Debt-Free Forever (22 page)

4. Make only the commitments you intend to keep.
Don’t let them bully you. Yes, some do try. You don’t have to make any commitment you don’t think you can keep. And you should only say yes to things you’re actually going to do. Saying yes to get them off the phone just means they’ll step up their calls. Ignoring a collection call won’t make the problem go away. If a collector gives up on trying to work out a plan with you, they’ll simply take the next step, which is legal action. Judgments against you show up on your credit history, and stay there for a long time.

5. Don’t try to pull an end-around.
Once the account has been turned over to an agency, they are the only ones you can deal with. If you try to contact the original creditor, you’ll just create confusion. The exception: if there’s an error in the account, you need to deal with both the creditor and the collection agency, and you should do it in writing so you have a paper trail.

GAIL’S TIPS

Bankruptcy isn’t the worst thing in the world. Living in the hell you’ve created is. And if you’ve been given a whack of credit that’s way above what you can manage, maybe it’s time to rub the slate clean and start again.

I’m not absolving people of their personal responsibility. Nope. I’m all about personal responsibility. But when I see couples earning $60,000 in family income being given $136,000 in credit, I scratch my head and wonder whatever happened to “responsible lending practices.” And I feel for the people who have debt they can’t manage because of significant changes in their lives like disability, divorce, widowhood, illness, unemployment, and the like. I even feel for the silly buggers who went out and charged up a storm, never understanding the implications and the impact the payments were going to have on their rest of their lives.

For many people, the decision to go bankrupt isn’t an easy one to make. It’s a thorny path. But if that’s what it’ll take to get you out of hell, then do it. It won’t be easy to live through. And the black mark will stay with you for a long time. But there is an end and you can have a life—a good life—after bankruptcy.

Bankruptcy is considered by many as a last resort, with a consumer proposal being the much-offered alternative. But what they don’t tell you is that your credit history will be crap for the same amount of time regardless of which method you choose. This is because as far as creditors are concerned, a proposal is as bad as a bankruptcy. (For that matter, as far as creditors are concerned, seeking credit counselling is as almost as bad as bankruptcy.)

Trying to decide between bankruptcy and a consumer proposal boils down to this: if you believe you can dig yourself out if you can negotiate with your creditors, a consumer proposal will work for you. However, if you’re at the point where you’re choosing between paying your debts and eating, bankruptcy will let you keep eating.

GAIL’S TIPS

So what do you do if you find yourself considering bankruptcy?

Hiding won’t do you any good, and denial is a fool’s game. If you think that bankruptcy is the
only
way out of the mess you’re in, get thee to a trustee and find out just what’s entailed in the process. Not all trustees are good trustees, so choose someone with a sparkling reputation, not a big ad.

How will you know if you need to see a bankruptcy trustee? Easy. If you add up your debt repayments to your various creditors and you just can’t make them and keep food on the table, you’re overextended to the point where bankruptcy could be an option for you.

Your duties as a bankrupt are outlined in the Bankruptcy and Insolvency Act. Essentially, you must do the following:

• Make an inventory of, and help to sell or hand over, all your assets (excluding the ones that are excepted, and they differ from region to region) over to offset what you owe.
  
• Cancel all your credit.
  
• Prepare a “statement of affairs,” which shows what you own and what you owe, and you’ll have to swear to the veracity of this document.
  
• Go to a meeting with your creditors.
  
• Execute any documents required under the act, including a power of attorney, transfer, deeds, or whatever else is necessary.
  
• Keep your trustee up to date with what’s going on financially in your life, and if you move, how to keep in touch with you.
  

Not every debt goes away if you file for bankruptcy. It would make sense to learn what will be discharged and what won’t before you take the big step. Your bankruptcy trustee should tell you all of this, but here’s a list:

• Debts that are “secured” cannot be discharged, so your mortgage, which is secured by the property, or a car loan, which is secured by the car itself, won’t be eliminated as part of your bankruptcy.
  
• Child support, maintenance, and alimony (both current and accrued) won’t be discharged, so if you haven’t paid your spousal or child support for a few years, filing for bankruptcy won’t make your obligation to pay go away; ditto court fines, penalties, and traffic offences, or civil claims arising from personal or sexual assault.
  
• Debts accrued through fraud or misrepresentation won’t be discharged.
  
• Student loans won’t be discharged unless it’s been seven years since you’ve been in school. In cases of undue hardship,
  an ex-student may apply to the court to obtain a discharge of student loans after five years. As long as the court is satisfied that the debtor has acted in good faith and is expected to continue to experience financial difficulties, this application could succeed.
  

Keep in mind that if you try to discharge a debt on which someone else has co-signed with you, you’re sticking your co-signer with the problem. Your bankruptcy may prevent a creditor from trying to collect from you, but nothing will stop them from collecting from your co-signer (unless he/she also goes bankrupt). Kids often have their parents co-sign on their student loans or credit cards; partners often co-sign for each other or take out credit jointly. If anyone else’s name is on the debt, creditors will just go after the next name on the application.

I’ve heard from people who have co-signed with mates or friends because with their better credit rating, they can help their pals get a lower rate of interest. I’ve heard from parents who wanted to help their kids through school. I’ve heard from wives and husbands who took out credit jointly, got divorced, never had their names removed from the debt, and then got stuck with the payments because their exes went bankrupt.

People, wake up! Credit is a great tool if used wisely. But it’s equally as dangerous if you don’t understand your responsibilities. Signing a piece of paper without understanding the ramification is dumb, dumb, dumb.

I’ve always felt that a co-signature is a bad idea. If a person can’t qualify for credit on his or her own, why should he or she get credit? If you are determined to co-sign, make sure you’re prepared to assume the payments should that be necessary. If you can’t afford to take on those payments, don’t co-sign.

Some assets are protected from liquidation as part of the bankruptcy settlement. These vary from one region to another, so your trustee is the best person to ask about what won’t be touched. For example, RRSPs and RRIFs are exempt from seizure except for the contributions made in the year prior to bankruptcy.

While your trustee will take you through the steps to see how much you will have to live on and how much you must repay each month, it’s good to have an idea before you start down this road. If you find you’re better off on the bankruptcy budget, that’s a big clue that bankruptcy is actually a good idea for your situation.

Under the bankruptcy system, the more you earn, the more you have to pay toward your debts. Limits are set for what an individual or family is allowed to keep. The more people in your family, the more of your income you are allowed to keep.

• In 2008, individuals could keep the first $1,836 that they earned net each month and then had to pay half of everything above that toward their debts.
  
• Families of two could keep the first $2,286 and pay half of everything above that.
  
• Families of three could keep the first $2,811.
  
• Families of four could keep the first $3,413.
  
• Families of five could keep the first $3,870.
  
• Families of six could keep the first $4,365.
  
• Families of seven or more could keep the first $4,860.
  

Let’s look at an example to see how this works. If you and your partner had two kids (so you’re a family of four) and earned $5,600 a month net of tax between you in 2008, you could keep the first $3,413 toward your living expenses. You’d have to pay half the difference (50% of $5,600 – $3,413), or $1,093.50 toward your debt. So you would have been left with a total of $4,506.50 a month to live on.

This is the tough part. So much is going to have to change. You’re going to have to learn how to manage your money if you don’t want to be back in this mess. And you’re going to have to deal with the stigma of the bankruptcy, and the black mark on your credit history.

Here’s what you won’t have to deal with: creditors calling you and trying to get blood from a stone. Once you file for bankruptcy, all the calls stop. You deal only with your trustee, and as long as you follow the rules, you can look forward to far less stress in your life.