Consumer Insolvency Information Session May 29, 2012 BDO WHO ARE - - PowerPoint PPT Presentation

Consumer Insolvency Information Session

May 29, 2012

BDO – WHO ARE WE? BDO WHO ARE WE?

• We are Chartered Insolvency and Restructuring
• We are Chartered Insolvency and Restructuring
• Professionals (CIRP) and Trustees in Bankruptcy
• We are licensed under the Bankruptcy and Insolvency Act

p y y (BIA) – a federal statute

• We are monitored by the Superintendent of Bankruptcy
• We are Officers of the Court
• We are Officers of the Court
• Most of us are accountants by training

BDO – WHAT DO WE DO? BDO WHAT DO WE DO?

• We solve problems
• We solve problems
• We are honest professionals that try to find a fair solution
• We help individuals deal with their debt allowing them to

concentrate on their financial rehabilitation and future concentrate on their financial rehabilitation and future

• We have a wide range of experience and training that encompasses

accounting, law, personal financial planning and counselling

• Where we help:

Where we help:

• Creditors pressuring for payment, threaten to sue or repossess a car, sell home

under Power of Sale, or hire a collection agency to recover their debt

• Utility companies cut off service because your bills have gone unpaid

In these cases we encourage you to seek advice early

• In these cases we encourage you to seek advice early
• Paying only interest and service charges on a monthly basis and no reduction of

debt

Personal Bankruptcy - How can we help you and Personal Bankruptcy How can we help you and

your clients?

Your clients need to save money

• Your clients need to save money.
• Why can’t they save? Payments necessary for unsecured

debt, over leveraged property, etc. , g p p y,

• If your clients were able to reduce their monthly

payments for above, could they then start to save?

• Personal Restructuring Plans run for a maximum period
• f 5 years, after which the debt is extinguished, and

clients can save even more clients can save even more

• If you help them, do you build a client for a long term

relationship?

CONSUMER INSOLVENCY CONSUMER INSOLVENCY

We are here to help people in need We are here to help people in need

Personal Bankruptcy - What is Happening Personal Bankruptcy What is Happening

Canadian debt levels keep rising in 2011 the ratio of

• Canadian debt levels keep rising in 2011 the ratio of

credit market debt to personal disposable income was 150.8% which includes mortgages and consumer loans

• This is up from the previous record of 148.7%
• The expansion of personal credit surpassed growth in

di bl i disposable income

• Overall household net worth dropped in 2011 as the

increase in residential real estate was swamped by a fall increase in residential real estate was swamped by a fall in equities, mutual funds and pensions

• An RBC survey has suggested that personal indebtedness

i t ti t i t d C di is starting to registered on Canadians

Personal Bankruptcy - What is Happening Personal Bankruptcy What is Happening

• The survey also reported that 93%
• f the respondents

y p p believed paying down debt was more critical that saving money for the future The an iet le el of pa ing do n debt as highest

• The anxiety level of paying down debt was highest

amongst 18 to 34 year olds and lowest with those over 55

• Interesting enough those over 55 are the fastest growing

segment of the population that are filing proposals or bankruptcy bankruptcy

• The survey also stated that 39%
• f respondents are

delaying vacations and major purchases because of the strain of financial burdens

Personal Bankruptcy – Changes made to Credit Personal Bankruptcy Changes made to Credit Levels

The amount eligible to be leveraged against ones

• The amount eligible to be leveraged against ones

personal residence has also been capped and done away is the mortgages that lent 110%

• r move against a

personal residence

• Inflation pressure is starting and both Mark Carney, Bank
• f Canada Governor and Jim Flaherty Finance Minister
• f Canada Governor, and Jim Flaherty, Finance Minister

have issued several warnings and concerns over the last 18 months

Does this Really Happen ? Does this Really Happen ?

Personal Bankruptcy – February 29, 2012 Stats Personal Bankruptcy February 29, 2012 Stats

Only 5 956 010 Canadians contributed to an RRSP

• Only 5,956,010 Canadians contributed to an RRSP
• 26%
• f eligible tax filers contributed to an RRSP in 2010
• Total contributed in 2010 $33 9 billion or $717 billion
• Total contributed in 2010 $33.9 billion or $717 billion

that is eligible (amounts to only 5% )

• Mean RRSP contribution 2010 $2,790
• Personal savings as a percentage of personal income

(after-tax) income has dropped from 20% in 1982 to 5% in 2009 (lowest was 2 5% in 2005) in 2009 (lowest was 2.5% in 2005)

• More than 12 million Canadians do not participate in a

defined-benefit plan

Personal Bankruptcy - Exempt property

• All RRSP or RIF other than contributions contributed in

the last 12 months

• Most life insurance policies are exempt except those

p p p where the debtor is the beneficiary or their estate

• As a result, these funds will not be available for

distribution to creditors

• Provision of protection is for all registered retirement

savings plans (RRSP's, RRIF's and DPSP's

• Contributions made in the 12 months prior to the date of

p bankruptcy will be recovered (clawed back) for the benefit of the bankruptcy estate for RRSPs in provinces without RRSP exemption laws (BC, Alberta, Ontario, NB, and NS) and NS)

Personal Bankruptcy - Exempt property Personal Bankruptcy Exempt property

• There is no limit on the amount of RRSPs that can be
• There is no limit on the amount of RRSPs that can be

protected.

• There is no need to set up the RRSPs in a locked in plan

to make them eligible for exemption to make them eligible for exemption.

• RESP’s, are not protected for the non-subsidized portion

which will be surrendered to the trustee to the extent of the debtors interest the debtors interest

Personal Bankruptcy – High Income Tax Debt Personal Bankruptcy High Income Tax Debt

Bankrupt individuals with more than $200 000 in

• Bankrupt individuals with more than $200 000 in

personal income tax debts representing 75 percent or more of their total unsecured liabilities are no longer eligible for an automatic discharge from their bankruptcy

• These individuals will have to seek a Court order to be

discharged of their debts They will have to convince the discharged of their debts. They will have to convince the Court that the relief they are seeking is justified on the basis of their efforts to repay their debts, their financial i i h h d b i d d h i f situation when the debt was incurred and their future financial prospects.

Continued…

Personal Bankruptcy – High Income Tax Debt Personal Bankruptcy High Income Tax Debt

The Court will be able to fix conditions on the discharge

• The Court will be able to fix conditions on the discharge.

Specifically, the Court may refuse to discharge these individuals from bankruptcy, suspend their discharge for a period of time, or require the bankrupt to comply with any requirement as the Court may direct.

• This is meant to be an anti-abuse measure targeting high-
• This is meant to be an anti-abuse measure targeting high-

income individuals who may strategically use bankruptcy to avoid paying large income tax debts.

Personal Bankruptcy - Mandatory Surplus Income Personal Bankruptcy Mandatory Surplus Income Payments

Bankrupts are required to make surplus income

• Bankrupts are required to make surplus income

payments to the estate in accordance with directives issued by the Superintendent of Bankruptcy

• First-time bankrupts with surplus income will be required

to make payments for twenty-one months

S d ti b k t ith l i

ill b

• S

econd-time bankrupts with surplus income will be

required to make payments for 36 months

Continued…

Personal Bankruptcy - Mandatory Surplus Income Personal Bankruptcy Mandatory Surplus Income Payments

Third time or more bankrupts generally have to appear in

• Third-time or more bankrupts generally have to appear in

court after 12 months to determine the terms of their release from bankruptcy (discharge)

• These changes are intended to require bankrupts who

have the financial ability to make reasonable contributions to their creditors to do so prior to contributions to their creditors to do so prior to

• btaining their discharge

Personal Bankruptcy – Second Time Bankrupts Personal Bankruptcy Second Time Bankrupts

Second time bankrupts will be eligible for an automatic

• Second-time bankrupts will be eligible for an automatic

discharge after 24 months from the date of bankruptcy.

• If second time bankrupts have surplus the discharge

p p g period is extended to 36 months

• The above 2 provisions have resulted in an increase in

th b f l fil d the number of proposals filed

• This measure will only apply to those who have

completed mandatory counseling and who have made completed mandatory counseling and who have made payments of their surplus income to the creditors

Personal Bankruptcy – Stay of Proceedings and Personal Bankruptcy Stay of Proceedings and Debts not released by Bankruptcy

• Stay of proceedings ends when the trustee is discharged

y p g g section 69.3(1.1) of the BIA

• Non-Discharge debt
• Student loan debt pursuant to section 178(1)(g) of

the BIA provides for the period from full time students to be discharged down to 7 from 10 years stude ts to be d sc a ged dow to

• 0 yea s
• The hardship period is now reduced to 5 years
• Section 178 (1)(e) does not release bankrupt for

debt or liability for obtaining property and services by false pretences or fraudulent misrepresentation other than those claims that misrepresentation other than those claims that arise from an equity claim

CONSUMER PROPOSAL

• A formal arrangement made by the debtor with the

d ll h d b d

CONSUMER PROPOSAL

creditors to pay a portion or all of the debt over a period

• f time
• Must be advantages and reasonable
• Must be advantages and reasonable
• Ownership of assets remains with the debtor
• Debtor usually pays a monthly amount for a period of 3

y p y y p to 5 years

• No interest and no penalty

S f di ( l l i i )

• Stay of proceedings (no legal action can continue)
• Creditor approval – 45 days
• Deemed Court approval 60 days
• Deemed Court approval – 60 days

Continued…

CONSUMER PROPOSAL CONSUMER PROPOSAL

• Debts must be less than $250 000 (up from $75 000
• Debts must be less than $250,000 (up from $75,000

prior to September 2009) (excluding mortgage on principal residence)

• 45 day waiting period
• 51%
• f creditors ($) must accept
• Legally binding on all unsecured creditors
• Legally binding on all unsecured creditors
• 3 months – default
• Counselling Sessions x 2
• Credit report – Maximum 6 years from date started
• Credit rating – R9 to start, improved to R7 upon

completion completion

Consumer Proposal - Example Consumer Proposal Example

L h l d b f $100 000 l di l

• Lets assume a person has total debt of $100,000, excluding personal

residence

• There is no equity in their home

There is no equity in their home

• Total combined household net income is $4,500
• Mortgage payments are $1,500 per month
• They have 2 kids
• Monthly credit card payments are $1,200 leave only $1,800 to service other

t payments

• They have currently have no savings on a monthly basis

Consumer Proposal - Example Consumer Proposal Example

Here is what can we do: Here is what can we do:

• 30%

repayment over 5 years would amount to a payment

• 30%

repayment over 5 years would amount to a payment

• f $600 per month
• This would leave $600 to put towards RRSP’s
• When the proposal is completed, debt $100,000 is gone

and they will have $30,000 plus interest in an RRSP If nothing was done they most likely would still owe the

• If nothing was done, they most likely would still owe the

$100,000 and have no savings

CREDIT COUNSELLING, DEBT POOLER, DEBT CREDIT COUNSELLING, DEBT POOLER, DEBT MANAGEMENT PROGRAMS AND EVERYONE ELSE

There are a number of profit and not for profit organizations out there There are a number of profit and not-for-profit organizations out there advertising to consumers to reduce their debt. Some are even promising reductions of up to 90%

• f their debt.

D bt M g t P g (DMP) Debt Management Programs (DMP)

• Regulated by Ontario Collections Agency Act
• Generally the total debt has to be paid within 5 years
• There may or may not be a reduction in interest rates
• Each creditor must be negotiated with separately, non-binding to all
• Some creditors refuse to deal with DMP companies
• Some creditors refuse to deal with DMP companies
• Negative impact on credit rating
• These DMPs have an extremely low success rate (look on web – I

believe that it is less than 10% ) believe that it is less than 10% )

CREDIT COUNSELLING, DEBT POOLER, DEBT CREDIT COUNSELLING, DEBT POOLER, DEBT MANAGEMENT PROGRAMS AND EVERYONE ELSE

There are a number of profit orientated firms attempting to

• There are a number of profit orientated firms attempting to

convince consumers to make payments to them and have them settle their unsecured claims For the most part in Ontario these firms run unregulated and to not

• For the most part in Ontario these firms run unregulated and to not
• perate within a monitored structure
• As a result, consumers are taken advantage of

Wh k d f h b ild l l f

• When consumers are taken advantage of, they build a level of

distrust to any future advisor. This make all of our jobs more difficult O b it BDODEBTHELP d t i i f ti

• Our web site www.BDODEBTHELP.ca does contain information on

these types of organizations

CREDIT COUNSELLING, DEBT POOLER, DEBT CREDIT COUNSELLING, DEBT POOLER, DEBT MANAGEMENT PROGRAMS AND EVERYONE ELSE

Not For Profit Credit Counselling: Not-For-Profit Credit Counselling:

• Exempt from the Ontario Collections Agency Act
• The total debt has to be paid within 5 years
• The total debt has to be paid within 5 years
• There may or may not be a reduction in interest rates
• Each creditor must be negotiated with separately

Not all creditors may choose to participate

• Not all creditors may choose to participate
• Negative impact on credit rating

CREDIT COUNSELLING, DEBT POOLER, DEBT CREDIT COUNSELLING, DEBT POOLER, DEBT MANAGEMENT PROGRAMS AND EVERYONE ELSE

Debt Consultants and other “experts” Debt Consultants and other “experts”

• Generally these consultants have no credentials (except

perhaps having gone through the bankruptcy process p p g g g p y p themselves so they are “experts” because of their experience) Th t l t d d d t b l t

• They are not regulated and do not belong to any

recognized Associations

• They generally charge consumer a fee (which can range

They generally charge consumer a fee (which can range for $500 to $8,000) to review their situation and then refer them to a Trustee

CREDIT COUNSELLING, DEBT POOLER, DEBT CREDIT COUNSELLING, DEBT POOLER, DEBT MANAGEMENT PROGRAMS AND EVERYONE ELSE

For Example: For Example: Yves & Lorraine - Estates #33-1598205 / #33-1598206

• They contacted Cambridge Life Solutions (“CLS”) in or around August

y g ( ) g 2011

• They were told to pay $480 per month and after 3 months of

payments CLS would call the creditors p y

• CLS promised that creditor calls would stop – they never did
• Capital One still took the Debtor to court after they started dealing

with CLS with CLS

• The Debtors cancelled their program with CLS in January 2012

Continued…

CREDIT COUNSELLING, DEBT POOLER, DEBT CREDIT COUNSELLING, DEBT POOLER, DEBT MANAGEMENT PROGRAMS AND EVERYONE ELSE

The Debtors made 4 payments of $480 for a total of $1 920 and they

• The Debtors made 4 payments of $480 for a total of $1,920 and they

got back $480 form CLS when they cancelled the program

• CLS told them nothing about their options under the BIA

Th h $32 500 f d d bt d th fil d C

• They have $32,500 of unsecured debt and they filed a Consumer

Proposal with BDO on March 2, 2012 for $280 x 60 months for a total

• f $16,800

Th t d t k ith BDO OSB d CAIRP

• They consented to speak with BDO, OSB and CAIRP

CREDIT COUNSELLING, DEBT POOLER, DEBT CREDIT COUNSELLING, DEBT POOLER, DEBT MANAGEMENT PROGRAMS AND EVERYONE ELSE

Partial List of These Companies to be aware of:

• 0910385 B.C. Ltd www.debt180.ca
• 1 800 ABC Debt www.1800abcdebt.com
• 4 Pillars www 4pillars ca

4 Pillars www.4pillars.ca

• All Debt Solutions www.AllDebtSolutions.ca
• Cambridge Life Solutions www.cambridgelifesolutions.ca

C di C t D bt R li f I d

• Canadian Customer Debt Relief Inc. www.ccdr.ca
• Credit Counselling Society www.nomoredebts.org
• Debt Free Solutions Negotiation www.DebtFreeSolutions.ca
• First Canadian Debt Solutions Inc. www.firstcanadiandebtsolutions.ca
• Ontario Consumer Credit Assistance www.occa.ca

Corporate Insolvency - Warning Signs leading to Corporate Insolvency Warning Signs leading to Commercial Failure

• Little of no revenue growth

g

• Increasing trade debt in the absence of increase in sales

volumes

• Significant expenditures on R&D in absence of customer
• Significant expenditures on R&D in absence of customer

validation

• Obsolete (>3months old) test market data
• Weak financial management – human and internal

controls

• Growing inventories in the absence of firm sales orders

Growing inventories in the absence of firm sales orders

• Overdue statutory obligations
• Absence of contingency plan

Corporate Pattern of Restructuring Candidate Corporate Pattern of Restructuring Candidate

Aggressive strategic plan Aggressive strategic plan

• Acquisition
• Expansion
• Absence of appropriate funding
• Absence of acceptance in the market
• Execution of plan without regard to market forces
• Execution of plan without regard to market forces

How Corporations React to Crisis

• Changes in executive suite

M t h

• Management changes
• Salary reductions
• Review of overhead expenses
• Layoffs and terminations

How Corporations can Respond to Current Market How Corporations can Respond to Current Market Conditions

Strong C$

• Strong C$
• Strong commodity demand and pricing
• Global competition
• Global competition

Actions to consider:

• Productivity improvements
• Assessment of products and market
• Investment in machinery & equipment, US purchases
• Strategic alliances

Corporate Restructuring Plan Corporate Restructuring Plan

Identify working capital and human capital required to

• Identify working capital and human capital required to

go forward Propose options for arrangement or compromise with

• Propose options for arrangement or compromise with

existing creditors, landlords, lessors and other stakeholders

• Evaluate options and make recommendations
• Outline risks and obligations for management officers
• Outline risks and obligations for management, officers

and directors

Wage Earner Protection Program (“WEPPA”) Wage Earner Protection Program ( WEPPA )

• Covers wages owing to an individual by an employer

(corporate or self employed) who becomes bankrupt or there is an appointment of a Receiver pursuant to pp p Section 243 of the BIA on or after July 7, 2008

• The maximum claim against assets is $2,000 per

employee plus $1,000 in disbursements for traveling employee plus $1,000 in disbursements for traveling sales persons which were incurred within 6 months of the company’s failure, subordinate to deemed trust

• Ranks in priority to secured creditor
• Ranks in priority to secured creditor
• Employee claims against program is $3,323 maximum

and an amount equal to 4 times the maximum insurable i d th E l t I A t earnings under the Employment Insurance Act

Corporate Bankruptcy – Other September 2009 Corporate Bankruptcy Other September 2009 amendments

Creates priority for any unremitted employee pension

• Creates priority for any unremitted employee pension

contributions in respect of a defined benefit pension plan

• Unpaid normal costs as required by legislation in respect
• f defined contribution plan

30 d d l i t t t j t t k

• 30 day good claims, now same state out, just must make

claim within 15 days of bankruptcy

• Interim Receiver now limited to 30 days max

Interim Receiver now limited to 30 days max

• Court can now waive 10 day notice period for a receiver
• Trustee can now terminate all contracts, not just leases
• Collective bargaining agreements can now be amended

by court

BDO CANADA LIMITED BDO CANADA LIMITED

• We are here to help
• We are here to help
• Confidential meeting
• No charge for 1st consultation

g

• Identify and quantify the problems
• Provide options and possible solutions

N bli ti

• No obligation

PROCESS PROCESS

Contact BDO to make an appointment to allow us to

• Contact BDO to make an appointment to allow us to

review the individual’s financial situation

• Gather/provide the necessary information to allow us to

p y analyze the individual’s finances

• No cost for the initial meeting
• Confidential
• No obligation

CONSIDERATIONS CONSIDERATIONS

When an individual meets with us they are not a

• When an individual meets with us – they are not a

“client”

• We remain neutral and we respect the rights of the

p g debtor and the creditors

• We will help the debtor, but our actions are governed by

th B k t d I l A t (BIA) the Bankruptcy and Insolvency Act (BIA)

• The focus is on restructuring debt through a proposal

instead of bankruptcy instead of bankruptcy

BDO Contact Information BDO Contact Information John Haralovich CA, CMA, CIRP Associate BDO Canada Limited 613-235-5225 ext 4563 jharalovich@ bdo.ca jharalovich@ bdo.ca