Uncertainties about the insolvency process

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Uncertainties about the insolvency process

As Canadians struggle with rising prices and interest rates, experts say they are unaware of the insolvency process, even though it could help those in dire straits get a clean slate.

The rising pressure is on display in consumer insolvency numbers, which rose significantly in the second quarter, according to the Office of the Superintendent of Bankruptcy. In August, the Canadian Association of Insolvency and Restructuring Professionals said it expects consumer insolvencies to surpass pre-pandemic averages later this year.

It is an absolute perfect storm, said Scott Terrio, manager of consumer insolvency at licensed insolvency trustee firm Hoyes, Michalos & Associates Inc.

He's worried that more Canadians are finding themselves on the brink - and don't know where to go.

In the first quarter of 2023, total credit card balances reached an all-time high of $107.4 billion, according to Equifax Canada. With more Canadians likely needing help with their debt, Terrio and other experts say there are misunderstandings about the bankruptcy process.

Under bankruptcy, a person is discharged from some or all of their debts within a legal settlement, said Sandra Fry, a credit counsellor with the Credit Counselling Society. If your monthly income is below a certain threshold, bankruptcy is a nine-month process and the only costs are legal fees, she said.

The Office of the Superintendent of Bankruptcy sets the annual threshold. For 2023, it varies between $2,543 and $6,729 depending on the family size.

If the debtor's income rises above it during the bankruptcy process, then the debtor has to pay some of their debt back over 21 months, Fry said.

Once the process is complete, they are free from those debts. The financial Consumer Agency of Canada said the bankruptcy would show up on their credit history for six or seven years after they are discharged, depending on the province. If it is not their first bankruptcy, it remains on their report for 14 years.

It will also impact their credit score and show up on the Court of King's Bench registry, which can have a negative effect on some professions and in areas like sponsoring immigration, Fry said.

Terrio said bankruptcy isn't the only option and that bankruptcy isn't the only option.

t does very many bankruptcies. Of our files, 90 per cent are consumer proposals, which is a legal alternative to bankruptcy.

Under a consumer proposal, you'll pay a larger portion of your debt back than you would under bankruptcy, Fry said, usually over five years.

This will be on your credit history for either three years after you finish paying your debts or six years after you sign the proposal,whichever is earlier, according to the Financial Consumer Agency of Canada.

It will also negatively impact your credit score, but less so than a bankruptcy, Fry said.

You have to offer the creditors more than they would have received if you filed bankruptcy, said Terrio, usually between 20 and 30 percent of the debt.

One of the main differences between a bankruptcy and a consumer proposal is that the latter doesn't involve your assets, said Andre Bolduc, chair of CAIRP and a licensed insolvency trustee.

But many people believe if they choose bankruptcy, they will lose all their assets, which isn't true.

For example, equity in your home, for example, is based on how much equity is attached to it. If there's none, or the equity is below a certain exemption level that varies by province, you can go through bankruptcy while keeping your home and continuing to pay the mortgage, Bolduc said. If that's not the case, you'll likely want to choose a proposal instead, he said.

There are exemptions for other assets, such as vehicles and registered savings plans, Bolduc said. Provinces also have exemptions that differ by province.

Many people may not realize they're on the precipice, since they're paying their minimums on a large amount of debt and maintaining a good credit score, Terrio said. But all it takes is one major change, such as a layoff, to make the house of cards fall. That's why it's important to map out what your worst case scenario looks like, he said.

When it's time to evaluate your options, only licensed insolvency trustees can actually take you through a bankruptcy or consumer proposal, Bolduc said. They can also go through other options outside of the insolvency process, and may refer you to a credit counselling agency.

However, he said you can also start at a non-profit credit counselling organization to evaluate your options. If a bankruptcy or proposal is what's best, they can recommend a licensed insolvency trustee, she said.

Credit counsellors can also help you negotiate with individual creditors to try and lower your interest rates, Fry said.

This will not be legally binding, and it will affect your credit score and ability to get new credit. It won't be in the public record, and the organization will also require you to participate in financial education, Fry said.

One of the biggest problems Bolduc sees is that people don't consult someone early enough about their debt, often because they're embarrassed. He has a message for those people that they haven't failed, and they're not alone.