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November 22, 2021
In this second part of our interview with two BDO LITs, we’re busting myths about income tax debt, student debt and mortgage debt. Listen or read.
In part one of this interview, Tera Beljo had BDO Licensed Insolvency Trustees David Noronha and Jeff Lewis on BDO’s Financial Wellness Podcast to look at five common myths about debt:
In part two of our two-part series, Tera, David and Jeff will look at numbers six through 10. Listen to this episode or read the full transcript below.
Tera:
Hi, you're listening to the BDO Financial Wellness Podcast, and I'm your host, Tera Beljo. And we have another great episode in store for you. This is actually the second part of what turned out to be a fantastic discussion with David Noronha and Jeff Lewis. David and Jeff are Licensed Insolvency Trustees with BDO Debt Solutions, and they hear many misconceptions about debt and debt solutions when they meet with clients for the first time.
In part one of our Truth Behind The Debt Myths series, David and Jeff set the record straight about myths one through five. Let's hear what they have to say about the next five common debt myths. You might be surprised to learn the facts behind the fiction. David, next myth is yours. If I file a consumer proposal or a bankruptcy, will my credit be ruined forever?
David Noronha:
Okay, I think the operative two words there is ruined forever because that is the myth because it isn't ruined forever, but a lot depends on what you do once you emerge from that insolvency process. Jeff and I have been doing this long enough to know that whoever files a bankruptcy or a proposal, they do the right things once their debt is taken care of, they're going to be easily able to rebuild their credit and they're going to be able to borrow money. I've had people that go bankrupt and within several years of their discharge, because they've done the right things, they're able to qualify for a mortgage. So, we get that all the time. "I'm never, ever going to be able to buy a house if I go bankrupt. I'm never ever going to be able to borrow money because my credit is going to be negative."
No, never is a long time. While you're in the process, absolutely, it's going to be really difficult. And I would argue while you're in it, you probably shouldn't have credit anyways, because we've got to fix those other things first.
Tera:
Absolutely.
David Noronha:
Before you get to that stage. So, baby steps before you start walking, before you start running. So yes, it is something to keep in the back of your mind and it's a question we get all the time. "I don't want to do this because it's going to wreck my credit." Well, even if you had good credit now because of your debt load and depending on your level of income to your expenses, you probably wouldn't even qualify for a simple line of credit because all of your other metrics are wrong. So people say, "My credit score is really great right now." Yeah, but you've got $100,000 worth of debt. You only make so much; you're spending $1,000 more than you're making every month. Nobody's going to lend you money anyways, even though you might have a great credit score. So what are we actually looking at here?
Jeff Lewis:
I'm just going to jump in there quickly, David. So, it is a little bit of a myth, Tera, that a credit score is not a measure of financial health and people think it is. A credit score is a measure of your ability to get credit. So, the reality is you can be struggling financially, but have a great credit score because you're just turning over your credit all the time. Then you could meet someone who doesn't really need to rely on credit, who's got money in the bank, has zero credit score because they pay cash for everything and don't need to use credit.
So, when I see people and they say, "Oh, I need to get my credit score back." You have to say to them, "Do you really need to borrow money here?" Now, if you're a certain age and maybe you're retired and retired people do file for bankruptcy, they're not going to buy a house and then they've stopped driving. They may not need to get a credit score. So, we say to them, "Well, budget. Learn to live on your income." But again, if you're a young person and you got many years to go through life and you want to buy assets, absolutely, you need to get yourself a decent credit score. So, you have access to those really good rates of credit that people have available now.
Tera:
So also, too, I've heard some of our LITs say the reality is your credit may already be damaged before filing. So, what can they do to bring it back after a filing? What are the steps there?
David Noronha:
Well, the first step is you got to take care of your current debt, that's the first step. But once you get to that stage, then you need to then start getting positive marks, or pings, or hits, or whatever you want to call it on your credit score. The easiest way is to go out there and get what's called a secured credit card and then use it properly. So, maybe you go out once a week and buy gas and then you put your credit card away, you don't use it again. Then when you get your bill, you pay it off in full, not minimum payment, not part of the payment, you pay it off in full. And you repeat that process as you go along.
Now, the other thing to remember is, and Jeff alluded to this, while you're in a proposal over a bankruptcy, if you have a car payment that you've been maintaining, that's going to help your score as well too, because that's being reported on your credit report. And if you are a renter, because most of them are, in a lot of cases, you can get a positive letter or referral or reference from your landlord who says, "Yes, this person's been a model tenant. They've never missed a payment." So, there are those things that you can do. Now, not one of them alone is going to solve your problem and all of them together will eventually do that because a lot of people think that you can snap your fingers, do all the right things in the span of three or four months and improve your credit score dramatically. Doesn't happen that fast. It takes a little bit of time, but it can be done, but you have to do those right things, create those positive experiences, so that whatever's being reported to the credit agency is being noted properly because credit agencies are simply recording stations. They take the information in, so the information that you want people, or the creditors, to be giving them is positive information.
Jeff Lewis:
So yeah, and that's absolutely right, David, and you got to remember that credit agencies are - they're private enterprise. So, they report the information that they're given. One thing I would say is credit is such a big area, credit agencies and credit reporting. We could talk for another hour just on that one subject, maybe it's another idea for another podcast, but remember if this is your first bankruptcy in Canada, hopefully it would be, then it's only nine months. It's a fairly quick bankruptcy. So, after nine months, you're debt free and you can start to bounce back from that fairly quickly.
If you file a proposal, which a lot of people do now, then even whilst you’re in the proposal, you can start to build your credit during the proposal period. So, lots of things you can do. And again, it's such a difficult and complex area. Again, talk to a licensed insolvency trustee, such as BDO, and get some really good advice before you decide which action you want to take.
Tera:
Okay, so thank you both for that. That was really good. You're right, we've done one credit podcast and there's still so much more, we haven't even scratched the surface of credit. So, I'm going to do number seven with you, David. I will not be able to renew my mortgage if I file a bankruptcy or a consumer proposal.
David Noronha:
Again, another myth because it happens all the time when people are in an existing mortgage, they're worried because they won't be able to renew it with whoever it is their lender is. Typically, what happens in that situation is when it comes time up for renewal, you just go through the normal renewal process because remember, lending by those institutions is such a competitive business. They don't necessarily want to lose your business because when they lend you, especially on a mortgage, they're clearly charging you interest, and as long as you make those payments on that mortgage, they're going to be making money off of you. So, if they don't renew that mortgage with you, chances are you're probably going to go somewhere else. And especially with housing prices the way they are now, it's not going to be really that difficult to have that mortgage on that place.
In fact, we have a lot of people coming in going, "How do I get out of my existing mortgage right now? Because I'm locked into a bad rate, I want to get a better rate." So, the competition for mortgages is extremely drastic. What you might lose the ability to do is negotiate a different rate because typically what happens is, and this has been my experience, is that when it’s time for you to renew your mortgage, all the forms are sent to you. You check off the right boxes, sign here, send it back and, boom, the mortgage is automatically renewed.
Now, if you want to play hardball on your lender and say, “I don’t want to pay.” And I can’t imagine how much lower you can get these days, maybe when mortgages were 12 per cent and you wanted to get it down to eight per cent or it was five per cent and you wanted to get it down to three per cent, maybe you could play one mortgage lender off on another. But now I think, what, mortgage rates are down to, what is it? 1.8 per cent or 2.2 per cent, or something silly like that. So, there's not going to be a lot of wiggle room with respect to that. So, I've almost never, and I can't say it has never happened because that would not be a correct statement, but it doesn't happen a lot. I haven't seen it happen, at least not to any of the individuals we've assisted with, in a very, very, very long time.
Jeff Lewis:
Yeah. Also, there's another fly in the organ with this because very often people that have mortgages with their banks also have loans and credit cards with their banks as well. So, if they're going to file a proposal or a bank ... Well, generally a proposal if they've got a mortgage. Some of the concern is, "Well, will they withdraw my mortgage?" Another myth, "Once I file for my proposal." I've seen it very occasionally try to happen. The law does protect you as well, so the Bankruptcy and Insolvency Act does not allow a lender to withdraw mortgage facilities just because you file a consumer proposal or a bankruptcy, matter of fact, and most lenders are aware of that. So, if that's something that people are afraid of, you don't need to be.
Tera:
That's really good to know.
David Noronha:
Yeah, and that extends to car financing as well. So, it's almost along the similar vein because those lenders are secured on a specific asset. So, a mortgage is secured on your house, car financing whether it be a lease or a finance, is secured on the vehicle, because the other times people go, "I'm going to not be able to keep my finance vehicle when I file a bankruptcy or proposal." I think Jeff touched upon it briefly at the beginning of this podcast is no, as long as you make that payment and you haven't had a bad history with them, of defaulting and falling back, and then having to get caught up in all that sort of stuff, you should be fine. So, you're not going to lose your finance car if you've always made that payment and you're not going to lose your house if you've maintained that mortgage payment and the renewal on it is not going to be that difficult.
Jeff Lewis:
Sorry, one more thing. Yeah, sorry. Very occasionally, if you are close to renewing your mortgage and you do have unsecured debt, that's a great time to go and see a trustee because you can renew your mortgage, say for five years and then go and find yourself a five-year proposal and the two will run concurrently.
Tera:
Perfect. Okay, so number eight. David, I'm going to go to you again. I can't include my student loans in a consumer proposal for a bankruptcy.
David Noronha:
Okay, so student loans is what we call a special debt, or at least that's what I call it, because there are different rules that govern student loan debt and the straight and narrow of it is simply this. If you have been out of school for more than seven years, you can include your student loan debt. Now, there's timing issues with respect to that. So, say for instance, you last attended school on the 7th of April. Well, it's not seven years from the 7th of April because typically the government takes it to the last day of the month. So, it's usually the last day of the month in which you were in school. So, if you want to go and file a bankruptcy, then you better file it on May 1st seven years from the date of April 30th using the example that I've had.
Where it gets really, really tricky and there's different jurisprudence on it, in fact, I just read an article on it the other day, is there's something called multiple dates when it comes to student loans. That simply refers to the fact where say you got a student loan to go to McMaster for business and you took a two-year program and you struggled, or you just realized that it wasn't for you and you left school. And then eight years later, you decide to go back to university. So, now you're past seven years, but you've gone back in the eighth year and you want to take nursing. Well, some have argued, and in some cases successfully that, "When I go back to school for nursing, had nothing to do with my business degree more than seven years ago. So that student loan, I should be able to file a proposal or a bankruptcy on." Well, unfortunately this is where it gets gray, because a lot of places are saying, "No, it's seven years from the last time you were in school, regardless of what topic you were taking."
So, it's flip-flopped back and forth. That's again, why it's really important to talk to an LIT because those rules change all the time based on government rulings or court rulings and the jurisprudence changes on a regular basis because there was a period of time where we operated not on the multiple date thing where we said, "No, if it had nothing to do with the prior loan, then yeah, you can go bankrupt on that student loan." Well, now it's a little bit more gray because there's been recent ruling saying, "Nope, that rule doesn't apply anymore."
So typically, if you have been out of school for more than seven years and you haven't gone back to school, then yes, that debt can be included in a student loan in a bankruptcy. But here's one thing to remember, and this is where sometimes it also gets a little tricky. If it's a federal student loan, so a national student loan, even though you may have gone bankrupt or filed a proposal that has taken care of it, because it's more than seven years old, we've had stories where Canada Revenue Agency has decided to keep your tax refunds against that debt. Then it becomes a little bit of a battle to try and get that back for you.
So, just be cognizant of that potential issue. When individuals come in and talk to me, I always say to them, "Be aware of it in case it happens. If it does, let us know. We'll go to bat for you, we'll try and send the proper documents and get that refunded to you." But that's just something to be aware of.
Jeff Lewis:
Yeah and also, if it's more than five years, so you've been out of school for more than five years before you filed your bankruptcy or proposal from the last day you attended school or did your last exam, but less than seven years, once you get discharged from your bankruptcy or the proposal's finished, you can actually apply to court under certain hardship provisions. It's not a given, but if you can show that the registrar or the judge that you're not working in the same industry that you studied in and you have no chance of paying back your student debt, then sometimes they will discharge it for you as well.
So, when the government looks at student debt, they once said to me they're investing in the future, in the person's future. The idea is they're going to get themselves a university degree, get a better job and then have the money to pay them back in the future. So, that's the whole premise behind it. But a lot of times, Tera, for one reason or another, they don't end up working in the profession that they've studied in, right? And they don't get the benefits of that.
Tera:
Yeah, definitely. And, David, is there any other options for student loan assistance?
David Noronha:
Well, you can rely on whatever the government allows you for relief assistance, non-payment assistance. There's a whole slew of them. You just go to whatever the ministry, the provincial student loan site, or even the federal and avail yourselves of that. We do a financial literacy presentation where we talk about student loan debt. One thing we always stress is when you start school and you have student loan debt, you need to be thinking about how you're going to effectively try and repay that back. Unfortunately, the statistics are so overwhelming. I think the last stat I saw that said that if you have student loan debt, the average student that graduates has about $30,000 worth of debt that they have to repay back. If you don't have a decent job, or if you don't have income that exceeds your expenses at a reasonable amount, how on earth are you even possibly able to do that?
So, familiarize yourself with all of those government assistance programs to take advantage of them as much as you can. The one thing you need to be aware of is whatever one you apply for, make sure that if it's suspension of payment or whatever, that they also suspend the interest payments. Now, I know with COVID, the government has enacted different rules right now that basically has alleviated that. But like everything else, once they get out of this COVID panic, as I call it, the old rules may come back and you just got to make sure that whatever you're being charged is the right amount.
Jeff Lewis:
Yeah, and just as an epilogue to that, David, just if people are listening and they do have debt and part of that is student debt, you can still file a consumer proposal for all of your debts. What will happen is the trustee through the proposal mechanism, will pay back part of your debt for you to student loans. The bit that's left because the debt was less than seven years old, you can take care of that yourself. It doesn't prohibit you from filing. So, it's still an option available to people. Again, it depends on your circumstance. So again, reach out to a trustee so we can evaluate your unique circumstances for you and give you some advice on that.
David Noronha:
Yeah, and that's a good point to point out, is just because you have other debt and your student loan debt isn't forgiven, does not preclude you from filing or availing yourselves of a bankruptcy or a consumer proposal option. But an LIT can explain how both of those work at the same time. So, that is a really good point.
Tera:
Perfect. All right, we're almost at the last one. So, we're at number nine now, and, Jeff, going to go to you. I can't include income tax debt in a consumer proposal or bankruptcy.
Jeff Lewis:
So yeah, this is a huge question at the moment, Tera, the reason is because the government - nine million people claimed CERB benefit in 2019 and again in 2020, which is an untaxed benefit, so a lot of people now are having tax debt that they didn't have before. It may not be a high tax debt from a dollar perspective, but it may just be that amount of debt that breaks the camel's back. So, the answer is generally yes, income tax debt is the same as ordinary credit. So, it's treated the same as a credit card, or a loan, or a bank loan. It is included in a bankruptcy and it is included in a proposal and the government, yes, they will accept a settlement in a proposal and then write the debt off in a bankruptcy.
Tera:
Now, I'm going to ask a question, because this was asked of me by a friend the other day, and it came to mind because it has to deal with tax debt. So, when you're doing consumer proposal, you go to all the creditors and you ask them to accept the proposal. If the CRA does not respond and the proposal goes forward, can CRA come back to you and take the money?
Jeff Lewis:
No, no. So, they're treated the same as any other creditor. So, in the consumer proposal, they're as a statutory voting period, it's 45 days. So, at the end of the 45 days as trustees, we count the claims that we've received, and a claim has a vote attached to it. So, as long as we receive majority, in terms of dollar value of the votes that we receive in favour of the proposal, then all the creditors are bound by the terms of that proposal, 15 days later, once it grants court approval, and that includes the Canada Revenue Agency. So yeah, if they don't vote and we get enough votes in favour, then they are bound by the terms, absolutely.
Tera:
Perfect, thank you.
David Noronha:
Yeah, that's a really good question, Tera, because a lot of people think that, "If I owe $20,000 in credit card debt and the government is owed 10 grand in back taxes ... " Well, if you file a proposal and the 20, as Jeff alluded to all vote yes, even if CRA votes no for their 10, because the 20 voted yes, the CRA's 10 has to be included in that. So, they're bound by the law to be part of that proposal, even though they voted no. So, that's something to remember.
Now where it gets difficult is if CRA is the 20 and they voted no. Now they control that process. I think it's important at this stage to differentiate between what I call the three key CRA tax debts. You've got income tax, obviously, which is personal. If you are a sole prop or you're a director of a business and you have HST potential liability, that's a different sort of debt. Or the worst kind, is if you have payroll source deductions, which means you withheld income at source and you didn't remit it to the government, that's a really, really strong tax debt that the government isn't going to ignore. A lot of times people come to us and they owe tax debt. It could be one of the three, it could be a combination of the three. The important thing is you get to us before the government actually places a lien on your home for that debt. Because once the lien goes on there, it's a secured debt and you're stuck with it. So, if you're struggling with that, don't wait to come see us until after that lien is placed. Because once that lien is on there, it's really, really difficult to get rid of.
Now, there are tools but they're really hard to use. If you're struggling with tax debt, any of those three, get to us in the early stages so that we can beat the lien on any property that you may have.
Tera:
Perfect. Jeff?
Jeff Lewis:
Yeah. So, David mentioned a good point. If all you do is owe income tax, so say you're self-employed and you've got outstanding returns and you file your returns and your accountant says to you, "John, your tax bill is huge, and you can't afford to pay it." Then we can still file a proposal for you. It is more negotiation with the Canada Revenue Agency, but absolutely we do it all day long and it is possible. So, as trustees, we have a good relationship with the individuals in the government, especially specific government departments, their insolvency group. We can have those one-on-one conversations and get an agreement in place that works for you.
Because they want to see you succeed as well. So, they're looking for how can they recover some of their tax and you can continue obviously working and supporting yourself. So, there is one different type of tax bankruptcy if you like. If you are unfortunate enough to owe more than $200,000 in unpaid income tax, then that does have special rules. Most people don't get to that level obviously, but if it is that high and it's the majority of their debt, which means more than 75 per cent, then there's an automatic what we call opposition for that. If you are in that level again, talk to a trustee who will advise you on the best way to deal with it.
Tera:
Perfect, all right. And number 10, we're closing her out. Jeff, this one goes to you and I'm glad this is the last one because it wraps up everything we've said and makes it very clear. Here's the myth, a Licensed Insolvency Trustee works for my creditors.
Fact: Licensed Insolvency Trustees are mediators that work to help get people out of debt
Jeff Lewis:
Yeah. Okay, it is a myth. And we're in a unique position because a trustee is a court officer, all right. So, what that means is we sit in this position between the creditors, so the people you owe money to, and the debtor who's the person that will come and see us. Our job is to make sure that everyone's dealt with fairly. So, the debtor is dealt with fairly that they're dealt with correctly under the Insolvency Act, they receive the protection that they deserve. And from a creditor's perspective that they receive the return that would be allowed to them under either the calculation under a bankruptcy or in terms of a proposal, what the debtor can really reasonably afford to pay back.
So, someone coming to see us might say, "Well, we're paying you. We're paying you. You are our client." Well actually, no. We're paying someone to really act as a sort of mediator, a legal mediator in the middle to make sure that the act is transparent. Because you got to remember, money's a dirty business and the government are very aware of that. So, as government licensed trustees - and there's only a thousand in Canada, so it's a pretty unique position, that they want to make sure that people are dealt with according the spirit of the act, which is to help unfortunate debtors rehabilitate. That's the prime focus of what we do, we help people and make sure that they're dealt with fairly.
David Noronha:
Yeah and just exactly right. We're in that unique position, and I always use a fence analogy when I say that, because as officers of the court, we represent the Bankruptcy and Insolvency Act and the debtors sit on one side of the fence and the creditors sit on the other side, both parties have rights given to them by this act. Our job is to make sure that they avail themselves or at least are aware of those rights. That's our duty to you but when you come in and see us, you don't know anything about the Bankruptcy and Insolvency Act.
So, our job is to help you understand that, to know what your rights and the things that you can do legally, to take care of this. That's our job. So, when you come in and see us, we're making you aware of all of that stuff. Then when we take that information, we file it, and we give that information to the creditors, the creditors come to us for a question. Our job is to make sure that they get the information that they're entitled to receive. So, it's not, we're out there working for the creditors to get as much as possible out of you for them. No, our job is to make sure that both parties, both sides, avail themselves of the act the way the act is intended to represent both sides, so that both sides are treated fairly.
So, I know a lot of our non-“licensed insolvency trustees”, they use that phrase and throw it out there to try and steal, work away from us to say, "Don't go see an LIT because all they do is work for the creditors." No, that is completely untrue. Our job is even greater than that because we have a fiduciary and an obligation and a duty. We're governed by the act; we're licensed by the federal government. We have professional codes of conduct. If you go see somebody who's not an LIT, ask them those questions. Where's your professional code of conduct? Who do you answer to? Are you licensed by the federal government to do this? And you're going to get no, no, no to all of those, or they won't give you a straight answer. That tells you all you need to know. So, when somebody says that about us, it bothers me because that's not our role.
Tera:
And I love the analogies you use because you know, fences make good neighbors.
David Noronha:
There you go.
Tera:
So, thank you both. Before we go, I am going to see, is there any myth that either of you have heard that we didn't touch on today, that you want to debunk? Jeff, I'm going to let you go first.
Jeff Lewis:
You know, I won't call it a myth, Tera, but I'm going to say to you, almost every person that comes to see me says, "Jeff, I wish I'd come to see you two years ago." It's not a myth, but it's a fact and human nature, if you're in debt and you're struggling, and lots of people are struggling right now because of COVID, your natural strive is to try and fix it yourself. But sometimes you're in, we call it a debt spiral, where the interest gets so high that you just can't pay back any of the capital, and you're never going to get off debt. We've all seen our credit card statements that says, "Minimum payments you're paid off in 35 years," or whatever.
So, I would say it's nothing to be ashamed of. It's just things that happen to people. If you really just ... not even you think you need help, just want to have a quick chat about anything credit reporting, budgeting, reach out to a professional, such as a Licensed Insolvency Trustee, of course, which we are, and just get some free advice, because you may find it's the best phone call you made all year, really. If you need help, then again, you're in the right place to get the help.
Tera:
Yep, just like life happens, debt happens.
Jeff Lewis:
Absolutely, yeah.
Tera:
And, David, what about you?
David Noronha:
There's not much really, I can add on to it. The 10 myths that we touched upon, and I think we may have strayed from it a little bit and added a few in there, are really the key big ones. As Jeff pointed out, I think the biggest hurdle from a lot of people is actually reaching out for help. I think the key there is to make sure you're reaching out to the right professional to get the right information, so that you can decide what makes the most sense for you.
The sooner you do it, the better, because the sooner you do it, the more options we're going to have, and the more time we're going to have to analyze it, structure it and put the right things in place. If you wait till the very end and in some worse case scenarios, exhaust all personal resources that Jeff's alluded to, well, maybe if you'd come to at the very beginning, we could have figured out a way, and again, through legal means, that you don't have to exhaust all of your resources. In fact, you can keep some of them and still be able to get rid of your debt. Wouldn't that have been better than trying to do everything on your own, lose everything, and then be left with no options whatsoever?
So, I always stress that. If you think you're struggling, talk to us, we'll give you the right information. And then you can decide what makes the best sense for you, because we'll explain all of those things to you in a fashion that you'll understand. We're almost Coles Notes versions, for lack of a better description. So, that's our job.
Jeff is absolutely right, people are saying, "I wish I'd talked to you sooner. I wish I'd done this sooner it would've been so much easier in my last year or two years of my life. I could have been rebuilding instead of struggling."
Jeff Lewis:
Yeah. And actually, David, I'm just going to throw in something that's come into my head there, pension funds. If you've got pension funds, don't withdraw your pension funds to pay off your debt, go and see a trustee because that's also an exempt asset by large. What you don't want to do is ruin your financial future when you retire to try and become debt free now. So, all sorts of reasons just to reach out, Tera you don't know what you don't know, that's the problem.
Tera:
Perfect. Thank you so much, both of you, for sitting down with me today. I can't wait to do it again. It was really fun.
David Noronha:
Yeah, it was awesome. Thanks guys, I really enjoyed it.
Jeff Lewis:
Me too.
Tera:
Once again, I want to thank my guests, BDO Licensed Insolvency Trustees, David Noronha and Jeff Lewis, for taking part in this two-part series: The Truth Behind Debt Myths. If you are looking for more Financial Wellness Podcasts, videos, debt management resources and tools, please visit our website debtsolutions.bdo.ca. And remember, we are here to help you turn the page on debt. Your next chapter is waiting.
November 22, 2021
In this second part of our interview with two BDO LITs, we’re busting myths about income tax debt, student debt and mortgage debt. Listen or read.
