Financial Restructuring FAQ’s

Frequently Asked Questions

Check out the answers to some of the most common questions we are asked about financial restructuring:

General

One of the most obvious signs that you may need to restructure debt is the inability to make your monthly debt payments. You may be taking out payday loans or borrowing from one credit line to pay another. You could have also reached your limits which means that you may have started to miss payments and default on your debts.

Time is of the essence when it comes to debt management. You do not have to wait until you have serious financial problems. This is why it is also important to look for some less obvious signs that point to the need for debt restructuring such as when your cash flow is barely covering your monthly expenses and some of your bills are going unpaid.

Personal finances can be complicated so even if you simply want to discuss your current situation, we are here for you.

If you are missing or have defaulted on payments to creditors you have likely already damaged your credit.

When you restructure your debt, the proceedings will affect your credit rating but they will also allow you to rebuild your credit. It is important to understand that credit rating is fluid and it can change. We provide you with financial counselling and the tools and support you need to get your rating back on track!

Let’s look at the different items and how they report to your credit:

  • Payments that are more than 30 to 150 days late – these items can be restored to good standing once paid in full, but the record of each late payment remains on your credit report for 6 years from the date it was paid in full.
  • Payments defaults of 6 months or longer report to your credit for 6 years from the date they are settled or paid in full.
  • Repossessions report to your credit for 6 years from the date they are settled or paid in full.
  • Judgements report to your credit for 6 years from the date you resolved them.
  • A consumer proposal will affect your credit, while in the proceedings, and for 3 years from the point that you have paid your consumer proposal in full.
  • A first-time bankruptcy affects your credit, while in the proceedings, and for 6 years from the date it is discharged.

As you can see – any issue with making your monthly payments will impact your credit. Though, in the example of a consumer proposal, 3 years from your discharge, the negative debt ratings will fall off the credit report. However, if you leave defaulted or habitually late payments on your credit, they could end up being there for much longer. The key is to restructure and start the rebuilding process as quickly as possible.

In a bankruptcy, the majority of times, you can keep your assets.

There are exemptions applied to specific classes of assets, under both federal and provincial legislation, that allow you to keep them. Though, in situations where the equity of the asset exceeds the exemptions, a choice will have to be made whether to keep the asset or to release your interest in it.

During a free, no-obligation consultation, we can discuss your personal situation and explain how a consumer proposal or bankruptcy would impact your assets including your home(s) and vehicle(s).

There are many debt restructuring options available to you, but the right one depends on your personal circumstances. Some restructuring options include:

  • Budgeting;
  • Debt Consolidation;
  • Debt Settlement;
  • Consumer Proposal;
  • And Bankruptcy.

Many types of financial restructuring can reduce the amount of money you have to pay back towards your overall debt:

  • Debt settlements – creditors will voluntarily settle debts (if you only have 1 or 2 creditors that you are dealing with this can sometimes be an option).
  • Consumer Proposal – through a consumer proposal you can reduce the amount of money you have to pay back towards your overall debt. The amount you pay back will be based on a variety of factors and can be a significant reduction.
  • Bankruptcy – in bankruptcy generally your monthly payments are based on your income and if there are any assets that need to be considered. Your surplus income determines the length of your bankruptcy. The sum of your payments in bankruptcy will almost always be far less than the total of the debt.

Note: in a consumer proposal or bankruptcy, interest stops the moment you file, so that also presents huge savings as the debt does not grow further.

Unsecured debts that may be included:

  • Personal debts;
  • Creditor debt – credit cards, lines of credit, and loans;
  • Tax debt;
  • Payday loans;
  • Overdrafts;
  • Student loans more than seven years old;
  • And private bill payments – cell phone bills, gym memberships, etc.

An unsecured creditor is a creditor who provided you credit without taking any security. A secured creditor has a security against the debt owed to them. Some examples include:

  • You own a home – your mortgage provider is a secured creditor. If you have a line of credit, they may have also secured it against your home. In case you default on tax debt and CRA puts a lien on your home, they become a secured creditor.
  • You have a car loan or lease – your car loan/leasing company will place a lien on your vehicle which makes them a secured creditor.
  • Liens – when an unsecured creditor registers a lien against your asset, it then secures the loan.

Debts that fall under section 178 of the Bankruptcy and Insolvency Act.  Most commonly these include:

  • Family responsibility (alimony or child support);
  • Certain debts arising from fraud or misrepresentation;
  • Fines and penalties imposed by the courts;
  • And student loans less than seven years old.

A consumer proposal is an alternative to a bankruptcy.

We’ve seen from our interactions that many British Columbians are often surprised to learn that there is another legislative debt solution besides a bankruptcy.

A proposal is an offer to your creditors that compromises your total debt to be repaid. In general terms, we will offer your creditors more than what they would have received if you filed for a bankruptcy. It is usually in their best interest to accept the proposal. The offer stating how much you will repay towards the debts you owe and over what terms is shared with your creditors. If a majority of your creditors, in terms of dollar value, choose to accept the proposal, it is binding on all the creditors.

A bankruptcy, on the other hand, is a legislative process that does not require acceptance from your creditors. It allows you to get a fresh start by discharging your responsibility for your current debts.

Bankruptcies are slightly more complicated as they consider your earnings each month and the assets that you have. Your family size and income level are the factors that determine the length of the bankruptcy and the requirement for surplus income payments each month. Your assets, should they be above the exemptions amounts, are also considered in the bankruptcy process.

One key difference between the two options is that the length of the bankruptcy and amount of monies to be paid into the bankruptcy are not certain, while in a consumer proposal, once accepted, you will have to make a payment for a specific amount over a specific time period. In a proposal, you can also accelerate the proceedings by increasing your monthly payments whereas in bankruptcy you cannot increase your payments to receive your discharge earlier.

Surplus income is a component of a bankruptcy proceeding. The Bankruptcy and Insolvency Act defines surplus income as “the portion of a bankrupt individual’s total income that exceeds that which is necessary to enable the bankrupt individual to maintain a reasonable standard of living…”.

LITs apply this definition to the rules set out under the Directive for surplus income and determine whether an individual has surplus income or not. Your family size will determine the standard that is applied to your income.

Surplus income in a bankruptcy scenario generally affects two things:

  • The length of a bankruptcy proceeding;
  • and the amount required to pay into the proceedings for surplus income.

If your income falls below the standard set for surplus income requirement your discharge will happen sooner and there is no requirement to pay for the surplus income.

If your income is above the standard set for the surplus income requirement your discharge is delayed by 12 months (on a first or second bankruptcy scenario) and the requirement for payment is 50% of the surplus income.

Consumer Proposal

In a consumer proposal, a licensed insolvency trustee makes a proposal to your creditors. The proposal amount is calculated on the basis of the amount of money you can afford to pay every month for usually 5 years. Then, a repayment plan is agreed upon and put into place.

Example: Your debt is $60,000.00 and your proposal is set for $200 per month over 5 years. The monthly amount would total $12,000.00 and so you would make a proposal to repay $12,000.00 over 5 years at $200.00 per month based on a total debt of $60,000.00.

In a consumer proposal:

  • You make a single monthly payment over a prescribed time period.
  • Interest on your debts stops.
  • Your creditors must stop collection action – this includes wage garnishments and frozen bank accounts.

You make a monthly payment to your licensed insolvency trustee each month which is then dispersed to your creditors. You can also accelerate the payments to reduce the length of the proposal should you wish to do so.

When you file a consumer proposal you receive a “Stay of Proceedings”, and unsecured creditors must stop collection actions.

This means if you are being garnished by the court or CRA, they must lift the garnishment.

The phone calls must stop, as all communications with your creditors goes through the trustee.

A consumer proposal enables you to get a true fresh start.

Bankruptcy

A bankruptcy is a legislative solution administered by a licensed insolvency trustee. The trustee will perform a calculation based on your income and assets.

Based on this the trustee will provide you with a monthly payment that has to be paid over 9 – 21 months, depending on if you have surplus income or not (24 or 36 months if this is your second time filing). The amount you must repay is based on your ability and not on the amount of debt you have.

In the event that you have substantial surplus income, which means that payments in a bankruptcy would be too large, your trustee may recommend making a consumer proposal to your creditors instead of a bankruptcy.

In a bankruptcy, your trustee will file your taxes.  You have to make your monthly payments, report your monthly income, and participate in 2 financial counselling sessions.

During this time, you are “undischarged”. Once you have made the prescribed number of payments, dealt with any assets, and have completed your credit counselling you will become eligible for an automatic discharge.

You stop making payments to your creditor and start making payments to the licensed insolvency trustee.  The trustee disburses the funds to your creditors on your behalf.

Like a consumer proposal, you receive a “Stay of Proceedings”, in a bankruptcy, which means that unsecured creditors must stop collection action. This means if you are being garnished by the court or CRA, they must lift the garnishment. The phone calls must stop, as all communications with your creditors goes through the trustee. A bankruptcy can enable you to get a true fresh start.

Tax Debt Questions

CRA does not usually accept voluntary, taxpayer negotiated settlements. The only ways to reduce a tax debt are:

  1. An application for taxpayer relief – this may only provide some relief of penalties and interest; principal debt will not be reduced and most of these applications are rejected.
  2. A consumer proposal.
  3. A bankruptcy.

Penalties:

  • Late filing: 5% of your balance owing and 1% of your balance owing, per month for up to 12 months. If CRA charged a late filing penalty on returns in any of the 3 years, preceding the current late filing, the penalty is 10% of your balance owing and 2% of your balance owing, per month for up to 20 months.
  • Repeated failure to report income: If you failed to report income in the 3 tax years, preceding a current failure to report income, the penalty is 10% of the amount you failed to report for the current year and 50% of the difference between the understated tax and the amount of tax withheld (related to the amount you failed to report).
  • False statements and omissions: if you knowingly or through gross negligence have made false statements or omissions on your tax return, the penalty is equal to the greater of $100.00 or 50% of the understated tax and/or overstated credits relating to the false statement or omission.
  • Interest: interest is charged on the tax debt owed as well as the penalties and is charged retroactively. The rate of interest CRA charges changes from time to time. See prescribed interest rates here Prescribed interest rates – Canada.ca.

For more information about CRA penalties and interest visit Interest and penalties – Canada.ca

CRA has significant powers when it comes to collection and enforcement. Unlike other creditors, CRA does not need to get a court order to garnish your wages or seize your assets. CRA can:

  • Freeze your bank account;
  • Garnish your wages – up to 50%;
  • Garnish soft income like pensions – up to 100%;
  • Send set-offs to your customers – in the case of contractors and consultants;
  • Place liens on your property and more.

If CRA is contacting you about a debt, it is prudent to get advice in a timely manner (before they commence enforcement action). In the case of garnishments and frozen accounts – a consumer proposal or bankruptcy will stop those immediately.

Your bank cannot remove the freeze once CRA has placed it. The only ways to get your bank account unfrozen are:

  • By paying your tax debt in full.
  • By making an arrangement with CRA that they will accept to lift the freeze voluntarily.
  • Through a consumer proposal.
  • Through a bankruptcy.

The only ways to get a CRA garnishment reduced or removed are:

  • By paying your tax debt in full.
  • By making an arrangement with CRA that they will accept to lift or reduce the garnishment.
  • Through a consumer proposal.
  • Through a bankruptcy.

Video Clips from the Superintendent of Bankruptcy

Discussing your options with a Licensed Insolvency Trustee

Submitting a consumer proposal to your creditors

Understanding the bankruptcy discharge

Bankruptcy and surplus income payments

Do you have questions about Financial Restructuring?

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