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HOW DOES DEBT RELIEF WORK: APPARENTLY NOT GREAT 4 EVERYONE

NOTE: On January 13, 2022, three settlement agreements were approved by the Honourable Justice Mayer of the British Columbia Supreme Court on January 29, 2021, and November 15, 2021. As a compromise of disputed claims, these settlements are not an admission or finding of liability by the settling Defendants. You can read all about the Settlement Administration Plan and how to file a claim by CLICKING HERE to read our latest 4 Pillars blog.

how does debt relief work
how does debt relief work

If you would prefer to listen to the audio version of this how does debt relief work Brandon’s Blog, please scroll to the bottom and click on the podcast.

How does debt relief work Introduction

On October 29, 2019, The Supreme Court of British Columbia, certified a class-action lawsuit in Pearce v. 4 Pillars Consulting Group Inc., 2019 BCSC 1851. At the crux of the litigation, the question of how does debt relief work legally will be answered. In Brandon’s Blog, I describe the issues raised in this class-action lawsuit.

What is a class action?

In a class action, one or more individuals called Representative Plaintiffs sue on behalf of all other individuals with similar claims. With each other, the people included in the class action are called Class Members. One court settles the concerns for all Class Members, with the exception of those that exclude themselves from the Class.

The 4 Pillars lawsuit class-action

A class-action legal action has been begun in the B.C. Supreme Court against the 4 Pillars Consulting Group Inc. (4 Pillars). The claim is that the 4 Pillars debt consulting business has breached the B.C. Business Practices and Consumer Protection Act as well as the federal Bankruptcy and Insolvency Act (Canada) (BIA).

how does debt relief work
how does debt relief work

Plaintiff seeks to certify his action as class proceedings. The litigation looks to recoup damages for the costs billed by 4 Pillars as debt consultants to its clients. In the 4 Pillars litigation, Mr. Pearce is looking to recoup damages for the costs billed by 4 Pillars to all persons that paid fees to it in British Columbia in connection with: (i) a consumer proposal under the BIA; or (ii) an informal debt settlement proposal with the person’s creditors, all after April 1, 2016.

How does debt relief work: The allegations

In his litigation, Plaintiff claims that Defendant provided debt restructuring services in breach of both provincial legislation and the BIA.

Mr. Pearce alleges that:

  • The major, if not single, debt restructuring solution given by 4 Pillars is to prepare the consumer proposal documents to hand over to licensed insolvency trustees (formerly called licensed bankruptcy trustees or a bankruptcy trustee) (Trustee) and schedules a meeting with the Trustee so that the consumer proposal can be submitted;
  • 4 Pillars debt consultants represent that it might hold financial liability negotiations directly with a customer’s creditors, trying to get you an informal debt settlement, although that service is hardly ever really supplied;
  • Their standard form agreement, which clients need to enter into with them, allows 4 Pillars to speak to the client’s creditors on their behalf;
  • Under their standard procedures, 4 Pillars gets in touch with the debtor’s creditors to advise them that they are acting for the debtor and they will need time to make plans for the debtor; and
  • They meet the debtor numerous times, collect information from the borrower, prepare a consumer proposal to provide to a Trustee and afterward meets the Trustee to administer the consumer proposal process.

Mr. Pearce goes on to state the 4 Pillars:

  • acts only for its clients, the borrowers;
  • prepares a consumer proposal for its clients and afterward represents to the Trustee why the proposal terms are reasonable;
  • urges the Trustee to recommend that the creditors accept the proposal on the suggested terms;
  • meets the Trustee and helps in answering the Trustee’s concerns; and

will, ideally, create an alternate proposal and, once more, advocate the Trustee, if their first consumer proposal is rejected by the borrower’s creditors.

The alleged cause of action under the BIA: Are the activities of a debt consulting business in breach of the BIA?

Mr. Pearce claims that contrary to the provisions of the BIA:

  • none of the entities or individuals offering financial debt restructuring services are Trustees;
  • performed various regulated activities that only Trustees are authorized to carry out;
  • collected financial information from their customers and prepared consumer proposals for them; required borrowers to pay fees and costs which are not allowed; and
  • 4 Pillars has actively solicited people to file consumer proposals which is prohibited.

There are many more claims being made by Mr. Pearce, including that there is not any real debt settlement negotiation with creditors or any real debt relief management, other than the preparation of the consumer proposal. Defendant, of course, denies it all. After hearing all the evidence, the Court found that there were sufficient grounds for this litigation to go forward as a class-action lawsuit.

Are Debt Relief Programs a good idea?

Is debt settlement a good idea?

Debt relief programs are a good idea. However, as Mr. Pearce’s litigation shows, there are companies that charge high fees and really provide no value. Worse, they may actually do more harm than good.

I have previously blogged about the risks of debt settlement businesses. In 2017, I covered the study by the Office of the Superintendent of Bankruptcy (OSB) on debt negotiation companies.

The major findings of the OSB study were that in 2016:

  • In 17% of all consumer proposal filings, the client reported having spent initially for debt counselling from a debt settlement company before being guided to a Trustee.
  • 57% of the consumer proposal filings for which earlier financial debt settlement advice was obtained, the Trustees had strong ties with 2 large-volume financial debt settlement companies. These 2 companies represented 64% of the total for those Trustee fees reported in 2016 for financial advice before submitting to a proceeding with a Trustee.
  • Thirteen Trustee firms, that included one national-level firm, were uncovered to have countless Trustees running in routine partnership with large-volume financial debt settlement firms.
  • For about 50 Trustees within these 13 firms, much better than 40% of their consumer filings were sourced from these debt settlement companies. For about 20 of those Trustees, more than 90% of their consumer proposal work stems from these 2 organizations.
  • Financial debt negotiation companies have actually long utilized scare tactics with consumers to draw in business. They tell consumers that all a Trustee intends to do is put them into bankruptcy.

The OSB concluded that customers were paying financial debt settlement companies fees with cash they could not afford to pay. Only when they could no longer pay, then the debt settlement company referred the people to their favourite Trustees! The OSB was additionally concerned about the business arrangements being made between financial debt settlement outfits and those same Trustees. The OSB is very concerned with how does debt relief work in Canada since it supervises the insolvency process in Canada.

Ever since the OSB has actually introduced modifications to methods that Trustees have to comply with for the regulation of debt counsellors and business arrangements with a view to curb these practices. For the record, I as well as my Firm have no relationship with any type of debt negotiation company

how does debt relief work
how does debt relief work

Do Debt relief companies really work?

How does debt relief work with a legitimate credit counsellor? What this says is that a legitimate credit counselling service can offer a good debt settlement program. There are community-based credit counselling agencies that do not charge fees and they really do know how does debt relief work. These organizations provide a valuable service in the areas of budgeting and debt management. They are not the kind of debt consulting services that rips off unsuspecting people and prey on their fears of going to see a Trustee.

How does a debt relief program affect your credit?

With a debt relief program run by a reputable credit counselling agency, you make one regular monthly repayment to the credit counsellor, which after that disburses repayments to your creditors. This kind of plan can have a negative influence on your credit rating. Naturally, any type of late payments or high unpaid amounts on accounts will certainly worsen your credit rating The unscrupulous debt relief companies have an additional trick up their sleeve that makes your credit score worse.

The debt restructuring businesses that actually do try to negotiate with your creditors first do not make payments to them from the funds you supply for some time. Their theory is that your account must first go into arrears. Some people speculate that the money you are paying them, while they are not passing it on to your creditors, goes to the company only. When your account is now months in default, your credit score worsens.

So, the debt settlement credit score impact is real.

Is Debt Settlement Really Worth It?

How does debt relief work with a true debt settlement program? Is it really is worth it? With real consumer debt relief you can:

  • get real credit counselling;
  • help with setting and following a family budget where you do not spend more than you earn;
  • receive true debt settlement where you will pay off all your debts for less than what the full amount is;
  • enjoy the time you need to pay this lesser amount to get rid of all your debts;
  • avoid interest and other high fees and charges; and
  • end the stress in your life and move forward without the pain, worry, and guilt that your unmanageable debts have caused you.

There is only one government-approved debt settlement program in Canada. It achieves all of the above. The only professional authorized to administer it is a Trustee. As Pearce, now class-action litigation shows, it is a consumer proposal. A consumer proposal and a Division 1 proposal are alternatives to filing for bankruptcy. As the Pearce litigation confirms, only a Trustee can administer these kinds of debt restructuring proposal.

Although they are the same in a number of ways, there are some substantial distinctions between a consumer proposal and a Division I Proposal. Consumer proposals are used for people whose financial debts aren’t greater than $250,000, not including any type of debts registered against your house. Division 1 proposals are readily available to both companies and also people whose financial obligations go beyond $250,000 (omitting mortgages signed up on their home).

A consumer proposal is an official process under the BIA. With a Trustee, you make a proposal to:

  • Pay your creditors a percentage of what you owe them over a particular amount of time, not greater than 5 years.
  • Prolong the time you need to pay back the reduced amount taking care of all of your unsecured debts.
  • A mix of both.

Settlements are made by the Trustee, using the monthly cash payments you make to the Trustee to make regular distributions to all your unsecured creditors.

4 Pillars lawsuit update May 24, 2021

4 Pillars appealed the decision that Mr. Pearce’s lawsuit should be converted into a class action proceeding to the Court of Appeal for British Columbia. See our updated blog describing the appeal:

4 PILLARS LAWSUIT GETS GIGANTIC APPROVAL TO PROCEED FROM COURT OF APPEAL FOR BRITISH COLUMBIA

How does debt relief work Summary

I hope you enjoyed this Brandon’s Blog on how does debt relief work and the 4 Pillars lawsuit. Are you or your company in need of financial restructuring? The financial restructuring process is complex. The Ira Smith Team understands how to do a complex corporate restructuring. However, more importantly, we understand the needs of the entrepreneur or the person who has too much personal debt. You are worried because you are facing significant financial challenges.

It is not your fault that you are in this situation, so many dollars in debt. You have been only shown the old ways that do not work anymore. The Ira Smith Team uses new modern ways to get you out of your debt troubles while avoiding bankruptcy. We can develop a financial plan to get you debt relief freedom and you can stop feeling the shame of debt.

The stress placed upon you is huge. We understand your pain points. We look at your entire situation and devise a strategy that is as unique as you and your problems; financial and emotional. The way we take the load off of your shoulders and devise a debt settlement plan, we know that we can help you.

We know that people facing financial problems need a realistic lifeline. There is no “one solution fits all” approach with the Ira Smith Team. That is why we can develop a restructuring process as unique as the financial problems and pain you are facing. If any of this sounds familiar to you and you are serious in finding a solution, contact the Ira Smith Trustee & Receiver Inc. team today.

Call us now for a free consultation. We will get your company back on the road to healthy stress-free operations and recover from the pain points in your life, Starting Over, Starting Now.

 

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Brandon Blog Post

CREDIT COUNSELLING CANADA: VERY BUSY WITH BANKRUPTCY ONLINE CHATTER

credit counselling canada
credit counselling canada

If you would prefer to listen to the audio version of this credit counselling Canada Brandon’s Blog, please scroll down to the bottom and click on the podcast

Introduction

Like many people, I have set up various Google News alerts. Mine are mostly on the topic of insolvency. I have done this so that whenever a news article is posted on the topic, I will be alerted. One of the alerts I have set up is for the term “credit counselling Canada”. Last week I have noticed that a fair bit of bankruptcy online chatter.

The posts being promoted include:

I have taken a look at the posts. Generally, they are very accurate.

Unscrupulous debt consultants

I was very happy to see some of the posts warning against going to the unscrupulous debt consultants that I have written about before. The Office of the Superintendent of Bankruptcy (OSB) has also warned against them.

The purpose of this Brandon’s Blog is to comment and shed light on several comments in their recent busy online articles that I think are slightly misleading.

Consumer Proposal Ontario

In the Ontario consumer proposal blog, it is stated that a consumer proposal can only be arranged and administered by a bankruptcy trustee (now called a licensed insolvency trustee) (Trustee) which is true. They then go on to state what the cost of a consumer proposal is, that you need to pay an initial setup fee. They also state that the Trustee will also keep 20% of all of your consumer proposal payments.

This is misleading. The way I read it, is they claim you will have to pay a Trustee a setup fee, their fee and an additional 20%. This is not correct. In reality, the Trustee’s fee is a fixed tariff set by the Bankruptcy and Insolvency Act (Canada) (BIA). The fee and disbursements of the Trustee are set in the statute. It is illegal, for the Trustee to collect anything above and beyond the statutory tariff.

The reality is that the Trustee’s fee and disbursements, set by a tariff, come out of the person’s consumer proposal payments. The consumer proposal payments are calculated off of what your creditors can expect in that person’s bankruptcy. Whatever that amount is, the bankruptcy law says that the amount offered in the consumer proposal must be higher. Therefore, the amount a person must offer to get creditor buy-in to accept the consumer proposal has zero relationships to the Trustee’s fee and disbursements.

As the Trustee is entitled to take its capped fee and disbursements from the consumer proposal fund, rather than costing the person, the Trustee’s fee and disbursements are actually free to the insolvent debtor!

Bankruptcy Trustee, Creditor & Debtor

The blog I read on this topic discussed is pretty accurate. The only issue I take is that when describing the role of the Trustee, they pull out the old scare tactic that although the Trustee makes sure that the rights of the debtor are not abused, the Trustee acts for your creditors. This is technically true but overlooks the role of the Trustee as a credit counsellor before the debtor decides whether or not to file either a consumer proposal or for bankruptcy.

In my professional practice, before I allow anyone to file for bankruptcy, I provide an exhaustive and detailed analysis of the person’s financial situation. I first ask the person to explain the issues and financial crisis they are facing which is upending their life. We then together look at their assets, liabilities and income so that I can come up with realistic options. We then discuss the options available and I explain the advantages and disadvantages of each. Then I provide my recommendation. All of this is done in an initial consultation and is no charge to the person.

If they wish to explore the options we discussed more seriously, I then have them complete our standard intake form called the Debt Relief Worksheet. That document when fully completed and provided to me with appropriate backup, allows me to confirm my initial diagnosis and recommendations. Then it is up to the debtor to make their choice as to how they wish to proceed.

After going through this process, with everything fully explained by me, there are no surprises. If the debtor follows my advice, they will have either a successful debt settlement consumer proposal or will discharge their debts through the bankruptcy process. During and after this entire process, the debtor does not feel that I am biased against them in favour of their creditors. Although I have acted formally on behalf of their creditors, the debtor thanks me for saving them and allowing them to restart their lives.

Personal bankruptcy Toronto

The blog I read on personal bankruptcy, part of a credit counselling Canada series, said that people will tell you that bankruptcy eliminated all of their debts. They then ask the question: Did they tell you that it is not possible for everyone? The obvious answer is no because someone who eliminated all of their debts isn’t worried about someone else’s situation and distinctions.

The three types of debts given as examples that cannot be eliminated by a discharge from bankruptcy are:

  • Secured debts, like mortgages and car loans
  • Student loans where you have ceased being a full-time or part-time student less than 7 years ago
  • Child and alimony support payments

This is all true. When I counsel debtors during the free consultation, we review issues like this. We discuss all of the person’s debts, which can be discharged and which cannot be. Just because a certain debt on its face cannot be discharged through bankruptcy, does not mean that the person cannot properly avail themselves of an insolvency process and improve their financial position in life.

Specifically, with secured debt, I attack it from the perspective of can you afford to keep paying that debt, or should you keep paying it. If the home is fully encumbered and there is no or little equity, perhaps renting is a cheaper alternative. We go through the same analysis for a car loan.

In some cases, it might make sense for the person to give up the asset to the mortgagee/lender and allow them to make a demand on the debtor for the shortfall. A shortfall happens when the lender sells the asset but the market will only pay less than the secured debt owing. The lender’s loss is the shortfall. They can pursue the debtor for the loss.

That lender loss, or shortfall, is now an unsecured debt. The person has hopefully found a car they can afford and home, condo or apartment to rent they can afford in their budget. They have now turned the secured debt into an unsecured shortfall claim. That unsecured debt can be discharged through either a consumer proposal or bankruptcy process.

So just because a secured debt cannot be discharged in bankruptcy, it doesn’t mean the person can afford or should keep that debt and continue making payments. They may have a better way to live while then being able to discharge their debts through an insolvency process.

Bankruptcy Discharge in Canada

The blog I read on bankruptcy discharge does not say too much about the bankruptcy discharge process. Rather, they do focus on the dangers of not getting a discharge and remaining undischarged bankrupt.

Everything they say on the topic is true. However, I believe it does leave out a lot of information. In my experience, if someone follows my advice and lives up to all of their obligations during the lifetime of their bankruptcy, then they are not going to have a problem with discharge. It really is only those who try to “game” the system, do not fully cooperate and refuse to make full and transparent disclosure who have problems.

That is how the BIA is designed to work. You are asking your creditors to forgo a lot of the debt you owe them. In return, you have to be fully cooperative and make full disclosure, so that every stakeholder in the bankruptcy process knows that it has been a fair process.

In all of the personal bankruptcies I have administered, it is a very small minority who have a problem with discharge. In all cases, it is their past behaviour or their lack of full disclosure in bankruptcy that has caused the problems, not the bankruptcy process itself.

Summary

I hope you enjoyed this Brandon’s Blog on credit counselling Canada. Are you or your company in need of financial restructuring? The financial restructuring process is complex. The Ira Smith Team understands how to do a complex corporate restructuring. However, more importantly, we understand the needs of the entrepreneur. You are worried because your company is facing significant financial challenges. Your business provides income not only for your family. Many other families rely on you and your company for their well-being.

The stress placed upon you due to your company’s financial challenges is enormous. We understand your pain points. We look at your entire situation and devise a strategy that is as unique as you and your company’s problems; financial and emotional. The way we deal with this problem and devise a corporate restructuring plan, we know that we can help you and your company too.

We know that companies facing financial problems need realistic lifeline. There is no “one solution fits all” approach with the Ira Smith Team. That is why we can develop a company restructuring process as unique as the financial problems and pain it is facing. If any of this sounds familiar to you and you are serious in finding a solution, contact the Ira Smith Trustee & Receiver Inc. team today.

Call us now for a free consultation. We will get your company back on the road to healthy stress-free operations and recover from the pain points in your life, Starting Over, Starting Now.

 

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HOW BANKRUPTCIES WORK IN CANADA: 5 NEW CANADIAN INSOLVENCY LAW AMENDMENTS

how bankruptcies work in canada

If you would prefer to listen to the audio version of this how bankruptcies work in Canada Brandon’s Blog, please scroll down to the bottom of the page and click on the podcast

Canadian bankruptcies laws

Last week I wrote about amendments to Canadian insolvency law for intellectual property rights in my Brandon’s Blog INSOLVENCY LAW CANADA AMENDMENTS FOR INTELLECTUAL PROPERTY RIGHTS In addition to the intellectual property rights amendments, other amendments affecting how bankruptcies work in Canada. They were enacted as of November 1, 2019. They too were part of the changes announced in the Canadian 2019 Budget.

Corporate bankruptcies Canada

Most of the amendments affect not just corporate bankruptcies. Receiverships and corporate financial restructuring are likewise affected. Even the operation of solvent companies is also affected. The amendments were made to the Bankruptcy and Insolvency Act (R.S.C., 1985, c. B-3) (BIA), Companies’ Creditors Arrangement Act (R.S.C., 1985, c. C-36) (CCAA) and the Canada Business Corporations Act (R.S.C., 1985, c. C-44). I will focus on the changes to the BIA and CCAA.

The BIA and the CCAA modifications in the Budget Implementation Act, 2019, No. 1, are planned to boost retired life protection by making the insolvency treatment fairer and much more clear. In the legislation, the amendments fall under the heading “Enhancing Retirement Security”.

This issue remained in the news over the past two years. High profile insolvency situations such as Sears Canada and U.S. Steel Canada brought this matter to the forefront. I wrote a few blogs on the topic of proposals to change the BIA and CCAA. The proposals were meant to supply protection to senior citizens. This consisted of private members’ bills introduced by Hamilton Mountain NDP MP Scott Duvall, Bloc Québécois MP Marilène Gill and Senator Art Eggleton, P. C.

None of their Bills ever came close to being enacted. Rather, the Liberal government made some changes. Only time will tell if the changes I describe below will accomplish the stated goal of enhancing retirement security.

Insolvency and bankruptcy code amendments – BIA

The BIA amendments will apply to bankruptcy, receivership and BIA financial restructurings done under the Proposal section of the BIA. The amendments are aimed at several areas. All the insolvency amendments are for insolvency proceedings beginning on or after November 1, 2019.

1. Good faith

Section 4.2 of the BIA is amended by adding a good faith provision section(4.2)(1). The new language states that any interested person in any type of process under the BIA must act in good faith relative to those proceedings. New subsection 4.‍2(2) codifies a power for the Court. It now states that if the court is satisfied that an interested individual fails to act in good faith, on application by any other interested party, the Court might make any kind of order that it thinks is proper in the circumstances.

I would have hoped that acting in good faith was always a given. Previously, the Court had wide discretion in insolvency proceedings to make an order that it believed to be just and appropriate. I am not sure this new language adds much to “enhancing retirement security”, but at least now it is codified.

2. Registered disability savings plan

Before Budget Canada 2019, there was a gap when it came to a registered disability savings plan (RDSP). The gap was that unlike an RRSP or RRIF, there was no exemption for an RDSP in how bankruptcies work in Canada.

Now Paragraph 67(1)‍(b.‍3) of the BIA is amended to include the same exemption for an RDSP that an RRSP and RRIF enjoy. That is, the amounts in any of these funds are now exempt from seizure in a bankruptcy apart from property added to any such plan or fund in the twelve-month period before the date of bankruptcy.

3. Director liability – Inquiry into dividends, redemption of shares or compensation

Section 101(1) of the BIA has been amended. It now deals with certain transactions that 1 year before the corporation went bankrupt. The time period is within the day that is one year prior to the date of the initial bankruptcy event and ending on the date of the bankruptcy both such dates included. If the corporation had:

  • paid a dividend, aside from a stock dividend;
  • redeemed or acquired for cancellation any one of its shares of the company’s capital stock; or
  • has paid termination pay, severance pay or incentive or other benefits to a director, officer or any person that manages or controls the business

the Court may, on the application of the licensed insolvency trustee (Trustee), inquire into the transaction to find out whether it took place at a time when the firm was insolvent or whether it made the firm bankrupt.

If a transaction referred to above has actually occurred, the Court can give judgment to the Trustee against the directors of the firm, jointly as well as severally, or individually as appropriate in the circumstances.

The amount of the pay or benefits, with interest on the amount, that has not been paid back to the company if the Court discovers that the payment of the pay or benefit:

  • occurred at a time when the company was insolvent or it made the corporation bankrupt;
  • was notably over the reasonable market price of the consideration gotten by the company;
  • was made outside the common course of business

and the directors did not have reasonable grounds to think that the payment:

  • took place when the firm was not insolvent or would not render the firm insolvent;
  • was not conspicuously over the fair market value of the consider obtained by the corporation; and
  • was made in the ordinary course of business.

Interestingly, the new statute also states that a judgment will not be made against or be binding on a director who had protested against the payment of the pay or benefits and had, therefore, vindicated himself or herself under the relevant corporate legislation from any kind of resulting obligation.

No doubt we will only learn how effective this additional liability of directors provision will be after several court cases. Presumably, this amendment to the statute will provide extra food for thought for the insurance companies providing director and officer liability coverage.

Insolvency proceedings under the CCAA

The CCAA covers larger company financial restructuring. In addition to amendments to the CCAA to mirror the BIA amendments discussed above, there were also a couple of other changes made.

4. Initial application

Prior to November 1 CCAA filings, the company was given an initial stay of proceedings for 30 days. Now, for filings November 1, 2019, and after, this initial stay period has been reduced to 10 days.

5. Relief reasonably necessary

An initial order made or during the 10-day initial application stay period will be limited to alleviation that is fairly required for the continued operations of the borrower business in the regular course, but no extra relief will be granted. This narrowing of relief during the initial order period means that the Company cannot ask for all sorts of extra relief outside of the normal course of business.

In order to attempt to get extra relief, the Company will have to make a motion to the Court on notice to any affected parties. The Company will not be able to pack it into an initial order and force affected parties who did not receive notice to have to come to Court under the comeback clause. This was the case before November 1, 2019.

Most times in a CCAA restructuring, it is necessary for the Company’s survival to get debtor-in-possession financing. When such financing is available, it usually comes with very onerous terms. To avoid essentially keeping all of the Company’s assets out of reach by using such financing, the CCAA has been amended. It says that when applying for the initial order or during the initial stay period, no order shall be made unless the court is pleased that the terms of the loan are restricted to what is reasonably necessary for the continued operations of the debtor firm in the ordinary course of business during that initial stay period duration.

In this way, Parliament has tried to put the brakes on wide-sweeping initial orders that have everything including the kitchen sink in them. Parliament wants to have the initial orders contain only what is reasonably necessary to keep the Company’s operations going until everyone is back in Court all lawyered up.

It will be very interesting to see what Court decisions come from all of these new amendments to the Canadian insolvency laws.

Summary

I hope you enjoyed this how bankruptcies work in Canada Brandon’s Blog on the other BIA and CCAA insolvency amendments effective November 1, 2019. Are you or your company in need of financial restructuring? The financial restructuring process is complex. The Ira Smith Team understands how to do a complex corporate restructuring. However, more importantly, we understand the needs of the entrepreneur. You are worried because your company is facing significant financial challenges. Your business provides income not only for your family. Many other families rely on you and your company for their well-being.

The stress placed upon you due to your company’s financial challenges is enormous. We understand your pain points. We look at your entire situation and devise a strategy that is as unique as you and your company’s problems; financial and emotional. The way we deal with this problem and devise a corporate restructuring plan, we know that we can help you and your company too.

We know that companies facing financial problems need a realistic lifeline. There is no “one solution fits all” approach with the Ira Smith Team. That is why we can develop a company restructuring process as unique as the financial problems and pain it is facing. If any of this sounds familiar to you and you are serious in finding a solution, contact the Ira Smith Trustee & Receiver Inc. team today.

Call us now for a free consultation. We will get your company back on the road to healthy stress-free operations and recover from the pain points in your life, Starting Over, Starting Now.

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INSOLVENCY LAW CANADA AMENDMENTS FOR INTELLECTUAL PROPERTY RIGHTS

Insolvency Canada news

The Federal government published in the Canada Gazette, Part II, Volume 153, Number 18, its intention to amend Canadian insolvency law for intellectual property rights (IP). On November 1, 2019, those changes came into effect. This change was part of the Canadian 2019 Budget. In Brandon’s Blog, I will discuss what the changes are and why they were made.

Insolvency law amendments for IP in Canada

Amendments relating to how IP is treated under Canadian insolvency law were made to the Bankruptcy and Insolvency Act (R.S.C., 1985, c. B-3) (BIA) and the Companies’ Creditors Arrangement Act (R.S.C., 1985, c. C-36) (CCAA) was made. The BIA controls liquidations and restructurings for people and companies, and the CCAA covers large company restructurings.

The changes are meant to shield IP user rights in cases where the IP licensor becomes insolvent.

The BIA, as well as CCAA changes in the Budget Implementation Act, 2019, No. 1, are intended to improve retired life protection by making the insolvency procedure fairer and much more clear.

Previous Canadian IP insolvency law

Previously, Canadian insolvency law only explicitly dealt with IP in restructuring proceedings. Both the BIA and the CCAA allows for a debtor to disclaim or resiliate agreements. There are certain conditions that the debtor business must meet. This essentially boils down to being able to prove that the agreement in question is either so onerous and/or costly to the debtor business, that a successful restructuring is impossible if the debtor must continue honouring that agreement.

Specifically, as it relates to IP, the BIA, and CCAA if a debtor who is a licensor under an IP agreement disclaims the agreement, the licensee has rights. The licensee can continue to use the IP and gain all benefits it had bargained for, as long as the licensee continues to perform its responsibilities under the IP agreement concerning the use of that IP.

There was no such equivalent section for the receivership or bankruptcy of the debtor. So, if there was a liquidation, the licensee was not protected the same way they would be if the licensor debtor business disclaimed the agreement in financial restructuring.

Insolvency law reform

The amendments in Budget Implementation Act, 2018, No. 2 were done to protect copyright (IP) individual rights in situations where the IP licensor comes to be insolvent.

Effective for all filings beginning on November 1, 2019, or later, there are changes to the BIA and the CCAA, Canada’s main insolvency statutes. The November 1 amendments are done so that the rights of a licensee under an IP agreement where the licensor has disclaimed the agreement will be the same in a financial restructuring or a liquidation through either receivership or bankruptcy.

The following modifications accomplish the goal of safeguarding IP customer’s rights in instances where the IP licensor ends up being insolvent:

  1. Many times as part of a corporate restructuring, the Court authorizes the company that filed a Notice of Intention To Make a Proposal, or a Proposal, to sell assets. The new amendments now make it so that if the corporation being restructured is the licensor under an IP agreement and sells it, the licensee retains its rights to use the IP, as long as they are and stay current under the agreement.
  2. If a bankruptcy trustee (now called a licensed insolvency trustee) (Trustee) administering the bankruptcy (or receivership) of a licensor under an IP agreement sells the agreement, the licensee retains its rights under that agreement. Again, the licensee must be current in its obligations to continue enjoying the benefit of the IP agreement.
  3. The Trustee disclaims the debtor licensor’s interest in an IP agreement as part of a bankruptcy (or receivership) administration. The licensee will continue to enjoy the rights and benefits of the IP agreement as long as it is current in all of its responsibilities under that same agreement.
  4. If that IP is sold in a CCAA restructuring, the CCAA legislation has now been amended, for administrations that began after October 31, 2019, offers that an IP licensee in excellent standing can continue to utilize the IP.

Proposed BIA wording for IP insolvency proceedings

These are new amendments. There have not been any court decisions on these new amendments yet. The new legislation is not available yet as far as I know. However, my understanding is that the BIA will be amended, in part, to implement the changes concerning IP agreements as I have discussed, along the following lines:

“Intellectual property — sale or disposition

246.1 (1) If the insolvent person or the bankrupt is a party to an agreement that grants to another party a right to use intellectual property that is included in a sale or disposition by the receiver, that sale or disposition does not affect that other party’s right to use the intellectual property — including the other party’s right to enforce an exclusive use — during the term of the agreement, including any period for which the other party extends the agreement as of right, as long as the other party continues to perform its obligations under the agreement in relation to the use of the intellectual property.

Intellectual property — disclaimer or resiliation

(2) If the insolvent person or the bankrupt is a party to an agreement that grants to another party a right to use intellectual property, the disclaimer or resiliation of that agreement by the receiver does not affect that other party’s right to use the intellectual property — including the other party’s right to enforce an exclusive use — during the term of the agreement, including any period for which the other party extends the agreement as of right, as long as the other party continues to perform its obligations under the agreement in relation to the use of the intellectual property.”

Summary

I hope you enjoyed this Brandon’s Blog on the insolvency amendments effective November 1, 2019. Are you or your company in need of financial restructuring? The financial restructuring process is complex. The Ira Smith Team understands how to do a complex corporate restructuring. However, more importantly, we understand the needs of the entrepreneur. You are worried because your company is facing significant financial challenges. Your business provides income not only for your family. Many other families rely on you and your company for their well-being.

The stress placed upon you due to your company’s financial challenges is enormous. We understand your pain points. We look at your entire situation and devise a strategy that is as unique as you and your company’s problems; financial and emotional. The way we deal with this problem and devise a corporate restructuring plan, we know that we can help you and your company too.

We know that companies facing financial problems need a realistic lifeline. There is no “one solution fits all” approach with the Ira Smith Team. That is why we can develop a company restructuring process as unique as the financial problems and pain it is facing. If any of this sounds familiar to you and you are serious in finding a solution, contact the Ira Smith Trustee & Receiver Inc. team today.

Call us now for a free consultation. We will get your company back on the road to healthy stress-free operations and recover from the pain points in your life, Starting Over, Starting Now.

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BANKRUPTCY LAW, A SHOE STORE CHAIN AND GOLF: WHAT DO THEY HAVE IN COMMON?

bankruptcy law

If you would prefer to listen to the audio version of this BANKRUPTCY LAW, A SHOE STORE CHAIN AND GOLF: WHAT DO THEY HAVE IN COMMON? Brandon’s Blog, please scroll down to the bottom and click on the podcast.

Introduction

I am writing this Brandon’s Blog more as an interesting story for those that live in the GTA and enjoy golf. Although as you will see, bankruptcy law does play a major role in this tale, it really is a story about what is probably the most famous Canadian golf course.

Bankruptcy and Insolvency Canada

Before getting into the interesting Greater Toronto Area golf course story, by way of background to it, I will first describe the bankruptcy law aspect.

A bankrupt shoe store chain workers lost their jobs when a Receiving Order (as a Bankruptcy Order was then called) was made putting an Ontario shoe store chain, Rizzo & Rizzo Shoes Ltd., into bankruptcy. All salaries, wages, commissions and vacation pay were paid to the date of bankruptcy. The province’s Ministry of Labour audited the company’s payroll books and records.

The Ministry’s audit determined that although the employees were all paid up to date, liability for termination or severance pay was owing to former employees under the Employment Standards Act (ESA). The Ministry delivered a proof of claim to the bankruptcy trustee (now called a Licensed Insolvency Trustee) (Trustee).

The Trustee disallowed the claim under the provisions of the Bankruptcy and Insolvency Act (R.S.C., 1985, c. B-3) (BIA). The Trustee’s disallowance was based on the ground that the bankruptcy of an employer acts to terminate the employment of the workers. This does not constitute termination by an employer. Therefore, no such liability for severance or termination pay exists.

The appeal of the Trustee’s disallowance

The Ministry successfully appealed the Trustee’s disallowance to the Ontario Court (General Division). The Trustee appealed to the Ontario Court of Appeal. The appellate court restored the Trustee’s decision. The Ministry sought leave to appeal to the Supreme Court of Canada but ultimately terminated that application.

After the discontinuance of the appeal, the Trustee paid a dividend to Rizzo’s creditors, therefore leaving much fewer funds in the bankruptcy estate.

After that, five previous staff members of Rizzo applied to set aside the discontinuance, add themselves as applicants to the Supreme Court of Canada leave to appeal. An order was made approving them to continue the appeal.

The Supreme Court of Canada decision

In a 1998 decision, the Supreme Court of Canada ultimately decided that the bankruptcy of an employer does terminate the employment of the workers. However, the Court felt that it was necessary to take a wider view of the ESA. The Court felt that one of the objects of the ESA was to protect the rights of employees when they lost their job. A finding that the severance and termination pay sections of the ESA to not apply in bankruptcy circumstances is incompatible with both the object of the ESA.

The Court went on to find that the legislature does not intend to generate ridiculous results if employees dismissed before the bankruptcy of an employer would generate a completely different result than those employees who lost their job by the bankruptcy of an employer.

Therefore, the Supreme Court of Canada found that employee rights to severance pay or termination pay is a claim provable in bankruptcy even if the dismissal occurred by the bankruptcy of the employer. This claim is an ordinary unsecured claim and does not have any priority.

The broader effect of the Supreme Court of Canada Rizzo & Rizzo decision

The obvious effect of the Rizzo & Rizzo decision is the bankruptcy law decision. However, the decision also stands for the concept that a statue must be looked at in a broader context. The Supreme Court decision in paragraph 21 states that “…statutory interpretation cannot be founded on the wording of the legislation alone”.

It goes on to say that “Today there is only one principle or approach, namely, the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament.”. This codified what can be called a modern approach to the interpretation of legislation.

So what does this have to do with a golf course?

Looking at the title of this Brandon’s Blog, I think I have now covered off the first two parts, namely, bankruptcy law and shoe store. Now for golf! On October 23, 2019, the Court of Appeal for Ontario released its decision in Oakville (Town) v. Clublink Corporation ULC, 2019 ONCA 826.

All golfers in the GTA know that Clublink owns and operates a chain of golf clubs in Ontario and Quebec, as well as Florida. The most famous and iconic golf course in the Clublink family and all of Canada is Glen Abbey in Oakville, ON. Clublink purchased this golf course in 1999.

Glen Abbey was the initial golf course solely created by Jack Nicklaus, one of the greatest professional golfers of all-time. The style of the course shows a specific focus on the viewer experience. Along with this value, the Town of Oakville believes Glen Abbey has substantial historical value. Glen Abbey has held the Canadian Open 30 times – 3 times greater than any other course in Canada. It, therefore, is connected with some of the most memorable events in Canadian golf history.

The 18th hole is significant as a result of its connection to Tiger Woods. In the final round of the 2000 Canadian Open, he hit a six-iron shot 218 yards from a bunker on the right side of the fairway to about 18 feet from the hole. The shot had to fly over a huge pond protecting the green.

On October 22, 2015, Clublink told the Town that they plan to redevelop Glen Abbey into a residential and mixed-use neighbourhood. Clublink proposed to develop 3,000 to 3,200 residences and 140,000 to 170,000 square feet of office and retail space. If Clublink’s plan to build succeeds, the word “four” will no longer be yelled out on the property!

The Court case

In November 2016, Clublink submitted applications to change the Town’s Official Plan and zoning by-laws and looked for authorization of a plan of subdivision, in connection with its redevelopment plan of Glen Abbey. In 2017, the Town recognized Glen Abbey as a considerable cultural heritage property under s. 29 of the Ontario Heritage Act (OHA). This notification stated the property’s cultural heritage value according to the provincial requirements of the OHA.

Clublink did not object to the heritage designation. Rather, they made an application to the Town under section 34 of the OHA to demolish and remove Glen Abbey. The Town alerted Clublink that their s. 34 application was legally beyond the range of a section 34 OHA application but was correctly within the range of s. 33 of the OHA which permits an owner to relate to altering a designated property.

Clublink commenced its very own application in the Superior Court for an affirmation that they could make an application under s. 34 of the OHA “for the demolition and removal of buildings and structures on the lands municipally known as 1313 and 1333 Dorval Drive … including but not limited to the tees, greens, hazards, fairways and cart paths”. Clublink was successful in its application and the Town of Oakville appealed the decision to the Ontario Court of Appeal.

What is the difference?

A study of the OHA is not why I am writing this Brandon’s Blog. The important point to know is that under s. 33 of the OHA, the owner may appeal to the Conservation Review Board. The Conservation Review Board holds a hearing and produces a report, in which it is to recommend whether the application must or ought to not be authorized. The Conservation Review Board’s report is not binding on the metropolitan council.

Unlike s. 33, if the metropolitan council rejects the owner’s application under s. 34, the owner of the property can appeal to the Local Planning Appeal Tribunal (LPAT). The local council is bound by the LPAT decision.

So as you can see, Clublink needs the Court ruling to stand that its s. 34 application is the correct one.

Is a golf course a structure?

In order to be successful, Clublink needs to prove that a golf course is a structure. The application judge found that Glen Abbey is both composed of structures as well as the golf course itself is a structure for the objective of s. 34 of the OHA. Clublink had actually correctly mounted its application under s. 34.

The application judge reached this decision because of the uncontroverted evidence before him was that Glen Abbey was the product of substantial engineering, design and construction. Relying on judicial and also administrative decisions from other contexts, he decided up that a golf course fits within the meaning of a “structure” as being a “thing constructed”.

After a very lengthy analysis, the Ontario Court of Appeal, with one Judge dissenting, confirmed the lower court’s decision.

So what does this have to do with Canadian bankruptcies laws?

The majority decision relied upon the Rizzo & Rizzo case. The Ontario Court of Appeal followed the confirmation in the bankruptcy law case by the Supreme Court of Canada that a strict dictionary or common usage interpretation of the word “structure” was inappropriate. A “…statutory interpretation cannot be founded on the wording of the legislation alone”.

Rather, a wider modern law approach must be used. The “…words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention…”. Therefore, finding that a golf course has detailed engineering, design and construction, it is a structure and Clublink was correct.

This is how bankruptcy law ties into a bankrupt Ontario shoe store chain and a golf course. It took a bit of a journey to piece it all together, but I am so glad that you stuck with me.

Summary

As you can see, not everything necessarily is how it appears at first blush. When I look out onto a golf course, I would never say, “what a marvellous structure”, but it is.

In the same way, financial decisions that we make along the way do not always turn out as we once thought it would be. Sometimes these decisions are forced upon us by life getting in the way, and sometimes they are voluntary. Nevertheless, when financial hardships strike, you need to find a way to solve your financial problems.

Do you have way too much debt? Before you reach the phase where you can’t stay afloat and where financial restructuring is no longer a viable alternative, contact the Ira Smith Team. We know full well the discomfort and tension excessive debt can create. We can help you to eliminate that pain and address your financial issues supplying timely, realistic and easy to implement action steps in finding the optimal strategy created just for you.

Call Ira Smith Trustee & Receiver Inc. today. Make a free appointment to visit with one of the Ira Smith Team for a totally free, no-obligation assessment. You can be on your path to a carefree life Starting Over, Starting Now. Give us a call today so that we can help you return to an anxiety-free and pain-free life, Starting Over, Starting Now.

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STUDENT LOAN BANKRUPTCY DISCHARGE CANADA: REGISTRAR STRONG DECISION REVERSED

Introduction

Last month, I wrote about the decision in the decision of the Registrar in Bankruptcy sitting in the Court of Queen’s Bench of Alberta in Edmonton. The case, Morrison (Re), 2019 ABQB 521, dealt with the issue of student loan bankruptcy discharge Canada.

What happens to student loans if you declare bankruptcy?

This was an application according to s. 178( 1.1) of the Bankruptcy and Insolvency Act (R.S.C., 1985, c. B-3) (BIA). As a whole, student loans cannot be released by a bankruptcy discharge where the date of bankruptcy took place within seven years after the day on which the bankrupt ceased to be a full time or part-time student.

However, Section 178( 1.1) of the BIA, permits after 5 years after the day on which the bankrupt, with student loan debt ceases to be a part-time or full-time student, the Court may, on an application, order that such financial debt will be released. For such Canada student loan forgiveness, the Court needs to be assured that:

  • the bankrupt person has really acted in good faith about their commitments under their student debt loan agreement
  • the bankrupt will remain to experience financial difficulty to such an extent that the bankrupt will be unable to pay that financial debt

The appeal of the Registrar’s decision

I won’t go into all of the details leading up to Ms. Morrison’s bankruptcy. If you want to read about it, check out my September 4, 2019, Brandon’s Blog, CANADA STUDENT LOAN FORGIVENESS: BANKRUPTCY TREATS STUDENT LOANS FAIRLY.

The Registrar discovered that the timing of when Ms. Morrison filed for bankruptcy compared to the seven-year cut-off was very close. The bankrupt’s key interest and her intent at the time of meeting with the Trustee were to get a discharge from all of her creditors on equal ground. The Registrar decided that Ms. Morrison did not seek bankruptcy to avoid only her student loan debt but rather to deal with every one of her debt problems.

There was obviously miscommunication between Ms. Morrison and her Trustee. The problem was that the miscommunication aggravated her specified objective.

The federal government did not oppose the discharge. The Registrar decided that her student loan debt should be discharged. He made a conditional order of discharge taking everything, including her surplus income, into consideration.

Both Canada Student Loans (CSL), as well as Ontario Student Loans (OSL), appealed the Registrar’s decision to a Judge of the Court of Queen’s Bench of Alberta. The reason OSL was involved was that her education was in Ontario. She later moved to Alberta to pursue work opportunities.

The Commercial Court’s review of a Registrar’s decision

The Judge first considered what is the proper criteria he needs to use. He determined that when it comes to the Commercial Court’s review of a Registrar’s decision, the Judge stated that the criteria that need to be followed are:

  • findings of fact are deserving of deference unless there is an overriding and palpable error;
  • questions of the law and matters of principle are reviewed on the standard of accuracy and correctness;
  • concerns of mixed fact and law exist along within a range in between the above 2 requirements;
  • a mistake in characterizing or thinking about the correct legal examination to be used attracts accuracy; and
  • in order to disrupt a discretionary determination, the reviewing Court needs to discover that the Registrar erred in principle or in law or failed to think about an appropriate aspect or took into consideration an inappropriate factor, resulting in a wrong conclusion, thus allowing the assessing Court to use its discretion to replace the Registrar’s findings.

The Judge’s review of the Registrar’s decision

The provision of the BIA that Ms. Morrison applied under is Section 178(1.1) of the BIA. That section states:

“Court may order non-application of subsection (1):

(1.1) At any time after five years after the day on which a bankrupt who has a debt referred to in paragraph (1)(g) or (g.1) ceases to be a full- or part-time student or an eligible apprentice, as the case may be, under the applicable Act or enactment, the court may, on application, order that subsection (1) does not apply to the debt if the court is satisfied that

(a) the bankrupt has acted in good faith in connection with the bankrupt’s liabilities under the debt; and

(b) the bankrupt has and will continue to experience financial difficulty to such an extent that the bankrupt will be unable to pay the debt.”

The Judge stated that as the legislation indicates, the determination of whether either of the called for parts of “good faith” and “financial difficulty” is established is contextual and fact-specific. It is based upon considering all aspects of the particular situation. Also if pleased that the requisite elements are present, the Court still maintains a discretion to decline the granting of such relief.

Can you put student loan on bankruptcy – Good faith

The Registrar’s finding was that Ms. Morrison’s actions evidenced an underlying behaviour of good faith but that objective was overborne by life getting in her way. The Judge accepted the part that life got in her way might be real in regard to the very early post-student years of 2008-2014. However, he decided that starting in 2014 she began to make a relatively decent living, yet made no effort to start to repay her student loan debt.

The Judge analyzed Ms. Morrison’s behaviour once she started earning a better income in 2014 and her statements concerning why she filed for bankruptcy. He also remarked that it was plain from her rancour and annoyance directed at her Trustee because her strategy to have bankruptcy free her from her student loan debt failed. She felt the Trustee did not advise her properly on the timing of the bankruptcy as related to when she ceased to be a full-time or part-time student. She was upset that she had this student loan bankruptcy discharge Canada issue.

The Judge then reviewed what are the things he must consider in trying to determine good faith. He stated that the relevant cases suggest, good faith that has to be shown in order for the application to succeed connects to the loan, not the bankrupt’s general behaviour throughout the bankruptcy. He said the things he must consider are as follows:

  • whether the student loan financing was used for the desired purpose;
  • did the person complete the financed education;
  • has the education obtained provide financial gain to the bankrupt;
  • were reasonable attempts made to clear up the student financial debts;
  • has the person actually used available alternatives, such as interest relief or loan remission;
  • the timing of the bankruptcy;
  • do the student loan debt comprise a considerable component of the total debt;
  • did the applicant get enough work and earnings to be reasonably expected to make payments on the loan;
  • the way of life of the applicant;
  • whether the applicant had adequate income for there to be surplus income under the Superintendent of Bankruptcy’s directive;
  • what offers the bankrupt might have made to the lending administrators and their reactions; as well as
  • whether the bankrupt was hampered at any time with health problems which would have either reduced the amount the person could work or entirely eliminate the possibility of working.

In weighing all these factors, the Judge was of the view that what counted against Ms. Morrison was her absence of initiative in attempting to repay the debt on some basis. The Judge also found that, notwithstanding that Ms. Morrison has struggled both personally and financially, and had a run of rotten luck, this could not excuse her from failing to make any attempt to repay the student loans.

Therefore, the Judge disagreed with the Registrar. He found that she did not meet the test of acting in good faith.

How can I get my student loans forgiven in Canada – financial difficulty

Both CSL and also OSL contended that financial difficulty, unlike the Registrar’s conclusion, has not been proven as Ms. Morrison’s own evidence shows she has the ability to make some repayment towards the debt. CSL likewise suggested that the Registrar decreased the statutory limit for financial difficulty by finding that the evidence need only show that settlement will provide a hardship to her rather than revealing the bankrupt will be unable to pay the debt.

Section 178(1.1)(b) of the BIA states regarding financial difficulty:

“the bankrupt has and will continue to experience financial difficulty to such an extent that the bankrupt will be unable to pay the debt.”

The Judge took this section to indicate that, for the present as well as in the foreseeable future, the bankrupt’s financial position will not allow them to genuinely both pay their debts and subsist in an affordable method.

Therefore, in His Honour’s view, the idea of a settlement of student debt may well entail some challenges or hardship. It is just when the difficulty would deny an individual a level of practical subsistence that the “financial difficulty” aspect of this section comes into play.

Student loan debt Canada forgiveness – The decision on appeal

The Judge agreed with CSL that the Registrar had lowered the bar on the determination of financial difficulty from what is intended in the BIA. He also found that Ms. Morrison has some capacity to make some contribution towards retiring the student loan debts concerned. The evidence also showed that CSL and OSL were open to some sort of repayment offer.

Accordingly, the Judge determined that the demands of s 178( 1.1) have actually not been met by Ms. Morrison and her original application is unsuccessful. Therefore, he reversed the Registrar’s decision and allowed the appeal of CSL and OSL.

The Judge further ordered that she is, nevertheless, at liberty to make a re-application (in this bankruptcy) no earlier than one year from the date of his decision. He further stated that any re-application will need to be supported by proof of good faith in relation to any kind of settlement to either CSL or OSL as well as her full disclosure of her financial position at that time.

The Judge said he did not wish to “pile on”, so he did not order any costs to be paid.

Student loan bankruptcy discharge Canada summary

I hope that you have found this student loan bankruptcy discharge Canada information useful. Do you have way too much debt? Before you reach the phase where you can’t stay afloat and where financial restructuring is no longer a viable alternative, contact the Ira Smith Team.

We know full well the discomfort and tension excessive debt can create. We can help you to eliminate that pain and address your financial issues supplying timely, realistic and easy to implement action steps in finding the optimal strategy created just for you.

Call Ira Smith Trustee & Receiver Inc. today. Make a free appointment to visit with one of the Ira Smith Team for a totally free, no-obligation assessment. You can be on your path to a carefree life Starting Over, Starting Now. Give us a call today so that we can help you return to an anxiety-free and pain-free life, Starting Over, Starting Now.student loan bankruptcy discharge canada

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THE EASIEST WAY TO ACTUALLY LIKE WHAT IS A DIVISION i PROPOSAL ONTARIO

what is a division i proposal

If you would prefer to listen to an audio version of this what is a division i proposal Brandon’s Blog, please scroll to the bottom and click on the podcast

Introduction

Over recent times, I have been receiving increased inquiries as to what is a division i proposal. The purpose of this Brandon’s Blog is to explain what it is. No person or company actually likes to enter a restructuring process to avoid bankruptcy, so hopefully, this discussion will be helpful to those that really need it to appreciate why if necessary, it is actually easy to like it; especially a successful one!

What is a division i proposal?

Division I is one of the two divisions of Part III of the Bankruptcy and Insolvency Act (R.S.C., 1985, c. B-3). Division I is a restructuring provision. It is available to people who owe more than $250,000 and companies with any level of debt, in need of financial restructuring.

At the beginning of any consultation with an insolvent person or for an insolvent company, is to determine if a successful restructuring can be accomplished. If not, the only other realistic alternative is bankruptcy. A successful restructuring of a person will allow that person to keep the assets they wish to keep and can afford to hold onto.

A company that successfully restructures will continue to provide employment. The jobs that will be preserved are not only those of the company that restructures. Its continuing to do business with suppliers who continue to do business with the restructured company will also avoid layoffs or terminations of their own staff. The reason for this is that their own volumes will not decrease, or decrease as much as if its customers went bankrupt and could no longer buy from them.

How do I start a restructuring plan for a person?

The first thing the insolvent person or company needs to do is hire a licensed insolvency trustee (LIT) (formerly called a trustee in bankruptcy). The reason why is because a LIT is the only one in Canada authorized to administer a restructuring proposal.

The LIT will discuss with the insolvent person about the nature of his or her assets and liabilities. Which assets are financed and which are owned free and clear. There will also be a frank analysis and discussion of the person’s income and expenses. The reason for this is to do preliminary credit counselling to help the person recognize how their historical household budget (whether they actually knew it or not) needs to change. Is there room in a new solvent budget to pay for an expensive asset, or does it need to be replaced by a less expensive one? A leased or financed auto is a prime example.

I want to make that determination upfront because a financed asset given up before the debt is fully repaid will create an acceleration of the full amount of that liability claim. I will want to make sure that it is done the right way, so the new accelerated liability will be caught as a debt being compromised, not a post-filing debt not caught in the financial restructuring.

Once the issues have been identified and the realistic options identified, I will then want to work with the person to put together a realistic post-filing cash flow budget. There are three main reasons for this, being:

  1. I want to make sure that there is a budget that shows the person’s monthly expenses will be no more than, and hopefully less than, their monthly after-tax income.
  2. We must be sure that the monthly cash flow shows the person can afford the monthly payments to the LIT required to have a successful restructuring.
  3. One step needed to have a successful restructuring is to have such a monthly cash flow budget signed off by both the insolvent person and the LIT showing the person can survive through and afford a successful restructuring. Any creditor can request to see a copy of that signed off cash flow budget.

How do I start a corporate restructuring plan for a company?

The initial step in any corporate restructuring is for the board of directors to recognize and also resolve that the company is insolvent, that it needs to reorganize under this part of the BIA and to approve the hiring of a LIT.

I described the consultation process I first go through with a person to determine if they can successfully complete a restructuring proposal and then to start developing it. Similarly, I go through a consultation process with the senior management of the company.

I first want to determine if we have the basic requirement for a successful corporate restructuring. That basic requirement is, the company’s business, or one or more portions of the business, must be viable, notwithstanding that it is insolvent. There must be a true demand for the business and that it will be able to operate successfully once its financial position is right-sized. It may be the whole business, or it may be the case that we need to use the restructuring process to cut away the dead business units, in order to allow the viable one to survive and ultimately flourish.

By its nature, corporate restructuring is more complex than a personal one. There are many more moving parts to a company. However, the basic analysis is similar. What are the assets and liabilities of the company? Which business units are capable of being operated profitably? Which assets that are financed are essential to the future of the restructured company. Which are redundant and must be jettisoned. How will all the answers to these questions affect the company’s labour force? How many jobs will be lost and how many will be saved?

Ultimately, all these answers must be compiled into a cash flow statement. We must know does the company have sufficient financing or funds available to it so that it can properly operate during the restructuring process. There is no point in starting a restructuring if the company cannot survive the restructuring period. What will the company’s post-restructuring cash flow look like? We want to know that answer also to make sure that there is a real business that can operate profitably after coming out of the restructuring process. Just like in a personal financial restructuring, the company and the LIT must sign off on a realistic cash flow budget to show that the company can operate and survive the restructuring process.

What if the person or company needs immediate protection but is not ready to file the real proposal yet?

Just like in a bankruptcy, the filing of a Proposal brings in an immediate stay of proceedings. What this means is that no creditor can either begin or continue any action against the person or company for the enforcement or collection of a debt. Sometimes the insolvent debtor is under attack from a creditor.

Examples of proceedings against a person or company need protection from are numerous. The more standard ones are:

  • They need to defend a lawsuit but can’t afford the cost and therefore a default judgment is about to be issued.
  • Attendance is required at a judgment debtor examination to disclose the nature and whereabouts of their assets.
  • The Sheriff may be seizing an asset that if successful, it will stop the person or company from conducting business.

The BIA provides a way for an insolvent debtor under such an attack to invoke a stay of proceedings before they are ready to file their formal restructuring plan. That option is to first file what is called a Notice of Intention To Make A Proposal (NOI). This is a BIA filing that serves as a notification to the creditors that the debtor will certainly be making a restructuring proposal but it needs to have the stay of proceedings start right now.

How the concept of NOI evolved is very interesting. Before the 1992 amendments to the BIA, there was no such thing as an NOI. However, people and companies needed to invoke an immediate stay of proceedings, but the BIA did not contain such provisions. So, what was done, is that the LIT would prepare what was called a holding proposal. All the proposal said was that I promise to file a real restructuring proposal as soon as possible. That holding proposal was then filed which brought on a stay of proceedings.

Paperwork and procedures

The LIT needs to be satisfied that: (i) all the relevant details have been gotten; (ii) the person or company has a likelihood of a successful proposal restructuring; as well as (iii) the person’s or company’s cash flow is enough that it can pay its ongoing post-filing debts through the restructuring process.

The LIT then assists the insolvent debtor in completing the necessary paperwork. The LIT also prepares its own report. The LIT then does a mailing to all known creditors to advise them of the filing of the Proposal, a means by which they can file their claim with the LIT and a description of what the process is and what it all means. The documents are:

  • the Proposal
  • a statement of the person’s or company’s assets and liabilities
  • a listing of creditors
  • the form 31 proof of claim
  • the voting letter
  • LIT’s report on the insolvent debtor, the Proposal and the LIT’s recommendation for voting in favour of (or against) acceptance of the Proposal

The meeting of creditors is then held to allow the creditors to vote on the Proposal. If the Proposal is accepted by the required majority of the creditors, then the LIT applies to Court for approval of the Proposal. Once approved by the Court, it forms a contract between the debtor and the creditors is formed. The person or company then needs to perform the promises it made in the Proposal to its creditors. This, of course, includes paying the necessary funding to the LIT for distribution to the creditors.

Executing on the Proposal promise

The Proposal of a person will require that insolvent debtor to make monthly payments to the LIT. The payments are made out of the person’s monthly cash flow, as indicated in its budget. The person can take up to 60 months to fulfill the promise of payments to the LIT for distribution to the creditors.

A company carries out its Proposal as it continues its operations. It hopefully succeeds in operating profitably. The firm would be conserving a particular amount of its earnings in money and paying to the LIT what is needed under the company’s restructuring strategy to create the Proposal fund it promised. The LIT after that makes the distribution to the creditors called for in the restructuring plan. When all the payments have actually been made, the company has effectively reorganized and continues its business having successfully completed its restructuring.

What happens if a Proposal is unsuccessful?

This is a very simple question to answer. What is a division i proposal if not successful? It is called bankruptcy. If a restructuring plan does not get either acceptance by the necessary majority of creditors or approval by the Court, then the person or company is automatically bankrupt. If the person or company fails to make all the payments called for, that also creates an unsuccessful restructuring. In any of those cases, It is as if the insolvent debtor filed an assignment in bankruptcy.

In that case, the LIT administering the restructuring program becomes the LIT administering a bankruptcy.

What is a division 1 consumer proposal?

I have been asked this question several times. Firstly, there is no such thing as a division 1 consumer proposal, but there is such a thing as a consumer proposal. A consumer proposal is found in Part III Division II of the BIA. So, it is called either a division 2 proposal or a consumer proposal.

Is consumer proposal worth it?

Before being able to decide if a consumer proposal is worth it, we need to understand what a consumer proposal is. The same way I described what is a division i proposal, I need to describe a consumer proposal. The consumer proposal process is a streamlined version of the personal division i proposal already described. It is only for people and not companies. Further, the person cannot owe more than $250,000, not including any loans registered against the person’s home, such as a mortgage or home equity line of credit.

I have written many times about different issues concerning consumer proposals. Rather than repeating it in Brandon’s Blog, I recommend you read my earlier blogs on the consumer proposal topic. Some of the blogs I have written for ease of reference are:

Summary

I hope that I have adequately answered the question of what is a division i proposal and how you can like it. The honest answer is that no one really does. However, if it is necessary for you or your company’s survival, it becomes very easy to like it.

Do you or your company have way too much debt? Before you reach the phase where you can’t stay afloat and where financial restructuring is no longer a viable alternative, contact the Ira Smith Team.

We know full well the discomfort and tension excessive debt can create. We can help you to eliminate that pain and address your financial issues supplying timely, realistic and easy to implement action steps in finding the optimal strategy created just for you.

Call Ira Smith Trustee & Receiver Inc. today. Make a free appointment to visit with one of the Ira Smith Team for a totally free, no-obligation assessment. You can be on your path to a carefree life Starting Over, Starting Now. Give us a call today so that we can help you return to an anxiety-free and pain-free life, Starting Over, Starting Now.

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SINGLE SPOUSE BANKRUPTCY ON-DEMAND: LEGAL EFFECTS WHEN ONLY 1 SPOUSE FILES FOR BANKRUPTCY

Single Spouse Bankruptcy: Does Declaring Bankruptcy Affect Your Spouse?

You are in either a common-law relationship or are married. You are thinking about filing bankruptcy alone as a single spouse bankruptcy without your partner filing. You have actually possibly questioned just how will your bankruptcy affect your spouse. The bright side is that in the vast bulk of situations, your bankruptcy will have no influence on your spouse. In most cases, there will be no legal effects when only one spouse files for bankruptcy.

The purpose of this Brandon’s Blog is to discuss the financial and legal implications of a single spouse bankruptcy. No doubt the stress and strain of one spouse’s debt load will place a strain on the household and the partner. Providing marriage advice is not my specialty, but insolvency is.

How Will My Bankruptcy Filing Impact My Spouse’s Credit and a Non-Filing Spouse’s Income In Bankruptcy?

Each individual has a separate credit rating and a unique credit report. When married, people’s credit scores and credit reports are not blended. When both spouses are working, their respective employers do not blend or pool their combined monthly incomes.

There is no credit record or wage or salary aggregators that combine credit reports or incomes of married or common-law partners. That merely does not exist. So when people wed, their credit ratings are not combined or averaged in any way. They stay separate.

For example, if you open up a credit card in your own name and do not include your partner as a supplementary cardholder, the credit history and debt for that credit card will never appear on your partner’s credit history record. If you make your payments on that separate credit card and they’re on time, or even continually late, it does not aid or harm your partner’s credit rating. Different financial obligations are never ever reported on anybody else’s credit report and do not impact their credit score.

Marriage or a common-law relationship, does not alter the fact that credit scores and reports are not combined in any way. For that same reason if you file an assignment in bankruptcy on the separate debt it is also not recorded on your partner’s credit report and will certainly not influence their credit score.

Joint debt is where both you and your partner are responsible for that debt. If just one partner files for bankruptcy there is no impact on the non-filing partner’s credit rating. However, the non-bankrupt spouse remains responsible to pay that debt. If the non-filing spouse does not do so, then it will affect that spouse’s credit rating and score.

Not because their spouse filed an assignment in bankruptcy, but because they are fully responsible for a joint debt. That’s the trick. So in a single spouse bankruptcy, initially the filing for bankruptcy by one spouse does not impact the non-bankrupt spouse credit rating, it can affect their financial situation and possibly their credit rating if there are joint debts that go unpaid.

single spouse bankruptcy
single spouse bankruptcy

Single spouse bankruptcy: How Will Filing Bankruptcy Affect My Spouse’s Property Or Income?

The second reason why one spouse’s assignment in bankruptcy will generally not impact a non-bankrupt spouse is that spouses are allowed to own separate property in their separate names. Added to this, the vast majority of unsecured debts such as credit cards, or secured debts like car loans mortgages are created by contract.

This means that only the person who agreed to be liable for the debt can be affected by it. Except in rare instances, one spouse is not required to pay the debts that are solely those of when the other spouse files bankruptcy either through their wages or their assets.

If you have joint property, bankruptcy law does not allow your non-bankrupt spouse’s portion of that property cannot be taken to pay your debts. Your licensed insolvency trustee (formerly called a trustee in bankruptcy) (Trustee) only holds the bankrupt person’s interest in the property.

While joint property can sometimes be sold, the non-filing spouse’s portion of that property must be returned to the non-filing spouse. It is never used to pay the debts of the filing spouse. The non-bankrupt spouse would, of course, be the natural purchaser of the bankrupt spouse’s interest in such joint property.

If you are filing in Canadian bankruptcy proceedings and wonder how the bankruptcy process will affect your spouse’s income, you are most likely confused about how bankruptcy can affect your spouse’s income. Your spouse does not need to be a part of a bankruptcy. It is a common misconception that bankruptcy affects your spouse’s monthly income.

The truth is, the courts do not look into your spouse’s income at all in a single spouse bankruptcy. However, your spouse’s income may be included in the calculation of family income and household expenses to calculate if the bankrupt spouse has any obligation to make surplus income payments from the household monthly income to contribute to his or her bankruptcy estate.

The individual contributions to household income also affect the surplus income calculation. Most of the monthly living expenses have an effect on the surplus income calculation.

Does Single Spouse Bankruptcy Change the Nature of Joint or Co-Signed Debts?

So you open a new account with one of the credit card companies in your name and do not get a supplementary card for your spouse. In that situation, your partner does not get a card for your account. Therefore, your partner also did not consent to be collectively responsible with you on that credit card. If you fail to make a payment on that bank card, they cannot sue your spouse.

If they can’t sue your partner, they cannot get a judgment against him or her. If they can’t get a judgment, then they cannot garnish your partner’s wages. They can not take your partner’s different bank account or different assets. They can try to collect the credit card debt from the individual that consented to be liable for it. This does not change because of a marital or common-law relationship. Therefore, if you file a personal assignment in bankruptcy, your non-filing spouse’s separate property and income cannot be taken by either the Court or your Trustee.

If unsecured creditors report a joint debt in the single spouse bankruptcy estate on that person’s credit record, that does not influence the non-filing partner’s credit history. However, for any joint debt, or a debt of the filing spouse that is guaranteed by the non-filing spouse, that is a different story. The non-filing spouse must live up to his or her obligations, which includes the responsibility for that joint or guaranteed debt after the partner files for bankruptcy.

If not, then the unsecured creditor definitely has remedies against the non-filing spouse. Not because they are the non-filing spouse, but because they are equally liable for the unsecured debt. However, if a creditor incorrectly reports the joint debt as being included in personal bankruptcy on the non-filing partner’s credit report, I do suggest that the non-filing spouse writes to the credit reporting agencies to get it corrected. The reason for this is because the non-filing spouse is not involved in bankruptcy.

single spouse bankruptcy
single spouse bankruptcy

A Non-Filing Spouse’s Joint Debt: Can my spouse and I file for joint bankruptcy?

Section 155 (f) of the Bankruptcy and Insolvency Act (R.S.C., 1985, c. B-3) (BIA) states:

“in such circumstances as are specified in directives of the Superintendent, the estates of individuals who, because of their relationship, could reasonably be dealt with as one estate may be dealt with as one estate”.

Section 66.12(1.1) of the BIA states:

“Two or more consumer proposals may, in such circumstances as are specified in directives of the Superintendent, be dealt with as one consumer proposal where they could reasonably be dealt with together because of the financial relationship of the consumer debtors involved.”

So, it is possible for the individual debtors who are spouses to file a joint consumer proposal to avoid personal bankruptcies or if it is really the only solution, a joint assignment in bankruptcy. What is necessary is that there should be is that the majority of their debts are joint, even though they are individual debtors.

Each situation will be different. Many times I have advised couples that they should file jointly and not do a single spouse bankruptcy. This is most useful where if only one spouse files either a consumer proposal or bankruptcy, the other spouse will not be able on their own to pay the joint debts. A joint bankruptcy filing will be more streamlined and less costly than if each spouse filed separately.

When considering a joint filing vs. single filing, follow the financial advice the Trustee provides. I once had a situation where the husband came to see me. He needed to file, but so did his wife. The reason was because of the predominance of joint debts. I advised that it would be best for the husband and wife to come to see me together so that I could explain the benefits of a joint consumer proposal filing to both of them.

The husband, thinking that he was protecting his wife, was adamant that only he would file in a single spouse bankruptcy process. Against my recommendation, he insisted on filing alone. We filed his debt management plan consumer proposal. As expected, the creditors where the debts were joint, starting making demands on the wife. She was unable to pay up, so, she too had to file a consumer proposal with me.

The unfortunate part was that the sum of the amounts that needed to be paid for a successful consumer proposal was greater than if they had filed jointly. So, as a family household, it cost them more than it would have if they filed jointly.

Both the husband and wife each made all the payments required under their respective accepted consumer proposals. It is just too bad that the total paid was more than if they had filed jointly. As always, I gave my best recommendations upfront. Unfortunately, the advice was not followed.

Single spouse bankruptcy: Bankruptcy and the non-filing spouse – Say goodbye to debt stress

Now what we have discussed are simply generalities in a single spouse bankruptcy. There are situations that do not fit neatly within these rules but that’s why you need an experienced Trustee to help review your situation and provide you with information on legal effects when only one spouse files for bankruptcy.

Do you have way too much debt? Prior to you getting to the phase where you can’t make ends meet and your credit report looks awful, reach out to a licensed insolvency trustee (previously called a bankruptcy trustee). In fact, if you understand that you can’t pay your separate debts, contact us.

We understand the pain and stress excessive financial debt can trigger. We can aid you to get rid of that discomfort as well as address your financial affairs and problems by offering prompt action and the ideal plan. We will be able to advise you on the legal effects when only one spouse files for bankruptcy or a consumer proposal.

Call Ira Smith Trustee & Receiver Inc. today.

Make an appointment with one of the Ira Smith Team for a free, no-obligation consultation and you can be on your way to enjoying a carefree life Starting Over, Starting Now.

Give us a call today so that we can help you get back to a stress and pain-free life, Starting Over, Starting Now.

legal effects when single spouse bankruptcy
single spouse bankruptcy
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CANADIAN DEBT RELIEF: WHAT ABOUT “Government Approved” GRIPPING DEBT PROGRAMS?

canadian debt reliefIf you would prefer to listen to an audio version of this Canadian Debt Relief Brandon’s Blog, please scroll down to the bottom and click on the podcast.

Canadian debt relief: What is debt relief Canada?

Canadian debt relief is the reconstruction of debt in any kind of form so as to give the indebted person or company a measure of breathing space.

Canadian debt relief measures can take a number of forms. It can be through an informal process or formal process (discussed below).

I just read a recently issued Scotiabank Economics report that says Canadians are going deeper into debt. With that in mind, I believe it important to describe the Scotiabank findings and then discuss the options available for reliable Canadian debt relief.

Canadian debt relief: The Scotiabank findings

The main Scotiabank findings are:

  • Canadian home credit increased to a 2-year high in August 2019.
  • Residential mortgage growth posted a 2-year high, supported by a mid-July 2019 decrease in the mortgage rate used for qualification under the stress testing as well as a decline in posted home mortgage pricing.
  • Consumer credit growth struck a 10-month high on the whole but the year over year pattern was the same as July 2019.

The increase in overall household credit was boosted by a much easier borrowing environment. The main types of debt were fuelled by a strong acceleration in both mortgage loans as well as non-mortgage consumer liability growth. Right now Canadians’ household debt-service ratio is at an all-time high. According to the Scotiabank findings, that has not stopped Canadians from continuing their borrowing binge. It seems that super-low interest rates and a strong job market are providing Canadians with either confidence or blind ignorance, to continue to borrow.

With unpredictability staying at raised levels and worldwide demand weakening, business financial investment and exports are not going to be a force to keep the Canadian economy strong. Therefore, it is essentially up to people buying homes primarily in the Vancouver and Toronto housing markets and general consumer credit demand, with government spending, to keep the Canadian economy strong. So, it seems that for the foreseeable future, the Bank of Canada will keep interest rates low. It seems that interest rates will only increase in reaction to events from outside the Canadian economy.

How debt relief works in Canada

It is not that difficult to qualify for real Canadian debt relief services. You need to be insolvent, or at least, be unable to pay your financial obligations as they come due. I am not talking about a consolidation loan that you need to apply for. If you are trying for approval from one of the debt consolidation loans providers, you also need to be able to qualify for a new loan. If you are applying for a Canadian debt relief program that requires you to get a consolidation loan, and you don’t qualify for the loan, then you will not qualify for that type of debt management plan.

However, for financial relief that does not involve you borrowing money, the bar to qualify is set very low. All you need is to admit that you have a debt problem. Once you do that, you can certainly get help from one of the Canadian debt relief alternatives.

I will describe the various levels of Canadian debt relief programs, but first, I want to answer a question I am asked regularly. The question is: Can you get credit card debt forgiven?canadian debt relief

Canadian debt relief: Do credit card companies ever forgive debts?

I have never seen complete and full credit card forgiveness given by a credit card company (except for two situations described in this section). It is possible, to achieve partial credit card forgiveness, but it is not easy. Credit card companies generally will not give any form of forgiveness.

If you stop making your minimum payments, the credit card company will ultimately “ charge off ” a person’s credit card amount owing after giving them an R9 rating on their credit report. A charge-off takes place when an account is seriously overdue for credit card bills. That will be after 180 days of not making the minimum repayment.

Charging off the amount owing on the credit card is not writing it off or forgiving it. It is just a way for the credit card issuer to mark it as uncollectible and eliminate the debt from their active books. What is done when the debt is charged off, is that it is either given or sold to a collection agent. You may be able to make a deal with the collection agency to pay less than the full amount you owe. However, it will still be a substantial sum and has to be paid all at once.

There are only two exceptions to this I ever heard. One is a recent feel-good story. In August 2019, it was reported that Chase Bank announced that it was leaving Canada. Chase Bank issued and administered the Amazon.ca Rewards Visa and the Marriott Rewards Premier Visa in Canada. In order to exit Canada quickly, Chase Bank announced that it was forgiving all credit card amounts owed by clients of its two Canadian charge cards. Highly unusual.

The only other exception is not such a feel-good story. If a person dies and the deceased Estate has no cash available after the funeral and testamentary costs or worse, has no assets including cash, then the credit card company is going to have no choice but to write off the liability. The Estate Trustee will, of course, have to provide proof that there are no funds available.

Canadian debt relief: Informal options

There are various informal debt-relief options available in Canada. The most common options are:

Debt consolidation

When when we hear the words debt consolidation we understand that it is the process of qualifying for and taking on a brand-new loan, in order to repay many or numerous smaller debt obligations.

Consolidating debt involves borrowing money. The concept is that either:

  • your credit rating is good enough so that you can take on the new unsecured debt; or
  • you have decided to offer security for the loan.

The primary purpose of resolving your debt via this type of borrowing is to lower the overall interest costs you are currently paying across many credit cards and other debt.

Credit counselling

Credit counselling can solve debt problems and supplies you with the skills to live debt-free. Credit counselling solutions consist of teaching proper budgeting, how to use debt sensibly, rebuilding credit and debt management programs.

A word of caution. Please make sure that if you want a credit counselling program that has a qualified and licensed non-profit credit counsellor, you reach out to a real Canadian debt relief provider such as a credit counselling agency and not a debt settlement company.

The Financial Consumer Agency of Canada has provided a stern warning for consumers to be careful when considering using a debt settlement company. Do not be pulled into what looks like the cheapest Canadian debt relief company. The danger signals and warning signs that the Agency warns consumers about are:

  • High-pressure sales
  • Unrealistic assurances
  • High costs
  • Companies collecting monthly payments from you to pay to your creditors supposedly for an agreed-upon settlement amount but postponing repayments to the creditors and never coming up with a real Canadian debt relief plan.

Debt settlement

I have also written about the dangers of debt settlement companies. In 2017, I wrote about the study by the Office of the Superintendent of Bankruptcy (OSB) on debt settlement companies. The main findings of the OSB report were that in 2016:

The OSB record indicates that in 2016:

  • 17 % of all consumer proposal filings, the customer reported having spent first for debt counselling from a debt settlement firm before being directed to a Licensed Insolvency Trustee (LIT) (formerly called a bankruptcy trustee).
  • 57 % of the consumer proposal filings for which earlier debt settlement guidance was obtained, the LITs had connections with 2 large-volume debt settlement businesses. These 2 companies stood for 64 % of the total LIT fees reported in 2016 consumer insolvency filings for debt settlement advice before submitting to an insolvency proceeding with a LIT.
  • Thirteen LIT firms, that included one national-level business, were discovered to have numerous LITs operating in regular partnership with large-volume debt settlement firms.
  • For about 50 individual LITs within these 13 firms, better than 40% of their consumer proposal filings were sourced from these debt settlement organizations. For about 20 of those LITs, more than 90% of their consumer proposal work originates from these 2 businesses.

Debt settlement companies have long used scare tactics with consumers to attract business. They tell consumers that all a LIT wants to do is put them into bankruptcy. Nothing could be further from the truth. As seen by the OSB study results, consumers were paying debt settlement firms fees with money they could not afford to pay. When they could not pay any longer, the debt settlement company then referred the people to their favourite LITs! Now that is the pot calling the kettle black. The OSB was also concerned about the business arrangements being made between debt settlement outfits and LITs.

Since then, the OSB has introduced amendments to practices that LITs must follow concerning credit counsellors and business arrangements with a view to curb this behaviour. For the record, I and my Firm have no relationship with any debt settlement company.

Canadian debt relief: What about “Government Approved” debt programs?

There are only 2 Canadian government debt relief programs in our country: (i) consumer proposal; and (ii) bankruptcy, which is the most drastic one.

I have written about consumer proposals many times. A consumer proposal is the only structured formal procedure sanctioned by the Government of Canada under the Bankruptcy and Insolvency Act (R.S.C., 1985, c. B-3) (BIA). This process permits insolvent people to make an official offer with specific terms, to pay their creditors less than the full amount owing in full settlement of all debts. This federal government authorized debt settlement strategy is to pay back only a portion of what you owe and you can take as long as 5 years of routine monthly payments to do so.

To qualify, a person must be insolvent and owe $250,000 or less to all creditors, other than for any financial debts protected security against their principal home. The most common examples are either a home mortgage or home equity line of credit registered against the real estate. The consumer proposal process provides protection from creditors. It is aimed at compromising unsecured consumer debts, including income tax debt, while the debtor makes regular payments. The end result of a successfully completed consumer proposal is debt cancellation of your remaining outstanding debts.

A consumer proposal is a streamlined process meant to either reduce or totally eliminate the need to go to Court. A successful consumer proposal allows the person to avoid bankruptcy while ultimately discharging all of his or her debts for an amount much less than the total amount owed.

Canadian debt relief summary

Since the purpose of this Brandon’s Blog is about eliminating your burden of debt before having to consider bankruptcy, I won’t discuss the bankruptcy topic here. Of course, anyone wanting to find out more about either a consumer proposal or bankruptcy can always call me.

Do you have way too much debt? Prior to you getting to the phase where you can’t make ends meet and your credit report looks awful, reach out to a licensed insolvency trustee (previously called a bankruptcy trustee). In fact, if you understand that you can’t pay your financial debts, contact us.

We understand the pain and stress excessive financial debt can trigger. We can aid you to get rid of that discomfort as well as address your financial problems by offering prompt action and the ideal plan to give you freedom from debt.

Call Ira Smith Trustee & Receiver Inc. today.

Make an appointment with one of the Ira Smith Team for a free, no-obligation consultation and you can be on your way to enjoying a carefree retirement Starting Over, Starting Now. Give us a call today so that we can help you get back to a stress and pain-free life, Starting Over, Starting Now.

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CREDIT REPORTING BODY: WILL THE STATUTE OF LIMITATIONS ERASE MY DEBT?

What is a credit reporting body?

A credit reporting body is also known as a credit bureau or credit reporting agency. It collects, saves, makes use of and reveals personal credit scores about individual consumers. The bureau refines these details to report on the credit rating or creditworthiness of a person. Businesses considering extending credit to people subscribe to and make use of such a credit reporting body.

One thing the bureaus do is report a listing and condition of your debts. More on this below. People with financial problems who come to see me many times are confused as to how a credit reporting agency operates. Many times people are confused between the credit reporting agency’s reporting of debts where the creditor can no longer sue. The reason they can’t sue is because of the statute of limitations in Ontario (again, more on this below). Yet, the debt is still listed by the credit bureau.

I recently came across an Ontario court decision, that describes perfectly why debts can still be listed on your credit report, even though the creditor has run out of time to sue you.

What are the major credit reporting agencies in Canada?

In Canada, there are 2 such reporting companies for consumers: Equifax and TransUnion. For companies, one of the most prominent credit reporting company is Dun & Bradstreet Canada.

How do I get a free copy of my credit file?

You are able to get your complimentary credit report once every 12 months from each of the two nationwide rating companies. If you need a current report more often than that, you can pay TransUnion or Equifax to get it. You can get your credit report by phone, fax, online or in person. Each credit bureau provides instructions on how to do it.

There are also two online services that will provide you with your credit score and report for free. They are Borrowell and Credit Karma Canada.

The Court case

This court case was somewhat unique in that it was a small claims court case. The 10-page decision clearly shows that a statute of limitations will not erase the debt. The case is Harvey v Capital One Bank, 2019 CanLII 69716 (ON SCSM).

Mr. Harvey sought $25,000.00 against Capital One Bank for purportedly posting to the credit reporting body firms, defamatory details impacting his professional reputation. Mr. Harvey admits he owed money to Capital One however asserts the debt can no longer be pursued, as it is beyond the 2 year limitation period for enforcement according to the Ontario Limitations Act, 2002, S.O. 2002, c. 24, Sched. B. Capital One Bank confessed it reported the debt but was fully justified in doing so according to the Consumer Reporting Act, RSO 1990, c. C.33.

The agreed statement of facts

Mr. Harvey and Capital One Bank submitted an Agreed Statement of Facts:

  1. Mr. Harvey had two Capital One Bank accounts. The account concerned was opened up on or about March 5, 2009. The second account was opened on or around June 2018.
  2. Mr. Harvey was contacted by collection firms acting on behalf of Capital One from 2015 to 2018 in an attempt to collect the debt.
  3. Capital One provided disclosure regarding the terms of the account when Mr. Harvey was originally authorized. He received duplicates of the account statements created, which were accurate, consisting of the balance owing, repayments, interest and fees or charges. All rates of interest and various other fees were correctly applied.
  4. Mr. Harvey was advised many times that his failure to pay the outstanding balance would be reported to the credit reporting body companies and it can adversely affect his credit rating.
  5. Mr. Harvey paid $200.00 on the account in question on October 27, 2014. He failed to make the minimum payment due on December 4, 2014. He as well failed to make any type of subsequent repayment, other than for a $200.00 payment around August 20, 2018.
  6. When Capital One charged off Mr. Harvey’s very first account on June 2015, the balance owing was $841.78.
  7. All details about the Capital One debt in the credit reports generated by Mr. Harvey were accurate and true, with the exception of one amount of $1,449.00 for a different Capital One account which Mr. Harvey would not admit to. In his testimony, he deposed that he has no particular memory of the components of that account or any understanding of the accuracy of the information.
  8. Other non-Capital One credit accounts referenced in Mr. Harvey’s credit record included unfavourable credit history reports. Some of his other non-Capital One credit rating accounts had actually been charged off and sent to a debt collector.
  9. Mr. Harvey acquired a brand-new Canadian Tire Bank MasterCard around January 2019 with a $300.00 credit line, a brand-new FIDO cell phone account around September 2019, a brand-new credit line for a car loan of $22,465.00 around September 2019 and also a new Capital One MasterCard with a credit line of $300.00 around June 2018.

Capital One Bank’s evidence

Capital One’s evidence was straight forward. Credit cards revolve and are reported to the credit reporting body companies on a regular monthly basis. There is a standard conventional rating system used by all financial institutions when reporting to the reporting agencies:

Rating scoreMeaning
R1Indicates settlement on time or 1 to 30 days delinquent.
R231 to 60 days delinquent
R361 to 90 days overdue
R4120 days overdue
R5121 to 150 days overdue
R6Does not exist
R7Used only for credit counselling and bankruptcy
R8Repossessions
R9Account has been charged off

Mr. Harvey’s Capital One debt was reported to the credit bureaus in conformity with the legislation. By April 9, 2015, the account, 5 months overdue, was completely limited, meaning it cannot be re-opened to make purchases. An R5 score was reported to the credit reporting body companies. By May 9, 2015, it was 6 months overdue. R5 was reported once again.

Once it is 180 days past due, the account is charged off and also an R9 rating is reported. When an account is charged off, it is still reported to the credit reporting agencies and remains an R9 score. After the account was charged off, Capital One engaged various collection companies as normal to attempt to collect the debt.

As the account remains overdue, Capital One continues to report to the credit bureaus up until reporting becomes statute-barred after seven years, based upon the date of the very first payment missed. That was December 4, 2014.

This 7-year reporting period is based on legislative provisions for credit report coverage. After seven years, Capital One makes one final entry in the record which erases the entire line from the credit bureau history. The credit reporting body companies have a similar procedure so they will remove this information also.

The Court’s analysis

The Court’s analysis was simple. It rejected all of the plaintiff’s submissions. The Court stated that the plaintiff never even produced any evidence in support of his claim that he has suffered damages through a loss of reputation.

The Court correctly analyzed the situation. The Deputy Judge found that by Mr. Harvey’s own admission the debt was never paid and stays outstanding. Capital One is not insisting on a claim to title; it is asserting its right to report an unpaid debt throughout the 7-year reporting period under the Ontario Consumer Reporting Act. The Ontario Limitations Act and Consumer Reporting Act serve completely different legislative purposes. They are also not in conflict.

The Court sided with Capital One’s position that the case relied upon by Mr. Harvey entails an argument concerning a right vs. a remedy. In Ontario, the limitation period acts to limit the remedy to sue but not the right to be repaid.

The Court’s decision

Capital One Bank lost the right to sue Mr. Harvey after the 2-year period expired. However, on a mutually exclusive basis, it had the right to report the outstanding amount owing for a 7-year period under different provincial legislation.

The Court further stated that the ramifications to companies extending credit to others might be harmed if such information was inaccessible, merely because the creditor did not commence legal proceedings for repayment of the debt prior to the 2-year limitation period. A person’s failure or refusal to pay their debts is vital details for other creditors, to whom that very same borrower has looked to for more credit.

The Court, therefore, found in favour of Capital One Bank and awarded costs against Mr. Harvey.

Summary

This case perfectly answers the question many people ask me when they come for their free consultation. The question is either: (1) Why is this debt still showing up on my credit report because it is too late for the credit card company to sue me?; or (2) Does the statute of limitations erase my debt? As seen in Mr. Harvey’s case, the limitation period and the reporting period are two different and separate issues.

Do you have way too much debt? Prior to you getting to the phase where you can’t make ends meet and your credit report looks awful, reach out to a licensed insolvency trustee (previously called a bankruptcy trustee). In fact, if you understand that you can’t pay your financial debts, contact us.

We understand the pain and stress excessive financial debt can trigger. We can aid you to get rid of that discomfort as well as address your financial problems offering prompt action and the ideal plan.

Call Ira Smith Trustee & Receiver Inc. today. Make an appointment with one of the Ira Smith Team for a free, no-obligation consultation and you can be on your way to enjoying a carefree retirement Starting Over, Starting Now. Give us a call today so that we can help you get back to stress and pain-free life, Starting Over, Starting Now.

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