Most people don’t think they’ll ever have to file for bankruptcy. That is until they’ve become so deep in debt that it’s virtually the only thing they can think of to address their money issues. The country is experiencing lower numbers of bankruptcies and insolvencies this year, and we’re curious to know why. Fortunately, Debt.ca got advice from five of Canada’s top financial experts. This article will get their insights on the drop in bankruptcies this year and what to expect in the coming year.
Table of Contents
- What do you think will happen the rest of this year and next year for bankruptcies in Canada?
- Why would you recommend someone choose bankruptcy over another debt relief program?
- What are your options when you’re bankrupt and need a home or vehicle?
- What are some ways to put a prior bankruptcy behind you and begin building your credit again?
- Is filing bankruptcy as bad as most people think it is?
- How do you know when it’s time to file?
- Carl Rumanek – Rumanek & Company, Ltd.
- Victor Fong – Fong and Partners, Inc.
- Richard Howell – Clark Farb Fiksel LLP
- Jeff Kahane – Kahane Law Office
- Melody Desmarais – Beverley & Associates, Inc.
There are news reports that personal bankruptcies and consumer proposals are dropping this year.
1. What do you think will happen the rest of this year and next year for bankruptcies in Canada?
I think that bankruptcies and proposals started to increase in October 2020 once the CERB transferred from CRA to EI, which took place in September 2020. I have heard that as many as 1,000.000 will no longer qualify and that up to 400,000 Canadians will qualify, but for an amount less than $2,000. In addition, once people start to file their income tax returns in March and April 2021 and realize that the CERB money is taxable income, the income tax debt will cause another group of debtors to consider bankruptcy or a consumer proposal.
This question is difficult to answer without knowing the outcome of the following variables:
- Will there be a second wave of Covid-19 starting in Autumn 2020? If so, it’s more likely than not that government support programs will continue, hence continuing the drop in consumer insolvency filings.
- If there is no second wave and the government support programs taper off, consumer insolvencies will likely increase.
Will there be a COVID vaccine available to the public in 2021? If so, then the economy may sharply rebound if such a vaccine was successfully administered to the public. This may hurt the number of consumer insolvency filings. If there is no vaccine forthcoming in 2021, then insolvency filings will increase, assuming government support programs taper off.
Firstly, it is clear that given the economic disaster resulting from Covid, an unprecedented number of businesses will not survive. In turn, an unprecedented number of individuals and families will be unable to survive financially.
Bankruptcy will be the only solution if consumer proposals or Division 1 proposals are not feasible. In short, the only way to restart their lives will be the fresh start provided by filing a bankruptcy.
It is anticipated that, although personal bankruptcy numbers are low for 2020, there will be a surge of personal bankruptcies in 2021.
2. Why would you recommend someone choose bankruptcy over another debt relief program?
Several reasons – if debts are very high, there may not be sufficient cash flow to warrant anything other than bankruptcy. If the individual debts are high, there is more scrutiny in a proposal than if the debts are all small balances. The names of the individual creditors are also important. Some creditors insist on a higher payout in a proposal than other creditors. Age is also a factor. The older you are, the less need you will likely have for large borrowing for a house purchase, new business venture, etc. Knowledge and experience are critical in deciding what to do.
Because they cannot afford another debt relief program such as a consumer proposal or a debt management plan.
Choosing bankruptcy is normally a last resort. Several factors will influence the decision, such as age, cash flow, assets, and family situation, to name only a few. Many legal questions need to be addressed, many of which will require sophisticated legal advice.
Sometimes there are no other choices. I.E., there is no chance of an orderly payment.
There can be several options to deal with debt. Bankruptcy would only be recommended when all other options were not viable.
3. What are your options when you’re bankrupt and need a home or vehicle?
Smaller landlords do not have the staff or knowledge to do a full credit review. They might phone one or two references that you gave but not much else. Our office has some car dealers who will supply and finance a car at a reasonable interest rate to our clients.
You can have a friend or family member with good credit co-sign a rental lease or financing agreement.
The question of alternate accommodation is often solved by selling assets, living with relatives or purchasing the trustee’s interest in the matrimonial home. There are several credit granters who will finance a replacement mortgage, particularly in view of the increased value of most real estate. I understand that a number of lower-end credit granters will finance automobiles for bankrupts.
The bankruptcy process allows for funds to go to you to pay for things like rent, and there is a provision where some funds in your home are paid to you and not your creditors.
Through the bankruptcy and consumer proposal processes, there are financial counselling sessions provided to address these issues. However, several vehicle financiers will provide vehicle financing while individuals are in bankruptcy.
4. What are some ways to put a prior bankruptcy behind you and begin building your credit again?
At our second counselling session (about 5 months after the start of a file), we give all clients written and verbal instructions on how to rebuild their credit and how to increase their credit score. Also, I always tell clients to phone me with any financial problems, no matter how long it has been since we worked together.
You can start rebuilding your credit using the 2/2/2 rule: 2 credit accounts with limits of $2,000 each, with a repayment history of 2 years. The easiest way to start would be to obtain secured credit cards.
The major credit reporting agencies will maintain the bankruptcy on their records for seven years after the date of discharge. On the other hand, a bankrupt can usually obtain a credit card based on a debit arrangement with pre-deposits.
Always make sure you pay your bill promptly. Do not take out extra credit. Do not max out your credit that you have (never exceed 60-70% of your available credit.) live within your means.
The Credit Bureaus confirm that a bankruptcy will stay on your credit report for 6 years after being discharged. Rebuilding your credit rating as soon as possible is the key to improving your credit score, which is a process discussed during your financial counselling sessions conducted as part of personal bankruptcy.
5. Is filing bankruptcy as bad as most people think it is?
The stigma is the direct result of advertising by lenders to condition the public that debts (including interest) must always be paid and that bankruptcy, debt consolidations, Consumer Proposals, debt settlements, etc. are all to be avoided. Of course – they want their principal and interest. This might have been true for my father and grandfather, but rebuilding credit in a digital world is much too easy. I do not think the average younger person believes that there is a stigma.
No, it’s not deserved, particularly in times like the one we live in now. Everyone is hurting financially due to the COVID-19 pandemic.
I believe that the “Stigma” of bankruptcy is largely a concept of the past, particularly in a few catastrophic economic times.
It is not a thing that should be judged, except to the extent that you try to get more credit. The situation is more critical. Suppose someone lost their job due to illness that is more understandable to someone who wants to buy more than they have (TVs, snowmobiles, etc.) but does not want to pay for them. There are lots of reasons for a person to go into bankruptcy. It is bad for your future credit for years to come.
The decision to file a bankruptcy should always be taken seriously. However, the legislation is written for an honest but unfortunate debtor. The stigma surrounding bankruptcy is not always deserved as statistics prove that the majority of bankruptcies are filed as a result of job loss, health issues and marital breakdown, which are all involuntary.
6. How do you know when it’s time to file?
There is never a specific ‘time to file.’ It varies from person to person. It does not always relate to the amount of the debt or the family situation of the debtor, although a partner yelling at you because of a joint debt could be an issue. There always seems to be what I call a triggering event. Could be a lawsuit, wage garnishee, turndown of credit application, collection calls, or something as simple as waking up one morning and saying to yourself – enough is enough, I can’t take this anymore.
You were in debt before COVID-19. You are worse now. It is not getting better. The only bright light is in two areas. First – Federal financial programs can get rid of all (Bankruptcy) or most of your debts (Consumer Proposal). Second, many lenders have already been hammered by COVID-19 losses. If you are going to do something about your debts, now is a good time. You are just another number to the creditors who seem to be more flexible to any offer in a proposal than they were just eight months ago.
When your creditors start going after your assets – i.e., your bank accounts are frozen, and your wages are garnished.
The question of when to file depends on a number of factors, but the fundamental question is whether there is any realistic alternative.
As soon as you start not being able to pay your debts, talk to someone. Even If you anticipate, you may not be able to talk to someone.
If you are considering liquidating retirement savings or other assets, it is time to talk to a Licensed Insolvency Professional about all available options to protect these valuable assets.
Being in debt is a serious matter that demands you acknowledge and deal with it immediately. Bankruptcy is possibly the last situation you want to be in. Speak to a trained credit counsellor before the debt problems get too out of control. There are several options to consider based on your situation. You may qualify for a debt settlement, credit consolidation, or other options.