I had a call from an individual who had no assets and no surplus income, but debts well in excess of $20,000. These debts consisted primarily of credit cards, bank loans, and some CRA debt for HST.
Given the individual’s predicament, he could not afford to continue making payments on all of the debts. The creditors had commenced collection calls, so he had to do something to take control of the situation. The most obvious and cheapest solution was to file for Bankruptcy.
However in discussions with the individual, he revealed that he had sold his principal residence in the last year and used the net equity of $100,000 to repay friends of his 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 Bankruptcy and Insolvency Act, and it would be prejudicial to his other creditors who should have been entitled to their share of the $100,000 equity. We advised him that we would have to disclose this preferential payment to his creditors whether he elected to file for bankruptcy or choose to do a consumer proposal, which was the other option open to him. 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 Trustee would have had to try and recover the payment to his friends and this might have prevented him from getting out of Bankruptcy automatically after 9 months. Therefore the individual’s preferred option was to file a Consumer Proposal and pay a reduced settlement amount out over 5 years. He was able to accomplish this within his monthly budget, and the creditors accepted the offer as they felt it was fair in relation to his personal and financial situation. Although he paid more than he would have in a Bankruptcy on the surface, 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