can get from your friend is to go talk to the professional. So if that’s the advice they’re giving you, that’s the advice you should look at.
Perfect. What else do we need to know regarding Consumer Proposals, Bankruptcies and making choices?
Jillian Taylor-Mancusi 11:10
Make sure that you make an informed choice by talking to an ally, to find out what options actually are best for you in your specific situation.
I think that’s a great way for us to wrap today up. Julian, thank you very much for being on the show. Thank you. My guest today, Julian Taylor Mancusi and you can learn more or you can schedule a free consultation with Jillian or team at LCTaylor.com.
And that’s it for today’s debt matters podcast. Make sure you subscribe wherever you get your favorite podcasts from and of course, for more information, you can always check out debtmatters.ca
About Jillian Taylor-Mancusi
Jillian is the managing partner at LCTaylor and has been a Licensed Insolvency Trustee since 2007. She is a member of the Canadian Association of Insolvency and Restructuring Professionals (CAIRP) and a Post President of the Manitoba Association of Insolvency and Restructuring Professionals (MAIRP)