Clean Slate

According to Carl Rumanek, a Toronto-area chartered accountant (CA) and trustee in bankruptcy with the firm of Rumanek & Cooper, “It used to be that the only way to get into debt was to buy a house or a car. Today, literally anyone can get credit and get in over their head.” For those who have experienced divorce, the problem is even more severe: all of those debts may have been manageable while you were married, but the cost of getting a divorce — in addition to alimony, child support, and the maintenance of two households — is likely to have made your financial situation more precarious than it was in the past. As finances get tighter and tighter, you might start considering what was at one time unthinkable: declaring bankruptcy. For many honest, hardworking people, bankruptcy is not only the last stage of a financial situation out of control — it’s also the only way to start anew.

Myths Demystified

There are many concerns and misunderstandings surrounding bankruptcy: that it will ruin your credit rating, you won’t be able to get or keep a job, you’ll have to give up everything you own, or that you’ll be considered a deadbeat. The truth, however, is far from that. “Most people are not deadbeats,” says Richard David Wilson, a bankruptcy trustee with the Toronto firm Watkins, Wilson & Associates. “They aren’t planning to go bankrupt. Rather, what has happened is that their expectations of what they can afford has been shaped by prior years. They’ve always been able to keep up with their payments, but their earnings have dropped because of an unstable job market, and there has been no equivalent drop in the cost of living.” Statistics back this up. In the first five months of 1997, Canadians filed 37,287 personal bankruptcies — an increase of 12.8% over the same period last year. Divorce, he adds, intensifies the problem. “Money problems are a frequent cause of divorce, and those problems don’t get better once the divorce is final.”

“Two can definitely live cheaper than one,” says Murray Kideckel, a Toronto trustee in bankruptcy in private practice. But, he notes, when the new costs of living separately are added to any marital debt, “it often means the bills don’t get paid.”

Henry Vine, a Hamilton-area trustee in bankruptcy with the firm Vine & Williams, agrees. “Bankruptcies caused by divorce are becoming more and more frequent. A person who may have other obligations suddenly finds him or herself subject to court orders to make payments, so those other payments that aren’t subject to court orders get put on hold. Suddenly you find you’ve got income tax arrears, and bank loans aren’t being paid because maintenance and child-support payments take priority.”

And the idea that bankruptcy will ruin your credit rating forever, destroying your chances of returning to a decent standard of living isn’t true, either. Your credit rating does automatically go to an R9 (the worst rating), and stays on your credit record for seven years, but it isn’t the end of all credit for you. “If you really put your mind to it, it’s possible to get credit very soon after a bankruptcy,” Wilson says. That R9 might officially be on your credit rating for seven years, but if you were a creditor, who would you be more willing to extend credit to: someone overloaded with debt, or someone who owes virtually nothing? While individual cases vary, most experts agree that within two to three years of being discharged of bankruptcy you should be able to obtain credit again, so don’t panic about ruining your chances for getting more plastic after you file. But before you start maxing out your cards again, remember what got you into this position in the first place.

So will you lose your job or be unable to find employment? The short answer is probably not, depending on what you do. It’s against the law to discriminate against someone because of his or her credit history, and some employers might even be pleased to see an employee who has been having financial troubles go into arrears. There’s less paperwork for them if you’ve been having your wages garnished (a court-ordered arrangement made by a creditor to have wages automatically withdrawn to pay off your debt), and you’ll be more able to keep your mind on your job rather than that looming debt. But if your job requires you to be bonded, you might face some problems, and “if you’re a CA, you lose your license to practice the day you declare bankruptcy,” says Rumanek. “But you can re-apply the day after you’re cleared, and it’s very likely you’ll get your license back.” So while bankruptcy is a serious matter, it’s very unlikely to cost you a job.

Consider your Options

If you’re having financial difficulties — from being unable to make your minimum payments on credit cards to your property being seized and your wages garnished — there are a few alternatives to bankruptcy you can consider. You might be able to get a Debt-Consolidation Loan that will pool all of your debts into one lump sum, thereby simplifying — and perhaps even reducing — your monthly payments. Even if you’re generally a responsible person with money, it’s easier to forget one of the five credit-card payments you were making each month than it is to forget a single debt-consolidation payment. And having only one creditor immediately reduces the number of people harassing you with letters and phone calls.

There are a couple of drawbacks to a consolidation loan, however. Financially, it may not be feasible. After all, if you couldn’t make ten payments of $50 per month, why should you be able to make one payment of $500, or even of $300? And finding a legitimate creditor who will be willing to loan you a sum of cash at a fair interest rate when your credit rating has already suffered might be a difficult task as well.

If a consolidation loan isn’t feasible, you might approach a Credit Counselor for advice and assistance. In some circumstances, a credit counselor can arrange a payment schedule for you and act as an intermediary between you and your creditors — perhaps even arranging an alternative payment plan. But you have to be on top of your finances for this to work, says Frank Kisluk, a Toronto trustee in bankruptcy and author of the bestselling book Life After Debt (Doubleday Canada, $16.95). “Credit counseling, like consolidation loans, can work very well — but only if you catch your problems in time,” he states. “The difficulty is that most people play ostrich-in-the-sand with their financial problems until it’s too late.”

Before you decide on bankruptcy, you also have the option of making a Consumer Proposal to your creditors. Proposals, which are outlined in the Bankruptcy and Insolvency Act (BIA) (see “Bankruptcy Lingo”), allow you to approach your creditors and offer them payment over a longer period for a lesser amount, or at a lower interest rate than you’re now paying. Why would a creditor accept less money over a longer period of time? For a very simple reason: it’s better than nothing. Consider that if you owe an unsecured creditor (see “Bankruptcy Lingo”) $50,000 and agree to pay him a third of that amount over a set period — say, five years — it’s a better option for him than having you miss your higher payments every month, become insolvent, and perhaps even declare bankruptcy. Bankruptcy for unsecured creditors means that they could get less than one-third of the amount you owe — if they get anything at all.

A consumer proposal might sound like the perfect solution to your financial difficulties since it allows you to pay off your debts in a timely manner and will presumably make it easier to re-establish credit after your debts are paid. But it isn’t quite as simple as that. Visiting a trustee in bankruptcy and arranging to make a proposal should set your credit rating to R7. Officially, this rating is supposed to be better than bankruptcy’s R9 and is also supposed to come off your record after only three years. But, as Kisluk points out, “I don’t know of a single creditor who considers an R7 better than an R9.”

Adding to the confusion is the fact that an R7 requires either you or your creditors to inform a credit bureau of your proposal — otherwise, your rating won’t change. And those four years might not make a difference if it will take you five years to pay off your debts with a consumer proposal anyway. “There is also a danger of getting two years into a proposal, suddenly not being able to make your payments, and having to go into bankruptcy anyway,” warns Henry Vine. The major advantage of a consumer proposal is that you get to keep any property with equity: a car that has been paid off and has a good resale value, or a home with higher market value than a debt load, for example. Unless you’re bonded, a CA, or you have a large amount of equity, bankruptcy is at least as feasible as any of your other options.

Step by Step

If you’ve weighed all of your choices and have decided you must get serious financial help, you’ll need to contact a trustee in bankruptcy (ask your lawyer, accountant, or friends for referrals). For your first meeting, you should bring with you any relevant financial information — mortgages, titles, deeds, court-ordered payments, RRSPs, bank statements, and any other documentation of assets and debts.

The trustee will look at your finances and discuss your options with you over one or two meetings before you make the final decision to file. The trustee will then have you fill out two documents: a Statement of Affairs, which lays out your assets and liabilities, and an Assignment, which turns over your assets to the trustee to be used against your debts. Once these papers are signed and filed with the government’s Official Receiver, you are officially bankrupt and can stop making payments to your creditors. The trustee will notify you creditors of your status, and for the next nine months, any surplus income you earn is given to the trustee to distribute. You’ll have to file two tax returns for the year: one pre-bankruptcy, and one after your bankruptcy is discharged. Any money received from the first return is given to the trustee, who will likely recommend that you agree to give over any earnings from the second return as a sign of good faith.

In paying your debts, your Secured Creditors have first dibs and can collect the property they hold a lien on in lieu of your liability to them. Next in line are Preferred Creditors, including (as of this Fall) any ex-spouses, children, or parents to whom you owe support. What is left is then divided between your Unsecured Creditors. You also have to pay the trustee as outlined in the BIA.

It can get more complicated, of course — but keep in mind that such complications aren’t very common, and most bankruptcies proceed without any opposition. If your creditors wish, they can arrange a meeting with you in order to change your trustee or give instructions as to how they want the estate to be handled. You might also be called into the Office of the Official Receiver to state, under oath, your financial situation. A judge can decide to impose a Conditional Discharge, requiring you to fulfill certain conditions before your bankruptcy is complete, or your discharge could be delayed by a complaint from the trustee or your creditors. But if this is your first bankruptcy, you’ve followed your trustee’s instructions, and all goes well, none of these problems will arise, and at the end of nine months, you’ll be free and clear of debt — with a couple of exceptions. Any spousal or child support, or any other court-ordered payments you owe do carry through — but with most of your debts released, payments that were difficult before should be much more manageable.

You’ll likely be wary of credit after having been kept on a short leash for the past nine months, but Kisluk suggests that you begin to use credit in a responsible manner as soon as possible after your discharge. “Go to a bank, set up a savings account, take out a loan against the savings, and then repay the loan,” he says. “Get any type of credit card you can, use it for small amounts, and pay it on time. You want to create some positive activity on credit bureaus’ computer screens to balance off the negative marks which are sitting there.” It might be a few years before you’re financially comfortable again, but if you keep on top of your finances, manage your debts well, and have a bit of luck, declaring bankruptcy can help you right yourself financially.

Bankruptcy Lingo

• Proposal: an offer by a debtor to creditors to alter payment schedules. A proposal might ask for smaller payments over a longer period of time, or for a reduction of the principal owed.
• Bankruptcy: a legal status in which you are protected from your unsecured creditors. In Canada, first-time bankruptcies are discharged in nine months if all procedures are followed.
• Debtor: person or business owing money.
• Creditor: a person or institution to which money is owed. A secured creditor holds liens for the value of your debt to them against the property you possess, and can recover this property in lieu of payment at any time — including if you go bankrupt. An unsecured creditor will not have any such hold over your property, and so is not guaranteed payment. A preferred creditor falls in between the former two when it’s time to collect.
• The Bankruptcy and Insolvency Act (BIA): a federal piece of legislation that lays out the rules and regulations of bankruptcies and proposals in Canada. Under this legislation, a person who is unable to pay off his or her debts is insolvent and a person who has sought legal protection from his or her creditors is bankrupt. You can be insolvent without being bankrupt, but not the other way around.
• Official Receiver: a federal government employee who accepts proposal and bankruptcy documents, chairs creditor’s meetings, and can question you under oath regarding the circumstances of your bankruptcy.
• Superintendent of Bankruptcy: oversees the implementation of the BIA.
• Inspector: a person specifically appointed by creditors to represent their interests.
• Trustee in Bankruptcy: a person licensed by the Superintendent to administer proposals and bankruptcies, usually a chartered accountant and a member of the Canadian Solvency Practitioner’s Association. The trustee’s job is to represent creditors and uphold the BIA, but he or she also protects your rights and can help you with financial advice and information. You choose the trustee, but your creditors have the power to replace him or her if they’re not satisfied.