As a Licensed Insolvency Trustee (LIT), a significant part of my initial consultation time with consumer debtors involves dispelling a number of myths, so I thought it might be a good idea to set the record straight. Below are some common facts vs. myths about LITs.
If I see an LIT I will lose all of my assets
Each Province and Territory has legislation that exempts certain assets from seizure by creditors and by extension an LIT. These exemptions generally apply to clothing, furniture, personal effects, motor vehicles, trade tools and in more limited cases, principal residence equity. What you are allowed to keep, and the value of the exemption varies by jurisdiction. The non-exempt portion of these exempt assets and non-exempt assets which generally include real estate, boats, art and the value of financial assets such as cash, crypto and investments (including RESPs and the value of RRSP contributions made in the 12 months prior to bankruptcy) must be seized and sold by an LIT in a bankruptcy and distributed to the creditors. Individuals that wish to maintain control of their assets may wish to consider a proposal as an alternative to bankruptcy, however they must present a cash flow plan to their LIT that shows that through a series of monthly payments, over a period of no more than 5 years, they can offer their creditors more than what an LIT would recover in their bankruptcy.
An LIT will deal with all of my debt
There are generally two types of debt, secured and unsecured. A secured creditor entered into a specific contractual arrangement with the borrower whereby money was only lent if one or more assets were pledged as security for the debt. Two common examples are a mortgage and a car loan. In both cases the lender has specific legal remedies to take the asset that was pledged should a borrower default on the loan. Common examples of unsecured debt are most credit cards, payday loans, lines of credit, overdraft, debt relating to the supply of goods or services (e.g. cell phone bills or private party contracts). In limited cases some of these creditors may have demanded a security deposit upfront. The bulk of the debt an LIT can help people with is the unsecured variety. As secured creditors have remedies available that sit outside the bankruptcy legislation an LIT can not stop a lender from seizing a house or repossessing a car when the loan has gone unpaid. Perhaps an individual could benefit from the assistance of an LIT through a bankruptcy or proposal in reducing payments towards unsecured debt which may free up room in a budget to make sure secured creditors are paid as agreed. If you are unsure as to what remedies a specific creditor has, its best to seek legal advice to review the terms of the loan agreement.
An LIT will help me not live paycheque to paycheque
A bankruptcy or a proposal will stop creditors from churning interest and penalty that adds a big chunk to what someone may pay on their debt. Also, part of working with an LIT involves insolvency counselling where we teach about budgeting and responsible use of credit. However, the one thing LITs can’t do is change someone’s costs of living or make them more money. One thing that unfortunately presents itself in many of my consultations is people using credit to supplement their income. During bankruptcy or a proposal, access to credit is cut off so one of the first things that has to happen is that an individual needs to present a budget that shows that their household is able to live on their after-tax income including making any required payments in the bankruptcy or proposal. An LIT can get you a fresh start but the first step is making the lifestyle changes to avoid what may be contributing to the budget imbalance that gave rise to the debt in the first place.
An LIT can stop lawsuits
A bankruptcy or a proposal as a means of dealing with creditors comes with the advantage of a stay of proceedings. It is a legal “cloak” that protects a debtor from action by their creditors and confines dealings to the process administered by the LIT. As with everything there are some exceptions, and a creditor can make application to court to lift the stay and continue the lawsuit. Creditors that have started litigation that is purely over money owed on an unsecured basis are usually savvy enough to not spend additional legal fees when they see their recovery is going to be limited. However just as secured creditors have rights beyond the bankruptcy legislation so do certain litigants. The legislation prescribes certain debts that are not extinguished in a bankruptcy. These include fines, spousal and child support, those arising from fraud and those arising from intentional bodily harm, sexual assault and wrongful death. Creditors that believe their litigation will give rise to a court ruling that the debt falls under the prescribed categories of non-released debts will likely seek to lift the stay of proceedings to continue the litigation. In that situation a debtor is always best to seek legal advice.
Consulting an LIT will lower a credit score
Getting a consultation with an LIT does nothing to a credit score, in fact as an LIT I have no access to anyone’s credit profile. Creditworthiness depends on a number of factors, and chances are if you are having difficulty paying your creditors on time, your credit score isn’t as healthy as it could be. When a proposal or bankruptcy is filed, there is a data exchange between the Superintendent of Bankruptcy’s system and the credit bureaus, plus your creditors get notice of the filing. Your credit profile is noted accordingly, and your file is noted as “R9”, the lowest rating. Upon discharge from a first bankruptcy or successful completion of a proposal the data exchange happens again, and the credit bureaus start a 2 year countdown to remove the notation form your file. In the case of a proposal, you are re-rated at “R7”, which means you made a deal with your creditors you lived up to your end of the bargain. As part of the process, your insolvency counselling involves a discussion of ways to use credit responsibly and rebuild as part of your fresh start.
An LIT can help you get a fresh start; however, we can’t work miracles. I find the best outcomes are achieved when a debtor is proactive in dealing with debt and consulting with a LIT as soon as signs of trouble are noticed.