Date 20.01.15
Determining If Asset Issues Will Get in The Way of Resolving Your Debt Pressures
Assisting people with their debt pressures is always an interesting (and often) challenging career, case in point: I had a call from an individual who had no assets and no surplus income, but debts of more than $20,000. These debts consisted primarily of credit cards, bank loans, and some CRA (Canada Revenue Agency) debt for business-related HST.
Given the individual’s debt load, he could not afford to continue making payments on all the debts. The creditors had begun to harass him with collection calls, so he had to do something to take control of the situation. The most obvious (and the most affordable) solution was to file for protection from the creditors through Bankruptcy.
However, in discussions with the individual, he revealed that he had sold his principal residence within the previous 12-month period and used the net equity he received when the sale closed (of around $100,000) to repay some friends who had helped him financially over the last few years. From his perspective, this was the morally correct thing to do for his friends. However, from a legal perspective this would be considered a Preferential Payment under the BIA (the Bankruptcy and Insolvency Act), and it would be prejudicial to his other creditors who should have been entitled to their share of that $100,000 equity.
We advised him we would have to disclose this preferential payment to his creditors whether he elected to file for bankruptcy or chose to file a consumer proposal instead, which was the other option open to him under the BIA. Under the Consumer Proposal, if creditors would accept his proposed settlement with full knowledge of the preferential payment, then there would be no further action to try and recover the $100,000 for the benefit of all creditors. If he had elected to file for Bankruptcy, then we as Licensed Insolvency Trustees would have had to attempt a recovery of the payments to his friends, and this might have prevented him from getting out of Bankruptcy automatically after nine months.
Therefore, based on this information once discussed by us with him, he was to file a Consumer Proposal and pay a reduced settlement amount out over five years. He was able to accomplish this within the restrictions of his monthly budget, and his creditors (the companies he owed money to) accepted the offer — They felt it was fair in relation to his personal and financial situation. Although he paid more than he would have had to in a Bankruptcy (before the net equity issue was dealt with), it provided him with the following benefits:
- He avoided having to go to court to get out of Bankruptcy, which would have been a costly and lengthy procedure
- He avoided the embarrassment of the Insolvency Trustee contacting his friends and trying to recover the $100,000
- He still got the overall relief from his debts that he was looking for, paying off significantly less than he owed
- He gained certainty in how the creditors would react to the preferential payment
- He was in a better position to start rebuilding his financial affairs
If you are unsure if your assets might get in the way of a settlement solution for your debt pressures, the best way to find out is to book a free consultation with one of our trusted insolvency professionals by clicking on the FREE CONSULTATION button, below, or by giving us a call today. Our Debt Solutions Managers and our Licensed Insolvency Trustees are here to work with you to resolve your debt pressures.