Personal Bankruptcy Case Study: The Single Mom
Lucy (not her actual name) was in a mess. She was a single mother of a teenaged son, working as a administrative assistant for a law firm.
Several years ago, her husband passed away. As a result, she struggled to raise her family on a single income.
The income from her salary, CPP survivor’s benefit and Child Tax Benefit wasn’t enough to pay for her living expenses. Also, Lucy had few assets.
To supplement her income, she started using her credit cards to pay for groceries and other living expenses. Over time, she had accumulated about $14,000 in credit card debt and could no longer make her minimum payments. The collection agencies eventually started to call her at home and at work, leaving unpleasant messages both with herself and occasionally her boss.
Lucy’s boss happened to be a well-connected lawyer in a prominent Toronto law firm. She referred Lucy to Victor Fong , a Licensed Insolvency Trustee at Fong and Partners Inc., who met with Lucy to assess her situation.
Victor noted that Lucy had just enough income to pay for her living expenses (e.g., rent, groceries, transportation, clothing, etc) and had no assets other than the following:
- a life insurance policy (her son was the beneficiary)
- some furniture with an estimated value of less than $11,300; and
- a 1997 Toyota Corolla with a black book value of $5,000
After reviewing her options with Victor, Lucy decided to file an assignment in bankruptcy after Victor explained that nothing would happen to her assets because laws in Ontario allow a debtor to keep certain assets, even in a bankruptcy. In Lucy’s case:
- Her life insurance policy was exempt under the Ontario Insurance Act , as the policy designated her son as the beneficiary.
- Her furniture was exempt under the Ontario Execution Act , as it had a realizable value of less than $13,150.
- Her Corolla was also exempt under the Ontario Execution Act , as it had a market value of less than $6,600.
Victor explained to Lucy that upon filing bankruptcy, her credit rating would be adversely affected. However, because Lucy was so far in arrears with her credit card payments, her credit rating was already badly affected, so she realized that the bankruptcy couldn’t make it any worse.
After Lucy filed her bankruptcy, the collection calls eventually stopped (her creditors now dealt with Victor) and nine months after, she was discharged from her debts.
Finally debt free, Lucy is now making monthly contributions towards an RRSP. She eventually wants to save enough in RRSPs to purchase a home under the Canada Revenue Agency Home Buyers Plan.
Consumer Proposal Case Study: The Overspender
Christy (not her real name) was an educated and professionally employed young woman, who made a good salary but had chronic spending problems.
When meeting with us, Christy explained that she never had enough money to last her until her next paycheque and was at a loss to explain where her money went, since she didn’t keep a budget. Her spending habits resulted in her accumulating $22,000 in credit card debt. She was unable to make her minimum monthly payments.
Upon reviewing her financial situation, it was clear that Christy couldn’t realistically pay off all of her debts. However, because she made a good salary, bankruptcy wasn’t necessary – she could offer her creditors a settlement, payable as a monthly payment plan through a Consumer Proposal.
Christy’s consumer proposal was very simple: she was to pay to the trustee $300 per month for 36 months for a total of $10,800. The money she paid was held in a trust account by the trustee. The trustee’s fees of $3,763 were paid from this account, after which the creditors were paid $7,037, or 32 cents on the dollar of their claims ($7,037/$22,000 = 32%). It was explained to Christy that the trustee’s fees are calculated according to a government tariff.
Christy’s consumer proposal was filed with Industry Canada and a copy of it was sent to her creditors. The creditors accepted Christy’s proposal as the most sensible option – in a bankruptcy, they would get a nominal return, but under the proposal, they would get 32% of what they were owed. Christy’s creditors stopped calling her and dealt directly with the trustee.
During the consumer proposal process, Christy was encouraged by us to keep all of her receipts and at the end of each month, prepare a summary of what she actually spent her money on. She was surprised to discover seemingly minor expenses greatly contributed to her financially difficulties:
- Gourmet coffees from Starbucks twice a day at the office ($200/month)
- Two packs of cigarettes per week ($72/month)
- Lunches at the food court during work days ($140/month)
- Impulsive clothes shopping after work at the Eaton Centre (on average, about $300/month)
Upon reviewing this information with Christy and with our input, she resolved to do the following:
- Instead of purchasing her coffee from Starbucks, she would make her own coffee in the office kitchen
- She would cut down on her smoking, or at least purchase less expensive cigarettes
- She would start bringing lunches from home
- Stop her impulsive spending habits by setting a maximum budget for discretionary expenses
Christy was able to bring her spending under control and is now even saving some money while she was paying off her consumer proposal.
Division I Proposal Case Study: The Tax Debtor
Larry (not his real name) was an IT administrator with a local university. He had previously owned and operated a bodyguard security service that he eventually shut down due to financial losses. During the course of this business, Larry had accumulated approximately $50,000 in personal income tax debt. Larry had not filed his personal income taxes for 5 years as he was concerned that he’d be unable to pay his tax debt once it was assessed. Larry also had consumer debt of about $30,000, consisting of mostly credit cards used to finance his business.
When we met with Larry, we explained that under the Income Tax Act , there were significant penalties for non-filing of income tax returns. We suggested that he make arrangements to prepare and file his income tax returns under the Canada Revenue Agency’s Voluntary Disclosure Program . On a voluntary disclosure, CRA has the legislative authority to waive or cancel penalties. The tax debtor is of course, liable to pay the taxes owing, plus interest.
Larry had filed his income taxes under the CRA program and was assessed approximately $70,000, which was his tax debt plus interest. Therefore, Larry’s total debts were approximately $100,000, being $70,000 in tax debt and $30,000 in credit card debt.
Being unable to pay this tax debt as well as his other debts, we explained to Larry that he can offer a settlement to his creditors through a Division I Proposal.
We drafted the proposal with Larry, in which he undertook to pay $700 per month for 48 months, or $33,600. The money he would pay would be held in a trust account by the trustee. The trustee’s fees would be paid from this account, after which the creditors would be paid the balance of funds.
The proposal was filed with Industry Canada and a notice of the proposal was sent to Larry’s creditors. A meeting of creditors was subsequently held. At that meeting, Larry’s creditors had an opportunity to vote for or against the proposal. Larry understood that if his creditors voted against the proposal, he would be automatically bankrupt.
The only creditor that actually attended was, as expected, the Canada Revenue Agency representative. The CRA representative thought the proposal offer was too low, and his vote in favour of it was conditional upon Larry amending his proposal to $900/month for 60 months, or $54,000.
Larry agreed to the requested amendment,and the proposal was so amended and approved by CRA. Upon the application of the trustee, the proposal was submitted to the bankruptcy court for final approval.
Having been approved by the creditors and the court, Larry is now paying off his proposal. Some time after the proposal was approved, Larry got a significant salary raise, which allowed him to pay down his proposal obligation even faster. He is expected to complete his proposal within 24 months, after which he’ll be discharged from his debts and shall start saving money towards purchasing a home.
Be Our Next Success Story – Contact us Today!
If you are drowning in debt and want to Start Over, contact our Licensed Insolvency Trustee, Victor Fong. Victor can meet with you at our head office or at any one of our various locations throughout the Greater Toronto Area:
Contact Info for our Toronto Ontario Bankruptcy Office
Fong and Partners Inc
Suite 1007-2 Carlton Street
Toronto, Ontario M5B 1J3