10 Signs of Debt Trouble
If you don’t live in Egypt, being in denial is a bad thing.
Most of us carry some form of debt, whether it’s a car loan or a credit card balance that we just can’t manage to pay off this month. But when does debt load become dangerous?
Well, one sign is when you don’t want to think about it and are kept up nights with stomach-twisting anxiety. The problem scares you so much you put your head in the sand and keep spending as usual.
If you think you have a problem, you probably do. But here are 10 more telling signs that you are sinking too far into a financial morass:
- You frequently pay bills after their due date, incurring secondary notices and penalty charges.
- Creditors are calling about unpaid bills.
- You regularly bounce cheques and overdraw your bank accounts, causing you embarrassment and triggering bank penalties.
- You use one credit card to pay the balance on the other, or use it to pay other bills or to buy necessities.
- You pay only the minimum balance on credit card bills.
- You’ve been denied credit because your debt ratio is too high, or need a co-signor for a loan because you are too much of a risk by yourself.
- You hit up family and friends for loans to make ends meet.
- You don’t know how much debt you’re really in, because you’re afraid to hear the number.
- You hide purchases and debt problems from your family, or you fight a lot with your spouse over debt issues.
- An unexpected expense, such as a car repair, sends you into panic mode.
Of course, just not thinking about money problems, or running way from them, doesn’t work. They always manage to find you. The best way to deal with them is head on, using the advice of a trusted expert. At Richard Killen & Associates, we can lead you through the appropriate responses to your particular situation, whether it is debt consolidation, a consumer proposal or bankruptcy.
Contact us for a free consultation – it will be the most stress-relieving call you will ever make.
Money Doesn’t Grow on Trees
For more than 20 years, Bill had run a successful Toronto tree care business, doing tree removals, pruning, planting and much more. His finances fell into the rhythm of the growing season. In the spring, the work would flood in and then taper off into the summer and fall.
In the winter, during his downtime, Bill would use credit cards to finance advertising, equipment purchases, insurance payments and personal expenses. He would depend on the work coming in the following spring to pay things off and get him ahead in the game.
The system worked until a few years ago, when a perfect storm of bad luck gave his credit heart rot. First the nature of the business had changed, with the Internet killing off traditional advertising channels and flooding the market with cut-rate competition, often under-insured and without much real experience, but still appealing to the price-conscious consumer.
Then there was the economy that had taken a plunge, limiting people’s budgets for yard care. “If they only have $3,000 and have a choice between getting tree work done or going on a vacation, what do you think they are going to choose?” says Bill.
But the leaf that broke the branch was the four trips on credit that he took to Costa Rica, arranging to bring his new wife back to Canada. “I thought that I’d make up the money with the spring boom,” he says, “except that that year it didn’t come.”
Bill found himself with a maxed out line of credit and three credit cards owing about $12,000 apiece. He was finally unable to make payments that were high as $5,000 a month. “I felt real shame,” he recalls. “Once I had walked around with a thousand bucks in my pocket and now I didn’t have enough money to buy food for my wife and baby. That’s really scary.”
A friend suggested he go to Richard Killen & Associates, to get a free consultation so he could understand his options to deal with the crisis. “When I went in to see Richard [Killen], I felt horrible,” he says. “But by the time, I left I felt excellent. It was the best day I had in a long time.”
A large part of the Licensed Insolvency Trustee’s job was to give Bill a reality check. Still deep “in denial,” he hoped that he could find someone to give him a loan to buy his way out of the crisis. Killen pointed out that throwing more money into the pit would not solve his financial problem and would in fact make his position worse.
When people see a trustee they learn that they have options other than to simply go bankrupt. One of the most important things the trustee should do is carefully explain the consequences of the various options available. In Bill’s case;, after fully digesting what Killen explained to him, he determined that the best course of action was bankruptcy.
Bill’s main concern was that he needed to keep his business going, because like everyone else he still had to earn a living for himself and his family. As Richard explained, a bankruptcy would not deprive Bill of that right. Even in complying with the legal requirements of the bankruptcy, Bill was able to keep all his equipment, including his tree truck, and chipper – the mainstays of his business.
It came as a big surprise to Bill to find out that a bankruptcy generally allows a self employed person to retain his ability to make a living. Most people believe or have heard that if they go bankrupt they lose everything. That’s just not the case.
Today discharged from his bankruptcy, Bill is more careful about how he uses credit for his business. He tries to pay as he goes with a debit card. He and his wife have a secured credit card with a $2,000 limit, ensuring any credit used is covered by what they have in the bank. “I pay off my balance right way,” he says.
As far as his seasonal business, last winter’s ice storm has proven to be a real boon, providing all the tree debris removal business he can handle in the spring. Still, Bill is acutely aware of how quickly his fortunes can change in this line of work, like a healthy maple suddenly brought down by blight.
Asked about what he could do to protect himself from such vagaries, he smiles and says, “We could always move back to Costa Rica. Money goes a lot further there.”
Serenity After Trial
“I thought the process was going to be hideous, humiliating and shameful,” Karen recalls of her bankruptcy more than a decade ago. “I was terrified when I went to see Richard Killen. I was in tears as I walked into his office.”
Karen’s story of battling debt is a familiar one. She had decided to make a brave midlife career change from working as a bartender. Finding employment in a Toronto health food store, she made the decision to go back to school to get certified as holistic nutritionist.
In classes for two years and working for close to minimum wage, she had to get student loans to make ends meet. And when this money fell short, she dipped into a line of credit.
“I found myself in about $30,000 of debt,” says Karen. “Things had gotten out of hand. I was scared and didn’t know what to do. But I talked to a friend who had gone through a similar crisis and he suggested I go to see Richard at Richard Killen & Associates.”
Karen was quickly reassured in her first meeting with Richard. “I sat down in the chair and he just made me laugh – in a nice way. He was just very kind to me. He assured me that this kind of thing happens to people and it doesn’t mean that they are bad or that they have to go through a humiliating experience.”
Killen points out that making mistakes simply qualifies all of us for membership in the human race. “We all make mistakes – every day,” he says from his Toronto office. “It’s what we do about them that defines who we are. This is something we forget when we are swamped by the problems.”
Killen then outlined her options, helping Karen to realize that not only could she survive but successfully manage the bankruptcy process. Most importantly, he made her realize that the choices were hers – nobody else’s. “He never left me hanging. If I called he was always available,” she says. “I always knew how I was doing during the nine months of the bankruptcy process.”
Karen was fortunate to able clear away her student loans along with her other debts when she received her bankruptcy discharge. “Student loans are different from regular debts such as credit cards,” explains Killen. “They are not given for normal profit-making reasons. They are meant to help us improve our future life by improving our education, so it’s understandable that they should be given special status under the law. A person has to make a reasonable effort to pay them back. However, sometimes no matter how hard a person tries they just can’t do it. If after seven years a person still can’t pay then the student loans qualify to be treated like any commercial debt. This is what happened with Karen”
Within a year of going bankrupt, Karen hit her new career path with full force. She managed a series of health food stores, worked in an holistic apothecary and had clients on the side for her holistic nutrition counselling.
A couple of years ago, she decided to make another major life change – less a career shift than giving herself space to understand and act upon her priorities, truly achieving that elusive work-life balance. She returned to the support network of friends and family in small-town Nova Scotia. And while she considers her next move, she is doing part-time work and volunteering in the kitchen of a Buddhist centre, practising meditation and finding a measure of serenity in the combination.
“The great thing is,” says Karen, “if I hadn’t gone through the bankruptcy process I wouldn’t be where I am today. It’s given me the space to get on with my life. As hard and distasteful it was to contemplate beforehand, it turned out to be one of the best things I could have done.”
How Much Is Too Much?
People sometimes ask: “If I go bankrupt will the trustee take all my income?” Well the simple answer is NO. But to understand that answer you need to wade through some layers of legal complexity.
While you go through bankruptcy, the trustee is required to monitor your income to see if maybe some part of it should go to your creditors. Remember, you have stopped making any payments directly to those creditors, so they are not getting anything from you. But, assuming you’re working and have income, it’s fair to ask whether any portion of your income should go to the creditors.
In the old days this question had to be answered by the court on a case-by-case basis. But since the early 1990s, the courts couldn’t keep up with the rising number of bankruptcies, so the government decided to let the trustee handle this question. After all, the trustee takes care of practically everything else. However, to ensure that consistency and fairness is maintained across the country, the government gave the trustees a strict formula that enables them to work out a solution that is fair and protects both your rights and your creditors’.
Every year, using the latest cost of living statistics, the federal government sets a “Standard” based on how many people live in a household. (Obviously the more people in the house, the more money these people need to get by.) This standard establishes a threshold. If your family income exceeds the applicable threshold, you are deemed to have “Surplus Income.” If you have a surplus, you may pay half the amount to a trustee for the benefit of the creditors. The formula is fair and most people have no problem with it.
Here’s an example: You’re part of a family of two who has a total combined after-tax income of $2,908. This is exactly $400 more than the standard threshold for a two-person family ($2,508). So the bankruptcy law requires you to pay half of this $400 surplus income, $200, to the trustee for the creditors. The Industry Canada website has all the details.
While this formula is fair, it can get complicated, especially since everyone’s situation is different. For instance, you have the right to question and disagree with whatever number the formula comes up with. There is a mediation procedure in place that can help you to work out a compromise.
Since the issue of surplus income may affect your decision about what course to take to solve your debt problems, you need to know the facts and your options. The best way to do this is have a trustee at Richard Killen & Associates explain them to you. It doesn’t matter how much surplus income you may or may not have, the consultation with us is truly FREE.
What Is a Consumer Proposal?
A consumer proposal is like a consolidation loan, in that your payments are reduced to one monthly payment. You make the payments to a trustee, who accumulates them and every six months pays the money out to your creditors.
The thing about a proposal is that it doesn’t necessarily involve paying pack 100 per cent of what is owed to the creditors. A proposal might just be a percentage. It’s basically making a new deal with creditors, so that they get paid to the best of your ability. The major difference between an informal arrangement with creditors and a proposal is that a proposal has the protections that are built into the law.
Will I Lose My Home in a Bankruptcy?
The fear of losing your home is a powerful one. When their finances go south, many imagine that bankruptcy will leave them homeless. Is this fear justified? Not really, or not in the normal course of a bankruptcy.
Yes, when you go bankrupt, you give control of your assets to a trustee in exchange for getting rid of your debts. This, in theory, could mean that the house gets sold to help pay back the creditors. But in practice this rarely happens, mainly because it is not in the best interests of everyone involved. The trustee has a lot of discretion, which he or she generally uses to safeguard the rights and interests of both the creditors and the debtor. Selling the house outright usually doesn’t achieve this purpose. So what normally happens?
Well, there are many different scenarios. If you have no realizable equity in the house – equity is the amount you’d get selling the house after deducting the mortgage and other associated costs – there is no point in selling the house, because all the money would just go to pay off the mortgage(s). In this case you get to keep the house as long as you keep paying your mortgage. The trustee doesn’t get involved.
But, what if you did have some equity, say roughly $20,000? To keep the house, you would have to pay the trustee this amount, because that’s what the creditors would have received if the house had been sold. So the creditors end up getting their fair share and you keep your house.
Yes, but if you had $20,000 to throw around, you wouldn’t be bankrupt in the first place, right? Well, you would have to raise the money, but the trustee would work with you to accomplish this. For instance, you might be able to get the money through a second mortgage. Or you could work out a direct monthly payment plan with the trustee. In either case, you would keep your house.
Where things start to get more complicated is if you have a significant amount of equity in the home, let’s say $100,000. In order to hang onto the castle, you would have to pay the trustee 100 large – a whopping sum, but not impossible and financing is usually obtainable.
But, in such a case you probably would want to explore the legal alternative to bankruptcy: a consumer proposal. If you go this route, you don’t risk losing the house. You simply offer the creditors a settlement, negotiated by your trustee under the protection of the law. Most often this solution satisfies everyone because it pays the creditors an acceptable sum while allowing you to escape the debt quagmire in an orderly and manageable way: win-win.
There are a couple of other points to understand when you’re dealing with the house question.
The first is that in all these scenarios the trustee will remind you of your right to get advice from a lawyer of your choice, someone who is there to protect specifically your interests. This is your basic legal right, but it becomes much more important if you have a lot of equity in your home. A good lawyer will help you deal with the situation and probably get you a better deal from the trustee and creditors than if you were doing this on your own.
The second point is that you should ask yourself: Whether I go bankrupt or not, can I afford to keep the house? If I try to hang on to it will it just drag me back into debt trouble down the line?
This is a tough one. We tend to be emotionally attached to our house in a way that we aren’t with most other things, even our cars. But, we have to ask ourselves this question if we’re going to regain control of our finances. The trustee can help you better understand your situation, but the answer to this question can only come from you. And you need to be brutally honest with yourself about it.
So, to get back to the original question: “If I go bankrupt will I lose my house?” For most people (the vast majority) the answer is “No!” So don’t be afraid to consult a trustee because you’re worried about losing the house. Contact us and get the facts. Remember our TV commercial: “It may be the most stress-relieving call you ever make.”
Consumer Proposal or Bankruptcy?
If you are coping with severe debt problems, you have five choices to deal with the crisis: Get a consolidation loan, try to negotiate with your creditors, run away, do a consumer proposal, or go bankrupt.
The first three options you can handle yourself (we don’t recommend trying to run from your problems; they have a nasty habit of catching up). Personal bankruptcies and consumer proposals are solutions governed by the Bankruptcy and Insolvency Act, and they can only be handled by Licensed Insolvency Trustees.
So why would you choose one of the legal solutions over the other? Well, every person’s case is different, so you need to come into a trustee to get advice tailored to your particular situation. But painting with broad brushstrokes, a bankruptcy is a faster and less expensive process, whereas a proposal may protect more of your assets and save your name from being associated with bankruptcy.
With a personal bankruptcy, you are released from your debts after you comply with certain duties. It’s a process that can be over in as little as nine months. Some of your assets would be exempt from this legal process – such as furniture and personal effects – and others would be handed over to the trustee and be used to repay creditors.
This latter category could include houses, high-worth cars, jewelry and certain RRSPs. Also, if you have an income over a certain set amount, you would have to pay 50% of this surplus to creditors, probably lengthening the time you were discharged from the bankruptcy.
A consumer proposal essentially reorganizes your debts. If the proposal is accepted by your creditors, you only have to make one manageable payment a month to the trustee. The length of term for a consumer proposal is five years or less, depending on fast you want to and are able to address your obligations. But generally speaking, it’s a longer more expensive process that a bankruptcy.
With the proposal you avoid the ‘stigma’ of bankruptcy and get to keep all your assets, providing you make your monthly payments and don’t slide into bankruptcy anyway. You may also want to consider a proposal if bankruptcy would also force your spouse to follow the same route, or if you are expecting to receive a large sum of money down the road.
Also, with a bankruptcy, you must complete a monthly budget for all income and expenses, as well as supply copies of your pay stubs to the trustee. If your income goes up during the period of your bankruptcy, then your surplus payments would also increase. With a consumer proposal, there are no monthly reporting requirements.
Will Bankruptcy Affect My Income?
Some people assume that if they file for bankruptcy they will have to turn over all their income to the trustee. Not true.
But there are other concerns people have over their income. A question we are often asked is: Will bankruptcy affect my income? Will I lose any of it to the trustee or creditors? The answer is: maybe, but probably not.
The fact is after going bankrupt people often find they now have “free income” for the first time in years. This is because they no longer have a long list of debts to pay every month.
When a person goes bankrupt, they are basically saying they can’t pay all their debts. They may be able to pay their rent and utilities and put food on the table, but they can’t do that and pay their credit cards and other loans. However, the moment they go bankrupt and get under the legal umbrella, those same creditors can no longer demand money from them, so they may actually have money to spare.
Now it is possible that person’s income maight be affected, but only if they are making such a substantial amount every month that, in fairness to the creditors, a portion of their surplus should be set aside for the creditors’ benefit. But this only applies after all the necessities are taken care of, so it is not such an onerous thing and most people have no problem with it. In fact it helps people feel better about having to go through the whole process in the first place.
There is actually a formula for working this out and the trustee will explain it all before you make the decision to file the bankruptcy. It’s just one of the many questions that a visit to the trustee clears up.
Most people don’t necessarily think of it this way, but the process goes directly to restore your control and give you an empowerment over your own affairs. This is one of the main goals and purposes of the bankruptcy laws.