A flood of letters came through Dana Copper's* mail slot and skated across the floor of her front hallway. The 32-year-old self-employed web designer kept her gaze on her computer screen, trying to ignore them so she could complete a project she desperately needed the money from. Dana knew the letters were from collection agencies. She also knew that this one project wouldn't erase her mountain of debt. "I felt like such a failure," she says.
Dana's debt – totalling just over $60,000 – began with a business line of credit and one personal credit card. Later on, she signed up for an additional credit card that offered travel points, and soon she also got a loan for a new car. At the same time, Dana's small business was not as lucrative as she had hoped it would be. A combination of some legitimate business purchases, a couple of trips (charged to her line of credit), the car purchase and high-interest credit cards fuelled Dana's financial crisis. Dana knew she was in trouble. She asked for a consolidated loan from her bank to pay off the majority of her debt at a lower interest rate. But she didn't qualify. So she turned to a family member for help on creating a budget. This didn't work either, because she was self-employed and paid sporadically by clients. "I would get larger sums of cash when contracts were fulfilled that were dispersed among my debts," she says. But then there would be lag times of weeks, even months, in her income. The reality was Dana simply couldn't pay her bills on time, and her debt wasn't going down.
Last February, Dana asked a trustee in bankruptcy (a professional licensed by the Office of the Superintendent of Bankruptcy Canada) for advice. "I went to her, freaked out, armed with a list of questions," says Dana. "Thankfully, she educated me on my options and let me decide which was more realistic." The following month, Dana decided to declare bankruptcy.
Last year, more than 115,000 Canadians took the same step as Dana. This year, there has been a 35 per cent increase in the amount of bankruptcies, and that number is still growing. These stats include what's known as a consumer proposal, or what the experts call "bankruptcy light," in which you work with a trustee who negotiates a payback schedule between you and your creditors.
Sadly, many Canadians are just one step away from bankruptcy, says Robert Powell, a chartered accountant, chartered insolvency and restructuring professional, and a trustee in bankruptcy for financial company AC Poirier and Associates Inc. in Saint John, N.B. A layoff, an inability to claim employment insurance, a divorce or separation, or a failed business venture is all that separates many of us from bankruptcy.
"I never thought I'd be this busy in my career," says David L. Smith, a trustee in bankruptcy with Bromwich and Smith Inc. in Calgary, a city which was, up until quite recently, booming and the job-creation capital of Canada. "We see people living paycheque to paycheque," adds Leo Wynberg, a trustee in bankruptcy in Toronto. "So many people are just one or two paycheques away from disaster."
Page 1 of 3 -- On page 2, learn what alternative measures other than bankruptcy may be viable for a person in financial crisis.
Obviously, if you are struggling with debt, bankruptcy isn't the first step you take. Just like Dana, you can look at other options, and for many people, they work.
The experts advise that you start with credit counselling and a debt management plan. Credit counselling is free, and taking an honest look at your finances with a pro can turn your situation around. (See "Online Help," page 3.)
Patricia White, executive director of Credit Counselling Canada, says there are all kinds of options that can be worked out with your creditors, such as reassessing the amortization period on your mortgage to reduce your payments and free up extra cash to pay off debt. It may also be possible to renegotiate interest fees on your debt.
If you have multiple debts, ask if they can all be consolidated into one larger sum. One debt and one payment is easier to manage. A consolidation loan may also come with a lower interest rate. Tip: If you go this route, cut up all your line of credit and credit cards so you don't rack them up again.
Another option to consider is the consumer proposal or "bankruptcy light." A trustee in bankruptcy comes up with a consumer proposal with your creditors for partial loan forgiveness, or to extend the period of time to pay it back. Wynberg says credit rating agencies generally delete consumer proposals from their records faster than bankruptcies.
When bankruptcy is your only option
For some people, such as Dana, bankruptcy is the only way to get out from under an avalanche of debt. "Bankruptcy can be harsh to acknowledge, but it's a legal and financial reality," says Smith. "People are entitled to get a fresh start."
Filing for bankruptcy will stop collection letters from your banks, phone calls from collection agencies and even wage garnishments through The Bankruptcy and Insolvency Act, which protects the rights of debtors and creditors in the event of bankruptcy. Then you send affordable payments to the trustee who distributes the money to your creditors. The amount of your payments are determined by the trustee in keeping with national guidelines.
There are some exceptions, however. For instance, you will have to continue making payments on secured debts for cars and homes that you still owe money on and plan to keep. Also, there are some debts that are not discharged from bankruptcy, says Powell, such as alimony and support payments and, in some cases, student loans.
Page 2 of 3 -- Think you know all about bankruptcy? Find 6 myths (and truths) about this complex topic on page 3.
For the most part, though, bankruptcy is a straightforward process that leads to the individual being discharged from the obligation to pay most of his or her debts, says Powell.
A first-time bankruptcy will take from nine to 21 months to complete – if your creditors don't dispute your claim. The length of time depends largely on the percentage of your income that must be paid to the trustee.
While Dana is grateful for her fresh start, she admits she still feels like a failure at times. To avoid landing in a financial crisis like Dana's, Powell advises people to take control of any financial problems early on. "It requires discipline and time, but most people can work their way through debt," he says. * Name has been changed.
6 bankruptcy myths debunked
Myth: You have to owe a ton of money.
Fact: If you owe more than $1,000 and are unable to pay your debt payments, you can declare bankruptcy.
Myth: I can walk away from all debt.
Fact: Not so fast. You have to pay a certain amount of your debt to your trustee each month. That money is then distributed to your creditors. If you get a raise or win the lottery, your payments will be reassessed. In addition, certain debts (court fines, alimony, some student loans) are not exempt.
Myth: I'll ruin my spouse's credit rating.
Fact: You and your spouse have separate credit ratings and as long as you continue to make the payments on your cosigned loans for assets such as your house and car, your spouse's rating will remain intact.
Myth: I'll never be able to borrow money again.
Fact: You will. With a first-time bankruptcy there is a nine- to 21-month process during which a small fraction of the money you owe is given back to your creditors. The amount you pay depends on the amount of "surplus income" you have – any household income that exceeds income levels already established by the government. When the process is finished you are free of previous debt and financial obligations. You can start rebuilding your credit rating right away. You may qualify for a mortgage or car loan in a few years.
Myth: My bankruptcy trustee will have to call my employer.
Fact: Filing for personal bankruptcy is between you, your trustee and your creditors. Unless a family member cosigned on a loan, your extended family never has to know. Your employers – present and future – are not notified about your bankruptcy.
Myth: If I go bankrupt, I have to give the trustee most of my earnings.
Fact: Bankruptcy payments are based on government guidelines. The larger your household income, the more you will pay. These guidelines take into consideration your earnings, the size of your family and nondiscretionary expenses such as your mortgage, child-care and support payments.
• Credit Counselling Canada, www.creditcounsellingcanada.ca
• Financial Consumer Agency of Canada, www.fcac-acfc.gc.ca
• Office of the Superintendent of Bankruptcy Canada, www.osb.ic.gc.ca
Page 3 of 3 -- Find out how one woman's finances took a disastrous turn on page 1.