Bankruptcy- Things to Know

Over the last number of years I noticed a growing trend in the financial sector surrounding the view on bankruptcy. I have witnessed a softening approach to the consideration of applying for bankruptcy. There was a time when individuals filed for bankruptcy as the last resort, today however applications for bankruptcy show clear signs of the lack of advice that people are receiving. There are particular cases where bankruptcy is warranted however there are so many alternatives that should be pursued first. The purpose of this blog is to inform readers to really think hard before declaring bankruptcy and scaring their credit score for 7 years. Seven years is a long time to interrupt credit access especially with a family where the potential need for credit is increased. It is not easy to see uninformed members of our credit union immediately regret the bankruptcy decision because they were not provided the facts and the alternatives.

The Office of the Superintendent of Bankruptcy Canada which regulates bankruptcy legislation even highlights that bankruptcy should be the last resort. They recommend several options prior to considering filing for bankruptcy.

1.       Contact your creditors. Creditors will want to work with you on trying to restructure your credit to make it more affordable. If you are honest, explain your current situation and show the correct intentions then this will increase your chances of a creditor working with you. Your credit union is here for you, so it is very important that we work with you and assist during a rough patch. Far to often I see the situation where members are embarrassed by their financial situation and as a result by-pass talking to their credit union contact. It is during these rough patches that you need the professional advice of a credit union advisor.

2.       Credit Counselling. If you are uncomfortable to speaking to many creditors and you want the process to be easier, then this free Government supported service is available. These individuals are professionally trained and are there for your benefit. The service is completely free, and they work on your behalf to talk to creditors to arrange rate reductions, term extensions, lower payments or settle on a balance for your account. This is an excellent service and they work to protect your credit and keep a relationship with your creditors which you will value in the future.

3.       Debt Consolidation. Many credit extension problems commence with credit spread across many products. The more credit options that a person has the more difficult it is to manage a credit reduction strategy. A rule of thumb I often advise members I speak to is the rule of one. One source of revolving credit (credit card or line of credit), one loan, one mortgage. Consolidate your outstanding credit in one of those products and remain committed to managing your outstanding credit. I am witnessing bankruptcy files with as high as 6 credit cards and multiple other credit product lines. The potential of missing a payment, not realizing the accumulated debt, or paying high rates become prominent with such a situation. Applying for a consolidation loan is a great way to commence a strategy to manage debt.

4.       Consumer Proposals are very similar to credit counseling however the focus is on settling the debt for a lower amount. The outcome of this action could result in an individual’s credit score drastically reducing because essentially the debt was not paid in full. Traditionally this service comes with a cost and is provided by a bankruptcy agency.

Bankruptcy is of course the last resort where you assign all your assets acquired during your bankruptcy to the trustee representing the bankruptcy agency. These assets will be divided among your creditors and liquidated. In some cases the trustee will negotiate on your behalf with a secured creditor to allow you to keep a particular asset. For more information follow this link https://www.ic.gc.ca/eic/site/bsf-osb.nsf/vwapj/Dealing-with-Debt-EN-F01-2015-12-03.pdf/$file/Dealing-with-Debt-EN-F01-2015-12-03.pdf

People also need to understand that the filing of bankruptcy is a business. There are agencies that guide people through the process, provide advice, and collect handsomely for it. I am not indicating that all agencies are financially motivated however people need to understand that this service comes with a cost. This cost should be considered when balancing the current debt versus the payment for bankruptcy service. For example, if your bankruptcy application is going to cost an average of $300 a month for 21 months, a thought should be how this $300 can be used alternatively to bring down your debt. I have witnessed cases where people have declared bankruptcy with small debt loads. If they had sought credit counseling and used the funds they were paying for bankruptcy to reduce their debt, they could have protected their credit and paid of their credit obligations.

The bottom line is there are legitimate reasons where bankruptcy is the only real solution. The sad reality is that people are getting the wrong advice and bankruptcy is used as a first resort versus taking other necessary steps. In one case in which I recall, members went bankrupt and the assets that were seized by our credit union were sold for the near balance of the debt outstanding. If the members simply sold the assets themselves and worked with the credit union, the remaining balance could have been consolidated and bankruptcy avoided. Instead, they had to deal with a poor credit rating for seven years and experience their assets being displayed for sale in the public. 

Happily Ever After: How to Get Your Finances in Shape for the Future

In Nova Scotia, one family found themselves looking toward the future, but being stuck in a financial past.

“We found ourselves in a situation that we had done the debt repayment, but were too much of a risk,” they wrote in an email. “Ideally we were asking for a second chance to start rebuilding our future.”

The good news? They did rebuild that future – in the house they wanted.

From living in an older mobile home, to putting a down payment on a new home, being able to get a solid grasp on their financing made a difference.

Meanwhile, in Newfoundland:

·         A “no” from Canada Mortgage and Housing Corporation wasn’t the end of the story and some happy Newfoundlanders are now owners of the home they really wanted.

·         A university student managed to pay for his education in a way that made the most of his financial options.

·         A low credit beacon score wasn’t the end of the world as a plan to consolidate debt helped residents get control of their money.

These are all true stories. True, happy stories about people who were able to do the big things in life – buy a home, pay for school and take control of their debt.

So how did they do it? And if you’re reading this and facing big financial question marks of your own, how can you do the same?

“If they’re in a tough financial position – just come in to talk to someone first,” says Penney Wilson of East Coast Credit Union in Sackville, NS. “I find what happens is a lot of people get to the point where they’re too far gone, they’re almost embarrassed. Come in and talk to us before things get out of hand.”

Meanwhile, Rhoda Pumphrey, a branch manager with Leading Edge Credit Union in Newfoundland, says one way to get your finances in solid shape is to start when you’re young – very young. She says often, young adults get into the real world and are met with some harsh realities.

“Sometimes people don’t know the real cost of living,” she says. “So instead of ending up in a situation where they’re trying to decide if they should go out with their friends or pay their tuition, they need help to learn how to budget so they can do both.”

According to Rhoda, financial literacy is a key skill that should be incorporated into learning early on. One easy tip she has for parents is to help kids learn how to budget with their weekly allowance. Show them how to put some away to save up for what they really want, for example.

Penney agrees.

“Finances are one of the most important things in your life,” she says, adding that parents can lead by example. “If the parents are financially responsible, usually their kids become financially responsible.”

For those of us who are older and still struggling to figure out how to make everything add up every month, the first step – says Tracy Keeping, a branch manager with Leading Edge Credit Union in Newfoundland – is to begin by being honest with yourself and getting a handle on what you’re really up against.

“I think everybody needs to sit down and write on paper what your net income is and what you’re paying out,” she says. 

Arwilda Brake, a financial services officer at the Corner Brook Newfoundland branch of the Leading Edge Credit Union, knows getting behind on your finances can be terrifying.

“These people had months of no sleep, they were very stressed out,” she explains about some people she met and worked with. “We need to take their situation and start from the beginning to put things in perspective.”

All the financial experts we spoke with – Penney, Rhoda, Arwilda and Tracy – agree that the best thing you can do to get organized financially at any age, is to ask for help and start to educate yourself. Make a list of all your expenses (from car and mortgage to cable and entertainment) and have a clear handle on how much you are getting paid. Then find someone who will take the time to sit with you and help you figure out the right way to get your checks and balances sorted out.

The Right to Vote

One of the most often overlooked benefit of being a member of a credit union is the ability to set the strategic direction of your credit union. People first and foremost venture off to find a financial institution that can best meet their needs through products and services. Need a car, align yourself with an organization that provides you financing for this purchase, its very simple. What if the organizations that you dealt with meant something more to you beyond the provision of services? Would you deal with an organization for example that could meet your particular needs but wasn't local, didn't participate in your community, didn't value your business, or really even cared about the relationship with you beyond the original transaction?

I think there is a growing movement of people that look beyond the original transaction with an organization and further evaluate their relationship with the particular organization in question. Most people simply don't buy a car based on its price, they consider warranty, how reliable the service center will be in addressing future problems, basically the after-purchase support. Some people will not buy from organizations that have poor environmental, labor, or services practices.

Assuming that more an more people are following this path, then the credit union movement is in great shape. Credit Unions are governed with the basic values that all of us as humans seek to achieve or experience. Credit Unions promote equality, trust, social responsibility, self-help, openness and care for one-another. Democratically, credit unions provide the opportunity for those that need its services, its members, to elect a board to ensure that the credit union remains true to these values. Unlike other financial institutions that are profit focused as per their capitalist mandate, their users are simply users of the service and have limited opportunity to participate in how their financial institution operates.

So as a member your tasked with selecting a board member who will best represent your interests, beliefs and values in the direction of your credit union. This task is quite important and everyone should exercise their democratic right to make such a decision. Over time more and more people will recognize the value in local ownership of organizations and the benefits of aligning their purchases with an organization that shares similar values. It is fine to select an organization based first on need, but I encourage that extra step of discovering the hidden values of choosing an alternate option.

Take the time to elect your directors, promote your credit union to your friends and family and most importantly recognize that your membership extends beyond your fulfillment to a particular need. Your contribution to your credit union is a contribution to building a better community. Strengthening the credit union movement will translated into greater community initiatives that will improve the lives of many, especially those that you call your neighbors.