Q: I remember my parents arguing about money a lot when I was growing up. There never seemed to be enough to pay all of the bills all of the time. My dad was adamant that he would never go bankrupt because he personally knew a lot of the people he had borrowed money from. My mom just wanted the stress to stop. I vowed that when I grew up I would do better, however, a few months ago the bill collectors started calling. I don’t have enough money to pay them all. I’m so frustrated with myself that I got into this position, especially because I do make good money and I think I’m only about 15 years away from retirement. I’ve seen ads from trustees that say they’ll reduce my debt by up to 80 per cent; is that really an option to deal with debt? ~Richard
A: Realizing that you’ve got more debt than you can afford is one of the most stressful situations you can find yourself in. The ironic thing about stress is that we need a little to get us motivated, but a lot of stress grinds us to a halt. It affects our sleep, all of our relationships, our ability to function day-to-day, our work suffers and, importantly, our ability to objectively evaluate options and solutions to deal with our stress drops dramatically. When we are stressed our decision-making skills are at their weakest, which can have drastic long-term consequences for us.
There is no quick and easy way to deal with debt
One common thing we find with consumers who are experiencing financial difficulty is that they tend to put off dealing with their situation as long as possible. Unfortunately, this can mean that someone has fewer options about what to do about their debt. It can also mean that someone is more easily tempted by solutions that look quick and easy.
Let me assure you, there is no quick or easy way to deal with debt; reducing debt by up to 80 per cent comes with its own conditions and limits. I would encourage you to do your due diligence with any debt-relief option before you commit to a course of action.
Here are some things to keep in mind as you explore debt-reduction options:
What does ‘reducing debt by up to 80 per cent’ mean?
When you want a quick fix for your financial trouble, an ad that promises to eliminate most of what you owe can sound very appealing. What many consumers fail to appreciate is how this actually works. The only people in Canada who can make such an offer through a legal process are licensed insolvency trustees, formerly called trustees in bankruptcy. The debt-reduction program is a Consumer Proposal, which is different than bankruptcy, but it is still a legal process under the Bankruptcy and Insolvency Act .
For older Canadians in particular, who take the responsibility of managing their financial affairs very seriously, the word “bankruptcy” still has a negative implication. This may be one reason why we have seen a shift in how insolvency trustees advertise their services. Terms for Consumer Proposals such as “alternatives to bankruptcy” and “reduce debt by up to 80 per cent” are more appealing options. This shift in advertising has been effective; over the past decade the number of Canadians in Western Canada who elected to resolve their financial problems by establishing a Consumer Proposal increased by over 400 per cent while consumer bankruptcies declined by over 25 per cent.
Have Canadians become better at managing their money?
Given these statistics, one might be tempted to wonder if the financial circumstances of consumers have improved dramatically in the past 10 years, making it easier for Canadians to repay more of their debt through a Consumer Proposal versus filing for bankruptcy. However, if we look at income levels in relation to the amount of consumer and mortgage debt people are carrying, as well as low personal savings rates, it’s clear that we are not in better financial shape today than we were a decade ago.
What is a Consumer Proposal?
A Consumer Proposal is a legal agreement between you and your creditors to repay part of the debt that you owe. The arrangement is governed by Canada’s Bankruptcy and Insolvency Act , can only be proposed to your creditors by a licensed insolvency trustee and is an alternative to you declaring personal bankruptcy. The amount that the trustee will propose you repay is largely based on your income and assets. What makes Consumer Proposals attractive is their potential to significantly reduce the amount of debt you are required to pay your creditors; however, this comes at a cost.
Fees to file a proposal are laid out in the Act, but they shouldn’t be overlooked. It costs about $750 to file a proposal, and if it’s accepted by your creditors, it costs another $750 to proceed. The trustee is also allowed to retain 20 per cent of future payments as a fee for administering the proposal. To be legally binding, the creditors who hold the majority of your debt must agree to the proposal. Once they do, you repay the agreed amount typically within about four years, but in no more than a maximum of five years. If your creditors don’t agree, the proposal is defeated and you will need to make a higher offer or consider bankruptcy instead.
Don’t overlook these three considerations:
Zero to 80 per cent
If you have assets that you can sell, income to support significant debt payments and no extenuating circumstances (e.g. a medical condition that precludes long-term payments), it is not reasonable to expect creditors to agree to reducing your debt by 80 per cent. The percentage will be less, and you could end up even repaying all of what you owe.
A Consumer Proposal is a legal arrangement and is therefore filed as a permanent public record. A proposal is not a private matter — it must be approved by the court and is included in an online searchable database.
If you can’t afford the payments
As with any debt-repayment arrangement, an important consideration is your ability to follow through and maintain the monthly payment required under the terms of a Consumer Proposal. If you miss more than two payments, the proposal could be annulled and you may need to file for bankruptcy. If you do end up needing to file for bankruptcy, it can impact current and future employment opportunities depending upon the professional requirements of different positions. Even needing to be bonded for work might not be possible if you’ve declared bankruptcy.
The bottom line on what it means to reduce your debt by up to 80 per cent
The term “bankruptcy” has received a bad rap over the years; it’s the right option for some people to resolve their financial difficulties, but not a good first option for most people. Due to this stigma, Consumer Proposals, advertised under any number of slogans, have risen in popularity. When you are looking for the best way to deal with your debt, choose your course of action carefully after weighing the long-term implications and pros and cons of each option.
Before electing to enter into a Consumer Proposal, get all of the facts. Find out about other little-known ways to resolve your financial problems including debt-consolidation options, a debt-management program or even if debt settlement is right for you. The best first step is usually to balance your budget ; then the right solution will be the one that allows you to regain your financial well-being and stability.
Scott Hannah is president of the Credit Counselling Society, a non-profit organization. For more information about managing your money or debt, contact Scott by email , check www.nomoredebts.org or call 1-888-527-8999.
Copyright Postmedia Network Inc., 2019