A Consumer Proposal or Personal Bankruptcy Will Clear Up My Credit Report

Myth or Fact?

Several times a week I get calls from individuals (debtors) who believe that if they go through a consumer proposal or personal bankruptcy their debts will be removed from their credit report and that will make it easier for them to get new credit. This is almost all myth.

Let’s take a look at what proposals and bankruptcies are intended to do;

These are procedures in Canadian Federal Law- the Bankruptcy and Insolvency Act, (BIA) designed to enable a person to get a fresh start financially by clearing away most unsecured debts.

The Basics of a Proposal

A Proposal is an offer to unsecured creditors to settle their debts. Usually the debtor offers to make monthly payments for a specified total, and the creditors get to vote on the offer with majority vote deciding. So, if most of the creditors who vote are in favour of the proposal, the creditors who didn’t vote, or voted against the proposal are forced into the deal. Once the proposal payments are completed, the debtor is free of the debt. This does not mean the creditors got paid in full, it means the Law wiped out the ability of the creditors to chase the debtor for payment. For  example, if a debtor’s  proposal, accepted by creditor vote is to pay 35% of what is owed, once the 35% is reached, the debtor does not have to pay any more.

The vast  majority of proposals end up paying creditors well less than ½ of the creditors’ claims.

The Basics of Bankruptcy

A Bankruptcy is a different procedure. There is no offer to creditors. The creditors do not get to vote on a bankruptcy. The law dictates what assets and income of the debtor must be gathered by the trustee to be distributed to creditors. In most bankruptcies creditors get nothing or pennies on the dollar. You are free of the debt when you are discharged from bankruptcy.

Typically proposals are designed to pay creditors more than what they could expect if  the debtor chose to go bankrupt otherwise creditors wouldn’t vote in favour of a proposal.

So What Does a Proposal or Bankruptcy do to Help Clear Up My Credit Report?

Nothing. There is nothing in the (BIA) that directly affects or controls credit reports or the actions of credit reporting agencies.

Credit reporting agencies retain credit information on individuals supplied by the individuals’ creditors. There is an obligation on the credit reporting agency to correct known errors in someone’s records but except for provincial limits on how long information can be retained in a person’s credit report, the completion of a proposal or a discharge from bankruptcy does not force the credit reporting agency to “remove” any mention of the debt. The reporting agency may add to the noted debt that it was dealt with by a proposal or bankruptcy but it can still appear.

What Will My Credit Report Show?

So, assuming a proposal or bankruptcy is completed, what can you expect to appear in your credit report ? You can assume the credit report will provide the information that you went through a proposal or bankruptcy and the date when the proposal was completed or the date you received your discharge from bankruptcy. It can also include  comments about the debts that were not paid in full because of the proposal or bankruptcy.

Here is an example to make my point;  If I were part of the team that helped heal you from serious car accident injuries, you wouldn’t expect your driving record to be improved because of our actions, would you?

A Licensed Insolvency Trustee can assist you in getting free of your debt, but we can’t help you improve your credit report – that is up to you.

A Collector For The Bank Told Me…

• they were going to sue me
• I would be responsible for court costs
• the sherriff would show up at my door and seize all my furniture
• my pension would be garnished
• the police would arrest me
• etc…

What Should I Do ?

Have you had anyone threaten you with any of these comments ? We hear stories like these from frightened people who contact us.

First, Relax!

Most of these comments are made to scare you into paying. Some of these threats are just not true and depending on what option you choose to solve your debt problem, the rest cannot be done.

Nothing Will Happen Without A Court Order

Before someone you owe, who is not a secured creditor, has the legal right to try to seize any of your property or your income they have to go to Court to obtain a Court Order, referred to as a judgement, verifying that you owe them money. That is what “suing you” is. The Court’s job is to decide if you owe the creditor and how much. The Court is not after you for money. The Court does not get involved in trying to collect the money you owe.

The Court Will Decide What Amount Can Be Enforced

The creditor is allowed to ask the Court to include certain costs for applying to the Court for a judgement, and if the Court thinks the costs are reasonable, will include the costs in the judgement. But you don’t owe the Court anything. The judgement states what the creditor is allowed to try to collect from you including the costs, using what processes are legally available.

Once the creditor has a judgement, then the creditor can attempt to seize what assets and income you have that are seizable as allowed by Provincial and Federal laws.

Only A Licensed Civil Enforcement Agent Can Seize Assets

In Alberta, a Civil Enforcement Agent who is licensed and regulated by the Province (the threatened “Sherriff”), conducts seizures on behalf of creditors with Judgements. Since the Civil Enforcement Agent is licensed by the Provincial government, they are obligated to know and follow the law regarding what can be seized for a creditor.

What Assets Can Be Seized?

Normal household furniture and appliances cannot be seized.

Nor can normal clothing and personal effects.

You do not have to let the Civil Enforcement Agent enter your residence unless they have a Court order allowing them to do so.

Your vehicle, with equity less than $5,000 cannot be seized.

Your tools of trade up to a resale value of $10,000 cannot be seized.

Only income above certain deductible amounts can be garnisheed, and then only a per centage of it. That means CPP and OAS recipients don’t get their pensions seized at source.

Lastly, owing a creditor is not a crime. Police only get involved if there is a crime. Police do not get involved in debt collection matters unless a crime was committed. So the police do not arrest you when you haven’t paid your credit card or other debt.

For more information about what a creditor can do to collect and your options to deal with your debt, contact a Licensed Insolvency Trustee in your locality.

A Collection Agent Has Been Calling Me Threatening To Seize My Furniture.

Can They Do That?

There are two general types of seizures when a debt is not paid;

1. Secured Debt Seizures

A seizure by a secured creditor on the asset the creditor holds for security such as a vehicle. A secured creditor has a security agreement which is a type of written contract signed by you and the creditor, which describes the amount and terms of payment for your loan, and the asset(in this example a vehicle)that is now held as collateral for the loan. If your are in arrears on the payment contract, you can assume the creditor has the right to seize the asset held as security according to the security agreement.

2. Seizures With A Judgement

A seizure based on a judgement for debt that allows the creditor to seize the types of assets that are allowed by law, to be seized. In this type of debt the creditor has to go to court and obtain a judgement. A judgement is a decision by court order that an amount is owed by you to the creditor. Once the creditor obtains a judgement they have to arrange for a Civil Enforcement Agency/Bailiff (the “Bailiff”) to seize what you have that is allowed to be seized by law.

Civil Enforcement Rules & Regulations

In the #2 type of seizure Provincial and Federal laws limit what items someone owns that can be seized by a bailiff. In Alberta, general and normal household goods worth less than $4,000 cannot be seized. And this amount is the “sellable value”, what it would be worth to sell as-is which usually means a fraction of the purchase price. For example, a 5 year old couch which was bought new, from a retail store for $1,000 may resell for $200. It can take a lot of household goods to add up to $4,000. Bailiffs understand this and are not likely to attempt to seize any “normal household goods”.

There is also protection from seizure for normal clothing and personal effects, as well as equity in a vehicle up to $5,000 and tools of trade up to $10,000.

In general, a creditor or a collection agency that suggests that “they will seize your household goods” is bluffing. They are trying to scare you into paying them.

If you are in doubt what a creditor can seize, contact a Licensed Insolvency Trustee in your locality to review your situation.

How Often Do Consumer Proposals Get Rejected?

And What Happens If They Are?

Consumer Proposals get accepted in our office “eventually” at a rate of 98% or better.

This means a combination of acceptance by creditors votes by the initial vote 45 days from the filing of the proposal PLUS acceptance of proposals that are initially rejected but are accepted after they are negotiated and/or amended (usually by offering more overall payment), within about a couple of weeks after the initial 45-day vote.

Why is the Success Rate So High?

This high success rate for acceptance is due to offering proposals that make sense to creditors and including the terms and conditions they commonly want. Creditors know that if the proposal is not eventually approved, the debtor will probably consider filing for bankruptcy in which case the creditors will likely get less than what is offered in the proposal.

What Do The Creditors Want To See?

Here are some of the issues the Licensed Insolvency Trustee, acting as Administrator of a consumer proposal, needs to prepare in the proposal and support documents in order to provide sufficient information for creditors to vote acceptance;

• A thorough statement of affairs of the debtor describing the debtor’s assets with realistic liquidation values, a list of creditors both unsecured and secured with notes advising what asset is held as security by which creditor, and the debtor’s personal information such as age, employment, employer, marital status, dependents and causes of financial problem, and disclosure of recent transactions.
• An estimated statement of the debtor’s household income and living expenses.
• The consumer proposal which describes how much the debtor is offering and the terms of payment(usually how much per month and for how long).
• An Administrator’s report giving the recommendation and justification of the Administrator for why the creditors should accept the proposal. The justification is commonly a comparison between the proposal offer and an estimate of what creditors could expect in a bankruptcy.

The creditors are relying on the Administrator’s knowledge, investigation and professional integrity in preparing accurate and fair information for the creditors to consider.

How Much Will I Have To Pay If I Go Bankrupt?

First We Evaluate Your Options With You

When you meet with a Licensed Insolvency Trustee (LIT) to review your situation and your options, the bankruptcy process results in the least amount you pay and is usually the fastest way to deal with your debt. The other options are designed to pay the creditors in full over time or pay them MORE than what they will get paid if you used bankruptcy.

Surrendering Non-Exempt Assets

The LIT reviews what you have in assets and advises what you are allowed to keep according to provincial and federal law regarding protected assets, and which assets (if any) the LIT is obligated to take and sell. You may be able to arrange to make payments over time for the assets the LIT has to take and sell instead of the LIT selling them.

Surplus Income Payments

There may also be an amount you have to pay based on your income sometimes described as Surplus Income Guidelines ( the “SIG”) which is a calculation of what you have to pay to the LIT from your net monthly income. This calculation takes into account your monthly income, the number of people in your household, the income of others in the household, and some types of expenses that are considered so necessary that they are subtracted from your income to reduce the surplus.

Example 1:

Here is an example of this calculation based on certain facts;

Your net pay from employer monthly                 $3,800/month

3 people in the household, including your spouse who is a homemaker with no income, and 1 young child

Regular prescription medicine costs $150/month with no insurance recovery

 

 $3,800     your net pay

-$3,246    which is a set deduction amount for a household of 3 people(2017 figures)

-$150       the medical expense which is a type of expense considered necessary

 

$404        your surplus income

X ½          the SIG says you pay half of the surplus to your LIT for creditors

$202        the amount you are obligated to pay from your income to the LIT for the month

How Long Will I Be Making Payments?

If you are bankrupt for the first time, the surplus payment is made for 21 months. The amount you pay each month may vary if your income, number in the household, and other factors change. A LIT in your area will be able to assist you in estimating this amount based on your situation.

Do I Have To Disclose All Debts In A Consumer Proposal Or Bankruptcy?

Why It Matters

When a consumer proposal or bankruptcy starts there is immediate protection from the collection action of all unsecured creditors against the debtor. To get this protection, certain things have to be provided to the Licensed Insolvency Trustee (“LIT”) so that necessary paperwork can be prepared, signed by the debtor and the LIT, and submitted to a government agency which starts the file.

One of these items is a list of all known creditors, to the best of the debtor’s knowledge. This includes secured and unsecured creditors.

What The LIT Does

The LIT will prepare a statement of affairs which summarizes assets, creditors, and a description of the debtor’s personal situation. The statement of affairs will be sworn as true and complete by the debtor (to the best of their knowledge).

Since a sworn statement is under oath all known creditors have to be listed.

What Happens To My Secured Debts?

The debtor is allowed to continue monthly payments to secured creditors in order to keep the asset held by the secured creditor as security such as their vehicle or residence, assuming they can afford to make these payments.

What Happens To My Unsecured Debts?

Unsecured creditors cannot be paid by the debtor after a proposal or bankruptcy starts for a debt that exists prior to the proposal or bankruptcy. Sometimes we are asked if a particular bank loan can be left out because the person has dealt with the bank for a long time and wants to maintain the relationship, or keep and continue to make payments on a credit card to preserve a credit rating on at least that credit card. We have to advise the person that there are no exceptions to this rule. According to the law all unsecured creditors have to be treated the same with no exceptions which means no payments from the debtor. This even includes a creditor related to the debtor.

What Should I Do?

For a review of your situation and assistance in determining which creditors are secured or unsecured and the types of debt dealt with by a proposal or bankruptcy, contact a LIT in your locality.

Can I Make A Consumer Proposal To My Creditors By Myself?

No, you can’t. But let’s make sure we are both talking about the same thing.

If you ask a Licensed Insolvency Trustee (“LIT”) what a consumer proposal is, the LIT will tell you that it is a specific process according to the Bankruptcy and Insolvency Act (“BIA”) where an individual can offer a compromise to their debts to creditors. This typically means total payments less than the full amount owed to creditors. If the required majority of creditors voting on the proposal is attained, the proposal legally binds all unsecured creditors (with minor exceptions). Once the proposal payments are completed, the debtor has no further obligation to pay the remaining amounts owed to creditors and the debtor has a “fresh start”, free from unsecured debt. Since this type of proposal is regulated by federal law, it has the authority of law to bind all unsecured creditors if a majority in debt value, (not necessarily all) creditors vote in favour of the proposal.

Who Can Administer a Consumer Proposal?

All of the processes described in the BIA to assist individuals or corporations can only be administered by a LIT who is licensed by a department of the federal government. This ensures that only impartial, qualified parties administrate the BIA to ensure fairness for both debtors and creditors.

Therefore, you cannot make a (BIA) consumer proposal by yourself.

What Can I Try By Myself?

You can make an informal or private offer to your creditors on your own. The problems you may encounter include;

• All creditors will have to agree or you will have to pay the creditors that don’t agree in full, because if one doesn’t agree and starts seizing assets or garnisheeing sources of income your payment plan can fall apart
• The more creditors you have the longer it may take to negotiate a deal with each creditor, and the more time it will take you to do so
• The chance of every creditor agreeing decreases the more creditors you have
• It can be difficult and time-consuming to find someone representing the creditor who has the authority to make a deal on behalf of the creditor.
• Each agreement with each creditor will need to be properly documented in order to ensure no further collection action by any creditor
• The CRA will not, by policy, settle a debt informally. If they settle with you everyone will want to negotiate their taxes.
• Most individuals do not have the experience or training to ensure that appropriate signed agreements are made to protect you in the future. Lawyers who are familiar with commercial law can prepare these agreements but their time can be expensive.

Can Licensed Insolvency Trustees Negotiate an Informal Settlement?

We have been asked in the past to negotiate informal proposals and the few we have attempted have run into many of the problems noted above. None were successfully negotiated. We do not attempt informal proposals anymore.

On the other hand, about 95%+ of the BIA consumer proposals we offer to creditors get enough votes to be accepted.

You can contact a LIT in your locality for more information about consumer proposals.

Bankruptcy Is Not Just “Bankruptcy”

What is it Then?

Bankruptcy is commonly used to describe one of the government law processes available in federal legislation known as the Bankruptcy and Insolvency Act (BIA). The BIA  regulates the options available to deal with businesses and individuals experiencing financial difficulties. Only Licensed Insolvency Trustees (Trustees) are allowed to administrate the options in the BIA.

Individuals seek the assistance of a Trustee to obtain protection from their creditors and get a fresh start.

What Are My Options?

The 2 common options for individuals are a consumer proposal or personal bankruptcy which are both processes over time. Either of these 2 options stops collection action from all unsecured creditors with minor exceptions like child and spousal support, some student loans, debts as a result of fraud and secured creditors.

What About Secured Creditors?

Secured creditors hold a physical asset as security for the loan to you, such as a bank holding a mortgage on your residence or a lender holding security on your vehicle. You have to continue making payments to secured creditors if you wish to keep the asset the secured creditor holds for security.

If you cannot afford to pay your unsecured creditors normally or negotiate payments with all of your creditors, either of the two options is designed to deal with all unsecured creditors at once.

Bankruptcy Alternative

A proposal is a way to avoid bankruptcy by offering a payment to creditors which is more than they would likely get if you went bankrupt. Most proposals offer monthly payments over time. The creditors get to vote on the acceptance of the proposal. If a majority of creditors who vote are in favour of the proposal, then all unsecured creditors are bound by the proposal. When the payment terms of the proposal are completed, the remainder of the debt to unsecured creditors is legally ended.

The Last Resort

The alternative, bankruptcy, should be a last resort if you cannot afford a proposal.

Bankruptcy typically costs you less than a proposal to obtain a fresh start but restricts you more while you are bankrupt prior to being discharged which is when the debt is discharged.

In either option, you are allowed to keep the basic assets that are protected from your creditors by provincial or federal law which the Trustee is obligated to follow.

What is My Next Step?

For a thorough explanation of how these options would affect you in your specific situation, contact a LIT near you.