Consumer Proposals: Declare Bankruptcy or is there an alternative for individuals in Canada?

Bankruptcy is a drastic measure and should always be filed only as a last resort in overcoming financial difficulty. Bankruptcy on its surface appears as an attractive and immediate remedy for overcoming debt crisis but its negative effects on your ‘credit-image’ lasts for years to come. Generally, information concerning your bankruptcy could blemish your credit report for a period of 6 to7 years after your discharge. If you have been bankrupt before, this period could be extended to as much as 14 years. This period could vary from province to province. Then to add fuel to fire, the impact could permeate in to restricting applying for certain types of jobs, licenses and loans.

In Canada is there an alternative to Bankruptcy?

In Canada the Bankruptcy and Insolvency Act (BIA) allows you may make a ‘Consumer Proposal’ to your creditors to reduce the amount of your debts, extend the time you have to pay off the debt, or provide a mix of both.

As a precursor to filing a proposal we recommend the following:

• You should have already ascertained that you can not pay your debts i.e. you are ‘insolvent’


• You approached your bank or financial institution which refused your request of combining or "consolidating" your debts into one loan.


• Do the math. If not the full amount, how much of your debt can you pay per month? (Consider your Income and Expenses)


• Create a rough payment plan to repay the debts


• Establish primary contact with each creditor (the person/institution) that you owe money to and communicate your informal plan by delineating why you are having financial difficulty in making your payments and suggest making lower payments over a longer period of time. You may be surprised that there are creditors who will be willing to accept such arrangements.

If the above does not work then in Canada a formal consumer proposal can be triggered under the BIA. The best part of filing a consumer proposal under BIA is that in Canada there is no claim of bankruptcy and your credit report stays clean.

Lets us first review as to who qualifies to file a consumer proposal under the BIA.
Any person who is insolvent and whose debts are less than $75 000 can make a consumer proposal. The $75,000 amount excludes a home mortgage. (If the debts are more than $75 000, the proposal can still be made but differs and is made under Division I of Part III of the BIA.)

When you wish to make a proposal, it must first be approved by the inspectors and you must have obtained the assistance of a trustee who will be the administrator of the consumer proposal.

The procedure begins with the help of an administrator who might be a trustee in bankruptcy or a person appointed by the Superintendent of Bankruptcy. (You can find a trustee by looking up your local yellow pages.) He or she will ask you about your financial situation assess it and give you advice about what kind of a proposal may be best for you and your creditors. The administrator will ask you to sign the required forms which will then be filed with the Official Receiver.

The advantage of undertaking this process is that upon filing the required forms with the official receiver your unsecured creditors will not be able to take legal steps such as seizing property or garnisheeing wages to recover their debts from you as long as your proposal is not rejected, withdrawn or annulled. Also, if you default on your proposal the administrator of the proposal gets discharged and creditors and resume their remedies against you. (If you wish to file a proposal you must first obtain the assistance of a trustee who will be the administrator of the consumer proposal.)

From the date of filing the proposal with the official receiver the administrator within10 days is required to send the Official Receiver a report that contains the administrator's opinion about fairness of your proposal and whether you will be able to execute the terms of the proposal. The report also lists your liabilities, assets and all your creditors whom you owe at least $250. The administrator is also required to send all your creditors a copy of your proposal and a copy of the report on the proposal and calls for a meeting of creditors if required under section 6615 of BIA. The creditors are instructed to either accept or reject your proposal within 45 days by replying to the administrator. No response means acceptance. If no creditors respond or your creditors vote yes, your proposal is approved pending Court approval. However, if more than 25% of your creditors vote no a meeting must be held in which your creditors vote whether or not to accept your proposal.

Your creditors will have up to 45 days to consider whether to accept or reject your proposal. A creditor may send a note to the administrator accepting or rejecting the proposal. If creditors do not respond, they will be considered to have accepted the proposal. If a sufficient number of creditors accept the proposal it then becomes binding on you and your creditors. You then must meet all its terms

If the proposal gets rejected by your creditors you will no longer be protected under the BIA. Within 5 days of the rejection of your proposal the administrator will the Official Receiver and all your creditors about the rejection after which the creditors will be able to take legal steps to recover their debts from you.

Once you have fully performed on your proposal, the administrator issues a certificate of full performance to you and the Official Receiver and you will be relieved of the debts that were listed in the proposal.

Highlights

• If a proposal gets accepted there are no more worries about collection calls from collection agencies or direct calls from your creditors.


• If there are any legal enforcements against you, like garnishment of wages etc, these are automatically stopped.


• A consumer proposal gives certainty and its actions leads to get your life back in order


• In Canada there is no claim of bankruptcy and your credit report stays clean.


• Note: Consumer proposals do not affect the rights of secured creditors. If a creditor has a valid security against your property (i.e., car or house), and if you can afford monthly payments, financial arrangements may be made with the secured creditor to keep the property and continue paying for it.


• If you want more information on making a consumer proposal to your creditors, contact an administrator of consumer proposals. (Look up your Yellow Pages under the heading of Bankruptcy)
  To read the BIA on Consumer Proposals visit the following link: ( BIA – Consumer Proposal Div II)
  
  DISCLAIMER:
  
  The information on this blog Credit Mantra is provided with the understanding that the authors and publishers are not herein engaged in rendering legal, insolvency or other professional advice and services. As such, it should not be used as a substitute for consultation with professional insolvency, legal or other competent advisers. While we have made every attempt to ensure that the information contained on the Credit Mantra Blog has been obtained from reliable sources and the blogger is not responsible for any errors or omissions, or for the results obtained from the use of this information.

Consumer Bankruptcy in Canada - YTD October 2007

In the month of October 2007 the number of individuals filing for bankruptcy reported by Industry Canada was 7,304. This is about 5% higher than the 6,947 bankruptcies that were filed by individuals in the month of October in 2006.
The total number of individuls that have filed for bankruptcy so far from January 2007 up until October 2007 is 67,524. This is about a percentage point higher than what the number was a year ago.

In the past 10 years in Canada, Consumer Bankruptcies form January to October have been averaging at 67,505
The number of Consumer Bankruptcies from January 2007 to October 2007 is more or less on track alongside the decade long trend. However if you compare the Jan 2007 to Oct 2007 number of 67,524 consumer bankruptcies to Jan 1990 to October 1990 number of consumer bankruptcies of 33,938 it is whopping increase of nearly a 100%! It would be also interesting to note that the maximum number of consumer bankruptcies occured in 1997 when the Jan 1997 to October 1997 number peaked at 73,381.

The current Canadian National Consumer Bankruptcies Average stands at 2 bankruptcies for every 1,000 individuals.The hightest per capita consumer bankruptcies have been recorded in Newfoundland (3.6 bankruptcies for every 1,000 individuals)The other two Atlantic provinces of Nova Scotia and New Brunswick are second and third respectively.Quebec is fourth in the line up with 2.8 bankruptcies for every 1,000 individualsOntario is right on the national average of 2 bankruptcies for every 1,000 individuals.The rest of the provinces are below the Canadian National Consumer Bankruptcies Average.

In essence, the eastern provinces are experiencing a growth in insolvencies whereas the western provinces are recording a decline. It could be speculated that the western economy is driven by the petroleum demand and the east is buckling under the pressures of a stong canadian dollar and a weakening manufacturing sector.

Canada is a large and diverse country. With its resources dispersed regionally we witness varied levels of economic trends unfold in the east and west.Currently the west is booming. Oil prices are rising giving Alberta an economic edge. Oil and oil-by-products account for almost 70% of its exports. There is a shortage of labour in Alberta as oil companies are struggling to drive production. In 2006, Alberta had the lowest unemployment rate of all the provinces at 3.4%. At that time Newfoundland was sitting at an unemplyment rate of 16%! Insolvency thus has a directly proportionate relationship to the joblessness rate of a province. Alberta has one of the least per capita consumer bankruptcy filings (1.2 bankruptcies for every 1000 individuals)As the west is experiencing prosperity and Bentley has opened a showroom in Calgary the rest of the country is in an economic downturn. Canada’s manufacturing sectors in Ontario and Québec are experiencing layoffs and closures. The exports are affected due to the strong Canadian dollar. All of this embroiled by a the housing boom, which on hand is helping create jobs but on the other fuelling increased credit extensions and spending. This helps mitigate the crisis in manufacturing sector and the recent cut in interest rates by Bank of Canada will again boost this sector to perhaps a record level of housing sales in 2007.

It will be interesting to see how all this pans out when the final insolvency figures for 2007 are released by Industry Canada in February 2008.

Adapted from an article written by PURU GROVER \/ MD Credit Guru Inc.

Insolvency numbers sourced from OSB Industry Canada