Dealing with Debt (10:V)

A. Introduction

NOTE: The following applies to individuals only.

Before giving or receiving advice dealing with debt, ensure that the debtor, in fact, is liable for the alleged debts. Be sure to determine who the actual creditor is. When a creditor assigns an account to a third party agency the third party does not become the creditor. There are situations, however, where third parties purchase accounts from creditors and thereby become the creditors themselves. Creditor remedies can differ depending on the type of creditor, in particular if a debt is owed to the government.

Most people do not seek advice until long after they have become overburdened with debts, however, getting help sooner rather than later will leave people with more options available to them. Financial counselling may be of assistance to explore which options will work best.

NOTE: Many counsellors and trustees provide an initial consultation at no cost. Consumers should be aware that unless they are going to meet with a lawyer they need not pay for an initial consultation.

B. Debtors’ Assistance Referrals and Resources

The Credit Counselling Society is a non-profit organization that assists people who are experiencing difficulties with debts. They provide free and confidential counselling with highly trained counsellors. They can answer questions over the phone or by online chat, Monday – Saturday, with extended hours.

NOTE: Exercise caution when hiring unregulated companies that promise to "reduce" a consumer's debt. Effective April 1, 2016, any debt repayment agent and any corporation that collects and/or settles debt in BC should be registered with the Consumer Protection Agency (the Credit Counselling Society is a licensed organization). For information on your rights relating to debt collection, refer to the Debt Collection tab on the Consumer Protection Agency website. Please see the Business Practices and Consumer Protection Act, s 127 for more information on debt repayment agents.

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The Financial Consumer Agency of Canada (“FCAC”) publishes a great deal of useful information on consumer’s rights as they relate to financial institutions, including information on opening personal banking accounts and guidelines for garnishing joint accounts: see http://www.fcac-acfc.gc.ca. You should be advised that credit unions in B.C. are governed by the provincial Financial Institutions Commission (“FICOM”). See http://www.fic.gov.bc.ca for further details.

The Public Legal Education and Information Network's “Clicklaw” web site has a helpful section titled “Debt”. Articles and information on various topics relating to consumer protection, debt and Small Claims Court in British Columbia can be found online at: http://www.clicklaw.bc.ca.

Information on how to deal with debt collectors and collection agencies and harassment can be found on the Clicklaw website or through Consumer Protection BC online at: http://www.consumerprotectionbc.ca.

The Office of the Superintendent of Bankruptcy in Canada, an agency of Industry Canada, assists debtors by providing them with many useful online resources such as “Dealing with Debt: A Consumer’s Guide” and “Debtor’s Frequently Asked Questions”. A full directory of licensed trustees in bankruptcy is available on their website: http://www.ic.gc.ca/app/osb/tds/search.html?lang=eng. A licensed trustee in bankruptcy will provide a free confidential assessment of your financial affairs and advise you of the merits and consequences of filing a consumer proposal or bankruptcy.

For further information the Office of the Superintendent of Bankruptcy can be contacted at:

Office of the Superintendent of Bankruptcy

Also refer to section F below, Settlements.

C. Communicating with Creditors when Unable to Make Contractual Payments

NOTE: Before communicating with creditors, debtors should be aware of the consequences of acknowledging a debt as a result of the Limitation Act SBC 2012 c 13. Under the recently revised Act, for debts last acknowledged from June 1, 2013 onwards, after two years since the last acknowledgement of a debt by the debtor, a creditor has no legal recourse for pursuing the unpaid debt. Therefore, by instructing a debtor to acknowledge a debt, even implicitly, a clinician will create a renewed two year time frame for the creditor to initiate legal action against the debtor. See note above, at the start of Section III, for further information.

NOTE: Debtors should also be aware that if a judgement has been rendered against them it can be enforced for 10 years after the date of judgement (s 7). Refer to the Limitation Act for exceptions to this rule (s 23).

Depending on a consumer’s circumstances, they may need to contact their creditors to ask for assistance in getting through financially difficult times. Most people truly want to honour their commitments; however, they may not be able to do so at this time. If someone needs help with determining what their budget is and if they have surplus income to offer their creditors a reduced payment, the Credit Counselling Society is able to help consumers at no cost: 1-888-527-8999.

If the debtor has enough surplus income in their budget to repay their debt, they may wish to contact their creditors in writing and offer reduced payments until they are in a position to make contractual payments again. This is not a legal arrangement. A sample letter requesting reduced payments can be found on CCS’s website at http://www.nomoredebts.org/debt-help/dealing-with-creditors/debt-letters.html.

The steps involved in this reduced payment are:

1. determine the amount(s) owed and to whom (verify with the creditors rather than relying on the debtor);
2. determine how much money is available to pay to creditors, keeping the basic standard of living in mind;
3. consider if the debtor has assets, bank accounts or investments at risk;
4. consider the nature of the debt and if someone else would be impacted if the debtor is unable to make full payment, e.g. a joint credit card;
5. work out a payment plan for the creditors on a pro rata basis;
6. write the creditor a short letter outlining your situation and providing proof of reduced financial capacity, e.g. EI stub;
7. send or fax the above letter with supporting documentation and retain proof of the creditor receiving said letter (e.g. fax transmission report), retain a copy for your file;
8. update creditor periodically, e.g. if debtor's situation stays the same or improves and if they’re able to resume contractual payments.

NOTE: Contact the Credit Counselling Society for free help with this process if needed. The creditors may feel the reduced payments are not acceptable, but would likely not pursue alternative legal action if this is all the debtor can afford at this time. Communication with the creditors is vital, especially if a consumer has no ability make payments at this time.

D. Debt Consolidation and Refinancing

Creditors will often offer refinancing or debt consolidation as the solution to the debtor’s financial problem. The interest rate may be higher for the consolidation. Terms and conditions will determine total interest paid and the payment period. If making payments in the first place is the problem, consolidation loans may not be the solution. All creditors should be treated on a pro rata basis; if the consolidation only satisfies a particular creditor, the debtor should ensure they are at least able to meet the minimum payments owing to all other creditors.

E. Voluntary Debt Repayment Programs

When someone has some ability to repay their debts, but is unable to meet the minimum payment requirements of their creditors, contact the Credit Counselling Society for help determining if the Debt Management Program (DMP) at the Society might be an option. This is an agreement between a debtor, to make set, reduced monthly payments, and their creditors, who in return agree to accept reduced payments and who often suspend or reduce ongoing interest charges. A client agrees not to incur further debt while on the program. If a debtor defaults from the program, creditors may proceed with any and all remedies available to them. The debtor should contact the Credit Counselling Society for more information at 1-888-527-8999.

NOTE: Though non-profit, the Credit Counselling Society does charge a small fee to administer the Debt Management Program (DMP). While counselling is free, CCS charges a one time setup fee of no more than the average monthly payment to creditors to a maximum of $75 upon entering the DMP. Once a debtor has entered intot he program and begins making payments, and only upon written acceptance by creditors, CCS charges 10% of a debtor's deposit to a maximum of $75 per month. CCS will consider reducing or waiving fees where they would become a barrier to debtors needing the help of a DMP.

F. Settlements

Depending on the consumer’s circumstances, their creditors may be willing to accept a settlement on a portion of what is owed. If a consumer has funds available, they can approach their creditors in writing to accept a onetime lump sum payment. In exchange, the creditors agree to report the debt as “settled’ to all credit reporting agencies. It is essential that the consumer get this agreement in writing from the creditors before sending any money for the settlement.

Debtors should be advised that some agencies that advertise “debt settlement” services may take advantage of debtors. Debtors should be aware of agencies that demand upfront fees before a settlement is negotiated. During the pay period of a settlement there is no protection from legal action or garnishes. Contact the Credit Counselling Society for help with the settlement process if needed. Please consult the Financial Consumer Agency of Canada’s warning regarding debt reduction companies at:

http://www.fcac-acfc.gc.ca/eng/about/news/pages/ConsAlert-ConsAvis-0.aspx?itemid=170

G. Government Debt

The government is the most powerful creditor in Canada and has unique remedies available to it. For example see Section II.B.6: Garnishment of Statutory Benefits. There is also a category of government entities called “tax payer support entities.” For debts owed to these agencies the six year limitation period still applies. Commercial crown corporations of self-sufficient entities do not belong to this category. Unpaid ambulance fees and Medical Services Plan premiums are example of tax payer support entities.

H. Services a Trustee Provides Under the Bankruptcy and Insolvency Act

The first appointment with a licensed insolvency trustee in BC is always free. During this appointment, the Trustee should outline the implications and information a consumer needs to consider before taking any action. This is the time to ask questions to understand the process and long term effect on your credit. A Trustee should be willing to take the time to explain everything thoroughly as there is no backing out once someone has signed the documents to assign themselves into bankruptcy. The same limitation does not exist with consumer proposals. For more information on how a licensed insolvency trustee helps with debt, refer to the Office of the Superintendent of Bankruptcy video series at

http://www.ic.gc.ca/iec/site/bsf-osb.nsf/eng/br03567.html

1. Consumer Proposal

Depending on the nature and amount of the debt(s) and the consumer’s ability to pay, a consumer proposal should be considered. Creditors may recover more money in consumer proposals than in bankruptcy. However, there are windfalls that arise in bankruptcies that can result in unexpected recoveries. A consumer proposal is a legal arrangement with creditors to repay a portion of the amounts owing. Assets are not usually jeopardized (as they may be in bankruptcy) and the interest stops accruing as long as payments are being made. Legal action is not effective while the consumer proposal arrangement is in place.

Filing a consumer proposal is not free. If the CP is accepted by the creditors, the first $1,500 is paid to the trustee. The first $1,500 is deducted before calculating the distribution to creditors. Consumers are also expected to pay the administrator 20% of the moneys distributed to creditors under the consumer proposal There may also be more fees [Bankruptcy and Insolvency General Rules, CRC, c 368, s 129(1)]. Please consult a Trustee for more detailed information. For more information on consumer proposals, refer to the Office of the Superintendent of Bankruptcy in Canada's description of consumer proposals at

https://www.ic.gc.ca/eic/site/bsf-osb.nsf/eng/br01976.html

2. Personal Bankruptcy

Personal Bankruptcy is governed by the BIA, and is based on the premise that the debtor is completely unable to pay their debts, even at a reduced rate, and does not have assets to liquidate (debtor is insolvent). Bankruptcy is one option to deal with a heavy debt burden. The record of a bankruptcy stays on a person’s credit record for a minimum of six years from the day the debts are discharged for a first-time bankrupt. This increases to 14 years for a second-time bankrupt. This does not necessarily mean that credit will be denied, only that the bankruptcy will be a factor that a potential creditor will consider when deciding whether or not to extend credit to that person. Certain professionals (such as lawyers, accountants, and mortgage brokers) may be required to report their bankruptcy to their professional organization. The BIA does provide that no person may be terminated just for filing bankruptcy.

The debtor is required by law to engage a trustee to administer their bankruptcy. Personal bankruptcy using a trustee may cost the debtor approximately $1 685 (including $85 per counselling session, of which two are mandatory for a first time bankruptcy and GST). Usually the trustee will require a minimum payment to initiate the proceedings; however, the first appointment with a Trustee is free. The timelines for automatic discharge, in addition to being subject to fulfilment of the terms and conditions of the bankruptcy are dependent on both bankruptcy history and the individual’s surplus income (as prescribed by the Superintendent of Bankruptcy standards – Directive 11R2).

If all the conditions of bankruptcy have been met, there are no facts for which a discharge may be refused pursuant to s.173 of the BIA, and no objections have been filed by creditors or the Superintendent of Bankruptcy Canada;

• A first-time bankrupt with surplus income payable less than $100 is automatically discharged after nine months;
• A first-time bankruptcy with surplus income greater than or equal to $100 is automatically discharged after 21 months;
• A second-time bankruptcy with surplus income less than $100 is automatically discharged after 24 months;
• A second-time bankruptcy with surplus income greater or equal to than $100 is automatically discharged after 36 months.

The period of the discharge may also be extended for certain prescribed reasons under BIA. Consult the Office of the Superintendent of Bankruptcy or trustee.

a) Debts That Bankruptcy Will Not Discharge

A debtor should know that filing for bankruptcy will not discharge their obligations, such as:

• an amount owing on a fine, penalty or restitution order imposed by a court in respect of an offence or debt arising out of a recognizance or bail;
• an award of damages by a court in civil proceedings in respect of bodily harm intentionally inflicted or sexual assault (including wrongful death resulting therefrom);
• a court order or a separation agreement regarding alimony or maintenance;
• an amount obtained under false pretences while acting in a fiduciary capacity;
• a debt resulting from obtaining property or services by false pretences or by fraudulent misrepresentation (other than a debt arising from an equity claim);
• any debt or obligation for federal and provincial student loans where the date of bankruptcy occurs before the date on which the bankrupt ceased to be a full or part-time student or, as of June 18, 1998 through an amendment to the Act, within 7 years after the date on which the bankrupt ceased to be a full or part-time student (BIA, s 178(1)(g)).

The full list of exceptions may be found in section 178(1) of the BIA. Questions about bankruptcy, including specific questions regarding Canada Student Loans, may be directed to a licensed insolvency trustee or the Superintendent of Bankruptcy, at 1-877-376-9902.

b) Assets That May be Retained by the Bankrupt in B.C.

The bankrupt may retain household furnishings and appliances valued at up to $4,000 and any other goods or property exempt from execution under provincial and federal statutes (COEA, s 71(1); Court Order Enforcement Exemption Regulation, B.C. Reg. 28/98, BIA, s 67(1) and relevant amendments).

See Section II.B.3: Exemptions from Seizure for a list of what the COEA allows a debtor to retain.

All RRSPs and RRIFs are exempt from seizure in a bankruptcy (except for contributions made in the year preceding bankruptcy).

Any material transaction made within the past 5 years is reviewable. If a preference was given to a creditor, the trustee may act on the transaction. Lastly, any tax refund for the year of bankruptcy or any prior year becomes part of the bankruptcy, and will go to a trustee for the benefit of the creditors., or it may be seized by the government to fulfil a government debt.

NOTE: If the debtor (except anyone in commercial activities (self-employed or business) or in jail) chooses a trustee and is rejected (due to a fee charge) because they are unable to pay, they should contact the Office of the Superintendent of Bankruptcy (“OSB”), and ask to participate in the Bankruptcy Assistance Program. The debtor must obtain a written refusal from 2 trustees and, if they qualify for the program, will then be assigned a trustee in the referral program for a reduced fee (not for free). This program is not available to everyone that cannot afford to pay. Further, it does not exclude non-exempt assets such as GST and income tax refunds from seizure. Information can be found at the Bankruptcy Assistance Program website or by calling the OSB’s national number at 1-877-376-9902.

NOTE: A debtor who is on a low end fixed income, such as a fixed income pension, with circumstances unlikely to change may have no need to declare bankruptcy as they would be, in essence, judgment-proof. Refer to section C above, Communicating with Creditors when Unable to Make Contractual Payments.

I. Student Loan Debt

The law surrounding student loans and grants is constantly changing, and varies greatly between provincial jurisdictions. Students should visit the federal and provincial student loan websites to get up to date information about repayment assistance. The information found below is up to date as of July of 2016.

1. Federal Student Loan Debt

The National Student Loan Service Centre (NSLSC) is responsible for consolidating all federal student debt in Canada. In certain circumstances, students can apply for the Repayment Assistance Plan (RAP) and receive payment relief. Successful applicants may receive temporary interest relief, permanent interest relief, and in the case of a student with a disability a portion of the principal amount of their loan may be forgiven. The level of assistance a student will receive is dependent on their income level, the size of their family, and whether they have a disability.

For further information on getting repayment assistance for Federal student loans, see http://www.canlearn.ca/eng/loans_grants/repayment/help/index.shtml.

2. Provincial Student Loan Debt

BC has a student loans service program called Student Aid BC. For further information on how to get repayment assistance for BC Provincial Student Loans, see https://studentaidbc.ca/repay/repayment-help.