There is no magical way to quickly improve your credit rating. The only way your credit rating will improve is:
- by obtaining credit from a credit-reporting lender, using it wisely, and making your payments on time. This might include a credit card, a phone company, a car loan, overdraft protection with your bank, a mortgage, or a line of credit. We have found the easiest of these to obtain is a secured credit card, often available to you:
- from Capital One Mastercard , as soon as your consumer proposal has been accepted by creditors, or after you are discharged from bankruptcy; or
- from Affirm Financial.
- by the passage of time. The credit bureau reports bad credit as well as good credit for a fixed time. Negative, or derogatory comments in the credit rating will drop off in time, usually 6 years.
Exemptions are allowances. The Province of BC and the Government of Canada allow an individual to keep certain of their assets free and clear from the claims of their creditors. These exemptions are spelled out in various provincial and federal statutes. The more common exemptions include:
- pursuant to BC’s Court Order Enforcement Act :
- necessary clothing of you and your dependants,
- household furnishings and appliances to a (net realizable) value of $4,000,
- one motor vehicle to a (net realizable) value of $5,000,
- tools (of the trade) and other personal property that are used to earn income from your occupation, to a (net realizable) value of $10,000,
- medical and dental aids required by you and your dependants,
- if you own or have an interest in your principal residence which is not subject to a foreclosure proceeding then your equity is exempt to a maximum $12,000 (if in Metro Vancouver and Greater Victoria, otherwise $9,000),
- excluding any contributions you made in the previous 12 months, almost all RRSPs (registered retirement savings plans), DPSPs (deferred profit sharing plans), and RRIFs (registered retirement income funds) are exempt.
- pursuant to BC’s Insurance Act, the cash surrender value in the policy where the named beneficiary in the policy is your spouse, child, grandchild, or parent.
The Bankruptcy and Insolvency Act also imposes on the Licensed Insolvency Trustee a duty to return to a bankrupt individual any surplus GST credits it may have received from Canada Revenue Agency.
The claim to exemptions becomes more complicated where a maintenance order (regarding your children and /or ex-spouse) exists. We caution you that legal counsel may be necessary to determine actual exemptions.
We have a pretty good idea how creditors respond to consumer proposals and we use both our knowledge and experience to create your consumer proposal to creditors. Sometimes, we are extremely confident that the consumer proposal we develop for you will be accepted by your creditors. As guidelines:
- we first estimate the recovery your creditors would experience if you went bankrupt. Knowing this figure, your consumer proposal must offer creditors a better return;
- together we will look at your budget to see what you can reasonably afford to pay monthly, after considering all reasonable expenses including for example clothing, medical expenses, entertainment, and meals out. If you wish to be freed up from an auto lease or purchase we will review that. We will calculate the monthly amount you must pay if you were instead bankrupt and we will recommend that in your consumer proposal you offer to pay a monthly amount that is not significantly less; and
- we will establish the number of months you should offer to make payments. We do this by considering whom you owe monies to, the relative sizes of your creditors’ claims, and understanding how these creditors generally respond. It is impossible to provide you with professional advice regarding how much you must pay if all that was known was the amount of your debts. If you are told otherwise, run. The make-up of who your creditors are can be extremely important in developing a consumer proposal that does not offer too much or have a high risk of rejection by creditors.
Your spouse will not be affected by your bankruptcy or proposal filing unless your spouse has co-signed, co-borrowed, or guaranteed a debt you have.
If you are bankrupt, the amount of your spouse’s income will affect the amount of surplus income you must pay, so that works in an opposite manner.
The Superintendent of Bankruptcy issues Directives to which Licensed Insolvency Trustees (“LIT”) must adhere. The Directive setting out the amount and method of calculation of what an individual must pay in 2017 if bankrupt is Directive 11R2-2017. The calculation procedure works like this:
- by questioning you, the LIT (The Trustee) will determine the number of persons in your family unit. This figure establishes the base amount your family unit is allowed each month before further adjustments. For example, according to this Directive, if you are by yourself, you are allowed net, after-tax monthly income of $2,121, a family of two is allowed $2,640, etc. These are loosely referred to as the Superintendent’s Standards;
- be reference to any support you can provide and from discussions with you and possibly others in your family unit, the LIT calculates the net, after-tax, monthly income of every person in your family unit;
- a determination is made whether your family unit has any non-discretionary expenses, these being payments for medical expenses, obligations to pay child support or spousal support, Court fines, and any employment-related expenses that can be deducted for tax purposes if the employer provides a T2200 – Declaration of Conditions of Employment; and
- as LIT we will consider gross business revenues, tax-deductible expenses, and income tax obligations to determine the net, after-tax, monthly net income of any self-employed individuals in your family unit.
Your requirement to pay surplus income (“RTP”) for each month of your bankruptcy is given by the formula:
RTP = (Family income – Non-discretionary expenses – Superintendent’s Standards) x (Your income / Family income) x 0.5
Every proposal document is different. However, every proposal should contain clauses to address the following matters:
- definitions of terms used;
- explanatory purpose of the proposal;
- Ken Rowan & Associates Inc. will be the Trustee under the proposal;
- the various classes into which secured and unsecured creditors are to be divided;
- the order of priority the Trustee is to follow in disbursing monies to creditors, including that source deductions are to be paid within six months following Court approval of the proposal;
- the amount, method of payment, and timing of payment of the Trustee’s fees;
- the date to which income tax debts and GST debts are being settled;
- the payments the corporation will make to the Trustee and the timing of those payments, and that when those payments have been made the corporation has fully settled all of its debts;
- how and when the Trustee will make distributions to the creditors;
- the right of creditors to elect inspectors to represent them and to guide the Trustee as necessary; and
- how any necessary amendments to the proposal can be implemented.
Contact us. We will go over your debt concerns, your assets, and help you put together a cash flow projection.
If there is no time to prepare a cash flow projection perhaps because of serious collection activities, the corporation can create an immediate stay of proceedings against all creditors – giving it time to attempt a workout – by filing through us a Notice of Intention to Make a Proposal pursuant to section 50.4 of the Bankruptcy and Insolvency Act.
Where time constraints are not as sensitive, after the cash flow statement is prepared and contains all supporting notes, whether reasonable or hypothetical, the following steps must also take place:
- changes as anticipated by the projected cash flow should be implemented;
- cash should be set aside for both working capital and professional fees. Suppliers may decide to supply only on COD; professionals need to be compensated;
- a list of all creditors with account numbers and addresses will be prepared;
- receivables, inventories, and fixed assets will be summarized with respect to their estimated net realizable values;
- security positions and key suppliers will be identified and discussions with them may be necessary to keep them onside;
- together we will review the reasonableness of continuing with lease agreements regarding equipment and premises; and
- by reference to all of this, your proposal to creditors will be drafted.
To proceed with this Notice of Intention or with the proposal the corporate directors must meet and resolve that one of the directors or officers be authorized to sign the necessary paperwork we will assemble.
It is important to note that if the company decides to file either a Notice of Intention to Make a Proposal or the proposal itself, the filing (by us) ignites a number of mandatory, time-sensitive steps under the Bankruptcy and Insolvency Act which, if not respected, can result in the company being declared bankrupt.
Although unpaid corporate income taxes rank as ordinary unsecured debts in the proposal workout and in the bankruptcy process, CRA can elevate the priority status of these debts to secured by certifying the amount owing in a certificate then registering the certificate in the Land Title Office or in the Personal Property Registry. The certificate and its registration create a lien enforceable against assets just like a mortgage.
Directors are not personally liable for the corporation’s unpaid income taxes.
When your corporation collects excise taxes (GST) it is deemed to hold that GST in trust for the Crown. If the Crown is not paid then directors are often liable for the GST.
Canada Revenue Agency is aware of the amount of your GST debt through the reporting, assessment and audit processes. And, if the corporation is not filing its GST returns, CRA can generate arbitrary assessments and then pursue you for the assessed debt. They pursue collection through assessment notices, reminder letters, warning letters, collection calls, and demands they make on third parties that may owe monies to your corporation. In other words, they can seize your bank account and attach your accounts receivable through the garnishment process. And they can file liens against the corporation in BC’s Personal Property Registry.
To guide you, we will need to know what GST returns have not been filed, whether CRA has arbitrarily assessed you, whether CRA has issued these garnishment notices called “Third Party Demand” or “Requirement to Pay”, what assets you have, and we will need to search the Personal Property Registry to determine whether liens have been filed. Make sure all the GST returns are filed.
Although the GST debt can be addressed in a corporate proposal or bankruptcy proceeding, we are always concerned about the personal obligations of the directors. If the company does not pay all the GST debt owing, CRA will likely pursue the directors.
Any debt to CRA for non-remitted payroll deductions (aka RP accounts) comprises a deemed trust against all assets of the corporation. If the corporation does not pay these debts, the directors are personally liable to pay them.
If you have source deduction debts, a restructuring is still possible:
- under the proposal process. A proposal to creditors requires these RP debts to be paid in full within about 6 months. When we assist you with your cash flow projections it will be necessary to show these debts will be fully retired by that time and that future RP debts are kept current; and
- in the corporate bankruptcy process, these debts must be paid by the Licensed Insolvency Trustee (“LIT”) from its realization from all corporate assets. They must be paid firstly, before monies are paid out elsewhere. Trustees are wary of accepting a corporate file engagement because the priority claims these RP debts have could result in less monies being available to fund the LIT’s costs.
If you have a growing debt for unpaid source deductions you should expect Canada Revenue Agency to quickly commence its garnishment process. The best way to deal with this source deduction debt may be to make a proposal to creditors through a LIT. The proposal can stop the CRA garnishment process and give the corporation time to accumulate monies to pay that debt in time.
After your tax account with CRA has been assessed, if it remains unpaid too long, your account finds its way to CRA collections.
If you cannot pay your taxes, you can discuss payment terms with CRA collections and meet with them. If terms cannot be worked out, then CRA proceeds with:
- audits of your books and records. CRA’s audits help them ascertain the amount of your tax debts and enables them to find out where you bank, what your assets are, and the addresses of your customers;
- issuances of Third Party Demands and Requirements to Pay. CRA sends these demands to your customers and to your bank, instructing them to pay not you, but CRA whatever amount they owe you. Effectively these demands dry up your cash flow making it impossible for you to pay your employees and your landlord, and can spell doom for your business. If this has happened to you, call CRA and ask them to remove their attachments;
- obtaining a Certificate from Federal Tax Court certifying that you owe these tax debts. This Certificate is then registered in the Land Titles Office against any real estate you own, and in the Personal Property Registry against your personal (non-real) property. These Certificates can also render more difficult a workout of your tax debts because these registrations convert unsecured tax debt into valid and enforceable secured debt against your assets; and
- assessing directors personally for the GST and source deduction tax debts.
If you are a non-filer, Canada Revenue Agency simply assesses what they believe you might owe. Although we refer to this as an “arbitrary assessment”, it really isn’t. CRA takes the information it has and generates a likely return for you and adds interest and penalties. There is little chance they gave you the benefit of all the deductions you would normally be entitled to. If you received an assessment and you never filed a return, you must still file all the outstanding returns. When you do that, this should bring your tax debt down.
If you still don’t file the correct returns, CRA will take collection activity based on the assessments they provided to you.
We draft your consumer proposal from our experience. It doesn’t have to be what we suggest – it can be whatever you want, within reason. But it has to be fair. Before we mail out your proposal to your creditors, we prepare our independent report for your creditors, showing the advantages of the proposal compared to the bankruptcy alternative. At the first counselling session scheduled for about 45 days into your proposal, we will advise you of the creditors’ response and the next steps. If the creditor response after 45 days is significantly negative, we will call a meeting of your creditors at which a vote would be taken. Although these meetings are not that common, when they do occur, creditors do not usually physically attend. The majority of the dollars voted (in respect of unsecured claims) determines the result. Your attendance at any creditors’ meeting is very important because it may provide an opportunity for you to amend your proposal if it would otherwise be refused by creditors.
It is conceivable that your creditors will not agree to a consumer proposal that is affordable to you. In that situation you can try another proposal, go it alone, or go bankrupt.
To make a consumer proposal, all of your tax returns should be filed up-to-date. This makes sense because if you haven’t filed a return on which there will be a tax debt, it is not reasonable to force that debt on Canada Revenue Agency when it doesn’t even know about the debt. CRA should know the amount of your debt to them when your proposal is filed so it can participate in the proposal process by filing a claim with us and voting on your proposal.
It is unreasonable to expect Canada Revenue Agency (CRA) to vote to accept your proposal if any tax returns are outstanding. All tax returns must have been filed if you want to make a consumer proposal and you have a debt to CRA.
If a tax debt has arisen between January 1 and the date of your proposal , that tax debt can be estimated and included as just another one of your debts in the proposal process. Including this debt is so very important to give you a fresh start. Make sure you let us know if this is your situation.
Pursuant to paragraph 128(2)(d)(ii) of the Income Tax Act, when a bankruptcy occurs there is a deemed year end. This means that for individuals, a pre-bankruptcy income tax return must be prepared and filed for the period from January 1 until the date of the bankruptcy. As your Licensed Insolvency Trustee, we would normally prepare that return for you. If you have an income tax debt for this unusual period, it is just another debt that is included in your bankruptcy proceeding. Any tax refund for this period is paid to your bankruptcy estate for the benefit of your creditors.
For individuals there will also be a post-bankruptcy income tax return for the remainder of the calendar year. If there is a debt owing on the post-bankruptcy income tax return, the bankrupt must pay it. If there is a refund, it is part of “property” that vests in the bankruptcy estate for the benefit of creditors pursuant to paragraph 67(1)(c) of the Bankruptcy and Insolvency Act and Canada Revenue Agency usually pays this refund directly to the Licensed Insolvency Trustee.
Co-borrowers and guarantors are still responsible to pay those “common” debts in full. Just because you made a consumer proposal or went bankrupt, this does not release the other party from being pursued for payment, and they can be pursued for the entire amount of the debt, not just a portion of it.
You would only make a proposal if you believed you could manage to make the proposed payments. If you fall behind in your agreed payments before you were able to finish it off, your proposal can end automatically, and your creditors would add interest and start pursuing you again. Generally, you should not be in arrears of three months payments to avoid such a default.
Transunion and Equifax will include in your credit report a reference to your consumer proposal. We are told TransUnion will report this for the lesser of (a) 6 years after the initial filing and (b) 3 years after completion. We are told Equifax will report this for 3 years after completion. The credit bureau sometimes reports information inaccurately and it might report a proposal as being a bankruptcy until the bureau is properly informed otherwise, when your proposal is completed.
It will be difficult to obtain credit and you will have to start small to re-establish your credit worthiness. We can show you how to do that with a secured credit card that should be available to you almost immediately. This contrasts greatly with the bankruptcy process, as the rebuilding of one’s credit where bankruptcy has occurred can be expected to take much longer and obtaining a secured credit card is a more expensive undertaking.
A consumer proposal is not a bankruptcy and is instead an alternative to bankruptcy. Have you read those tag lines – “avoid bankruptcy!” – well, they’re selling consumer proposals.
A consumer proposal, once filed, creates a legal stay of proceedings, meaning that unsecured creditors are legally required to stop bothering you. For example, calls from collection agents and garnishments will stop.
Your proposal payment plan will be whatever you and your creditors agree to and we will show you what payment arrangement makes sense. You can pay it off early.
There will be two individual counselling sessions as well as optional monthly financial reporting. These will give you greater money-management skills and you should establish better confidence regarding your financial future.
Unsecured debts to the Crown such as income taxes, GST, and MSP are all included in the proposal.
And because of all of this, your proposal will provide you a fresh start. Your cash flow should be under control and you can start saving money! Best of all, you are almost certainly going to feel very relieved, very quickly!
A bankruptcy broker is a loose term to describe a fee-based individual providing nominal debt help. They are on the fringe of providing assistance in dealing with debt because, being highly engaged in lead generation, their plan is to attract individuals, charge them a fee and then refer to them to a Licensed Insolvency Trustee.
Due to ethics and the undermining of their own professionalism, many Licensed Insolvency Trustees understandably refuse to become involved with bankruptcy brokers because they believe a bankruptcy broker is a useless waste of money. This is not always the case because some bankruptcy brokers provide add-on services to their cultural community, including translation services.
If you need debt help, you can reach us at 604-531-4186
Surrey head office: #210, 2411 – 160 Street, Surrey BC V3Z 0C8
Metrotown office: #206, 5050 Kingsway, Burnaby BC
Downtown office: #708, 1155 West Pender Street, Vancouver BC