67 – Canadian Laws for Repossession: Dealing with Car Loan Debt and Vehicle Repossession

Wayne Kay 00:03
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. 

In today’s show, we’re going to have a great discussion regarding Canadian laws for repossession. What that means when you’re dealing with your car loan debt or vehicle repossession. What happens when you can’t afford your car payments anymore, or what happens to your vehicle payments when you file for Bankruptcy or a Consumer Proposal and what that looks like in a few different provinces as well.

My guest today, Daniel Maksymchak from LCTaylor Licensed Insolvency Trustee with offices in Winnipeg and Kenora. Daniel, thanks for being on the show.

Daniel Maksymchak 00:49
It’s good to be back, Wayne. Thanks for having me.

Wayne Kay 00:51
We will have a great discussion. I’m following, and you are obviously following what’s going on in Canada and they’re talking about record debts for consumers, consumer debt. I guess that would be what – credit cards?

Daniel Maksymchak 01:02
Yes, credit cards, lines of credit, pretty much anything that’s unsecured is usually what they’re referring to – things that aren’t mortgages or business debts. Consumer debts would be things that are used for consumer spending, such as credit cards. Like you said, lines of credit, depending on how they classified it, it might also include car loans.

Wayne Kay 01:22
And that’s our topic today. We’re going to be talking a lot about car loans and car debt. Is this a problem that we are seeing?

Daniel Maksymchak 01:29
It can be. As people’s other debt load rises and interest rates rise and the cost of servicing their debt rises, it squeezes things. So even if a car payment is fixed, it’s just another debt on the pile that may not be manageable as a sum. Especially with recent car prices. Used car prices have really spiked over the course of the pandemic with new cars being harder to find.

And of course, with higher prices means higher payments. So it could be a challenge that a lot of people are facing.

Wayne Kay 01:57
It is actually shocking to me, the price of vehicles nowadays.

Daniel Maksymchak 02:03
Yes, it’s an issue. People are not able to find new cars, which historically have been often subsidized by the factory to some extent with low financing or incentives to purchase.

And when they can’t find those, they’ve got to seek out used cars. As with anything, more demand on the same supply raises the prices. And with higher prices means higher payments on the financing and less attractive incentives. You don’t see the 0.9% financing advertised as much now as you used to. So higher payments because the vehicle is more expensive and higher interest is a problem for sure.

Wayne Kay 02:40
So when it comes to car loans, I’ve got some friends that are working in the industry. They were saying on average, people would get a loan for I think it was seven years, and payments for one of these trucks are often around $1000. They’re making this payment for seven years, which is unbelievable to me. They said that is pretty much the average, which I was shocked with.

Daniel Maksymchak 03:09
Yes, I mean, it’s up there. If you do the math on that, seven years, 84 months, $1,000 a month, the total cost of this vehicle is $84,000. Which is a lot of money. 

Right now, the breakdown of the price which has gone up on these vehicles and the interest – it’s also gone up. But at the end of the day, on someone’s finances, really what matters is the payment they’re making. That’s what people look at these days. And unfortunately, when you finance something over a long period of time like that, you’re relying on this vehicle being usable for that whole period of time, the seven years.

Wayne Kay 03:43
Right.

Daniel Maksymchak 03:43
But of course, the longer that you have a vehicle for, the more maintenance is required, the more you might be tempted to acquire another vehicle instead. 

And usually when that happens, you’re going to have negative equity on your current vehicle. It’s not worth as much as you owe on it at the time that you’re looking to get rid of it. And oftentimes people will then roll that into the next vehicle loan. 

So not only is there a cost, obviously, for the new vehicle that they purchased, but they’re starting out underwater on this vehicle simply because of the shortfall from the previous vehicle that’s been rolled into that pain.

Wayne Kay 04:15
So then all of a sudden, you get to a point where, life was good, everybody was doing great, and then we have something come up in life and no longer can you make that car payment. It’s just too much of a struggle. So what happens to your vehicle when you can’t afford the car payment? Walk us through what that looks like for a lot of Canadians.

Daniel Maksymchak 04:36
Yes, so it varies from province to province, and it also varies on your overall circumstances. If somebody calls a Licensed Insolvency Trustee and they’re having trouble with their car payment, the first question really is, what do you have for other debts? Is it just this car payment that’s the issue, or is there an overall situation with regards to your debt that’s unmanageable? 

In Manitoba, at least, if it’s just vehicle debt that’s the problem, provincial law allows someone to really just have that vehicle be seized. If that vehicle is seized, they can’t sue you for the shortfall under local legislation. 

What that means is the vehicle gets repossessed, they seize it, but then that’s the end of it. You lose the vehicle, but they can’t then if you have this negative equity and they go and sell it for a loss – they can’t sue you for the money that they’ve lost on that ordeal. As opposed to other provinces like Ontario, where we also deal, where they can.

So in that case, if you’re going to be sued for that negative equity, then oftentimes simply letting them seize the vehicle isn’t sufficient. You then need to maybe file a proposal or a Bankruptcy to deal with that loss on the vehicle because they’re going to come after you with a bill for that negative equity.

Wayne Kay 05:55
Essentially, when the price of oil went down and the whole oil industry got nailed over in Alberta, I was hearing that a lot of people were just kind of leaving their vehicles at the airport and flying back to wherever they lived in the country and said, I’m not going to worry about this. I’m just going to walk away from this vehicle and the price and the payments.

I guess that’s kind of what you’re talking about is if you surrender the vehicle back, then you kind of are free of it in some instances. I guess before you do that, you should talk to somebody. Who would you talk to? An LIT?

Daniel Maksymchak 06:29
Yes, you would definitely talk to an LIT specifically in your province.

Wayne Kay 06:33
Right.

Daniel Maksymchak 06:33
We don’t operate in Alberta, so I can’t speak unfortunately as to what the regulations are on the vehicles there. The two provinces that we operate in at LCTaylor, Manitoba and Ontario, differ greatly in this regard because Manitoba, that would be something you could do. Basically, you can’t make the payments. So the payments aren’t being made.

Eventually they seize the vehicle and usually that’s the end of it. Whereas in Ontario, if that happens, they seize the vehicle, they sell it, and then they send you a bill for the money they’ve lost. I can’t speak to, unfortunately, how it would be in Alberta, in your example.

Wayne Kay 07:06
Yea, and then you mentioned that there’s an option of Bankruptcy and Consumer Proposals. What happens to your vehicle payments if that were to happen?

Daniel Maksymchak 07:17
If people come in, and this was where I was going earlier, is it an overall debt problem or is it simply a matter of you how you have this one vehicle payment that’s no longer manageable? Because oftentimes people have a vehicle and they have a payment that is large, but at the end of the day, they need that vehicle to get to work. They wouldn’t be able to get into another vehicle for a payment or cost that’s any better. 

So really the vehicle is kind of non negotiable in some circumstances, and it’s really the other debt that’s causing the problem. And if you can deal with that other debt, then that obviously frees up more cash flow to manage the vehicle payment as well as everyday life.

So that’s where a Bankruptcy or a Consumer Proposal or some other kind of debt restructuring is useful so that you don’t lose the vehicle because you have more money to service the vehicle. It’s the other unsecured debt that can be dealt with more easily.

Wayne Kay 08:11
Okay. And there are limits on how much a vehicle can be worth when it comes to those situations or not.

Daniel Maksymchak 08:20
Well, it comes down to how much equity is in the vehicle. If you were to file a Bankruptcy, let’s say the vehicle is an asset if there’s equity in it. But if you have a vehicle where you owe the same as the value of the vehicle, or you owe even more than the value of the vehicle, there’s no real money there to be had for the Bankruptcy estate, which is to say the unsecured creditors. 

Any value of that vehicle is basically locked up by the secured lender on that vehicle. So there’s no reason for the Trustee to get involved and sell that when all the money is just going to go to the secured creditor. So the secured creditor essentially makes the decision: are we going to let this person continue to have the vehicle and continue making the payments to us or do we want to take it and sell it?

And from our experience, nine times out of ten they don’t want to seize the vehicle and sell it. They’d much rather just continue receiving your payments with interest. So if that’s the case and there’s no equity in the vehicle, then the vehicle is unaffected. 

Now, if there is equity in the vehicle, then that equity, a certain amount of it depending on your province, is protected as an exemption. Typically in the vehicle that you’re allowed to use that vehicle and continue to own it through the Bankruptcy, as long as it’s within that exemption amount. But if there’s a lot of equity in the vehicle and it’s possible that it’s beyond that exemption amount, then yes, if you wanted to keep the vehicle, you’d have to pay that amount of equity beyond the exemption into the estate to keep the vehicle.

But typically vehicles, the second you drive them off the lot, they’ve lost value and usually the value of them goes down faster than the payments to pay the debt down goes. So most of the vehicles we see have no equity and it’s simply a matter of if the debtor wants to keep it, they just have to keep up those payments with the lender.

Wayne Kay 10:05
Okay. And what about when it comes to leasing? Is that a different ball game altogether from actual purchasing?

Daniel Maksymchak 10:13
Legally, leasing is quite similar to financing. It comes down to the lease payments, the remaining lease payments. Plus there’s usually a balloon payment at the end, if you want to retain the vehicle at the end at least.

So if some of those payments plus the balloon payment is less than the value of the vehicle, that is to say you could sell the vehicle, pay out all the remaining payments plus the balloon payment and have money left over to keep – then that would be an asset of a Bankruptcy. But typically that’s not the case as well. So it’s usually a matter of if you want to keep the vehicle on a lease through a Bankruptcy or Consumer Proposal, you just keep making the lease payments and then it’s the usual arrangement there.

Wayne Kay 10:57
So when you talk about making these balloon payments and if you’re in financial trouble or you’re not able to make these car payments, I don’t think there’s any extra cash there to make any kind of a balloon payment.

Daniel Maksymchak 11:10
Yes, that’s true.

Wayne Kay 11:11
Right.

Daniel Maksymchak 11:11
You get to the end of the lease and suddenly they’re expecting a buyout of the vehicle. Now, it depends on how much that buyout is. And sometimes you can even finance that buyout at the end if you wish to keep the vehicle.

It’s true, though I don’t have any stats on this offhand, but I imagine that most people, instead of being able to come up with that money, move into something else that’s financing, trade it off payment.

Wayne Kay 11:39
And then they’re okay, then they don’t have to worry about, obviously the financial issue, if they have one. And they can then maybe just drive maybe their second vehicle, which is fully paid for.

So can we talk a little bit about – somebody is in a situation where they do have their vehicles that are paid for, but they have other situations when we talk about the consumer debt at the beginning of the show. Maybe they just don’t have the money. It’s a crunch. They don’t know what to do. All of a sudden, they’re in financial trouble. I’m dipping into my savings.

I’m getting phone calls from creditors. What do you do at that point? So when it comes to the vehicles that you already own, maybe you can walk us through something like that. Do people automatically have to sell or do they get to keep them for work purposes? What have you seen?

Daniel Maksymchak 12:33
Yes. If a vehicle is paid off, then any amount that that vehicle has in value is equity in the vehicle, essentially. So, depending on your province, there are exemptions in place to allow you to keep an amount of equity in the vehicle. And this varies from province to province.

Some provinces, such as Manitoba, have a stipulation that the vehicle has to be used for work. Other provinces do not have that stipulation. Depending on the province in which you reside, by talking to an LIT, you can figure out the lay of the land. How much you would have to pay if you want to retain your vehicle, even if you did a Bankruptcy, or essentially what that vehicle would be worth to the creditors if it was to be taken. 

Let’s say you wanted to surrender the vehicle. You didn’t want to keep paying to retain it after the bankruptcy has been filed. Definitely talk to an LIT, because these numbers, they change periodically and there’s regulations if you’re using it for work or you’re not. You own it outright, you own it jointly with a spouse or something like that. There can be a lot of moving parts in this. 

But something that I’d like people to take away is that usually the Trustee will give you the first right of refusal to buy back the vehicle from the estate – so you have the right to keep it if you wish and that you can come up with the value of that vehicle in the form of payments over time.

Wayne Kay 13:57
Actually you bring up an interesting point. If you do have a spouse or a partner, are you able to juggle things to move them into another name or do you find that couples as a whole will both declare Bankruptcy together. What does that look like?

Daniel Maksymchak 14:16
Sometimes couples will have a lot of debt that’s either joint or they have a lot of debt in both of their names because the same circumstances have affected both of them. So they both had to take out that debt to get by. And in those situations, usually we do see them both filing Bankruptcy or Consumer Proposal either jointly or separately. But that’s not always the case, right?

Sometimes you’ll have a couple that perhaps got together later in life. One had the debt, the other did not, so therefore it’s not necessary for one of them to file because they don’t have the debt. 

In that case, your question was, can you do anything with respect to the vehicles and whether they can be switched names or something like that? There are strict laws in the Bankruptcy and Insolvency Act that prevent that kind of thing from happening, from moving assets outside of the reach of creditors. So the Trustee would have to basically unwind that transaction, put it back in the name of the person who originally had been in, so that the credit can receive fair value from that vehicle.

Wayne Kay 15:18
Okay, so basically I feel like I was being shifty there.

Daniel Maksymchak 15:23
I mean, yea, it’s something that the legislators thought of when they wrote the Bankruptcy and Insolvency Act.

Wayne Kay 15:30
Right.

Daniel Maksymchak 15:30
The idea is for the creditors to receive fair value from the assets of the debtor and there’s regulations in place to prevent those assets from being moved out of the reach of the creditors.

Wayne Kay 15:42
So you have a common law couple that buys themselves a house together, but they’re keeping everything separate. One loses their job, they’re not able to make the payment because everything is kind of separate. Does that affect the other person’s credit if everything is separate or not?

Daniel Maksymchak 16:02
No. So if everything is separate, everyone has debts in their own name and their own assets. So if someone does a Bankruptcy or a Consumer Proposal and their spouse doesn’t, then it’s not going to affect that spouse. It would be that person, say the husband’s debt that would be involved in the Bankruptcy that would take the hit on the credit that would be reporting to the credit bureaus that they’d been involved in a Bankruptcy.

But just by virtue of having a relationship with another person, it doesn’t affect your credit. The only real time where your credit could be impacted by a spouse’s filing would be if you had joint debt. If somebody has a joint debt or they co-signed on behalf of someone else’s debt to guarantee that that debt would be paid. 

Then if someone goes bankrupt or does a Consumer Proposal that results in not all of the debt being repaid – the creditors are going to look to the other person who is a joint debt or guaranteed the debt and basically say – Hey, you guaranteed that we’re going to be paid if this person is not paying us and they’ve gone bankrupt. So we’re not going to get paid in full from them. We’re requesting or requiring you to make the payments to make us whole. And if the spouse can’t do that, if they just don’t have the means to do that, then of course it’s going to impact their credit as well because they’re not able to uphold the guarantee that they gave, essentially.

But as long as somebody just has debts in their own name and the spouse didn’t guarantee them – as the joint debts are on them, then that creditor has no right or reason to report the spouse as being negligent in payments or anything like that.

Wayne Kay 17:37
So when you co-sign, it’s a very serious thing that you’re signing for because if that person cannot make those debts, it’s on your shoulders. You don’t get to just say, well I co-signed, but it’s more their problem, not mine.

Daniel Maksymchak 17:51
No, exactly. By co-signing you’re saying that if this person can’t pay for any reason under the sun basically that you will be paying. So you call it co-signing or everyone calls it co-signing, but it’s really co-buying or co-paying. You’re guaranteeing that this is going to be paid if they can’t.

So you have to be prepared for that, worst case scenario, if you’re ever going to co-sign for anything for anyone.

Wayne Kay 18:16
Yes. That’s great advice. Anything else we need to know? When it comes to the Canadian laws?

Daniel Maksymchak 18:21
Regarding repossession, I think that was a pretty good summary. If you have a creditor threatening repossession of an asset of yours or you have payments that are falling behind on an asset that is secured – that gives the creditor the right of repossession. I would definitely call a Licensed Insolvency Trustee, find out what your options are, find out what the creditor can legally do and not do with respect to that asset. LITs in most cases offer free consultations and there’s no harm in calling one up.

We’d be happy to talk to you and go through the options and possibilities so that you’re informed and you’re not making an uninformed decision with respect to what’s an important asset in your life, which is your vehicle – which is mostly what we’ve talked about so far today.

Wayne Kay 19:07
Yes. Terrific. That’s great information. And it’s very easy. They can simply go to your website, LCTaylor.com, to schedule that free consultation with LCTaylor, Licensed Insolvency Trustees.

Daniel, thanks very much for being on the show. It’s always a pleasure.

Daniel Maksymchak 19:23
Thank you, Wayne. Take care.

Wayne Kay 19:24
My guest today, Daniel Maksymchak. That’s it for today’s Debt Matters podcast. Just make sure you subscribe wherever you get your favorite podcast from. And of course, if you want more information, you can always check out our website, debtmatters.ca. Thanks for listening.