Most frequent questions and answers
Great question. The short answer; a whole lot. First off, don’t fall for the uneducated advice, of someone with no interest in your affairs, simply telling you that bankruptcy is quicker and cheaper than a consumer proposal. There are a lot of people out there who have been through bankruptcy and would tell you quite the opposite. Fair warning to the reader, the following may induce a headache: A bankruptcy can be very restrictive. For one, your income is monitored on a monthly basis. The reasons for the monitoring is because you are limited as to how much of your earnings you can keep while in bankruptcy. The limit is very low and not enough for someone to live on, at least not in our part of the world. If you earn more money in a month because you had an opportunity to work overtime, well, between the income taxes taken and your bankruptcy payment, you may wonder if you actually worked overtime or if it were all just a bad dream. When you file a consumer proposal, you income is not monitored, it’s that simple. If you earn more, you keep it. When you file bankruptcy, all of your equitable assets vest with Licensed Insolvency Trustee – LIT, (previously known as Bankruptcy Trustee). In other words, they own your non-exempt goods. So, depending where in Canada you live,, if you own a second vehicle, a snowmobile, RESP’s for your children’s education, or maybe you have have contributed to RRSP’s /RSP’s in the year prior to filing bankruptcy, have equity in your home, and the list goes on, then the trustee will collapse the investments or receive the assets from you, in order to sell them and disperse the funds to our creditors, after taking their cut of course. That doesn’t make the LIT a bad person, they simply have a role to play in the process which is one of court officer acting as a fiduciary to the general benefit of the creditors. The other option, so that you do not lose your assets, is one of repurchasing the assets (which you already paid for originally) back from the trustee. Now remember, you have to try and purchase these items back while the LIT is also receiving a portion of your income, assuming that you are earning more than the allowable limit. So by working more hours or by making more money to buy your goods back from the LIT, you are also increasing your surplus payments and making your bankruptcy more expensive. Do you have a headache yet? If the above is unclear, think hamster wheel. Throw into the mix that you will lose one or more of your income tax returns and you will wonder why bankruptcy didn’t provide the relief that you thought it would. Maybe at this point it would be time to seek out the individual who told you that you should just go bankrupt, and kindly tell them to stop giving people advice in this regard. You can loose an inheritance if you receive it while you are still in bankruptcy. You can’t be a director of a company while in bankruptcy, and you cannot even begin to rebuild credit until you are discharged or released from your bankruptcy. That brings us to a whole other topic; how long does it take to get your discharge or “walking papers”? That depends, is this your first time going bankrupt or have you filed for bankruptcy before? First time is 9 or 21 months with a 6 year post discharge hit on your credit bureau. Second time 24 or 36 months with a 14 year post discharge hit on your credit bureau. Now in contrast, if in a consumer proposal; your income is not monitored, your assets do not vest with the LIT, you get to keep your tax returns, you can in fact be a director of a company, you can begin to rebuild credit immediately upon your proposal being approved, the proposal is removed from your credit bureau 3 years after completion. In some cases, if done with someone representing your best interests and working on your behalf, it is not uncommon that a consumer proposal may cost the consumer less than what it would cost to go bankrupt. Why? Well simply because the LIT doesn’t get to see as much of it and the creditors receive more of the money. The acceptance of your consumer proposal is not determined by the LIT, it is determined by the creditors who are generally receptive to proposals because it is better for them than if you went bankrupt. Therefore, the differences are vast, the two are miles apart. So if you don’t have an innate knowledge of the Bankruptcy and Insolvency Act, it can be quite difficult to discern your rights and what option is best for you. That is unless you have an expert, who cares, and will take the time to show you all options, answer all of your questions, and calmly walk you through the process, beginning with the end in mind.
Okay, here is your quick answer. Your credit score will take a temporary hit. You can begin to rebuild credit immediately, but the rebuild has to be done with the guidance of a professional who actually knows what they are talking about. It is more than just getting a secured credit card. If you carry on with any credit products such as a car loan or mortgage after having a proposal filed, so long as you continue to make those payments on time, then those products will maintain a good rating of 1 (one) meaning “paid as agreed”. Any credit products included in your proposal will rate as a 7, meaning that you are making payments to the creditor under an arrangement that they have agreed to. If anyone tells you that a proposal to creditors shows the same as a bankruptcy on your credit bureau, or that it shows as an R9, that person may not be fully informed as to how all of this works. People who are not experts will often seem to hand out the wrong advice or information. Now, if you want a full and proper answer, if you actually care to understand this topic and are not just looking for a fast food answer, click here to read more.
This is a question that we are often asked of course. Before we answer the question, let’s step back and layout the landscape of a credit rating and it’s real value in someone’s life. First off, we have been taught and led to believe, that having a credit score is king in all things financial, and that in some way, a credit score is even tied to our individual self worth. Take that belief and throw it out the window. It’s bunk, trash, and it is this exact mentality or belief that has kept so many people absolutely laden with huge amounts of debt. It is better to be cash rich and credit poor, than cash broke because you are spending all of your hard earned money servicing the interest on your debt in order to maintain a good credit score. Generally speaking, as a society, we are all to willing to sacrifice our lives servicing debt, in order to pay homage to the almighty credit score. In the debt relief industry, it is all too often heard by someone burdened carrying too much debt: “I want to get out of debt, but I don’t want to ruin my credit rating”. A lot of people saying this have been allowed to carry so much debt, that they may never actually have the ability to pay the debt down. This means they would spend the rest of their lives just servicing debt, barring a windfall or an inheritance. All of that being said, let’s get to how a consumer proposal affects your credit score. Remember, money lost to service debt is gone forever, you can never get that money back, but a temporary hit on your credit rating can be rebuilt, and quite quickly might I add. When you have a proposal filed to your creditors, one done with your interests in mind, your monthly cash flow should be improved immediately. By improving cash flow, you will feel the relief almost right away. Your debt load should be significantly reduced, depending on circumstances, and the interest on the debt will be stayed. At this point, a credit rating will be the last thing you are thinking about. You will likely sleep better at night, and enjoy your days more. That being said, you can immediately begin to rebuild credit right at the beginning of your proposal. While still in a proposal, it is possible to obtain a good credit score. Now remember here, there is more to a good credit rating than just a good credit score. Let’s say that you are not in a proposal and you make all of your minimum payments on your debt. You can have a very good credit score of say 725, yet a poor credit rating. By that I mean you could show a great payment history on your debt, but your percentage of available credit used, and your total debt service ratio (TDSR), meaning how much of your income goes towards making your debt payments, these two items could be showing very poor. So although you have a good credit score, you may not be able to borrow another dime. Back to how a proposal affects your credit score: When you have a proposal to creditors filed, your credit score will decrease (depending on your current score) however your total debt service ratio will show better right away. Meaning, you have more available cash flow since you are not making big payments to multiple creditors. The proposal shows up on your credit report as a record which remains on your credit report for 36 months after you make your last payment into the proposal. The rating on the proposal will only show up beside the creditors who have been included in your proposal. So, if you keep a car loan or a mortgage, and continue to make on time payments on these items throughout the proposal, they will continue to show in good standing with a rating of a 1 (one) meaning paid as agreed. Any of the credit products included in your proposal, will have a rating of a 7, meaning that you are making payments to the creditor under an arrangement that they have agreed to. Rebuilding credit can begin immediately after your proposal is filed. Rebuilding has to be done methodically and with the guidance of a professional who understands how to do so as efficacious as possible. There is no sense in beginning to rebuild credit if you are going about it the wrong way, and there is a lot of bad advice out there on this topic. It is not a long uphill battle as it can be done very efficiently. That being said, you do not want to rebuild your credit rating just to get right back into debt. Your goal should be to get out and stay out of debt, put savings in the bank, and begin to plan for the future… all of this at the same time.
I think the answer needs to be started with; how much will it cost you if you don’t file a consumer proposal? Or; how much will a consumer proposal save you? Or maybe; how much will a consumer proposal cost if you don’t have the right team helping you? Okay, so you can see that the question raises other questions which need to be considered. However, for the purpose of this FAQ, the answer will be brief. Everyone in the debt relief or debt help industry gets paid somehow. You need to know this. There is no free lunch. If the person or company doing the work receives a piece of the pie (or dollars) that you are paying into your proposal, or if they receive funding from the creditors, that person or company does not have the ability to work autonomously to your benefit alone. Let that be clear. That being said, there are some companies and individual professionals who do a better job finding the balance between getting a rate of return for the creditors while also considering the entirety of the debtors situation and their ability to perform the proposal in full, without failing on life’s other obligations. Thats a mouthful and it would take a lengthy answer to un pack. Suffice it to say that not all proposals are cut from the same cloth. And, because our government does not acknowledge the need for debtor representation, the consumer debtor can most often be at a disadvantage. In an industry where so many have made a lot of money off the stressed out and vulnerable debtor, isn’t it time that the debtor doesn’t get fleeced when genuinely looking for solutions to solve their debt? That’s why we provide the service that we provide. We refer to professionals who have the right philosophy and experience in seeing the success of the consumer.
Yes and no. In order for your student loan to be discharged with your consumer proposal (and with a bankruptcy for that matter), your period study end date PSED, meaning the last day you were in school, needs to be a minimum of 7 years prior to the date of filing your proposal. You may also have multiple PSED’s if you went back to school later and used a second student loan. This could mean that your first student loan qualifies to be discharged with a proposal but the second loan doesn’t, so you would see some benefit in this situation. Further to that, if your student loan does not qualify and is non-dischargeable, your student loan account can still be listed in your proposal and this can help somewhat. By that I mean, your student loan account will still receive a part of the proceeds from your proposal, helping to pay down the loan, while the remaining consumer and tax debt will be discharged.
A credit counsellor is a company or organization that receives funding from your creditors. Their role is that of attempting a basic consolidation of debts. There may still be interest incurred on the debts, and they often have a fee. So, the consumer still ends up paying back more than they owe, yet still receives the same rating on their credit bureau as a consumer proposal. The challenges with this program are a few. 1. The creditors are not obligated to partake. Some may opt in, and some may opt out. 2. There is no legal protection for the debtor. Meaning that creditors could still pursue the debtor. 3. The plan provided doesn’t usually improve cash flow all that much. This tends to be a problem, seeing as people do not usually seek a solution to their debt challenges until their cash flow is greatly restricted due to servicing their debts. And finally, as mentioned above, the impact on your credit rating is the same as a consumer proposal.
That is a great question. The answer could be exhaustive, so this is an attempt to keep it short. An individual who files a first time bankruptcy in Canada would be in bankruptcy for a minimum of 9 months, but for many it would actually 21 months and their income will be monitored monthly. The reason for the income monitoring is so that the Licensed Insolvency Trustees (LIT) can determine the portion of the bankrupt’s income that should be paid into the bankrupt’s estate. In other words, the more you make, the more you pay. In saying that, if you do not make your bankruptcy payments, the bankruptcy trustee has the lawful right to garnish your wages and oppose your discharge or, “release” from bankruptcy. If someone were to file a second time bankruptcy in Canada, the minimum time frame to complete the bankruptcy becomes 24 months, and many would be in bankruptcy for 36 months. The same requirement of income monitoring applies for a second time bankrupt. What is more, is that a second time bankruptcy in Canada will remain on an individual’s credit bureau for 14 years after discharge. 16-17 years respectively. There are numerous other changes as well. But in short, the changes to the Bankruptcy and Insolvency Act (BIA) which took effect in September 2009 has made bankruptcy, in many cases, much more expensive and quite extensive for the individual going bankrupt.
Yes and no. As in the case of a consumer proposal, your period study end date PSED, meaning the last day you were in school, needs to be a minimum of 7 years prior to the date of filing your bankruptcy. You may also have multiple PSED’s if you went back to school later and used a second student loan. This could mean that your first student loan qualifies to be discharged with a bankruptcy but the second loan doesn’t, so you would still see some benefit in this situation. A problem which sometimes occurs is when an individual was advised to file a bankruptcy or a proposal to creditors, within months of their PSED hitting the 7 year mark. Proper advice would be to wait the 6 or 7 months, and then file for bankruptcy or a consumer proposal. During this 6-7 months, an action plan should be put in place to assist with the debt and creditor challenges that would soon go away once the insolvency is filed.
ABSOLUTELY NOT! Run from anyone who is telling you that they have a government program, or that they offer assistance through the government, or that their fees are covered by the government. And then make a report to consumer affairs in order to save the next person from being conned.
No. The goal is to have a professional review your situation and let you know if they think that a consolidation loan would be in your best interest, what the cost of the loan would be, and who would be your best option to apply for the loan through (as you do not want to shop for credit because it will hurt your opportunity to get approved). They would also show you options outside of a consolidation loan so that you can make an informed decision as to what makes financial sense for you. That is the point of a free consultation. It allows you to review all options without a lender sitting in front of you who only makes money if they create debt on you.
There are probably official definitions somewhere. However, a credit score is overrated. You could have a great credit score, but not be able to borrow any more money because your overall rating is not that great. There are those who have an excellent credit score, and earn a great income, but the bank cannot lend them anymore debt because their debt service ratio is upside down. Debt service ratio meaning how much of your monthly income goes towards servicing your debt. Percentage of credit used is also another determiner of whether or not a lender will allow you to take on new debt with them. If all of your credit products are over 70% of the credit limit, you may be looked at as someone who uses credit to survive and therefore determined to be a risk, thus not get approved even though you have a great credit score. Think of credit score as a high level overview, and think of credit rating as more granular inspection.
That is a great question and one that you should ask the government. There is no mandate in Canada for consumer debtor representation through the insolvency process. A Licensed Insolvency Trustee represents the creditors, is an officer of the court, and is the only person licensed in Canada to administer bankruptcy proceedings as well as file a consumer proposal. They are to investigate the affairs of the debtor and required to work to the general benefit of the creditors. In other words, as a trustee, their fiduciary responsibility is to the creditors, not to the consumer. The trustees statutory duty actually prevents them from acting as an advocate for the debtor when making a consumer proposal. None of this makes the trustee a bad person. They simply do not have a dual role of both creditor and debtor representation, otherwise they would be in a conflicting position. It is for this reason that a licensed insolvency trustee and a practicing lawyer, are not to be one in the same in Canada. A licensed insolvency trustee’s fiduciary responsibility to the creditors and a lawyer’s obligation to attorney client privilege, simply conflict.
All of that being said, I don’t have a full answer for you, other than this is just how it has been for decades. However, what we are doing at GMDF is of great value to the consumer debtor, as our goal is to refer people only to professionals who have a philosophy in their practice of seeing the success of the debtor. Trustees or insolvency specialists do not all implement the identical solutions. Differences not only in philosophy, but also in interpreting the rules, calculating asset values, calculation of debtors income, willingness to draw out the process with the creditors in order to see a successful solution that will work for the debtor, and believe it or not even profitability, can come into play. There are myriad of factors why “trustee A” might present a solution to the creditors which could, in the end, cost the consumer debtor thousands of dollar more, when compared to “trustee B’. That is not to say there is anything nefarious going on, as it is most likely small but key differences in viewpoints or interpretations that make the difference.