Individuals who are undischarged bankrupts cannot be directors of Ontario corporations. For this and other reasons, many clients wish to avoid a bankruptcy filing.
Several practitioners have contacted me to find methods of avoiding bankruptcy, so today I will provide a simple outline of your clients’ choices. Although I will be considering individuals, the story is similar, though more complicated, for corporations.
Budgeting
The most common reason for personal insolvencies is simply excessive spending. Easy credit has allowed most Canadians to incur excessive debt from overspending. (For more on this topic, see CGA Canada’s report on Canadian household debt.) The first step in addressing this problem is to reduce spending, and the best way to do this is to develop and then follow a household budget.
Many people simply do not understand how to budget, so they need some coaching and some practice. Breaking any bad habit may take a few failed attempts, but at least these can serve to teach us where we are vulnerable and how best to avoid giving in to temptation.
Debt consolidation
Many credit cards charge interest rates greatly in excess of the rates charged on other personal loans. For debtors with significant high-interest loans, consolidating these with a lower-interest loan may make their debt manageable.
Debt consolidation is most successful when there are unencumbered assets to be offered as security for the consolidation loan and the debtor’s net income is sufficient to support household expenses plus the payments on the new loan.
Care must be taken that, in case of a future default, there is no erosion of the security of creditors caused by the consolidation loan, since that may be attackable by them.
Asset sales
Some spending is not consumed, but goes to purchase assets. These may be sold to pay off debt. It often makes sense, if the debtor can be persuaded, to sell their house, thereby realizing any equity in it and reducing ongoing living expenses. (Rental rates are down in most places across the province.)
Filing a Proposal
A proposal is a formal procedure governed by the Bankruptcy and Insolvency Act and is available to individuals and to corporations. A proposal is an offer to creditors to pay them a fixed portion of debts in exchange for forgiveness of those debts. The debtor makes monthly payments to the trustee, who then makes periodic distributions to creditors.
Creditors are usually motivated to accept a proposal because it offers them more than they are likely to see from a bankruptcy. If, however, they refuse the proposal, bankruptcy is automatic.
The simplest and least expensive option, a consumer proposal, is an option for anyone with unsecured debts greater than $5,000 but less than $250,000, or $500,000 per couple. Unsecured debt includes credit cards, lines of credit, personal loans, unpaid income taxes, etc., but not mortgages.
Let’s consider as an example a debtor with $100,000 in consumer debts whose income, net of reasonable living expenses, would allow monthly payments of $1,000 to creditors. A proposal then may be made to creditors to pay, say, 50% of the debts ($50,000), being $1,000 per month over 50 months. The remaining debt is forgiven.
Once a proposal is accepted, all legal actions undertaken or contemplated by secured and unsecured creditors are stayed (stopped).
If there is any worry that creditors will force a bankruptcy before a proposal is filed, a Notice of Intention to File a Proposal can be filed. This acts immediately as a stay of proceedings against all creditors.
Such proposals must be initiated through a licensed Trustee in Bankruptcy.
