Bankruptcies Drop in May, 2006.
The latest bankruptcy statistics for May, 2006 were released on the internet by Industry Canada on June 29, 2006.
Consumer bankruptcies fell 5.5% (7,021/7,431);
Business bankruptcies fell 7.4% (637/688);
Proposals rose slightly by 1.9 % (1,754/1,721);
Overall, Insolvencies fell 4.3% (9,412/9,840).
Year to date insolvencies were down 5.0%
For more information and more detailed analysis please refer to this site.
We answer general personal bankruptcy and personal proposal questions on our Ask a Bankruptcy Trustee Blog. When we get a question that a number of people ask and/or a question we think will be of general interest we feature it on its own blog and give a more detailed explanation.
One of the questions we are frequently asked is how people can protect their assets from seizure in a bankruptcy; how a relative can be paid and not anyone else and other similar questions.
How to conduct yourself before filing bankruptcy or a proposal
Many people know they must file bankruptcy or a proposal but keep putting it off hoping for a change in circumstance or a miracle. If you find yourself in this situation it is important you conduct yourself properly concerning whom you pay and how you deal with your assets.
If you fail to do this you may put yourself in a position where you have your bankruptcy discharge postponed or denied and face severe fines by the court.
Many people ask how they can protect their assets from being seized and sold in a bankruptcy or if it is acceptable to pay a relative, for example, instead of a big credit card company.
The simple answer is you cannot protect assets from seizure or give preferred payments to relatives or anyone while on the verge of bankruptcy. Some people even consider “running up” their debt just before bankruptcy since it will be written off anyway. A word of advice: Don’t! Trustees in bankruptcy have extraordinary powers to recover preference payments and assets “sold” at below market value. Trustees in bankruptcy also have the duty to report such activities to the court where severe penalties are possible.
Some “don’ts”:
• Don’t make significant purchases on credit prior to bankruptcy or a proposal;
• Don’t make significant payments or payments to creditors out of the ordinary course of your payment history. Many people want to pay a relative, for example, ahead of a credit card company. Don’t do this. The law doesn’t distinguish between types of creditors and severe court penalties can be imposed;
• Don’t cash in RRSP’s or stocks on the eve of bankruptcy or a proposal;
• Don’t “sell” or transfer assets to a friend or family member;
• Don’t purposefully neglect to list some of your creditors. All debt must be listed.
Your attitude
The best way to look at an impending bankruptcy or proposal is that it is the law of the land and your right to get a fresh financial start by erasing most, if not all your debt while retaining certain assets specified by your province or territory of residence.
Accept this without guilt and without “beating yourself up”. At the same time don’t cheat. Play by the rules and your fresh financial start will come about smoothly, without stress and investigation and without guilt!
CIBC Forecasts Bankruptcy rate jumping in ’07
The CIBC in a June 12, 2006 Report noted the fall in bankruptcies to the end of April this year.
The report forecasts that personal bankruptcies, which hit the lowest level in seven years in the past few months, are expected to rise slightly in 2006 and could mushroom next year because of higher interest rates and a slowing economy.
The bank’s economist, Benjamin Tal, said in the report:
“While we expect the overall bankruptcy numbers in 2006 to rise very moderately, it seems that even this optimistic assessment should be revised downward. The most likely scenario is that we will see little change in the number of bankruptcies in 2006 and a 3%-5% increase in 2007”
For information on historic bankruptcy statistics please refer to this website.
Credit Counsellors under Scrutiny.
Canada’s Office of Consumer Affairs is undertaking the funding of a study on Credit Counsellors in order to ensure that consumers are well served and to reduce the risk of fraud or conflict of interest. Consumer Affairs was prompted to take this step by the widespread abuses of the credit counselling industry in the United States. The study will be conducted by L’Union des consommateurs.
Their analysis will focus on the following points:
o cost of credit counselling;
o sources of funding;
o policy on the allocation of payments to creditors;
o existence of a consumer awareness program;
o nature and size of the business;
o annual volume of counselling sessions;
o training required or offered to credit counsellors;
o rules of ethics;
o existence of and participation in a national association.
L’Union des consommateurs have stated that they will call on members of Credit Counselling of Canada for assistance in identifying the agencies to be targeted and finding pertinent local legislation and major legal precedents.
It is unfortunate, that by seeking cooperation with members of Credit Counselling of Canada, that there appears to be a bias by
L’Union des consommateurs towards non-profit credit counsellors. This built in bias will mar the credibility of L’Union des consommateurs report, especially with the latest news coming out of the US on May 15, 2006 about the widespread abuses by non-profit credit counsellors.
The US Internal Revenue Service (IRS) reported on May 15, 2006 that, the audits of 41 organizations, representing more than 40 percent of the revenue in the industry, have been completed. All of the completed audits have resulted in revocation, proposed revocation or other termination of tax-exempt status.
RAMPANT ABUSE BY CREDIT COUNSELLORS IN THE UNITED STATES
Credit Counsellors Controlled by Credit Card Companies:
Steve Rhode, president and co-founder of Myvesta issued a statement on November 20, 2003 on the Credit Counseling Hearing Held by The Subcommittee on Oversight of the Committee on Ways and Means. Amongst other things, he said that credit counsellors were controlled by the credit card companies.
“Back-Office” Servicing Companies are Threatening to Change the Industry into a Debt Collection Mill:
In March 2004, the United States Senate tabled a report entitled Profiteering in a non-profit industry: Abusive practices in credit counseling. The report contains stories of abuses committed in the United States in the field of support services for consumers in debt. The Committee reported that the proliferation of for-profit, “back-office” servicing companies is threatening to change the industry into a debt collection mill instead of an industry whose focus should be on consumer counselling and education.
Consumers Deceived into Paying at Least $170 Million in Hidden Fees:
On March 21, 2005 the Federal Trade Commission issued a statement that one of the largest non-profit credit counselling firms in the US, AmeriDebt Inc., will shut down its debt management operation as part of a settlement of Federal Trade Commission charges that it deceived consumers into paying at least $170 million in hidden fees.
Attorney General Jay Nixon of Missouri, in announcing the lawsuit, filed in St. Louis Circuit Court against non-profit credit counsellor AmeriDebt, said that:
“…AmeriDebt has served more as an anchor than a life preserver for many consumers. “
IRS Takes New Steps on Non-Profit Credit Counseling Groups Following Widespread Abuse:
The IRS announced on May 15, 2006 that over the past two years, the IRS has been auditing 63 non-profit credit counseling agencies, representing more than half of the revenue in the industry. To date, the audits of 41 organizations, representing more than 40 percent of the revenue in the industry, have been completed. All of the completed audits have resulted in revocation, proposed revocation or other termination of tax-exempt status.
“Over a period of years, tax-exempt credit counseling became a big business dominated by bad actors,” said IRS Commissioner Mark W. Everson.
“We are taking the unprecedented step of contacting every known organization in the tax-exempt credit counseling world to determine if there are further problems. And we are issuing guidance to assist those smaller organizations who do play it straight and want to continue to stay on the right side of the law.” Everson said.
In addition, the IRS has tightened up its review of new applications by credit counseling firms for tax-exempt status. Since 2003, about 100 applications have been reviewed, but only three have been approved.
WHAT DOES THIS MEAN FOR CANADIAN DEBTORS CONSIDERING USING A CREDIT COUNSELLOR?
Canadian debtors who are considering using a credit counsellor should take the precaution of getting a second opinion from a trustee in bankruptcy or an insolvency lawyer.
Trustees will give a free consultation with no obligation to use their services. Insolvency lawyers will charge you for 1 – 1 ½ hours of their time but it will be money well spent for your peace of mind and potential savings of thousand of dollars.
Here are some things to be aware of when dealing with credit counsellors:
• Credit counsellors that advertise as “non-profit” are funded by banks, credit card companies and other credit grantors and therefore have a conflict of interest. Be careful! Their mandate is to steer people away from going bankrupt or filing a proposal. Be skeptical and you decide if they are giving the best advice for you and your family or the best advice for their sponsors the banks, credit card companies and other credit grantors.
• Setting your monthly payments too high is common. We find that the Industry Canada Standards on required payments in a bankruptcy or a proposal are very accurate in establishing the maximum payments that should be made. You can calculate your maximum monthly payments by filling in this predictor.
• Setting a payment plan for an extended period of time such as five or more years is common. This is almost always a very bad idea for you. Most trustees in bankruptcy feel that the term should be a maximum of three to four years. It is a stipulation in the Bankruptcy and Insolvency Act that the term for a “Consumer Proposal” be no more than five years. Terms longer than this have a very high failure rate, because people cannot see a “light at the end of the tunnel”.
• Some credit counsellors just want to charge you for filling out bankruptcy forms and referring you to a “very good” bankruptcy trustee. Don’t pay anyone for doing this! All bankruptcy trustees have the same code of ethics and the same costs and will all give you the same service.
• Some credit counsellors may try to mislead you by saying that their services will give you a better credit rating than a bankruptcy and that a bankruptcy or a proposal will ruin your credit rating. Don’t be fooled! Any kind of a payment plan or bankruptcy or a proposal will be flagged by the credit bureau and will be a negative on your credit bureau report.
• Some credit counsellors may try to frighten people into using their services by saying how terrible bankruptcy is. Don’t be misled by these bankruptcy myths.
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