143 – Can You Switch Between Bankruptcy & Consumer Proposal

Wayne Kay 00:04
Can you switch between a Consumer Proposal and a Bankruptcy? 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. Can you switch or not between a Bankruptcy and a Consumer Proposal? When is the right time to do so? When is not the right time to do so?

You’re going to find out the advantages, disadvantages, and a lot more from my guest, Francyne Myers from Allan Marshall & Associates Licensed Insolvency Trustee from Nova Scotia. She’s in the Halifax and Truro offices. Hi there, Francyne.

Francyne Myers 00:45
Hi, Wayne.

Wayne Kay 00:46
Thank you very much for being here.

Francyne Myers 00:48
Well, thank you for having me.

Wayne Kay 00:50
Well, we always have great discussions and dive deep into the situations that people get themselves into. And a lot of times it’s not of their own fault. Things happen in life that can really throw you off financially.

Francyne Myers 01:04
That is absolutely true, Wayne. We see more and more of it considering that there’s so many external factors putting pressure on people these days. Are you seeing an increase in the last six months?

Francyne Myers 01:18
I’m sad to say I actually am, yes.

Wayne Kay 01:23
Well, we kind of expected that, though, because of what happened economically, everything crashed. A lot of people lost jobs trying to keep their houses, keep food on their tables. And then we knew eventually this was all going to catch up. So this is not really a surprise with what happened.

Francyne Myers 01:41
No, I think it’s also people who are probably adjusting to what you say, like a new normal life is different, and we all have to accept that. And perhaps change our spending habits and just the way we live a little bit.

Wayne Kay 01:54
Well, that’s why we do this show, so that we can help Canadians that are having a tough time. They need to find out about some options. And there’s all this fear that’s wrapped up, when you get into this financial situation where you’re not able to make the payments. What do you do?

So I’m interested to hear all about whether you can switch between Bankruptcy and Consumer Proposal. And right off the top, I have to say, I didn’t even know that was an option.

Francyne Myers 02:20
A lot of people don’t. And they’re actually quite surprised when I say, yes, of course you can.

Wayne Kay 02:26
What does that look like? So here, somebody’s having a tough time. They come to you. And you kind of say, okay, here’s probably the best plan for us to start with. And then do they have to pick one or the other? I would assume they do.

Francyne Myers 02:40
Yes. So when somebody comes to me and I do a consultation, I do like to give a recommendation and perhaps avoid switching from one to the other.

And I’ll tell you why, Wayne, because every time you file either Bankruptcy or proposal, there’s a hit against your credit report. So when I do a recommendation, I want to recommend something that’s going to be the option for them so they don’t have to switch back and forth. But sometimes there are circumstances where you do have to switch back and forth. And that’s what, you know, we’ll talk about here.

We can start with talking about, let’s say, going from a Bankruptcy to a Consumer Proposal, if you like, and then we can talk about Consumer Proposals to Bankruptcies, if that works for you.

Wayne Kay 03:31
Absolutely. I look forward to this.

Francyne Myers 03:33
All right. So totally different circumstances. Let’s talk about going from a Bankruptcy to a Consumer Proposal. It’s not as common right to switch from a Bankruptcy to Consumer Proposal as it is from a proposal to Bankruptcy. And we’ll talk about that a little later on. But yes, you can definitely go from a Bankruptcy  to a proposal.

The reason for doing this is often a change in circumstances. So what’s happened is, let’s say somebody’s become entitled to what we call a windfall, such an inheritance. In this kind of situation, even though any funds you’re entitled to, you’d have to tell the creditors, of course, if you filed the Consumer Proposals.

The advantages of switching from a Bankruptcy for a proposal in this case would be, for instance, that once you have your Consumer Proposal accepted by the creditors and approved by the court, usually that’s just time going by for the courts, not actual court hearing.

Your Bankruptcy gets annulled. So this means that your Bankruptcy actually gets wiped from your credit report. So rather than at this point having two insolvency proceedings on your credit report, you only have the one.

Francyne Myers 05:00
Whereas what would happen if you didn’t do that? In a Bankruptcy, all the money you would be entitled to would come into the Bankruptcy and then the Bankruptcy would be, you would receive what we assume you’re discharged and then the Bankruptcy all be closed. But it’d be on your credit report for six years. Whereas if we do it through a proposal, the Bankruptcy is wiped out.

It’s gone, it’s annulled and you’re done after three years off your credit report because the proposal stays on your credit report for such a smaller time.

Francyne Myers 05:37
Also, depending on the amount of money you might be entitled to, let’s say I’m supposed to get $100,000. I’m going to throw that out, and I only really owe $50,000. Well, you can say in the proposal, I’m only paying in $50,000 at this point because creditors, that’s pretty much all they would expect.

And then the rest of your money is all tied up because in a Bankruptcy, all the money has to come into the Trustee, and then the Trustee does all the wonderful things with the magic, pays out the creditors, and only after all that is done do you get your money back. So this way you’re not tying up all your money.

Francyne Myers 06:19
And, you know, if the terms of proposal say that once the windfall comes in to the Trustee, the Consumer Proposal is over with, your proposal is done, you get your certificate of full performance, no more waiting for the Bankruptcy to be over. Because keep in mind, Bankruptcy doesn’t end until it’s supposed to. You can’t really cut it short.

So if you are supposed to be in Bankruptcy for 21 months, which is a very common timeframe, and this money comes in in a year, well, you are still not going to be out of Bankruptcy for at least another nine months. Whereas if we do it through a proposal, then once that money comes in, you’re done.

Wayne Kay 06:58
Okay.

Francyne Myers 07:00
So it doesn’t, may not necessarily save you any money that way, but there’s definitely advantages. Your Bankruptcy is gone, you’re out of your proposal a lot quicker, and you can stipulate that not all the funds come in as long as the creditors agree to that. So there are definitely some, especially with larger windfalls, very much of a rehabilitative advantage.

Wayne Kay 07:27
Is there a disadvantage then?

Francyne Myers 07:29
The disadvantage to me would be – well, and it’s not really a disadvantage, Wayne. They just may not accept it. So then you’re just still in the Bankruptcy.
So I would say in those cases, let’s try. Because in my mind, the creditors are getting their money much more quickly. That’s a big plus for creditors.

There may be another circumstance where a person who’s in Bankruptcy all of sudden gets a great job or a large bonus at work, which means that the payments that they’re making in a Bankruptcy, because it’s based on your income, will skyrocket.

So you’re like, whoa, that’s like, I just can’t make those payments in Bankruptcy anymore. So then maybe we would make an offer to the creditors of what payments to make to them.

And then once all those monies, or the monies come into our trust accounts, then, first of all, the Bankruptcy has, of course, been annulled. And then you just do your payments in the proposal, and then you’ve, then you’ve got the three years left. Not the six years.

Wayne Kay 08:34
Right.

Francyne Myers 08:35
So there’s definite advantages and disadvantages. The only thing I can think of is what are the chances of the creditors accepting it? But I got to tell you, if you’re giving the creditors the same money as they would get into Bankruptcy and they’re getting it quicker, they aren’t really concerned if it’s also advantageous to you because they’re looking at their bottom line.

Here’s the other thing, Wayne. In a proposal, there’s probably a really good chance that the cut that the Trustee gets, is less.

So dollar for dollar, the creditors may actually be getting more in a proposal than they would in a Bankruptcy. So there’s another plus for the creditors to accept somebody’s offer.

Wayne Kay 09:26
Now what about going the other way? Let’s say you start off with a Consumer Proposal and then you decide Bankruptcy is best.

Can you give us some great options there? What does that look like? And why would somebody do that?

Francyne Myers 09:40
Yes. So that’s actually more common. Consumer Proposals usually have 60 month terms. Well, you and I know how much life has changed in the last three or four years. So we’re actually seeing more and more Consumer Proposals and it’s not the norm, but we are seeing a bit of an uptake.

People in Consumer Proposals are switching to Bankruptcies as the cost of living keeps increasing and people can’t keep up with the monthly payments that they propose to their creditors two, three or even four years ago.
Because life has changed so much and that payment doesn’t vary in a proposal with your income like it does with a Bankruptcy.

So if you can’t keep up with your proposal payments due to a change of circumstances, you basically have three options, including Bankruptcy.

Number one, if your cash flow problem during the proposal is temporary, well, you can defer up to two payments. But if you fall behind three payments, then your proposal is automatically annulled, which means your creditors can start to pursue you for the full amount of your debts.

And at that point, maybe you’re looking at a Bankruptcy. But if it’s just temporary, you think you’re going to be off work for a month or something. Well, you can defer up to two payments and then you get back on track.

So you probably don’t need to do a Bankruptcy then. You can also amend the terms of your original proposal. If you’re near, this is even if your proposal is in danger of being annulled and you don’t want to, you know, have another, have a Bankruptcy on your record.

Then you can talk to the Licensed Insolvency Trustee. And as long as you’re not in default, let’s say you’ve missed a couple payments, you’re fine.

Before there’s an annulment file an amendment to your Consumer Proposal. So what it does is sends a new offer out to your creditors, maybe a reduction in payments, maybe a reduction in the number of payments or both.

Now with as long, here’s the risk with that. If your creditors do not accept your amended proposal, your original proposal is annulled.

Wayne Kay 12:13
Which means what? When you talk about it, you’re probably looking at it.

Francyne Myers 12:17
You’re probably looking at having to file a Bankruptcy.

That’s a conversation I have. A lot of times people say, okay, keep in mind, if we do this, you cannot go back to the original proposal, which is a little counterintuitive. Not to the general public, to me as well.

That if they don’t accept this, because to me, you know, why wouldn’t you be able to do that? Unfortunately, the law is written that if they don’t accept an amendment, that the original proposal is gone. So we have to be committed to this right before we file an amendment. Or basically at that point, there’s really no choice but to file a Bankruptcy.

Francyne Myers 13:03
And then, you know, finally, you know, if somebody does come to me and they can’t do it, or here’s the other thing. Sometimes people have obtained other credit after they filed a Consumer Proposal and they’re starting to find that it’s hard to deal with the new credit and keep up their proposal pain.

I had somebody actually come to me recently who had purchased a vehicle and then their income went down, so they couldn’t keep up the payments on the Consumer Proposal and they wanted to send the vehicle back. So the only way we could do that is for them to file a Bankruptcy.

Wayne Kay 13:48
I’m seeing how important this is for anybody you’re working with. You kind of work together for quite a while and you have to be completely open and honest about what’s happening in your financial situation at all times.

Francyne Myers 14:02
Yes. And you definitely want to do that. The Trustee, from my point of view, I always say to people, what are you thinking? What do you want to do, you know, what’s your goal? All right, tell me everything so I can give you good advice and explain the pros and cons so you can make a good decision.

Wayne Kay 14:23
Because often times we’re not seeing what the cons are going to be.

Francyne Myers 14:27
That’s right. Now there’s a bit of a disadvantage in my mind from switching from a proposal to a Bankruptcy. Now, you may remember I just said, well, if you go from a Bankruptcy to a proposal, once the proposal is accepted, your Bankruptcy is gone. That’s great. Not so when going from a proposal to a Bankruptcy. If you do that, then it will show the two insolvency proceedings.

Filing a Bankruptcy after proposal does not annul the proposal from your credit report. Sometimes creditors will think you file two bankruptcies within a fairly short period as bankruptcies and proposals are not always clearly reported on their credit reports.

You may end up having some explaining to do and tell somebody that, no, I didn’t file two bankruptcies.

Here’s a situation we had. We had someone who filed a proposal, and in this case, the creditors did not. And this was a few years ago, probably more than a few years ago, the creditors did not accept the proposal. Now the problem is as soon as you file a proposal, it shows in your credit report.

The creditors did not accept it. So this person ended up having to do a Bankruptcy. So within probably a few months, they had the proposal notation and then they had the Bankruptcy three months later. And some creditors do not understand that that is actually legally impossible. They thought that the person had filed two Bankruptcies within three months.

Because they didn’t report it. And like I say, it’s not legally possible. You can’t do that. And there’s just really no way you could get out of a Bankruptcy in three months and file another one. It just wouldn’t work.

Wayne Kay 16:21
Right. Exactly.

Francyne Myers 16:21
But they didn’t know and they saw these two notations. So you have to also be very careful. I suppose an advantage in a Bankruptcy following a Consumer Proposal is mostly you can incur any new debt since you filed your proposal, not just the debt at the date of the proposal. Now this can also be a disadvantage because let’s say you don’t want to include that new debt because you’re using that to establish new credit. Well, now you’re forced to include that credit card.

Let’s say that it’s in good standing in the Bankruptcy. You have no choice because I’ve had people say, oh, I got a, you know, x credit card, and it’s in good standing, but I just can’t afford this car anymore. I need to send that back. And I’m like, I wish we could only deal with the car, but we can’t. We have to include everything. So it really is a conversation as to what the pros and cons are. Cause there’s a lot of nuances that you may not think of.

Speaker D 17:37
Right.

Francyne Myers 17:37
So just to kind of keep that in mind as well, you know, the advantage of going from proposal to Bankruptcy, you can add in new debt. But, Wayne, when you go from Bankruptcy to a proposal, you can’t add in new debt. You can only deal with the debt you had at the Bankruptcy.

Wayne Kay 18:00
Right. I think you’ve done a great job of explaining all this.

Francyne Myers 18:03
Oh, okay.

Wayne Kay 18:04
Really good.

Francyne Myers 18:05
Because it can be. It’s a lot of information, and especially when people have a lot of pressure on them with all this. You need to really very clearly set out what the advantages and disadvantages are of both.

Wayne Kay 18:20
The one big take away I’ve already mentioned is the importance of being completely open with the Trustee of what you’re going through financially, what you’re thinking, what you may want to be doing to build your credit ahead and just be completely open and honest.

Francyne Myers 18:36
Yes. Because then I can give you what the pros and cons are so that you can make a good decision.

Wayne Kay 18:43
Any final words of advice you need to share regarding this topic?

Francyne Myers 18:47
Well, first of all, before you may want to talk to switching from one to the other, always review your cash flow to see if there’s any way that you can make that one proceeding still work, especially when you are going from a proposal to a Bankruptcy, because then you’re going to end up with two notations on your credit report.

Wayne Kay 19:14
Yes, perfect. Well, great advice. I thank you so much for your time. I love talking to you, and you give me so much good information.

Francyne Myers 19:22
All right, thanks, Wayne.

Wayne Kay 19:23
My guest today was Francyne Myers. You can learn more or schedule a free consultation with Allan Marshall & Associates Licensed Insolvency Trustee through their website at wecanhelp.ca.

And that’s it for the Debt Matters podcast for today. Just 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.