Thursday, 4 February 2016

Why Bankruptcy Might Not Be The Best Option

Why broke people shouldn’t always choose bankruptcy

*Originally published on Advisor.ca* 
By Ted Michalos February 1, 2016

bankrupt-drowning-financially
 There’s more than one way to deal with being broke. While instinct might suggest simply filing for bankruptcy, it’s also worth considering a consumer proposal – a legal agreement allowing a debtor to repay an agreed upon portion of his or her debts to creditors.

Choosing the best method to resolve debts comes down to how each will impact someone’s income, assets and monthly payments.
People used to favour bankruptcy. Prior to 2008, there were as many as six personal bankruptcy filings for every consumer proposal. In 2009, the year personal insolvency filings in Canada peaked, there were three personal bankruptcy filings for every consumer proposal.

In September 2009 the federal government enacted changes in the Bankruptcy and Insolvency Act that made personal bankruptcies longer and more expensive. This, in turn, made it easier for people to file a consumer proposal instead. Today it’s a fairly even split nationally, while in Ontario there are now more consumer proposals than bankruptcies.

There are times when filing for bankruptcy is the correct way to deal with financial problems; and sometimes filing a consumer proposal makes more sense. A bankruptcy trustee has a duty to present all options to debtors and help them make decisions based on the assets they own, the income they earn and what they can afford.

Deal with the financial impact of tragediesWhat is a consumer proposal?
In a consumer proposal, a person offers to settle unsecured debts for a portion of what he owes. There are no new interest charges on debts included in a proposal. In most instances, the total repayment ends up being around one-third of a person’s unsecured debt. With the average insolvent debtor owing around $60,000 in unsecured debts, that means he would typically pay $20,000 under a consumer proposal.

From the creditor’s perspective

So why would creditors accept one-third of what they’re owed? Simply because there’s a chance of getting even less money back from someone who is bankrupt. A consumer proposal is an alternative to filing for bankruptcy, and the debtor is likely to declare bankruptcy if he can’t make a deal with creditors. As long as the debtor offers terms that require him to repay more than creditors would get in a bankruptcy, it makes sense to accept the consumer proposal.
Creditors accept a proposal by voting on it. Each dollar of unsecured debt represents a vote, and creditors representing a simple majority of unsecured dollars need to agree to the terms. Technically, when a consumer proposal is filed, the law assumes it will be accepted. It’s only if creditors with 25% of the total debt ask for a meeting of creditors that a vote even takes place.

From the debtor’s perspective

Consumer proposals have the same legal protections as bankruptcy. Debtors automatically receive a Stay of Proceedings, which halts any lawsuits, wage garnishments or similar actions. It also prohibits any new actions. To remove the Stay, a plaintiff needs to bring a motion before the Bankruptcy Court and argue the legal action should be permitted. These motions are fairly uncommon and usually only occur when there are allegations of misdoings on the part of the defendant, or when the plaintiff requires the Court to determine the amount of the claim.
When the debtor fulfills the obligations set out in the proposal, he receives a Certificate of Full Performance, which, like a bankruptcy discharge, eliminates the debts spelled out in the proposal.

Why choose a proposal?

When a person files personal bankruptcy, he is saying, “I cannot afford to repay any portion of my debt. I need to avail myself of the relief provided under the law to have my debts cleared.” However, there is a cost to having the debts erased.
A bankrupt person exchanges the things he owns for the unsecured debts that he owes. While he doesn’t lose everything, (every province has an Executions Act exempting things such as furnishings, personal possessions and, in some provinces, cars), he may lose his home equity, investments, and other property.
While RRSPs and pensions are largely protected in bankruptcy, other non-registered investments, and RESPs, are not. In addition, bankruptcy law bases a person’s payments on his household income and size. The more a bankrupt person earns, the higher his bankruptcy payments will be.
When someone files a consumer proposal, the payment terms are agreed to up front. This benefits the debtor in several ways. No assets are seized and sold, and there are no penalties if his income increases during the proposal. A proposal will always cost an insolvent debtor more than filing for bankruptcy, but the payments are fixed and may be spread over a five-year term. This often means they’re more manageable than the payments required in a bankruptcy.
There are, of course, debtors for whom a bankruptcy might negatively impact their employment. For example, people who must be bonded or handle trust money are not bondable if they file for bankruptcy. By filing a consumer proposal, a debtor can honestly say, “I have never filed for bankruptcy” on any form or application.

Ted Michalos, B.A., CPA, is a Licensed Insolvency Trustee and co-founder of Hoyes, Michalos & Associates Inc. in Ontario, Canada.

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Tuesday, 26 January 2016

Did You Buy a Home in 2015? Want to Save Money this Tax Season???

Hey everybody! This is one of those opportunities that I love in my job where I get to be the bearer of excellent news, and I love that!

For those of you who bought a home for the first time in 2015(or even for some of you who weren't first-timers), there could be some big tax savings coming your way when you file your 2015 tax return. Make sure to discuss all the options with your tax professional or accountant, but the basics are as follows:

-Eligible first time home buyers who purchased a home in 2015 can claim an amount of $5,000 on your 2015 tax return. This in turn could lower your taxes due or result in a larger refund. Either way, it's a win-win if you qualify so make sure to ask about it when filing this year.

-Eligible persons who purchased a home in 2015 and qualify for the disability tax credit, or those purchasing a home for the benefit of family who is eligible for the disability tax credit may also qualify to claim the same $5,000 amount. You do not have to be a first time home buyer to qualify for this amount under this disability credit program.

If you're interested in the details, check out the official CRA page here:

http://www.cra-arc.gc.ca/nwsrm/txtps/2016/tt160120-eng.html

For those who haven't bought yet, or are thinking about purchasing in 2016, make sure you look into the RRSP Home Buyers Program, which allows eligible first time home buyers the opportunity to access their RRSP savings without paying tax on the amounts withdrawn. Details on this program can also be found at the link above.

If you are able to plan your purchase to combine these two great government programs, you could stand to save yourself a whole bunch of money while getting your first foothold on the property ladder!

***This article is intended for informational purposes only. Please refer to your tax professional or the official CRA guidelines to determine eligibility or for the most up-to-date information. CRA guidelines are subject to change at any time.***

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Friday, 15 January 2016

Caulking: When, Where, and Why

Mike Holmes: OK, holiday relaxation is over and it's time to pull out the caulking gun

Caulking is a project most homeowners will do themselves at some point, so it's no surprise I often get questions like "Do I caulk my toilet? What about the sink? Do I caulk around the kitchen cabinets?" Since the number of indoor jobs rise as outdoor temperatures drop, let's talk about what should and shouldn't be…

Wednesday, 13 January 2016

Income Confirmation: 101

While I'm no king of analogies, I'd like to think that applying for a mortgage is a bit like being a lion in the circus. Not because of the abundance of clowns ;), but because you're a majestic beast being forced to jump through many hoops by the lion-tamer(the lender) so that you can have a tasty treat at the end(your mortgage). While the number of hoops and the height may vary, the one which is almost universal for all mortgage applications is known as:

Income Verification

Income qualification is the process by which your Mortgage Broker, and in turn your lender, attempt to verify both the amount and the long-term sustainability of your income. If you do not have enough income to make your payments in a timely fashion, it becomes quite a bit more difficult to get a mortgage approval(*note I said 'more difficult', not to be confused with impossible!). Due to constantly increasing instances of fraud and misrepresentation, it can be more difficult now than ever to verify and confirm your income.

Fraud

2015 played host to some well-publicized mortgage fraud, thanks to a few bad eggs ruining it for the rest of us who work hard and remain ethical and honest in our businesses. As a result, the qualification and verification processes to obtain a mortgage have become more stringent and demanding. It is more important now than ever before to make sure you have a Mortgage Broker on your side who can help you navigate the process and explain the steps along the way.

Together, we will go through both your current earnings as well as your historical income to determine the best documentation to verify how much you are paid. This depends on factors such as your length of employment, how you are paid(hourly, salary, commission, etc.), or whether you are self-employed.

Employees

When you are an employee, it becomes somewhat easier to verify your income since you are being paid by a third-party source. Depending on your income type(salary, hourly, commission, tips, etc.) you may need only some or all of the following documents:
  • Letter of employment from your employer
  • Recent paystubs
  • Your latest 2 years Notice of Assessment(CRA tax document)
By using all or a combination of these documents, we can verify your length and place of employment, your average earnings, and whether or not you are likely to continue earning this amount. Having an average of your past years income(NOAs) helps to establish your average earning potential, regardless of how your pay is calculated. It also helps to show a track record and whether your income is increasing or decreasing.

Self-Employed

Those who are self-employed often find themselves under more scrutiny when verifying income, and the reason is quite simple: If you  own the business, you are the one in charge of writing your own paycheque. In light of this, lenders want to confirm not only your income but also the income of the company. No matter the business you're in, you must be able to show that your earnings are reasonable in relation to the company's earnings. Income for those who are self-employed can be established by some or all of the following:
  •  Your latest 2 years T1 General tax returns(CRA tax documents)
  • Your latest 2 years financial statements for your company
As always there can be exceptions to these rules and some lenders may ask for more or less documentation than others. Another important point is to consider the risk of your application overall. What is your 'loan-to-value', or the percentage of mortgage vs. the property value. If this is more than 80%, you can bet lenders will want to verify your income beyond any doubt. Also take into account your credit score, have you been late or missed any payments? Do you or have you had any accounts in collections? All these things can contribute to a 'riskier' mortgage application and may signal the lender to do more due diligence with your particular application.

If you'd like to know more about how to verify your income, or how much income you might need to qualify for your dream mortgage then give me a call any time! I can be found online at www.ryanWsmith.ca or 'Like' my Facebook Business Page to keep up-to-date.

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Monday, 11 January 2016

2015 - Recap

Hey everyone, Happy 2016! I've been taking some time the last week to recap and review how my 2015 went, and to sum it up it was excellent!

Last year saw the culmination of years spent dreaming, reading, researching, and learning turn into a realized goal: become a successful mortgage broker. Changing gears and pointing my career in a new direction has been terrifying at times, but ultimately rewarding in so many ways.

I have my clients to thank for the joy that you give me in doing my job. As with most things in my life, I give 110% when I am here and you support me with your smiles when the job is done and everything goes according to plan. Even when our best-laid plans are derailed I know I can count on that sense of achievement that comes from seeing a file through to completion, whether that be a new home, a refinance of your current home, or an expansion of your real estate investments. These are all substantial parts of your lives and I'm grateful to be a part of them with you!

In my personal life, 2015 brought plenty of great things as well. A great year with my fiance, a new home, and lots of good times spent with family and friends! A ton of hard work and effort behind the scenes went in to making the good happen, and I can't thank my future wife and my friends and family enough for supporting me when it came time to put in work.

2016 will bring many more adventures and I'm eagerly awaiting them all: Our wedding in September(with tropical honeymoon to follow!), and the massive renovation going on in our new home. In amongst all this I look forward to more enjoyable times with family and friends, and specifically to spending more time with my brother who has come back to Kamloops to pursue a new chapter in his own life.

Thanks 2015, you were good to me!
Here's to an even better 2016!

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