Category Archives: bankruptcy

Rack up debt. Declare bankruptcy. Repeat. And repeat again. How thousands of Canadians are doing it and costing the rest of us.

Clockwise from top left, repeat bankrupts Stéphane Flynn, Jacques Bélanger, Joseph Cloutier and Charles Rotenberg.
Clockwise from top left, repeat bankrupts Stéphane Flynn, Jacques Bélanger, Joseph Cloutier and Charles Rotenberg.

It was his fourth in 10 years, during which time he had relied on Canada’s insolvency system to rid him of more than $100,000 in debts.

This time, the buck was going to stop. The judge overseeing the case had had enough. Nantel, she ruled, did not deserve yet another fresh start.

“He’s shown no reluctance of using bankruptcy to be freed from his debts,” the judge, known as a registrar, wrote in a 2012 decision. “His past conduct demonstrates a contempt for the rights of his creditors.”

Discharging Nantel of his fourth bankruptcy — liberating him of the debt that led him into insolvency — would undermine the integrity of Canada’s bankruptcy system, the registrar said. She denied his application.

Nantel, who refused to comment for this article, persisted.

Four years after the 2012 ruling, Nantel, now working as a mechanic and living 120 kilometres east of Montreal, went before a different registrar and received a discharge from that same bankruptcy.

And eight days after that, he declared bankruptcy for a fifth time, owing more than $37,000 in new debts.

Nantel is one of a staggering number of Canadians who are washing themselves of their debt by re-using a bankruptcy system meant to rehabilitate honest but unfortunate debtors, a joint investigation by the Toronto Star and La Presse has found.

Bankruptcy system insiders and observers are surprised at the magnitude of the nationwide problem revealed in the investigation’s data analysis.

One in five Canadians who filed bankruptcy in 2018 was doing it for at least the second time. That works out to 11,500 debtors who filed their second, third, fourth or even fifth bankruptcy, according to data obtained from the Office of the Superintendent of Bankruptcy.

“One fifth-time bankrupt is probably one too many,” said Thomas Telfer, a law professor at Western University who has authored the country’s most detailed research on repeat bankruptcies.

“It shows that the bankrupt has not received the message.”

In cases of repeat bankruptcies, the courts have said focus is expected to shift from rehabilitating a debtor to protecting the public and the system from being abused.

Yet, despite the courts’ stern rhetoric, government data shows the vast majority of completed proceedings end with the person released from their debts.

The Star and La Presse have interviewed dozens of debtors and insolvency experts, including the trustees that administer bankruptcies and retired court registrars who previously presided over bankruptcy cases.

Many repeat bankrupts are people marred by bad luck, their lives sideswiped by job loss, divorce, illness or other tragedies that catapulted them back into insolvency.

Others, however, rack up the same kinds of debt over and over, then turn to bankruptcy for what the courts have called a “fiscal car wash.”

“In some segments of society, it’s become almost a game. People take advantage of the system and they take advantage of the leniency of the registrars,” said Yoine Goldstein, a retired Canadian senator and lawyer who led a task force advising the government on potential reforms to Canada’s insolvency laws.

Unpaid taxes owed by repeat bankrupts make up a portion of the nearly $4 billion the Canada Revenue Agency has written off since 2009 because of consumer and commercial insolvencies. In Quebec, the provincial tax agency has lost nearly $2 billion to insolvencies in the last five years alone.

Meanwhile, credit card lenders absorb the cost of bankrupts who do not pay their bills by charging high interest rates to their customers who do pay their debts.

The Star/La Presse investigation has also found the problem of repeat bankruptcies is greater in Quebec, home to an overwhelming number of the country’s third-, fourth- and fifth-time bankrupts.

In some cases, such as Nantel’s, four- and five-time bankrupts have shed their debt more quickly and easily than had it been their second bankruptcy.

When a person declares bankruptcy, a trustee sells whatever assets are available and distributes the proceeds to creditors (some assets, such as clothing and registered retirement savings that are more than one year old, are protected).

In some cases, when the bankrupt’s income exceeds what a government formula deems necessary to maintain a reasonable standard of living, the debtor must make “surplus income” payments, increasing the amount of money creditors recoup.

The bankruptcy is over when the person gets discharged — a release from the legal obligation to pay back what was owed, though it does not cover certain debts such as child support or alimony.

Unless someone such as a creditor opposes, a first bankruptcy is automatically discharged in nine months or 21 months. The second bankruptcy can be automatically discharged in two years or three years.

Subsequent bankruptcies go to court, where the judge can grant a discharge or refuse it. If granted, the discharge is completed after a delay, known as a suspension, or with conditions, such as the debtor having to prove he is up to date with his taxes. Often, a discharge comes with both a suspension and conditions.

Although the total number of consumer bankruptcies is going down year over year, the percentage that are repeat bankrupts has steadily climbed.

Third-time bankrupts have become common in some provinces. Fourth and fifth bankruptcies, once almost unheard of, are now “a scourge,” registrars have said, and “a clarion call to systemic integrity and to the court’s role in it.”

Repeat bankrupts include real-estate agents, roofers, restaurateurs, tax lawyers and drywallers.

With each bankruptcy, they are required to take two financial counselling sessions. Some debtors, however, take away the wrong lesson.

“They go through bankruptcy and they learn, frankly, how easy it is and how forgiving it is. Then think, ‘Gosh, why don’t I do it again?’ ” said John Owen, whose previous business helped credit lenders pursue claims against insolvent consumers.

Owen testified in 2003 before a Senate committee reviewing Canadian insolvency laws, and he warned of the country’s disproportionately high rate of repeat bankruptcies.

At that time, about 10 per cent of bankruptcies filed were repeats. That rate has now doubled.

“There’s a cost to it. No question. There is a societal cost,” he said.

It’s unknown how much lost tax revenue can be attributed to repeat bankruptcies. One thing, however, is clear: The government, sometimes, only recoups pennies on the dollar, if it gets anything at all.

Three-time bankrupt Jacques Bélanger has racked up mountains of tax debt to the CRA and Revenue Quebec. After the Laval man’s meagre assets were picked over in his most recent bankruptcy, filed in 2014, the CRA, owed more than $101,500, received just $59.20 — less than Belanger spent a month on cigarettes.

Three-time bankrupt Jacques Bélanger has racked up mountains of tax debt to the CRA and Revenue Quebec.

“I want to make clear that I never exploited the system. I was just unlucky,” Bélanger said in an interview.

There are few debts more important than the payment of taxes by those enjoying a good income, said registrar Nathalie Champagne in 2017 when faced with Charles Rotenberg, a former Ottawa tax lawyer. Rotenberg, who surrendered his licence after the law society found he misappropriated a client’s funds, was on his third bankruptcy, this latest leading the CRA to write off $313,000. “The Bankrupt before me has enjoyed a good income and he has not paid his fair share of taxes which is unfair to the rest of the tax-paying public.” She refused his discharge.

Rotenberg travels every year and lives in a five-bedroom house bought by his wife and works as a consultant, Champagne noted in her decision, adding “his life and lifestyle have been seemingly unhampered by his third bankruptcy.”

Rotenberg told the Star he drives a Honda. The other car in the driveway, a dark grey 2018 Cadillac sedan, is registered to his wife, vehicle records show. He said that when he travels, it is to visit family. The money that the law society found he misappropriated has been paid back, he said. His consultancy’s website says he helps clients with “Dispute resolution with the Canada Revenue Agency.”

Rotenberg said he assumed substantial liabilities from a business partner who had been managing the books which, coupled with serious health problems, left Rotenberg unable to work and continue to pay creditors and led to his third bankruptcy. He said the court will not let him re-apply for his discharge until 2021.

Charles Rotenberg, a former Ottawa tax lawyer, is on his third bankruptcy, this latest leading the CRA to write off $313,000.

The courts can refuse a discharge when the debtors’ behaviour has been particularly reprehensible.

In 2015, a Quebec court decided it was the best way to handle the fifth bankruptcy of Stéphane Flynn. In an interview, Flynn blamed his bankruptcy on runaway costs in his construction business and clients who didn’t pay on time. In reviewing the case, the judge saw a man with more than $500,000 in debts who treated bankruptcy as a way to escape his debts.

“It is extraordinary that he has been allowed to do so multiple times without opposition to his release,” registrar David Cousineau wrote in his decision to refuse Flynn’s discharge.

Except it was not extraordinary. Discharge has become routine for repeat bankruptcies.

Of the 395 proceedings involving fourth- and fifth-time bankruptcies that were completed between 2011 and 2018, just 21 resulted in a discharge being refused, according to federal data. That’s five per cent.

In every other case, registrars gave a conditional or suspended discharge. (The majority of fourth- and fifth-time bankruptcies filed during these years have not yet had a discharge ruling, according to the data).

The willingness to grant discharges marks a notable shift from how courts historically treated repeat bankruptcies, their decisions guided by an often-quoted judgment that a “third bankruptcy is one too many.”

Stéphane Flynn blamed his fifth bankruptcy on runaway costs in his construction business and clients who didn't pay on time. In reviewing the case, the judge saw a man with more than $500,000 in debts who treated bankruptcy as a way to escape his debts. The discharge was refused.

“Third-time bankruptcies are of grave concern, often demonstrating a degree of irresponsibility that justifies simply refusing a discharge,” Manitoba Justice Colleen Suche said in 2012 in upholding a decision to deny a three-time bankrupt a release, forcing him to re-apply in a year.

Michael Bray, a retired registrar in New Brunswick who presided over insolvency hearings from 1999 to 2013, said the stigma surrounding bankruptcy has diminished. He said stiff sanctions can be used to dissuade a debtor from returning to insolvency.

“It used to be that most people that came for their first-time bankruptcy…a lot of them never wanted to be here again. I think that feeling is gone now,” he said.

“If the courts don’t impose a good sanction, then it’s not difficult to be a three-, four- or five- (time bankrupt).”

Canada’s Superintendent of Bankruptcy, whose office regulates and supervises the insolvency system, would not be interviewed for this article.

In written answers, her office said insolvency laws contain “safeguards against potential abuse,” and the decision to discharge a debtor with three- or more- bankruptcies is a matter of judicial discretion based on the circumstances of each case.

Some trustees say the court’s shift stems from repeat bankruptcies becoming more common and, as their shock value dissipates, registrars are growing more sympathetic to how financially tenuous many Canadians have become.

Another theory is that registrars, aware that creditors almost never attend court to oppose discharges, are asking: If the people owed money don’t care enough to be here, why should I dole out a harsh penalty?

“That was the frustrating part of that job. You’re supposed to be somewhat of a gatekeeper but no one is complaining,” said Scott Nettie, a registrar in Toronto bankruptcy court from 2005 to 2012 with a reputation of coming down hard on debtors who misused the system.

“I know there are registrars across the country who, in those situations where no one is there (opposing discharge) and no one is complaining, they’re like, ‘go forth and sin no more,’ ” Nettie said. “Then there are others, and I was one of these, who struggled with: ‘But it’s not right.’ ”

Among the least engaged creditors, according to Nettie and other trustees and registrars, are credit card companies.

Scott Nettie, a registrar in Toronto bankruptcy court from 2005 to 2012 with a reputation of coming down hard on debtors who misused the system.

Credit lenders rarely oppose a discharge and once discharged, many repeat bankrupts have little trouble securing more credit.

A Nova Scotia man filing his fifth bankruptcy had amassed more than $20,000 in credit card debt, even though two of his earlier bankruptcies remained on his credit report. A businessman from Collingwood, Ontario, had 10 cards in his wallet and owed more than $64,000 when he filed his third bankruptcy in 2014.

Those credit card companies may only recover a portion of what they’re owed.

“They don’t care,” said Nettie. “They’ve already costed the price of losing that part of the business completely into what they charge the rest of the paying customers. Why would they pay good money after bad to pay someone to come (to oppose in court).”

A spokesperson from the Canadian Bankers Association said the country’s banks are prudent lenders that only offer credit to borrowers they believe can and will repay the loan.

Losing money to a four-time bankrupt was not something Dieter Gauger could easily absorb. In 2013, Gauger, a retired millwright, and his wife Edith hired a Hamilton contractor to renovate their Stoney Creek townhouse.

The contract said the work would cost $65,000. But after collecting $60,000, the contractor, Stephen Monahan, left the house unfinished and unliveable, Dieter said. The Gaugers drained thousands from their retirement savings to pay someone else to complete the renovations while they stayed in a Super 8 Motel. The Gaugers took Monahan to court, where in 2015, they got a default judgment for nearly $36,400.

But Gauger does not expect to see any of that.

Two months after the court order, Monahan filed for bankruptcy, his fourth. Described by one registrar as “a menace to credit system,” Monahan told the court his first three bankruptcies were his own fault, the consequences of poorly managing his business. His latest, with nearly $93,000 in debts, was the result of cancer, he said. He said his prognosis is grim.

“I’m very sorry to the people I owe money to and I’m sorry for my failures,” he told the court at his October hearing. Citing his poor health, the court issued Monahan a suspended discharge. He can be free of the debts as early as summer 2020, as long as he pays roughly $1,600 in outstanding administration costs.

For Gauger, it doesn’t feel just.

“I lost $36,000,” the 76-year-old Gauger said. “The system worked for Monahan but not for me.”

The problem of repeat bankruptcies is particularly prominent in Canada’s eastern provinces.

Since 2011, Nova Scotia has had the most repeat bankruptcies per capita in the country with 75 for every 100,000 residents — more than double the national average.

The high rates are likely fueled by a combination of low wages, an unstable job market and a high cost of living, especially in places like Cape Breton, said Rob Hunt, a trustee with Grant Thornton based in Nova Scotia.

“We find people have then relied on credit to bridge their income,” he said. “People finally get to the boiling point where they’ve exhausted their credit and they can’t afford to keep making the monthly payments.”

More than half of the roughly 9,360 Canadians who filed their third bankruptcy between 2011 and 2018 lived in Quebec. For fourth-time bankruptcies, Quebec’s portion climbs to 74 per cent.

And of the 88 Canadians who declared bankruptcy for a fifth time, almost all of them — 90 percent — lived in Quebec.

Insolvency experts within Quebec say they are stunned by the numbers but offer a variety of possible reasons.

Quebec is the only province going back to the late 1980s that has consistently had higher rates of consumer bankruptcy per capita than the national average.

The province has among the lowest rates of disposable income per resident in the country, which could mean fewer Quebec debtors can afford to settle their debts through scheduled payments under a consumer proposal and instead opt for bankruptcy. A consumer proposal, another form of insolvency, is a settlement in which a debtor repays a percentage of what is owed and is an alternative to bankruptcy.

Research has found French-speaking Canadians scored lower on financial literacy than their English counterparts.

The Quebec numbers are also partially due to inconsistencies in the sanctions imposed on bankrupts from courthouse to courthouse and province to province.

How it is supposed to work is spelled out in the Bankruptcy and Insolvency Act. A first-time bankrupt will be automatically discharged after nine or 21 months, unless there is opposition. Changes introduced in 2009 allow for automatic discharges for unopposed second bankruptcies with a waiting time of two or three years. Subsequent bankruptcies must go to court where a judge decides on sanctions.

This is where the system’s consistency unspools.

In Toronto, trustees say the court will postpone the discharge hearing of a third-time bankrupt for at least three years, then delay a discharge for another nine or 12 months.

“The court is of the opinion that a third-time bankrupt shouldn’t be able to get out faster than a second-time bankrupt,” said trustee Mark Morgan from David Sklar & Associates.

But that’s not how it works across the country. In 2018, a labourer living in small-town Quebec was discharged from her third bankruptcy just two years after she filed it. A year later, she again declared insolvency, this time filing a consumer proposal.

Consumer proposals have overtaken bankruptcies as a preferred way to handle debt, particularly in provinces such as Ontario. However, the federal government says it does not track repeat proposals, meaning the rate of repeat insolvencies may be much higher than the data suggests.

The government’s 2009 changes also inadvertently softened oversight, shielding debtors from the scrutiny of the courts until they arrive before it for a third time, according to some trustees and one former registrar.

“This may signal that going bankrupt twice is not as serious as it is. This may be in part what’s led to an increase in recidivism,” Morgan said.

Joseph Cloutier is a 48-year-old drywaller in Toronto who, at his peak, could bring in $4,000 a week. But he never put money aside for taxes. When he filed his first bankruptcy in 2008, he owed the CRA $22,000; during his second, in 2011, he owed $60,000. He received automatic discharges both times.

In 2016, Cloutier again filed for bankruptcy. His CRA debt: $124,000.

“I’m terrible at managing money. I’ve been terrible all my life,” Cloutier said. “I’m one of these people with an addictive personality. If you’re going to give me a million dollars, I’ll spend it all by next week.”

Joseph Cloutier is a 48-year-old drywaller in Toronto who, at his peak, could bring in $4,000 a week. But he never put money aside for taxes. Tax debt drove all three of his bankruptcies.

In November, a Toronto court ruled that Cloutier could be discharged from his third bankruptcy in 15 months with conditions, including that he first pay the CRA debt that had been mounting since he filed his latest bankruptcy.

Law professor Thomas Telfer said the law should be tightened so cases like this, in which a second bankruptcy is filed within three years of the first one being discharged, do not qualify for automatic discharge. Instead, the debtor would go to court where a registrar can determine whether the debtor is honest but unfortunate or abusing the system.

A decade ago, trustee Mark Morgan co-wrote an article about “the revolving door of bankruptcy” and the rising rates of recidivism. Still, he says it “blows his mind” to learn from the Star and La Presse that 88 Canadians have declared bankruptcy five times since 2011.

“It shouldn’t be that easy,” Morgan said. “They’re basically thumbing their noses at the system. I know you can’t do anything to me because you haven’t the first, second, third or fourth time.”

His article outlined strategies to stem what he saw as a growing problem. They included more financial education for youth and new Canadians, more consistent sanctions and expanded counselling, as the two sessions required under the Act aren’t enough to fix “a lifetime of bad” financial behaviour, he said.

“Recidivism will continue to be a problem as long as society, creditors, the courts and the insolvency community allow it to be,” Morgan warned.

In May 2016, seven years after Morgan’s call to action, Kenneth Nantel was again seeking to get liberated from more debt.

It was Nantel’s fifth bankruptcy in 16 years, filed just eight days after he was discharged from his fourth. Much of the $37,000 he owed was to the government, and he blamed his money problems on a loss of income.

He was earning roughly $3,300 a month as a mechanic, enough for him to make surplus income payments to increase the amount of money his creditors would receive.

“If it was his second bankruptcy, the debtor would have to pay a total of $17,748 over 36 months,” Nantel’s trustee noted in his submissions.

Even though it was his fifth bankruptcy, the registrar ordered Nantel to pay only $5,916.

When reached by phone, Nantel refused to comment. “I’m not really interested in talking about what happened in the past,” he said before hanging up.

Nantel can be discharged from his fifth bankruptcy as early as September 2020.

Source: Toronto Star – JESSE MCLEAN DECEMBER 09, 2019

This investigation was done in partnership with Katia Gagnon and Marie-Eve Fournier of La Presse.Data analysis by Andrew Bailey.With reporting contributions from Bryan Meler and Jaye Williams of the Ryerson School of Journalism

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Walking Away From A Mortgage in Canada

If you are over-mortgaged and facing negative equity in your home, can you walk away from your mortgage in Canada?  We explain what you can do when you can’t pay off the entirety of your mortgage loan after a sale or bank foreclosure.

How does a mortgage shortfall happen?

If you’re a homeowner and your mortgage is higher than the equity or the market value of your home, you are by definition, underwater. Meaning, if you sold your home today, you are not likely to get the full mortgage paid out by selling. Put another way, you have negative equity in your home.

Causes of a mortgage shortfall:

  • Price decline: you bought at the peak with a high-ratio mortgage, and the market dropped. For example, you bought a condo or a house for let’s say a million dollars with 10% down. The market subsequently flattens, and the list price is now $800,000, so you’re underwater by $100,000 plus selling costs, real estate commissions and potential mortgage penalties.
  • Debt consolidation: our typical homeowner client has more than $50,000 in unsecured debt. If you consolidate this through a second, or even third mortgage and the market softens, you can easily find yourself with less equity in your home that the total of all your mortgage debt.
  • Negative investment cash flow: you may have purchased an investment property and are funding the rental shortfall via a secured line of credit. If the market does not increase sufficiently to cover your accumulated cash loss, you may find yourself facing growing negative equity.

Canada has full recourse mortgage laws

A theoretical shortfall is not a real shortfall. You don’t have to sell. If you can keep your mortgage payments current, and expect that the market will return before you intend to sell you can hold tight.

If you are in default your lender will begin proceedings to collect. If you do not respond and cannot catch up on missed mortgage payments, your bank or lender will likely begin proceedings to sell your home through a power of sale.

If you sell with a shortfall, or your bank forecloses, you still owe your mortgage lender any deficiency between the money realized from the sale and the balance owing on your mortgage.

Should you sell your home for less than you borrowed and find yourself unable to repay the shortfall, in Ontario, your lender can pursue you to collect the difference, as they have full recourse:

Full recourse means that a lender can pursue you if your house is underwater and you sold your home, and there’s a shortfall … your mortgage lender can come after you legally for that debt in Canada.

How do I deal with an unsecured mortgage shortfall?

Like any debt, you are expected to make payments on it. If you are unable to pay back this shortfall, your creditors will pursue legal actions like a wage garnishment. In the case of CMHC, while it may take some time, they can also seize your tax refunds.

In Ontario, any mortgage shortfall after the sale of your home becomes an unsecured debt. Initially, your mortgage lender was a secured creditor. However, because the security, your home, has been sold, there is no longer any asset attached to the debt, and they are now an unsecured creditor.

If your mortgage was subject to insurance because you had a low down payment, your first step might be to draw on your CMHC Insurance. In this case, CMHC pays your original lender. However you still owe the debt, it’s just that now CMHC is now your creditor.

The good news is you have options to deal with mortgage shortfall debt:

  1. Make a settlement offer through a consumer proposal,
  2. File for bankruptcy to eliminate what you owe faster and get a fresh start.

The best place to start is to speak with a licensed debt professional about your relief options.

I think the big myth buster here is that if you have a shortfall on a house that someone’s pursuing you for, a consumer proposal or a personal bankruptcy actually takes care of that. And that’s where I think a lot of people are pretty surprised about Canada’s legislation around this stuff.

For a more detailed look at how to deal with mortgage shortfalls and how lenders can pursue you to recover a mortgage shortfall in Canada, tune in to today’s podcast or read the complete transcription below.

Source:  Hoyes.com (Hoyes – Michalos) By 

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10 most common bankruptcy myths

 

“The Act permits an honest debtor, who has been unfortunate…” to “…make a fresh start…”.

So reads page two of the 1,841 page annotated Bankruptcy and Insolvency Act (BIA) regarding a person who files bankruptcy. The legal process of bankruptcy effectively assumes one’s ‘innocence’ and is intended to be financially rehabilitative rather than punitive in nature. The days of debtor’s prisons have been assigned to the scrapheap of history.

Yet bankruptcy—and legal insolvency generally—is one of the more mercurial and misunderstood areas of personal finance. Recently I wrote an article arguing that unsustainable debt loads have become the new normal in Canada, in which I drew on my first hand experience with people struggling with debt trouble. As such, I have personally met with thousands of clients and have fielded every type of question imaginable about debt, assets, income, investments, businesses, taxes and just about anything else you could conjure up.

Myths about bankruptcy abound. Licensed insolvency trustees and their staff, such as ours, spend a lot of time dispelling misinformation when we are asked about what is involved with bankruptcy.

From what I’ve seen there are three possible explanations for the myths that exist about bankruptcy. Firstly, the majority of people will simply never have any personal involvement with it; secondly, our proximity in Canada to our giant neighbour, the U.S., from which we get most of our TV, film and even news consumption, means we hear tales of “Chapter 7” or “Chapter 13,” yet Canadian bankruptcy law differs greatly from the U.S. Bankruptcy Code. And thirdly, we have that font of unending opinion masquerading as fact known as the Internet.

Faced with such formidable competition for legal knowledge, it’s worth taking some time to address the most common bankruptcy myths in Canada, ones we hear on a daily basis in our offices. Canadians should be aware of their rights and options in the event of financial trouble.

Here are the top 10 bankruptcy myths (in no particular order):

1. I will lose my home

Very few people who file bankruptcy in Canada actually lose their homes these days. The net equity in your home is what is of interest to the creditors, specifically. And there are even exemptions for this depending on the province you live in ($10,000 in Ontario).

If there is non-exempt equity in your house when you file for bankruptcy,  you make a settlement payable to the estate (via the Trustee). Upon discharge, the trustee would release its interest in the property. Or you could file a Consumer Proposal as an alternative to bankruptcy (in which case your assets are yours to keep, anyway). Either way, you would keep your home. Or you can choose to have the Trustee sell the home and use the proceeds to pay the creditors only the amounts they are owed by proven claims.

2. I will lose my possessions

Personal effects, furniture and household goods are exempt in bankruptcy. Exceptions would be made if you had items of extraordinary value such as fine art, which you would be asked to declare on your sworn Statement of Affairs to the creditors. You can exempt one car with a net value of $6,600 or less. So if you have a fully encumbered car (financed or leased), keep it if you wish, provided you continue to make the payments in the normal course of business. Keep your stuff.

3. I will lose my job

It is illegal for an employer to terminate employment simply for filing a bankruptcy. In fact, unless there is a wage garnishing order in place, your employer will not be informed of your filing. Some professions have rules in place precluding your filing a bankruptcy, such as having a broker’s license in which trust accounts are managed. In that case, a proposal could be filed instead as it does not include such restrictions.

4. I will go to jail

Laugh if you like but we get asked this a lot. I hesitate to even mention it, but it is possible to be imprisoned under s. 198 of the BIA for Bankruptcy Offenses, but it is rare and you’d have to work hard to get there. Example: fraudulent sworn statements or conveyances (transfers of property) without disclosure. In well over two decades of practice, we’ve never had a bankrupt person go to jail.

5. My spouse’s credit will be affected

An almost universal question for married people who file bankruptcy. You cannot affect another person’s credit by filing a bankruptcy, period. If you have joint debts with your spouse and he or she does not also file, they are 100 per cent liable for those debts and only those debts.

6. I will not be able to get future credit/buy a house

As stated earlier, bankruptcy is intended to be rehabilitative in nature, not punitive. It would not be fair to punish someone forever for filing a bankruptcy, so the record of it stays on your credit report for six years following discharge for first-time bankrupts. After that, it is gone. Your ability to buy a house will always be governed by your financial circumstances: your income, your assets, your spending and obligations. Many former bankrupts have been taught budgeting by their Trustee as part of the process and are now, of course, debt-free. So on paper, as long as they have the downpayment, many look pretty attractive as a lending risk. Even while the bankruptcy is still on your report when you apply for a mortgage, most still get approved in our experience. CMHC will guarantee a mortgage within three years of your discharge from bankruptcy depending on your financial situation.

7. I will not be able to renew my mortgage

Everybody who has an existing mortgage has asked this, and we’ve never had one client not get renewed, provided they remain with their existing lender and are current with the payments. Most are set up for auto-renewal.

8. I cannot include the taxes I owe in bankruptcy

Absolutely untrue. All taxes owing are unsecured debts fully dischargeable by bankruptcy (and proposals). This includes not just personal income tax but HST and, in the case of a business, payroll tax, which is a director liability and would trail you personally. The myth about taxes not being dischargeable in bankruptcy likely derives from the U.S. Bankruptcy Code, in which only certain tax debt for specific periods are dischargeable and only in certain situations. Canadian bankruptcy law discharges all tax debt universally, unless the Canada Revenue Agency has taken steps to secure it (a lien on a property) or in the case of fraud or tax evasion.

9. I will not be able to keep any lottery winnings

Despite how few people actually win the lottery, almost everyone asks about this. Any unexpected windfall of money during a bankruptcy is considered a non-exempt cash asset of the estate that vests in the Trustee for the general benefit of creditors. In normal parlance: the Trustee would pay out all proven claims by unsecured creditors in the bankruptcy in full, and the remaining lottery winnings would be returned at the time of discharge.

10. My trustee will restrict the income I can make

The bankruptcy act sets out surplus income standards, updated annually, which govern the portion of the bankrupt’s income which should be paid to creditors. The standards are based on the number of people in a given household. So a bankrupt is technically not restricted in what they can make, but they must pay more if they make more above these levels. The bankruptcy would also be longer (before discharge) if there is surplus income.

Bonus Myth (11): Mortgage shortfalls can’t be included in bankruptcy in Canada

Wrong. Mortgage shortfalls certainly can be included in a bankruptcy (or consumer proposal). But it only matters in the provinces with power of sale legislation: Ontario, Newfoundland, New Brunswick and PEI. Let me explain by way of some background.

In Canada, certain provinces have power of sale legislation in place. In that system, a lender will commence proceedings when the homeowner defaults on their mortgage. The borrower remains responsible for any losses the lender may incur from the sale, and the lender will then commence legal action to recover the shortfall.

By contrast, a foreclosure (also the prevailing law in the U.S.) is undertaken by a lender when the homeowner defaults on their mortgage, but in this case the borrower is not liable for any loss incurred by the lender. In the U.S., many homeowners walked away from their properties during the 2008 housing crisis and were not liable for the shortfalls.

A bankruptcy (or a consumer proposal) stops or prevents any legal action taken against a homeowner for the shortfall incurred by the lender. It becomes a debt fully dischargeable in bankruptcy or via a completed proposal. This includes any type of mortgage (first, second, HELOCs, privates). The secured debt gets paid out as much as possible from the property’s sale, and any shortfall is unsecured, and therefore eligible for discharge in any insolvency proceeding.

So if you are upside down on your mortgage (you owe more than the home’s value), you could file a bankruptcy or proposal and include that shortfall amount amongst your other unsecured debts in that insolvency. That is a sizeable advantage to a debtor versus being on the hook for any loss in a foreclosure.

Source: MoneySense.ca – Scott Terrio is an estate administrator at Cooper & Co. Ltd, a licensed insolvency trustee in Toronto. Follow him on Twitter at @CooperTrustee

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Fixing Your Credit After a Bankruptcy to Apply for a Mortgage

When I first started working with Charlie (not his real name) in 2005, his bankruptcy had just been discharged, meaning his remaining debt was cleared. His credit score was 526, and he didn’t think he had a chance to even get a credit card.

Charlie’s bankruptcy filing was needed after a difficult divorce and a medical emergency. In fact, a a majority of people who seek bankruptcy protection do so after a medical emergency, difficult divorce, job loss; or some combination of the three.

It didn’t take long for him to realize that his financial life was not over. Within a couple of months, he’d gotten more than a dozen credit card and other loan offers. After the discharge of a Chapter 7 bankruptcy, you’re considered an even better risk than someone who still has a mountain of debt because you can’t file for bankruptcy for at least eight years. In reality, you can get a credit card immediately after your bankruptcy discharge.

Many people think, That’s exactly what got me into trouble in the first place, so I’m going to avoid plastic in my life forever. That’s a huge mistake if you want to buy a house. You need to rebuild yourcredit score, and the best way to do that is to show that you can manage credit wisely. A credit card history that shows you can pay your bills on-time every month is one of the best ways to rebuild that history.

With my help, Charlie’s credit score was back to 646 in about 2½ years, which is enough to qualify for an FHA and VA loan even in today’s rough mortgage marketplace. When we checked his score in January 2011 it was back up to 727; now he can qualify for some of the best interest rates.

The key is to work on three pieces of the puzzle at the same time immediately after the bankruptcy: Clean up your credit report, begin rebuilding a positive credit history and start saving. Now that you don’t have credit bills to pay any more, start putting as much of that money aside as you can to save toward the downpayment on your next home. The more money you can put down, the better you will look to a mortgage banker.

Fix Your Credit Report

The last thing you probably want to do after a bankruptcy is to review your credit report and see all the damage that you did. Get over it. The quicker you clean up that report, the faster you will be able to improve your credit score. You can get a credit report for free from each of the credit reporting agencies at AnnualCreditReport.com. By federal law you are entitled to one free report each year.

When you get that report, review it and note any errors you see on the report. For example, you may find accounts that are not yours or lenders who reported late payments that are not accurate. The credit reporting agency will send you instructions about how to make corrections. Follow those instructions carefully and make your corrections. Send any proof you have that the account reported is incorrect. The credit reporting agencies tend to believe your creditors rather than you, so the more proof you can send the better.

In addition to making corrections, also inform the credit reporting agency of your bankruptcy and note any accounts on that report that were discharged by the bankruptcy. The credit report agency will then note the bankruptcy, and that will start the clock for the debt to be removed from your credit history. Most negative credit accounts can stay on your report for seven years from the last date of activity. A Chapter 7 bankruptcy stays on your credit report for ten years.

But as a negative mark ages on your credit report its impact on your credit score becomes less and less significant, which is why you can rebuild your credit score even before the bankruptcy drops off.

You may find that you have to go through the correction process several times. Each time the credit reporting agency fixes a report, they will send you a corrected copy. Check it again for any errors and report any remaining errors until your credit report is accurate and all your discharged accounts are noted.

Rebuild Your Credit History

While you’re working with the credit reporting agencies to clean up your credit report, you should also be working on rebuilding your credit history by opening one or two credit accounts to begin positive reporting on your credit report. Each time you pay a bill on time that will be a positive mark and will help to minimize the negative marks.

You’ll likely have to start with a secured credit card. These cards usually require an annual fee and charge higher interest rates. While they’re not the best deal out there, they may be your only choice right after a bankruptcy. After about six to 12 months of using a secured credit card on time, you should be able to get an unsecured card with better terms.

You also may be able to get a retail credit card. Don’t go overboard with getting new credit now that you can. Stick to one or two credit accounts to show you can use credit wisely and pay it on time.

Monitor Your Credit Score

As you’re rebuilding your credit score, you may want to monitor your progress. If your score continues to go up, you’re on the right track. But if you find that your score goes down in any quarter, think about your credit activities. Did you charge a large item? Did you open a new account? That way you’ll learn what does positively and negatively impact your credit score so you can be sure you have the best score before applying for that mortgage in the future.

Six months before applying for a mortgage, don’t take on any new debt and risk ruining all the work you did to rebuild your credit score. Keep your credit accounts active but your balances low to get the best credit score.

Source: AOL Real Estate – Lita Epstein Mar 4th 2011 

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Five things to do if you are over-extended on your mortgage

Mortgage default may be rare in this country, but nearly 9% of indebted households need 40% or more of their gross income to pay their debt service charges, says the Bank of Canada Financial System Review.

If you can see problems coming, then you can take action to avoid foreclosure, which happens when lenders run out of other alternatives and borrowers can do no more to pay their debts. Here are five options to consider when you are being crushed by mortgage payments:

1. Extend amortization: If the mortgage has been paid down to 10 or 15 years, then extending it to 20 to 25 years or even to 30 years will decrease payments. In a lot of cases this will work, says Elena Jara, director of education for Credit Canada Solutions, a Toronto-based non-profit organization which offers free credit counselling.

2. Seek better terms: You can go for lower interest rates with the same or a different lender but with a potential penalty, says Bill Evans, a mortgage broker with Mortgage Architects in Winnipeg.“If you are having trouble with payments with one lender, another may not want to take you on. But if you can present a case for a new income, you can go to a so-called specialty lender such as Home Trust or Optimum Trust for a fresh look at your problem and potential solutions,” Evans says. “If you just want to alleviate the problem, timing is crucial.”
3. Renew at a floating rate: There is more risk but lower interest cost in floating rate mortgages. If you are on a fixed rate mortgage with relatively high rates and want to go to a lower floating rate, perhaps by taking the mortgage to another lender, then there may be relief when it is time for loan renewal. The present lender may add a penalty, but over time, floating rates and the often attractive rate on a one-year closed loan can offer relief, Mr. Evans says.

4. Sell it and rent: In markets with high home prices as a result of speculative building, absentee owners will often rent at relatively low cost. That makes for good deals for renters.

5. Discuss a consumer proposal: The homeowner can avoid outright bankruptcy and foreclosure of the home by talking to creditors, suggests Bruce Caplan, trustee in bankruptcy for BDO Canada Ltd. in Winnipeg. “The homeowner can make a consumer proposal in which a settlement plan is devised for the creditors. Secured creditors such as the banks or private mortgage lenders can work out new terms such as reduced payments or a payment bridge for a period of time with the homeowner,” he suggests.

And number 6; Don’t suffer in silence until you lose control of the situation. Contact a mortgage professional who can review your circumstances and possibly offer you a solution to get back in control.

Source: The Financial Post Andrew Allentuck | November 21, 2013 12:40 PM ET

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Seniors going bankrupt in soaring numbers

Judy Southon with her husband, Vic. Southon, 67, fell deep into debt after Vic developed dementia and could no longer work. He died in 2011.

Judy Southon never imagined it would come to this. She and her husband Vic had good jobs, raised a son and were homeowners. But after a run of bad luck, the 67-year-old wound up deep in debt and had to declare bankruptcy.

“I was scared and shocked,” says Southon, who lives in Toronto.

The golden years have become a tarnished chapter for some. Seniors are carrying more debt into retirement and, as a result, a growing number are going bankrupt.

According to the federal Office of the Superintendent of Bankruptcy, 10 per cent of those who declared bankruptcy in 2014 were aged 65 and older.  That’s a whopping 20.5 per cent increase from 2010.

Spend savings, pile on debt

One of the reasons is actually a plus — we’re living longer. “For many of us, we’re outliving our savings,” explains Nora Spinks with the Vanier Institute of the Family, a non-profit research organization.

Another driving force is that more seniors are retiring in the red.According to Statistics Canada‘s most recent numbers, in 2012, 42.5 per cent of people aged 65 and over still had debt. That’s a stunning increase of 55 per cent since 1999.

Bankruptcy trustee Doug Hoyes blames the lingering debt largely on our addiction to low interest loans.

“If you’ve got decent credit, you can go out and get a mortgage for 2.5 per cent. So why not be buying the bigger house?” he says. “Today we don’t need to save because we all have a line of credit.”

But paying down debt in your senior years can be challenging on a fixed income. Throw in an unplanned setback like a financially needy adult child or a family illness and the bills can become crushing.

‘The stress of the financial burden plus the stress of caregiving was huge’– Judy Southon, senior

Southon’s setback began when her husband’s communications business failed in 2002. To keep paying the bills, they had to sell their condo. Then, the unthinkable: Vic was diagnosed with dementia and could no longer work.

“I became very frightened, quite frankly, because I realized he wasn’t going to be generating any more income and everything was up to me,” says Southon.

She had given up her teaching career to go into business with Vic. While caring for her ill husband, she still managed to hold down a job at a bank until she was laid off in 2008.

“The stress of the financial burden plus the stress of caregiving was huge,” she says.

Vic’s dementia worsened to the point where she had to move him into a nursing home. That meant paying his housing costs plus her rent. “We had two homes to pay for plus at this point I wasn’t making enough to make ends meet,” says Southon, She was landing only short-term, low-paying jobs.

Vic died in 2011 but the bills kept mounting to the point where Southon couldn’t keep up. “The ‘b’ word was floating around in my mind for about a year,” she says before she bit the bullet and, at age 66, filed for personal bankruptcy.

The financial burden of ill health

A new research study examining older Canadians and finances found that unexpected major events such as big health expenses challenged many seniors’ financial plans.

Seniors in debt

Wayne Kilgallen, 64, owes $15,000 in credit card debt he racked up to buy necessities like food and clothing. (CBC )

The Ontario Securities Commission report surveyed more than 1,500 Canadians over 50.

For those under 75, the most common event derailing financial plans was an unplanned early retirement, often due to ill health.

Wayne Kilgallen worked most of his life as a farmer in Saskatchewan. But he had to quit five years ago after suffering a severe heart attack. Now, at age 64, he lives on disability in Toronto, where he has family.

To cover costs for simple things like clothing and food for himself and his dog, he says he’s had to resort to credit cards, racking up $15,000 in debt.

“Usually I run out of dog food and I worry more about my dog than I do myself,” says Kilgallen, adding that he can’t give up his pet because she’s “family.”

Kilgallen’s debt payments now cost him about half his $872 monthly living allowance.

“I try to make it but it’s hard,” he says. “I got this debt, I got that debt, I can’t really do anything.”

A better plan

Spinks, with the Vanier Institute, says the best way to guard against falling into financial traps in later years is to develop a long-term plan.

“When it comes to senior debt, the more we understand about our own expenses and our own financial situation in adulthood, the better equipped we will be to be able to handle the future and less likely to fall into financial difficulty,” she says.

Although she fell into difficulty, Southon says she now has her finances in order and has mapped out a promising path for the future.

She’s working two part-time jobs and has just become a licensed spiritual practitioner. She hopes to set up a practice and use her life experiences to help others.

“I look back on it as a learning experience,” says Southon. “It is a way of starting over again. Never will this happen again.”

Source: CBC.ca  Sophia Harris, CBC News Posted: Jun 29, 2015 5:00 AM ET