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Consumer Proposals and Informal Proposals – Do You Know What You Are Signing?

Consumer Proposals and Informal Proposals – Do You Know What You Are Signing?

Sorting through the many debt consolidation and restructuring options available to Canadians can be a real challenge. Stress-levels are high, money is tight and your hard-earned dollars should go to the program that will best help free you from debt. So how do you know which program will provide the relief that you need? 

Bankruptcy vs Proposal :Protecting your assets

This is our second article in our series comparing bankruptcy and proposals discussing some of the differences between bankruptcies and proposals. While both proceedings offer you protection from your creditors under the Bankruptcy and Insolvency Act there are some key differences. 

One significant difference between a bankruptcy and a proposal is what happens to your assets in the process. In a bankruptcy you are required to vest assets with the Trustee, while in a proposal you are not.  But what does that really mean and how does it impact you? 

Bankruptcy

  • You are required to surrender assets (with some exceptions) with the Trustee

Proposal

  • You are not required to automatically surrender assets.
  • You can choose to surrender certain assets.

When you file for bankruptcy, you make an “assignment in bankruptcy” which involves assigning all your assets to the Trustee to be divided between your creditors.  Some of these assets are exempt, meaning your creditors cannot take them – nor can the Trustee.  An example of an exempt asset is household furnishings. 

Some assets are non-exempt, which means either the value of those assets must be contributed to the estate or those assets must be sold.  An example of a non-exempt asset would be an ATV.  

There is a limit to the value of the exemption for each type of asset and, as a result, an asset can be exempt but still have a partially non-exempt amount that would need to be collected by the estate. To clarify, here are some examples that discuss vehicles, which are exempt up to the value of $5,000:

  • A vehicle worth $4,000 that is free and clear (there are no outstanding debts tied to the car) is exempt.
  •  A vehicle worth $7,000 that is free and clear is exempt up to $5,000, and the remaining $2,000 would need to be paid into the estate.
  • A vehicle worth $17,000, with a secured loan of $4,000, has an available equity of $13,000 — $5,000 of which would be exempt, with the balance being non-exempt.

The Trustee is responsible for collecting on non-exempt assets, pooling that money together with other realizations — such as surplus income — and ultimately dividing it appropriately amongst the creditors.

 The minimum duration of a bankruptcy can range from 9 months to 36 months, and it is important to know that any assets you acquire during that time will vest with the Trustee . That means if you win the lottery or get an inheritance, the value of those non-exempt assets go into the pool of money for your creditors. If your bankruptcy is extended beyond the minimum term then your assets will continue to vest with the Trustee until you are discharged.

In a proposal, the trustee will complete the same assessment of your financial situation as they would in a bankruptcy, taking stock of all exempt and non-exempt assets. They will then determine the total estimated realizations that would be available to creditors in a bankruptcy and suggest a proposal amount that exceeds that. 

You can choose to surrender some assets to the trustee, as part of your proposal contributions, but it is not a requirement.  Generally the proposal simply sets up a new payment schedule that offers your creditors more than they would get in a bankruptcy. For the term of the proposal, any and all assets you currently own, or new ones you acquire, are yours to deal with as you see fit. 

For contemplating selling your assets outside of a bankruptcy or proposal there is some good food for thought here.

 If you would like maintaining control of all assets - current and future – think about a proposal when you are weighing your options. Feel free to call us to chat over a coffee – figuring our your next step is just a phone call away.

 

 Rebecca Frederick, CIRP, Trustee in Bankruptcy
(587)400-3344

 

Why liquidating your assets could mean more than liquidating your retirement

I help people who are in financial difficulty know their options and how to best move forward. The people who come to me for help have usually faced some kind of unforeseen circumstance that has negatively impacted their finances and pushed them into the deep end. They then tread water for as long as they can, trying for months or even years to pay down all their debts.  

Sometimes, in an effort to do all they can for their creditors, people liquidate their RRSPs, the cash surrender value of their life insurance policies and even the RESPs they had started for their kids. The emotional trauma of being pursued by creditors is a daunting experience and liquidating assets is done out of sheer desperation to get some relief.

When all debts are paid out by RRSPs, you have:

  • made good your commitment to pay your creditors; and,
  • avoided taking more drastic measures such as bankruptcy.

However, if you’re considering this option for yourself, there are three big costs to to be aware of:

1. Your investment has been eliminated
Sure this sounds obvious, but think back to the reason you decided to purchase these investments initially. RRSPs provide you with income to live on when you are older, and without RRSPs you will be required to live on Old Age Security and the Canada Pension Plan, which do not provide much in the way of monthly cash flow. I have seen elderly people try to live on $1,500 per month who end up utilizing credit cards to fill in the gaps between their income and their base costs, and eventually file for bankruptcy down the line because the cost of living is just too much. Without life insurance, you may be leaving your family with the burden of dealing with your finances when you pass away and getting additional insurance can become cost prohibitive as you get older.

2. You could owe more income tax
At the time the RRSP is collapsed, the financial institution is required to remit 10% of the RRSP to the government for income taxes. Unfortunately, this means it is likely that not enough income taxes were deducted and there will be another bill to pay come tax season.

3. It eliminates the benefits of compound interest on your savings
Even if you re-purchase new investments in the future, you have compromised the available earning potential with the original investment. In order to earn the same amount, you will now have to spend considerably more because you have lost the benefit of having that investment compound and grow over time.

Now I am not suggesting you shouldn't do all you can do to resolve your financial difficulty before filing for bankruptcy or a consumer proposal. But, as with anything, it is important to get good information about your options before proceeding. Knowing the benefits and drawbacks of your options allows you to make an informed logical decision instead of a rushed emotional decision.

Under the Civil Enforcement Act of Alberta, most RRSPs, life insurance policies and RESPs are exempt from seizure. In layman’s terms this means your creditors cannot take these assets away from you in an attempt to collect the outstanding debt. In a bankruptcy or consumer proposal, you would be able to retain these assets.

If you are considering selling your assets, there are only two outcomes to this scenario: all debts are paid out with the proceeds of the investments; or only a partial payment on the debts is made. 

Too often the second scenario takes place, where only a portion of the debt is paid down with the proceeds from the sale of the assets. The danger is that, if the balance remaining on the debts is not manageable, then the assets were sold without creating any real change in your circumstances. If you are selling assets, work the numbers first to ensure the balance remaining will be paid out in a short period of time.    

If you have reliable income and can make regular payments, filing a consumer proposal and keeping your assets is a great alternative. If you do not have a consistent income and cannot make regular payments into a proposal, you might still look at selling your assets. But instead of just reducing your debts, you could propose to your creditors that you will redeem your investment and they, in return, will forgive ALL the debt. This way, if you do have to lose that future retirement income, you have at least traded it for a considerably larger debt repayment and avoided filing for bankruptcy. Consumer proposals are also nice because, if your creditors vote no, the proposal may have failed but it ends right there — you are not automatically bankrupt, and at least you know you made every effort to avoid bankruptcy and maximize return for your creditors.

So if you are struggling and thinking of liquidating your assets, come talk with us. Maybe liquidating your assets is the best idea, but maybe there are better options out there too. Let's talk. Your future 65 year-old self will thank you for it.

If you want to meet for coffee or have a chat over the phone we can discuss what might be best for you.

Rebecca Frederick, CIRP, Trustee in Bankruptcy
(587)400-3344