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November 19, 2021
Trying to find your way out of debt can be stressful and confusing. There’s no shortage of debt myths out there, and it isn’t always easy to separate the fact from the fiction.
Trying to find your way out of debt can be stressful and confusing. There’s no shortage of debt myths out there, and it isn’t always easy to separate the fact from the fiction. It’s tempting to rule out some debt solutions, especially if you don’t have all the information you need to decide what’s right for you. In this episode of BDO’s Financial Wellness Podcast, our guests BDO Licensed Insolvency Trustees David Noronha and Jeff Lewis help us sift through the first five of 10 common debt myths to get to the facts. To learn more about our conversation listen to this episode – part one of our two-part series about debunking debt myths – or read the full transcript below.
Tera:
Hello and welcome to the BDO Financial Wellness podcast. I’m your host, Tera Beljo and you’re listening to part one of our two-part series about debt myths. In this episode, we’re going to set the record straight about the first five of 10 common misconceptions about debt. The thing is when it comes to debt, the more you know, the better. And if your decisions about managing your debt are based on fallacies not fact, you and your finances can and will suffer. In this debt debunking series, I’m joined by BDO Licensed Insolvency Trustees, David Noronha and Jeff Lewis. David and Jeff set the record straight about common myths they hear from their clients when they’re meeting them for the first time.
I am lucky enough to be sitting here with David and Jeff and we are going to debunk some debt myths for you today. David, I’m going to start with you and you’re going to get the first myth that we’re going to debunk. The first myth is, I will go jail if I don’t pay my debt.
David Noronha:
Well first off, let me start by saying, I’m going to really look forward to this session with you and Jeff because some of these are brilliant. We get these all the time and I’m so looking forward to telling people about these because I think this is going to put a lot of people’s concerns and worries at ease because what we’re going to be talking about are real life situations. And these are questions we get all the time. And I can’t tell you how many times when I’m talking to somebody or somebody’s sitting in my office or in our boardroom and they go, “I’m really worried because if I don’t pay my credit card debt police officers are going to show up at my door. He’s going to arrest me and he’s going to basically throw me into the jail overnight because I didn’t pay my bills.”
Tera:
I’ve heard there’s no such thing as a debt jail.
David Noronha:
Well, it’s more mental than anything, I believe. People do it to themselves and that’s understandable because nobody really goes out there and says, “I want to incur debt and then not pay it.” If you are, then technically maybe you should be thrown in jail. But having said that, everybody is entitled to credit. In fact, some people that technically wouldn’t even qualify for it are getting credit these days because the competition for lenders to provide that facility is so aggressive out there that individuals sometimes we’re seeing that don’t actually have any income are getting credit cards. How do you qualify based on that? They’re getting pre-approved applications. They go out there and use the credit card with the intent to pay it back or they believe they’re going to be able to pay back over time but then life gets in the way.
They run into struggles and they go, “Oh my goodness, I don’t have enough to pay that bill, but I still need to use it because I don’t have enough to put food on my table. I don’t have enough to pay my car payment,” or whatever and then they start running up their credit. And one of their biggest worries is, is that they’re going to be able to arrest me because I’ve used credit and now, I can’t pay it back. It literally almost never happens. I’ve never seen anybody get arrested because they tried to use their credit in the ordinary course and then they ran into struggles and they found that they couldn’t pay it off.
In all the years I’ve been doing this (and I’ve been doing it for a very, very long time) not anybody that’s come see me has been thrown in jail because they couldn’t pay their debt. And that also includes what they owe to Canada Revenue Agency. Now they (creditors) do have certain powers but it’s extensive and it’s rare that they actually use that. If anybody’s worried because they can’t pay their debt that they’re going to be arrested for it, it’s in fact, an absolute myth in my mind.
Tera:
What I’m hearing is there’s a difference between fraud and getting into debt troubles and not being able to pay your bills.
David Noronha:
And that’s a really good point because fraud is a really, really dangerous word. If anybody alleges that you’ve committed fraud, they literally have to go prove that in court. They have to write up charges. They have to serve you with papers. They have to take you to court and they have to basically get a court to say, “You committed fraud.” And yes, if you did commit fraud, then technically they could use the means behind that to enforce some sort of collection activity to do that. But even if they do get the fraud charge, it’s rare that that leads to jail time. You have to be a criminal of the utmost sophistication to even begin warranting things like that. We’ve seen people that have basically run Ponzi schemes, defrauded people of millions of dollars, those are the kinds that end up going to jail.
If you’ve got a $10,000 credit card debt and you’re struggling to pay it back, they’re not going to throw you in jail for that. Even if they allege you committed fraud and they make you feel like you might have, they still have to go prove it. They have to get a judgment against you for that to happen.
But that sort of leads to the next point, if they do get the judgment, then they can take extra collection efforts. That’s when they can garnish your wages. That’s when they can go freeze your bank account or place a lien on your property if in fact you own a home. That’s where you don’t want them going to court and getting those orders because then they can now go ahead and take your money, freeze your accounts and maybe even take your assets, which is what you don’t want.
Tera:
You just brought up garnishment. That brings us to debt myth number two, once a garnishment against my pay starts, it cannot be stopped. Can you debunk that one for me, David?
David Noronha:
It can absolutely be stopped. The difficulty with garnishments is there’s always a timing delay. It doesn’t happen overnight. It doesn’t happen immediately, but we do have the power under the Bankruptcy and Insolvency Act to stop wage garnishments. And it’s even more powerful because we can stop wage garnishments that have been enacted by the government. If you owe outstanding income taxes and they’ve garnished your wages, if you file a consumer proposal or if you file a bankruptcy, you can in fact stop that wage garnishment. But the minute you file, we have to prepare the paperwork, we have to send the paperwork not only to the government, but we also have to send it to your employer. Sometimes that’s a little bit embarrassing for the individual because now clearly the employer’s going to know that you filed an insolvency proceeding but that’s really the only effective way that you can stop the wage garnishment.
Clearly, the other way is to pay what you owe so that whoever’s garnishing wages will lift it on their own but typically that’s not going to happen. It can be stopped but if you come and see us on a Monday, you file on the Tuesday, the garnishment technically will stop on the Tuesday but because of timing and documentation and the employer, as well as the person or the company garnishing your wages needs to verify all of that, it usually takes a little bit of time. Just be cognizant of that. It can be done but it can’t be done immediately.
Tera:
Okay. And what else ends when you file a consumer proposal or a bankruptcy?
David Noronha:
Interest and penalty. They freeze on that date. After that date, the creditors that you owe money to have to stop charging your account with those monies. The other thing that gets into place is what we call a stay of proceedings. If your creditor wants to sue you, if your creditor is in the middle of suing you or if your creditor actually has a judgment, the stay of proceedings takes place effectively on that date and that legal proceeding stops regardless of what stage it’s in. If somebody has served you with a statement of claim and says, “Tomorrow we’re taking you to court.” If you file a bankruptcy or a proposal, we can stop that proceeding. Now we have to notify the court. We have to notify the person that’s suing you, their counsel, make sure that everybody has the proper paperwork.
And sometimes you may still have to go to court just to explain what’s going on because the timing requires you to attend but we give you all the documents to go to court with because I always suggest to our clients is that, don’t assume that they already know about that so it may not be a bad idea for you to attend and provide the paperwork. And then you just simply refer them directly to us and we will make sure they have every document that they need in order to put that stay of proceedings in place.
Jeff Lewis:
Yeah. I’ll just follow up Tera on what David was saying. You got to remember that the Bankruptcy and Insolvency Act is a federal act and it is a very powerful act. It actually exists to help debtors rehabilitate. The very fact that it can stop anything really that is creditors having action against you is really what it’s designed for. The stay of proceedings trumps any legal action that will be against you, stops it dead in its tracks. Once you see a trustee, generally, we’ll also notify the courts for you. We’d have immediate notice about the proceeding and at any point. If there’s a judgment, it will stay a judgment. If it’s a preliminary procedure, just entering court, it will stay that as well.
If you do get to the stage where you have creditors take you to court and you got to remember, that’s only within a certain timeframe. In Ontario and Canada, the legal proceedings have to take place within two years. After two years, you’re what’s called judgment proof. The creditors cannot take action against you. Within that two years, absolutely a trustee can stop that for you. And any garnishment as well. A garnishment effectively is a legal action against you, if you like. A garnishment follows a court judgment so the procedure is that a creditor would take you to court, get a judgment against you to say that you owe them money. And then once the court’s agreed that, and it’s hard to disprove that because you owe them money, you owe them money, they’ll get what’s called an execution order, which can be used in many forms. A garnishment is the most common. They’ll attached that to your earnings. We would as trustees immediately inform the employer and goes into the payroll department and it stops.
Tera:
Perfect. Well now it’s your turn to debunk something for me. This next one is, and you know what, David touched on it a little bit ago so let’s kill this one for good. Everyone will know that I filed a bankruptcy or a consumer proposal.
Jeff Lewis:
Yeah. Good question. And it’s something that we hear very often. The legal answer to that is yes, it is a public filing. When you file with a trustee because it’s regulated by the Office of the Superintendent of Bankruptcy, which is a government department and because it is a legal proceeding. I already mentioned that Bankruptcy Insolvency Act is a federal act, then you do get a court number in your district. Technically, yes, anyone can go into government’s website, currently pay a fee and find out if you’ve filed a bankruptcy proposal. Now, most people wouldn’t know where to look. Most people wouldn’t have the fortitude to do that or could be bothered. You need some information, given the millions of people that have filed already in Canada, you need a person’s exact name, usually a date of birth because if you look for a John Smith, you may get a 100 or 200 people turn up.
What most people are concerned about is the credit agencies. As you know, there’s two credit agencies in Canada, TransUnion and Equifax. They both will report any activity on your credit file. And one of those activities are legal proceedings. They’ll report the fact that you filed a bankruptcy or consumer proposal, just to inform the creditors if you do go and apply for credit after you filed, that you filed. And so, it’s putting them on notice. It’s a public record. It does stay there for a certain amount of time and then it will fall off. Even though it falls off your credit report, they can still go to the government. But again, as I said, people won’t usually bother, and people talk about seven years.
Usually, for a first bankruptcy, it’s seven years from discharge date. After seven years, it will fall off your credit report. It does go up to 14 years for a second bankruptcy. What we notice is that filing a proposal is a more lenient approach and hence that it falls off your credit report a bit sooner. That’s generally in Ontario, six years from the day you file, not from the day you get discharge or proposal finishes. And if you pay off within three years, then it can be shorter than six. It’s usually three years from your last payment date.
Tera:
Perfect. And David, you had something to add?
David Noronha:
Yeah. At the first get off, when people file a bankruptcy or proposal, obviously the government has to be aware of it as Jeff’s pointed out because we have to register it. The only other parties that get notification from us are the creditors. The people that you identify. If you’re not being garnished, then we don’t even tell your employer so there’s way on earth that your employer will know. And we get all the time, people will know that. No, they won’t because they don’t know where to look. Now, if they’re sophisticated enough as Jeff’s pointed out, then absolutely they’ll find that information out. But unless they do a credit report on you, there’s no way you’re going to know.
A little side story with respect to that, when I first started doing this, I helped somebody go bankrupt because they were in a lot of trouble. Three weeks later, I met this person at a hockey arena, and they were terrified. They were petrified because, oh my goodness. Everybody knows what you do for a living, Dave. Well yeah, absolutely. But just because I know you doesn’t mean I know you because you came and saw me. I simply know you because our daughters play hockey on the same hockey team. And I helped this individual throughout the whole bankruptcy, the first nine months, because that’s your discharge summary bankruptcy and nobody had a clue. I said, “Nobody’s going to know about it. They simply aren’t.” That fear is more self-driven than anything because you felt like you’ve done something that you shouldn’t be doing and people are going to be able to see it on your face and all that sort of stuff. They absolutely are not. Put that fear aside. Your creditors and the government will know and that’s essentially what it’s going to come down to.
Jeff Lewis:
Yeah. Just one more caveat to that and something we usually forget actually is that 99.99% of bankruptcies are what we call summary administration. It almost like a fast track bankruptcy where we don’t need to notify anyone other than the creditors. In the rare instance that you have more than $15,000 worth of assets, we need to file what’s called an order administration, which we really don’t do that often but the law requires us in that instance to notify the creditors and anyone interested by putting a notice in the local newspaper. That’s again, we do that very infrequently but by and large most people that end up filing for bankruptcy have assets under the $15,000 threshold.
Tera:
Okay. What I’m getting from you both is the neighbor who didn’t like me, who lived upstairs is not going to know if I file for a consumer proposal.
Jeff Lewis:
Highly unlikely.
David Noronha:
Not unless they’re a creditor or the Superintendent of Bankruptcy or knows where to look to find it. If they don’t have those three things, then probably not.
Tera:
All right. And now Jeff, we’re onto number four, which is, I will lose everything if I declare bankruptcy. And I think this is a key because I think there’s a lot of confusion between Canada and the US in terms of what goes on with a bankruptcy, so I love that we have this one.
Jeff Lewis:
Yeah. Just quickly, the US and Canada operate under different legal regimes when we come to insolvency. Certainly, in Canada, again, it’s a big myth. The main aim of a trustee, so when you go to a trustee and file a bankruptcy, then the job of a trustee is to take your assets and distribute those assets in an orderly fashion to your creditors. But what the law does allow is that you retain certain amount of assets to allow you to rehabilitate and really create a fresh start for yourself. It’s provincially based. There are exemptions provincially. It’s called the Executions Act in Ontario and the main assets people claim essentially for are household furniture, which is a very sizable exemption. And we work on secondhand garage sale value. I’ve never really come across anybody that has anything that’s valuable to the trustee.
Your clothing is fully exempt. And of course, the big one is cars, motor vehicles. And if I had a penny for a time everyone came to see me and said, “Jeff, I want to file a bankruptcy, do I lose my car?” I’d be a rich man. The answer is no. There is an exemption in Ontario for a vehicle, it’s just over $7,000 currently. It goes up every year with inflation, generally. And it’s the value of your car and a secondhand value after taking off any debt that you owe on the vehicle. In other words, if the equity in the car is more than 7,000, then that may be something that you have to purchase back the extra from the trustee. But by and large, we very, very rarely see that.
For most people, generally, there’s no money in their vehicle because it’s financed over a long period. The basic answer is if you can afford to keep paying for your vehicle in the bankruptcy, then you can keep it and they won’t take back your vehicle or creditor, lender will take back your vehicle because you file a bankruptcy, they will take back your vehicle because you stopped paying for it.
Tera:
Okay. And what about our house? Because that’s a huge concern for people too. Where am I going to live?
Jeff Lewis:
Houses are a bit different. A lot of people that file a bankruptcy usually are renters. We don’t see that as more of an issue for people, but the people that do own a house, again, that’s provincially based. In Ontario, there is a very small exemption, but it’s very small. Usually people that have own real estate and we’ve seen property prices increase substantially in the last couple of years and that’s an issue for people. A very common question is, “I’ve got this debt that I need to pay. It’s unsecured credit cards and loans but I’ve got a house which has got equity in there.” And sometimes more than the debt that they owe. But you can’t obviously pay back your debt with bricks because one’s solid and one’s not. We usually recommend that situation to file what’s called a consumer proposal where again, as David said, the interest and penalties will stop and we’ll negotiate with the creditors for them to pay back their debts over an orderly period up to usually 60 months.
David Noronha:
And then Tera, so just to build on that. And that’s why I think it’s really important that when somebody is in that situation and they’ve got assets that they’re worried about and they’ve got debts that they’re struggling with, it’s really critical that they talk to a Licensed Insolvency Trustee like Jeff or myself because we can answer all of those questions about, am I going to lose my assets? How do I take care of my debt and still try and to keep my assets together? Because we have that Bankruptcy Insolvency Act that we operate under and we know what the rules and the guidelines are and hopefully we should be able to structure something that will satisfy all of those concerns. Because if you are willy nilly and getting information off the internet, not knowing really you should be doing this or not but it seems like a good idea, you might actually get yourself into more trouble, which is what we don’t want you to do.
We want to be able to structure something so that you get to keep as much as you possibly can while at the same time getting rid of your debts. That’s the information that Jeff was imparting upon everybody is that there’s so much in there and there’s so much information. We don’t have enough time in this podcast to go over all of those exemptions and things of that sort. And sometimes they can get a little bit complicated. We can talk to you about that and if we require more information, then we can explore it even further. But I think that’s the critical component. Talk to us because we will have that information and those answers.
Tera:
I’m going to add a myth then, I don’t have the money to come talk to you guys.
David Noronha:
We will figure that out in that discussion because sometimes there are other ways that we can work around that also as well. And people say, “How do I go bankrupt when I have no money? How do I file a proposal when I don’t have the money?” Well, you actually might but you don’t know where to look for it.
Tera:
And visiting one of you lovely gentlemen is also free to talk about it, right?
David Noronha:
Absolutely. And it’s a 100% confidential.
Jeff Lewis:
Yeah. Yeah. I was going to say the worst thing that you can do if you are in debt and you do feel like you’re drowning and can’t manage it yourself, then the worst thing you can do is not talk to a professional. And like David said, it’s a confidential, no charge appointment with a trustee. And at the very least, if you walk out the door with some more information you had when you went in that helps you duly direct it yourself, you’ve done yourself a favor. And if you really decide that you do need professional help, then you need to know what help is available for you.
Tera:
Okay. Onto number five and this is a big one and I actually had a discussion about this with a family friend over dinner the other week, cosigning a loan means I am only responsible for 50 per cent of the debt. Jeff, do you want to take that one?
Jeff Lewis:
And that’s a huge myth, let me tell you. You need to be understanding the wording of that. If you cosign a debt for somebody else, what you are saying to the lender is that, “I will pay that person’s debt back in full if that person cannot afford to pay.” And that’s really important because you’re not just signing for half of it. And a lot of people don’t really understand I think when they cosign what it actually entails and it’s been some very sad conversations in the past when clients come in and they have a cosigner and we say to them, “We can take care of the debt from your perspective, but guess what? Your father or your mother or your friend or whoever cosigned for you, they’re going to get a call from the bank as soon as you filed or the lender and they’re going to ask them to pay it back in full.”
It’s a big myth and something you need to be aware of and not just the people coming to see us but anybody out there that thinking of cosigner for someone, don’t cosign unless you can afford to pay that debt yourself.
Tera:
And I’m going to add to that because we talked about this a little bit in the last podcast we did, what about being responsible for your spouse or in some cases ex-spouse’s debt? David, do you want to?
David Noronha:
Yeah, so I was just going to add to what Jeff said because this is where we see it pop up more often than not is between couples, especially if they’re going through a separation or a divorce and they actually sign a legal document that says one spouse is going to be responsible for a 100 per cent of the debt, even though both cosigned it. The one that now thinks that they’re off the hook, if the one that has agreed to be responsible for it ends up not paying it back, the bank is going to come after the other person and then you’re completely caught blindsided and off guard because I just signed a family legal document saying that I’m not responsible for the debt anymore. But you have to remember the bank didn’t sign that agreement, so the bank’s not bound by it. Now they’re going to be able to come after you for all of that.
That’s where sometimes what we do crosses over into the family law issues. We are always talking to individuals and a lot of them who are going through difficult separations or even family law lawyers that may not be up to speed on the Insolvency Act to say, “You know what? Before you start structuring deals with your clients, maybe you need to know what happens if one of them goes bankrupt or files a consumer proposal.” I think that’s really, really critical.
And the other one that we see a lot is when other family members sign, a parent signs for a child or a child actually signs for a parent, student lines of credit are another big one, where the parent has to sign it otherwise the student isn’t going to get that line of credit. But once the student graduates, if they’re not paying it back, mom and dad who cosigned that student line of credit is going to be on the hook for it. Anytime you cosign a debt, you are literally saying, “I’m on the hook for a 100 per cent of it all if the primary borrower doesn’t pay it back.” It’s really, really important.
Jeff Lewis:
Yeah. And Dave is absolutely right. And divorce is a contributor to sometimes filing an insolvency. I heard a statistic actually, I’m not sure whether it’s correct but they said the biggest cause of divorce is actually financial matters between couples. It’s really important to talk to your spouse and both be on the same space, from a financial perspective.
Tera:
I heard a great, somebody tweeted this to us actually and it says “significant other: sign if I can’t”.
David Noronha:
I have to find that. That’s pretty good.
Tera:
It was pretty good. Well, there you have it. That was part one of our debunking debt myths. And once again, I want to thank my guests for this episode, BDO Licensed Insolvency Trustees, David Noronha and Jeff Lewis. And stay tuned for part two coming next week. 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 19, 2021
Trying to find your way out of debt can be stressful and confusing. There’s no shortage of debt myths out there, and it isn’t always easy to separate the fact from the fiction.
