Creditor Protection & Insolvency with Scott Terrio | E015

Dispelling the myths of insolvency in Canada.

In this episode of Financial Planning for Canadian Business Owners, Jason Pereira, award-winning financial planner, university lecturer, writer, talks with Scott Terrio, Manager of Consumer Insolvency at Hoyes Michalos. Hoyes Michalos is a Toronto-based license and insolvency trustee. Scott Terrio talks about what insolvency means, what the options are, and how business owners can protect their assets in the event of insolvency. 

Episode Highlights: 

● 01:15 – Scott Terrio explains the work that he does. 

● 02:55 – What is the process and options for when people get into debt issues? 

● 04:18 – What are consumer proposals? 

● 06:50 – How are consumer proposals different from bankruptcies to the consumer? 

● 10:30 – Business debt is quite different from consumer debt. 

● 13:33 – Can a spouse become liable for their other spouse’s debt? 

● 14:57 – How much back and forth typically happens with consumer proposals? 

● 17:07 – What is normally the timeline differences between consumer proposals and bankruptcy? 

● 19:36 – What if someone goes through a consumer proposal and gets in financial trouble again? 

● 21:08 – What are the misconceptions about bankruptcy in Canada? 

● 24:25 – Which types of assets do creditors not have access to? 

● 27:37 – Consumer debt usually costs you more over time. 

● 28:38 – What do RESPs, TFSAs, RDSPs look like in a credit situation? 

● 30:23 – Which bankruptcy programs are relevant to this COVID-19 moment? 

3 Key Points 

1. Hoyes Michalos is a Toronto-based license and insolvency trustee firm with 25 offices across Ontario, Canada and did about 5800 files last year. 

2. Consumer proposals are for individuals, not a business, with $250,000 in unsecured debt or less, and are making an agreement to pay a percentage of your debt. 

3. About 70% of consumer proposals go through as offered and about 99.9% co ahead with a counter-offer. 

Tweetable Quotes: 

● “Sooner is always better when you are talking about debt. Most small business owners, once they’ve gotten into a little bit of trouble, whether it is tax debt or supplier debt or bank debt, they keep digging.” – Scott Terrio 

● “What a proposal actually is, is you are making a legal settlement with all of your unsecured creditors as a group, through a trustee, through the courts.” – Scott Terrio 

● “You file a bankruptcy, you get an R9 rating for 6 years after your bankruptcy discharge. So, that is either 9 months or 21. The R9 isn’t as bad as people think, because I’ve had all kinds of people get mortgages.” – Scott Terrio 

Resources Mentioned: 

● Facebook – Jason Pereira’s Facebook 

● LinkedIn – Jason Pereira’s LinkedIn 

● FintechImpact.co – Website for Fintech Impact 

● jasonpereira.ca – Website 

● sterrio@hoyes.com – Email Scott Terrio 

● Linkedin – Scott Terrio’s Linkedin 

● Twitter – Scott Terrio’s Twitter 

● hoyes.com – Website for Hoyes Michalos

Full Transcript:

Speaker 1:[Music 00:00:01]. Welcome to the Financial Planning for Canadian Business Owners Podcast. You will hear about industry insights with award-winning financial planner and entrepreneur, Jason Pereira. Through the interviews with different experts with their stories and advice, you will learn how you can navigate the challenges of being an entrepreneur, plan for success, and make the most of your business and life. And now your host, Jason Pereira.

Jason Pereira:Hello, and welcome to Financial Planning for Canadian Business Owners. I'm your host, Jason Pereira. Just a reminder to please sign up for my newsletter at jasonperiod.ca. Where you receive notification of all my podcasts, television appearances, blog posts, and et cetera. Today on the show, I have Scott Terrio. Manager of consumer insolvency for Hoyes Michalos. Hoyes Michalos, is a well known Toronto based licensed insolvency trustee. And I brought Scott on the show to specifically talk about what insolvency means, what the options are, and how business owners can protect their assets in the event of insolvency. And with that, here's my interview with Scott.

Jason Pereira:Hello, Scott.

Scott Terrio:How are you doing, Jason?

Jason Pereira:Good. Thanks for taking the time to come in.

Scott Terrio:You're welcome, no problem.

Jason Pereira:Actually, sorry. Quarantine time to come on digitally. Yes.

Scott Terrio:[crosstalk 00:01:09]. We all know what that means at this point, right?

Jason Pereira:Yes. Exactly. So Scott Terrio of Hoyce Michalos. Tell us about what it is you do.

Scott Terrio:Hoyes Michalos, is an Ontario based licensed insolvency trustee firm. We have 25 offices across Ontario. The head office is in Kitchener. But we're in all the big centers; everywhere from Windsor to bury, to Ottawa and down to the GTA. I work in the King and Yonge office downtown in Toronto, specifically, when I'm working there. And so I've been working at home since March 18th, and everybody has.

Scott Terrio:We switched our firm over, man, almost overnight. Like Doug and Ted did an amazing job. Getting everybody set up at home, and we're continuing to function right now. The courts are closed, but because all proceedings that we do are summary in nature, whether they're proposals or bankruptcies, we don't actually need a physical courtroom. So that kind of makes it easy for us. And we can keep helping people who haven't had the benefit of continuing work.

Scott Terrio:We did about 5,800 files last year. Which is a lot. I'd say we're, not sure what percentage of the Ontario market we are, but we're one of the top three consumer insolvency firms in the country.

Jason Pereira:Excellent. So I have no doubt that this year will be a gang buster business year for you. But, yeah.

Scott Terrio:It was going to be before this. So now it's going to be nuts.

Jason Pereira:Before we get into the entire credit protection angle, let's talk about what the process is for what happens when people basically get into debt issues. And specifically around what their options are? And really one of the things I want to bring to light here, is I want people understand that they can turn to people like you, sooner than later. Because more often than not, by the time you get to them, they've already done some things that are probably detrimental.

Jason Pereira:Let's talk about that.

Scott Terrio:Yeah. Regardless of whether it's an individual consumer, or a small business, Jason, sooner is always better when you're talking about debt. Most small business owners, once they've got into a little bit of trouble. Whether it's tax debt, or supplier debt, or bank debt; they keep digging. And they keep pushing things down the road, and debt only gets worse with time. It's the opposite of wine, I guess.

Jason Pereira:Yeah. The eighth wonder of the world with compounding works against you.

Scott Terrio:Exactly. The longer you go with debts, the worse it gets. Plus the complexities of business mean that you're trying your best all the time. Possibly you're resorting to using source deduction or HST, in order to keep your payroll going. If you're in that much trouble, and that's normal. I mean, it's commendable in a way.

Scott Terrio:You're trying to keep things running. But then of course you keep getting in deeper. Usually, the sooner somebody comes to us by far the better we can do with them. But that's not really how it works psychologically. Especially when a small business comes to us, they're usually, well, well, well down the road. And we're at the point of talking about some kind of a recovery. Either a proposal or a bankruptcy.

Jason Pereira:Okay. So let's talk about what happens then? So specifically around the concept of proposal, people know the term bankruptcy. And they also think it means a lot of things it doesn't in Canada. But let's start specifically with consumer proposals. What is a proposal?

Scott Terrio:There's two types of proposals. There's a consumer proposal, and that's division two. Or, a division one proposal. There's two definitions. So a consumer proposal is for an individual, not a business. Cannot file a consumer proposal as a business. And it's when you owe $250,000 in unsecured debt, or less. Okay? And when I say debt, when I talk about debt here, I mean everything; tax debt, HST, source deduction, credit cards, lines of credit, student loans over seven years, payday lenders, all that stuff.

Jason Pereira:Unsecured. As long as it's on your mortgage or against other assets like car loans.

Scott Terrio:Right. Exactly.

Jason Pereira:Yeah.

Scott Terrio:So secured debts are outside of this. And of course, if you have the option of giving back the asset that's tied to the secure debt, either the car or the house. Then you could file, and put the shortfall in as an unsecured debt, in your proposal or bankruptcy. That's the definition of a proposal. What a proposal actually is, is you're making a legal settlement with all of your unsecured creditors as a group. Through a trustee, through the courts, nobody goes to court.

Scott Terrio:You're actually saying, "Look, I can't pay you all of this debt back with all the interest and penalties, et cetera, but I can pay you something." So the idea is you pay them a percentage. And that varies depending on a bunch of things that we'll get into that. But you're basically, you're making a settlement with them where you're paying a monthly amount, for 60 months or less. And it's structured. It doesn't change once the creditors approve it. So it's locked in. You have the option of amending the proposal. If you've run into any kind of material change to your income; like you lose your job or something like that. So there is a kind of a parachute out. And you can always file bankruptcy within a if you really need to.

Jason Pereira:Essentially, basically, they're able to more or less, not quite fully get out of debt. But come up with a proposal, a schedule to pay this back at something that is far less crushing. To their soul and to their pocket book. What does that debt reduction look like again? Sorry.

Scott Terrio:Well, what you're doing is you're paying them back a percentage. But it covers the whole thing. So they are forgiving a huge amount of the principal, and all the interest stops.

Jason Pereira:So that's a negotiation though? Based on capacity.

Scott Terrio:Yeah. And the way we set them up is we always calculate a hypothetical bankruptcy first. Because, if the creditors are voting yes or no on your proposal, they want to know, "Well, if we say no to this, what are we going to get in the bankruptcy?" Because, bankruptcy is always shorter. And so in order for them to be incentive to take the proposal, you have to give them better than they would get. Had you filed a hypothetical bankruptcy instead.

Jason Pereira:Now how is the proposal different than the bankruptcy for the consumer?

Scott Terrio:Right. A bunch of ways. Number one is the credit rating. When you file a bankruptcy, you get an R9 rating for six years after your bankruptcy discharge. So that's either nine months or 21. And the issue is, I mean, the R9 isn't isn't as bad as people think. Because I've had all kinds of people go and get mortgages, and business loans, and stuff after that. Because you're debt free, right? Your debt service ratio at that point is zero.

Jason Pereira:Yeah. Your ability to take out debt suddenly improved dramatically, despite the hit on your rating, right?

Scott Terrio:Yeah. Your cashflow is pretty good and you're not spending all your money every month supporting debt. So a lot of lenders look at that and kind of go, "Okay, this actually is a fresh start." So as long as you have either a good business plan or a good cash flow, lenders will lend to you.

Scott Terrio:But that aside, the bigger issue with bankruptcy, which is why we try not to do bankruptcies, if we don't have to. Is that there's a lot more involved in bankruptcy. Number one, just in terms of duties. You have to report your income every month and prove it to us. If your income changes, if it goes up, you have to pay more in surplus income. And the surplus income rules are really restrictive in terms of what you can make every month, after tax.

Scott Terrio:So bankruptcy can get very expensive in a hurry. And we have to do your taxes for you, by law, for the year of your filing. And you also would lose any refunds if you had them coming to you. So that's expensive. But the bigger thing to me, is that after the six year period has passed, the statutory sixth period, with the R9 and on your credit rating. Thereafter, for the rest of your life, if anybody ever asks you, "Have you filed bankruptcy?" You have to say, "Yes." Otherwise, it's fraud.

Jason Pereira:Yeah. [Crosstalk 00:08:17] disclosures on everything.

Scott Terrio:Yeah, otherwise it's fraud. Now, we can all argue how well Canada deals with fraud, wink, wink, nudge, nudge. But, this is something I tell everybody that comes in about. If they walk in and they're insistent on doing a bankruptcy, okay. I'm going to tell you the whole thing. Right? And we're going to have to acknowledge it all in writing and everything. Because you really, you should be doing a proposal, or at least attempting one in the first place.

Jason Pereira:Fair enough. I'm also thinking, in terms of just, you said, the involvement, what about the cost of this? Right? I mean, is this cost not born by the assets of the insolvent person? Is there's going to be less going to all parties because of that?

Scott Terrio:Well, what normally happens is, and I'll put this in the context of small business. Because, that's what we're talking about here. So we never do business filings. Okay?

Jason Pereira:Okay.

Scott Terrio:We could, we're licensed to, but we don't. And the reason we don't, is because if somebody comes to us with a significant business problem, as I said earlier. It's not usually something that is buyable already, right? Like they're at the point where they're going to close it down. And then what we do is a personal filing. Because most times, small business owners will have either personally guaranteed the business debt. Because most banks aren't going to be giving you 300 grand.

Jason Pereira:Well, that's the thing, right? Is that like more often than not, we talked about the credit protection aspect of incorporation. But as I keep saying to people, that's a misnomer. Because, the reality is, unless you're a massive corporation with lots of assets, they're going to want your signature on it every time.

Scott Terrio:Right. And so we're talking about businesses that are mostly service in nature. Like there aren't really any assets, it's all sweat equity, and reputation, and stuff like that. And so when you close it off, if it's incorporated, well, that was smart, wasn't it? Because, now all the corporate debt is gone. It's history. They can't come after the corporation because there isn't one. But, inevitably there's personally guaranteed debts that will now be yours personally. So that's got to be dealt with personally.

Scott Terrio:And anything like a director liability, right? Like HST source, deduction, payroll tax, that stuff is all coming after the directors. We end up doing personal filings on every single one of our business [inaudible 00:10:18] situations.

Jason Pereira:Yeah. And if someone was say a large scale manufacturer, they may have securitized their assets against... I mean, more often than not. Here's the reality. It's interesting because people are so used to the concept of, "If I go to a bank and I have $250,000 as a down payment, what kind of loan will they give me?"

Scott Terrio:Yeah.

Jason Pereira:They're used to mortgages where that's like four or five to one. They're not used to the fact that, "Oh, you have 250,000. Great. We'll take that 250 and we'll lend it back to you."

Scott Terrio:Right. And that's because what's the percentage of small businesses that fail in the first two years?

Jason Pereira:Enormous.

Scott Terrio:It's huge. Right? Yeah. And if you buy a house, well, chances are, you're probably going to have that mortgage for years and years, bank's going to do well. Worst case scenario, you sell it. Right?

Jason Pereira:Yeah, absolutely. Yeah. That makes a lot of sense as to why the business bankruptcy, or business proposals wouldn't be done because frankly, I mean, those assets are collateralized. If they're collateralized. If not, they're secured by the consumer. Basically the consumer proposal, definitely a more favorable route to go. Have you seen situations whereby business owners have done the consumer proposal, and then the business continued on without issue?

Scott Terrio:Yeah. So usually what happens with those, is they will transition the business to somebody else. They'll do a proposal on their own personal debts and the creditors will go for that because they end up getting something back. It's usually, we set them up, they're pretty generous. And then what they'll do is the business will keep operating, but mom or their cousin or somebody kind of takes it over during the time period of the proposal.

Scott Terrio:Now, a proposal doesn't prevent you from being a director, but a bankruptcy does. So in a bankruptcy, you would have to assign the directorship until you're discharged. In a proposal, there's none of those restrictions. So yeah, if you've got a business that's viable, you can do a proposal on your personal debts, and keep going on the business.

Scott Terrio:Now of course the creditors, all this will be disclosed to the creditors. And so they'll be looking at this and going, "Okay, well, if it's really that viable, why doesn't he just pay his debts back?" But all that'll do is just mean they'll want more back in the proposal. And usually it's reasonable enough. Especially with the percentage, or the interest forgiven. And especially if their CRA debt, because that's massive.

Jason Pereira:Well, they're sitting in the pole position. Right? They get it all back first, right?

Scott Terrio:No, they don't.

Jason Pereira:No, they don't? Okay.

Scott Terrio:No. CRA has no super priority, except if there is a business bankruptcy, and there are assets involved. And then all crown debts get paid first, but that's the only one. [crosstalk 00:12:38] it never happens.

Jason Pereira:I'll give you the other one. And it has nothing to do with insolvency. It's on death.

Scott Terrio:Yep.

Jason Pereira:If there's a tax liability by the estate, and beneficiaries have received assets already, those assets can be gone after by CRA. Especially if they came by way of beneficiary designation. Whereas, other creditors can't.

Scott Terrio:Yep.

Jason Pereira:But I mean, that's not a business owner, credit protection issue. That's a estate planning issue.

Scott Terrio:Yeah. And, I mean, CRA has all kinds of powers that people don't realize, along those lines. Like, if you have a bunch of debt, CRA can come after your spouse.

Jason Pereira:Yep.

Scott Terrio:They can raise, what's called a liability assessment against your spouse. And just say, "Well, I guess you must have some money." Right? And people hear that and they freak out. Right? But, this is all just knowing and not knowing. Right?

Jason Pereira:Well, you bring up an interesting point there. Because that's an often common misnomer, or point of panic, I find with people. Is they think, "Well, Oh, my God, my spouse got into all this debt. What happens? Can they come after me?" Right? Let's just clarify that.

Scott Terrio:Well, there's legal separation, debt cannot be inherited. That's important. So if you die with debt, your estate has assets it has to pay out what it can to the creditors. But if you die without assets, nobody's inheriting that debt. Right? Likewise, you cannot be accounted for, liable for, judgment creditor debt. Like banks and credit cards, stuff like that, for your spouse. Those guys can't touch you. It's just a CRA thing.

Jason Pereira:Yeah. Unless, of course you have basically guaranteed said loan. In which case [crosstalk 00:14:02]-

Scott Terrio:Yeah, well-

Jason Pereira:Well, then it's technically your loan as well.

Scott Terrio:Yeah.

Jason Pereira:So, okay.

Scott Terrio:Co-signing is another matter entirely, right? And that's actually a very, very common misunderstanding from people that we talk to is, "Well I'm joint on those debts. So are they going to come after me for half?"

Jason Pereira:No, it's all debt.

Scott Terrio:Yeah, I know. I got some bad news for you, right?

Jason Pereira:Yeah. Yeah.

Scott Terrio:Yeah.

Jason Pereira:Everybody thinks joint means 50/50. No it don't.

Scott Terrio:[crosstalk 00:14:25].

Jason Pereira:No it don't.

Scott Terrio:No, joint means 50/50, almost as much as marriage does, Jason?

Jason Pereira:Yeah.

Scott Terrio:Put it that way.

Jason Pereira:Yes. As my wife reminds me, when I want to eat her ice cream.

Scott Terrio:Yeah. Oh, yeah.

Jason Pereira:Some assets don't get divided evenly.

Scott Terrio:No, it's all or nothing, man. That's right. Good example.

Jason Pereira:We talked about the consumer proposals. Let's talk about the back and forth process of this.

Scott Terrio:Sure.

Jason Pereira:How much negotiation do you typically see in a consumer proposal? Do they accept the first offer? Is there always a haggle?

Scott Terrio:Good, good question. So everything is, there's a lot of structure in this stuff. The bankruptcy act says, "When you file a consumer proposal, the creditors have 45 calendar days after the date of signing. In which to give us, the trustee, back proof of claim and their vote." Okay?

Jason Pereira:Mm-hmm (affirmative).

Scott Terrio:If they don't prove a claim, they don't participate in the dividends. I've seen situations, it's rare, but where bank votes yes or no. And then doesn't send a proof of claiming, well, they don't get any money. That's kind of stupid. So the trustee's job is to make sure they do all that stuff right though. Typically about 70% of proposals, go ahead as offered. And 99.9%, go ahead with a counter offer. Okay?

Scott Terrio:Because the creditors can, it can come back and say yes or no, they can ask for more. If they ask for more, you're not bound by that. So I will call the person say, "Okay, look, here's what they wanted. You offer 300, they want 500. Let's saw it off at 400." It's not a massive negotiation. It's usually that's about it.

Jason Pereira:So you're not ping-ponging back for periods of time?

Scott Terrio:No. No. Usually once and that's it. And a lot of creditors, they all behave differently in voting. So every year dollar owed in a proposal, is a vote. So if you owe 100 grand, you need $51,000 worth of votes on aggregate, to make the proposal go ahead. And the other 49 doesn't matter, they're in any way. So we have creditors who are hard to deal with. We have creditors were easy to deal with. CRA usually wants specific things.

Scott Terrio:Like they demand that you be current on your filings, which is sensible. So we just have people bring their filings up to current anyway, beforehand. Because I'd rather have CRA be in a good mood when they vote. Right? I mean, we cultivate relationships with the CRA officers that are involved. Because usually there's only seven or eight of them for the country in this case [crosstalk 00:16:34]-

Jason Pereira:[crosstalk 00:16:33] Scott calling.

Scott Terrio:Yeah. I get to know them. Right? Like they're shocked by that. Because they're used to like, everything's got to have a wall right up in front of it. But I just call them. I say, "Look guys, now here's what so and so went through. He got divorced last year, his mother was sick, whatever." I kind of give them the, make it a person, right?

Jason Pereira:Which all too often, in any financial aspect, especially, well even government as well, is that too often, this becomes a dehumanizing exercise. Because you lose sight of the fact that these aren't numbers on a page. These are people's lives.

Scott Terrio:Yep. Yep. Exactly right.

Jason Pereira:Start to finish. What are we looking at timeline for consumer proposal versus bankruptcy?

Scott Terrio:Yeah. Good question. So both of them to get underway, is quick. I talked to three people today for the first time, and they're fighting next week. Now, sometimes it's months, sometimes it's weeks, oftentimes it's within two weeks. In fact, I'd say eight or nine times out of 10 with me anyway, everybody's different. But I like to get things moving. If you're coming to see me, your soul searching is all done, dude.

Scott Terrio:We're not discussing whether you should be doing something or not. We're discussing like what are we doing exactly? The details. Right?

Jason Pereira:Unless, I sent them there. In which case I'm sending them their specific saying, "You don't have to do it. You just got to listen."

Scott Terrio:Yeah.

Jason Pereira:Right?

Scott Terrio:Depends on the source. Yeah.

Jason Pereira:Yeah. Exactly.

Scott Terrio:Well, no, that's true. Right? Like I have usually, and you're right. What we call business and professional referrals. It's totally different, right? Because we're talking about, can we do this as a viable operation? Right? Can we do this as a proceeding, but still keep the business going, whatever.

Scott Terrio:But with consumers it's usually more cut and dried. It's like you hit the wall. Let's get something underway here. It can happen within a week, or it can take months. Basically depends on the speed the person needs to go. And we also like to get all the ducks in a row, before we file something. Because you can't unfile something. When you get a bankruptcy underway, or a proposal, you can't stop it. It has to see itself out, or fail. So length of time, bankruptcy can either be nine months for first time bankrupt with no surplus income. 21 months, first time bankrupt with surplus income. 24 months, second time bankruptcy without surplus. And 36, second time with surplus.

Scott Terrio:Those are the four lengths of bankruptcy. Now, keeping in mind that bankruptcy can be any length, if you don't do your duties. So by the end of the bankruptcy, if you didn't pay the trustee, or you didn't do your counselings, or you didn't give us your tax information to do your taxes, or if you didn't provide your income to us every month, you don't get discharged.

Scott Terrio:And if you don't get discharged, big giant question mark, because it's up to the court, right? And the court will usually place a conditional order on your discharge. You could be in bankruptcy for another year, or two. Proposal, is five years or less, consumer proposal by statute. We set them all up for five years because they are open terms. Means you can pay them any time you'd like to sooner, without penalty or interest. So five years or less, basically.

Scott Terrio:There are situations where a lump sum proposal is possible. Where somebody has access to family funds or something, and they just want to pay it all. And usually if you can do those, the creditors will take less than otherwise, because they get all their money at once. Right? That's pretty much how the timeframes work.

Jason Pereira:Now, there was one other thing I wanted to cover. Because I think we covered it in previous conversation. What happens if someone does a consumer proposal, and then gets themselves in hot water again? What are their options at that point?

Scott Terrio:You mean after the proposal's seen itself through, are you talking?

Jason Pereira:Correct. After the proposal's seen itself through.

Scott Terrio:Later down the road. Okay. So-

Jason Pereira:Yeah. Two or three years later, uh-oh, I did it to myself again.

Scott Terrio:Yeah. It doesn't happen a lot, but it does happen. Usually it's very specific circumstances. But they can always do a proposal or bankruptcy again, as long as there are new debts.

Jason Pereira:Okay.

Scott Terrio:So you can't do a proposal twice on the same set of debt. So if you fail the proposal, if you miss three payments, that's the rule, out of 60, your proposal is deemed annulled. And you've got no more chance of doing a proposal on those debts. The creditors will then go back to day one, and add penalties and interest back. So if you go four years and fail your proposal, you're going to be an unhappy camper. Because now you're going to go back right to the full 50,000 you owed. And then they're going to be after you again, because the stay is lifted. The creditor's rights are revived, all that stuff.

Jason Pereira:Interesting. And yeah. So bottom line is, once you agreed to one of these things, keep your word. Because it can be very punitive if you don't.

Scott Terrio:Yeah. You can. And there are ways that like a proposal has two parachutes, right? You can file an amended proposal. As I said, if you have a material change to your circumstances; like you lose your job or something. And then you would offer less, and they would take it because it would still be better than a bankruptcy, probably. Or you can still file a bankruptcy, if you needed to.

Jason Pereira:So we talked about all those. Before we get started on credit protection, and assets that are fair play versus not fair play for creditors. Let's start talking about one other question for you. In other interviews and other conversations, we talked about how, what we get through American media, often skews Canadian consumer's understanding of what bankruptcy is and means. Tell me, and the listeners, what are the big misconceptions about bankruptcy in Canada?

Scott Terrio:Yeah. So like everything else, this industry suffers from being in such proximity to a giant. And so every time you watch a show and you hear chapter seven, or chapter 11, or chapter 13, that's the American bankruptcy code. That's nothing to do with Canada. We have all the very similar proceedings that we can do, but they're done very differently. American bankruptcy law, in a nutshell, is highly litigious. So you need a lawyer.

Jason Pereira:You mean like America in general.

Scott Terrio:Yeah, exactly. It just reflects the society, exactly. Okay? So everything you think about down there is the same in bankruptcy. If you're going to do bankruptcy, you're going to court. Your tax debt is not necessarily included, it's up to the court. Your student debt, not necessarily included, up to the court. The amount you're going to pay, like all that stuff is highly determined by the court. And by how much you can pay a lawyer.

Scott Terrio:So it's expensive. It's time consuming. Lawyers get rich on it. And pretty much nobody else. And the Canadian system is extremely streamlined. Like I've had American bankruptcy lawyers say to me at conferences, it's like, "Holy shit. I can't believe somebody can go through this just with a couple of meetings and they never ever see a lawyer or a judge."

Jason Pereira:Do they say how do you guys make money?

Scott Terrio:Yeah, they do. And there are bankruptcy lawyers in Canada. There are lots of them, but they are for situations that go sour. Okay? Basically if somebody doesn't do their duties, and it's worth hiring a bankruptcy lawyer, to go stand in front of a judge. Oftentimes the trustee will do it themselves. But there are situations, especially in business bankruptcies or bigger matters, that are personal bankruptcies. Where you need a lawyer, because you've got to sort out a bunch of stuff. But usually that's where they hid assets, and they lied on their statement of affairs, and they didn't tell us about the yacht in Monaco, and all that kind of stuff.

Jason Pereira:Whoops.

Scott Terrio:Yeah. I know.

Jason Pereira:Let's not forget that we had a finance minister forgot to talk about our French villa in a disclosure. Let's not... Yeah.

Scott Terrio:Yeah. Exactly. That kind of stuff. Right? Where it's like a massive nondisclosure was discovered. Okay, well that's bad.

Jason Pereira:That's fraud.

Scott Terrio:Yeah. Yeah, exactly. So the bankruptcy lawyer step in. I don't know if doing 11 years of this, I've seen a bankruptcy lawyer three times, maybe? Like, it just doesn't happen. Because, if you do everything right up front, it's not going to happen. Right?

Jason Pereira:Yep.

Scott Terrio:So the Canadian bankruptcy lawyer is a whole different animal than down there. Like they very rarely do personal stuff. Or else if they do, it's the bigger matters where there's assets involved in the estate, stuff like that. But it's oftentimes business bankruptcies. And they get involved to make sure that the corporate proceedings are going the right way, and stuff like that.

Jason Pereira:It's funny. Every time I think of bankruptcy in the States, I think of the one scene from the office. Which I'm sure we've talked about before. Michael gets up and says, "I declare bankruptcy." And they're like, "Michael, that doesn't do anything. You can't just say you're bankrupt." "No, no, I didn't just say it, I declared it."

Scott Terrio:Yeah, I get that one on Twitter a lot. People fire that one at me, yeah.

Jason Pereira:Because it was brilliant. No, you have to do something.

Scott Terrio:Just declare it. Yeah.

Jason Pereira:Exactly. All right. So now that we've covered off what a consumer proposals look like, and what bankruptcy looks like. And hopefully everybody takes away, that if you get into trouble, the former versus the latter. And seek out help sooner than later. Because oftentimes, and we'll talk about this now. There's certain things that creditors do not have access to generally. So let's talk about what types of assets those are?

Scott Terrio:Okay. So in bankruptcy law in Canada, there are a lot of exemptions, okay? So you can have a car that's worth 6,600 bucks net value. You can have a car that's worth 50 grand, as long as it's owed 50 grand. Like as long as it's encumbered, I don't care. Because the net value is nothing, right? So you could be driving a Porsche, and paying the full $80,000 loan on the thing. That thing's worth 50. Great. Keep driving it, if you want.

Scott Terrio:Now, we have a cash flow discussion at that point with the person and say like, "Is this makes sense to keep paying for this thing every month?" But yeah, anything that's encumbered, you can have a house worth a million dollars as long as you owe a million dollars. Because I don't get anything, if I sell the house; bank gets it all. Now, home equity is not exempt, obviously. So if the house is worth a million and you only owe 700,000, well, you're going to have to deal with the 300,000 of that. Or the net amount after sales. Right?

Scott Terrio:So you could have an RSP worth any amount, as long as you haven't contributed in the last 12 months. So Jason's clients put all your money in an RSP and don't do bankruptcy for a year and you're good. Okay?

Jason Pereira:So that said, though, those are the assets. So if I put something in the last 12 months, it doesn't taint the entire thing? Or just the last 12 month contribution?

Scott Terrio:No, it's the last 12 months contributions to a registered account, is a reviewable transaction. Which means the trustee has to disclose that to the creditors. 

Jason Pereira:And how much [crosstalk 00:25:42]-

Scott Terrio:Usually that means they asked to have it paid in the bankruptcy to cover the non exemption.

Jason Pereira:Which makes sense. Right? Because I've put it in one day before I go talk to you, why would that be at the table? Right?

Scott Terrio:Yeah, exactly.

Jason Pereira: So what about pensions? They're a little bit different, right?

Scott Terrio: No pensions are exempt assets. Okay? In a bankruptcy, completely.

Jason Pereira: There's no 12 month rule there. Right? Because-

Scott Terrio: No, that's right. Because it's a locked in a account. So there's no 12 months rule on pensions. That's correct.

Jason Pereira: And this is where people end up getting into trouble sometimes. Because they'll be like, "Oh, things aren't going very well. I've got a lot of debt right now. I'm going to start cashing on my RSPs, or pension." Which basically, like I've had people refuse to go talk to people like you. And instead of unlock liras. and I'm rubbing my temples in pain because it's like, wait a sec, you just compounded your problem. Now, you have a tax liability, that you are realizing in order to pay off this debt. You have literally nothing to show for.

Jason Pereira: In fact, you're worse off from retirement standpoint.

Scott Terrio: Yeah. Because if you take out 40 grand, you're going to get taxed at 35% for taking that out. And next year, when you do your taxes, you're going to have 40 grand more on your income to get taxed on. And now-

Jason Pereira: That becomes a-

Scott Terrio: You've got 40 grand less to retire with. So it's just a mess. Right? But people panic. And I see that happen all the time, by the way. You don't have to be a big player. I've seen people take as little as 3000 out of an RSP to make a quick rent payment or something. Like, dude, what are you doing? But again, it's knowing versus not knowing, and being able to undo versus not. Right? So that's why it's better to talk to somebody sooner because prevention in this stuff is way better than trying to undo something.

Jason Pereira: Yeah. I would say that one of the more common desires of anyone you speak to is to be debt free. That concept in itself, everybody seems to be married to the idea. And don't get me wrong. We all want to get there because Hey, you want to be encumbered. It lowers your cost of living. It all makes sense. But I will see people do it to the detriment, right? The RSP one's an example. Right?

Scott Terrio: Yep.

Jason Pereira: And I've often had to give the argument like, would you rather be debt free sooner and then have to start from scratch all over again? Or be debt free five years later and have a substantial nest egg? That is really the decision people are facing sometimes. If they make these calls.

Scott Terrio: Yeah. And you know what? No matter what investment return you get, I can almost guarantee that your debt will cost you more over time. Right?

Jason Pereira: Oh, yeah.

Scott Terrio: Because most debts are 20% interest or something like that, credit card.

Jason Pereira: Yep.

Scott Terrio: So unless you're making 40% returns on your investment, even if you are, you're still paying all that interest and you're dragging it along behind you. So it's better to get debt free first. And then you can do all kinds of things.

Jason Pereira: Well, consumer debt, right? Like we're talking about low-interest debt or [crosstalk 00:28:13]-

Scott Terrio: Yeah. Yeah.

Jason Pereira: Like it's different, right?

Scott Terrio: Yeah. Totally.

Jason Pereira: But yeah, I mean one of the first things, as much as I always cringe when people are in the rock and the hard place of making good money, massive credit card debt, and then massive RSPs. And it's like, well, no, these two things are not going to solve each other. Unfortunately, you just got to tighten the belt. If you lose your job, if you're in lower income period, that can be an opportunity to harvest those RSPs potentially.

Scott Terrio: Absolutely. Yeah.

Jason Pereira: So TFSAs, RESPs, RDSPs. What do those look like in a credit situation?

Scott Terrio: RESPs, sadly, this is a very big failing of the bankruptcy law, are not exempt in a bankruptcy. So if you've got a 30 grand in there for your kids, the net amount, so the amount that you contributed, not the government is non-exempt. So that's bad. So usually what we'll do is, well again, I'm telling everybody to do proposals anyway. But if you come in and you have that as part of your situation, I say, "Look, you better do a proposal here. The creditors are going to want you to pay a chunk of that in the proposal, but it's better to keep that habit there rather than start over. Right?"

Scott Terrio: So that's a tough one. RDSPs, are treated similar to RISPs in bankruptcy. So disability savings plan. CFSA is cash. So if you've got 30 grand in the CFSA, you might as well have it in a bank account. That's not exempt, that's money. That would be in play in a bankruptcy. And therefore you'd have to pay for that amount and more in the proposal, because the creditors are going to want a bit more. Right?

Jason Pereira: Absolutely. And I mean the most common thing that I see is, we all see I think, is someone starts a business, they want to have the assets in their spouse's name, right? There's a certain amount of limitation [inaudible 00:29:47] do that. For instance, the putting the house in the wife's name has always been one of them, but good luck getting a mortgage when only one person's name on the mortgage.

Scott Terrio: Right. Oh, yeah.

Jason Pereira: So there's a limitation there. And we also have to be cognizant of what are known as attribution rules, as well. Because they can lead to tax implications. So overall good coverage. I mean, bottom line is before you go start tapping any assets to pay off debts, make sure you understand whether or not critters can touch those. Now, before we were of course doing this during the entire COVID crisis, you've clearly seen a spike in businesses as we discussed earlier.

Jason Pereira: Is there any specific advice around some of the programs that have been put out by the government that you want to share? That would be relevant to this time period.

Scott Terrio: Well, I'd say the big one is the office of the superintendent of bankruptcy, which is the governing body, the federal that oversees this business, they're like the watchdog. When the sur benefit was announced, they immediately said, "That doesn't count as surplus income." If you file-

Jason Pereira: That would have been terrible, my God.

Scott Terrio: Well, it would have. But it just means that if you file bankruptcy right now on that 2000 a month, there's no surplus income. So if your wife is making a whole bunch of money, and you lost your job, you could do a bankruptcy for nine months, 200 a month. So it's a great time to do bankruptcy. Now, of course, I would try and get you to do a proposal anyway, because you should, if you can. But it lowers the amount of a potential proposal because the creditors wouldn't get anything in a bankruptcy, right? So why wouldn't you do that? Right? Because if you only stand to go back to work... In other words, a good time to file a proposal is when you're making as little as possible. Because you're doing it now.

Scott Terrio: It's like a balance sheet, it's a snapshot. And so if you go make more later, six months from now, on a five-year proposal, that money is yours to do whatever you want with. Now, you would probably pay the proposal down faster, but you don't have to. So a lot of people right now are kind of scrambling to do that. And say, okay, well look, now once I got their heads sorted. Because these are the ones that called us panicking. Right? We also have been telling a lot of people right now to do nothing. So that's why the bankruptcy filings, and proposal filings, are going to drop like crazy for March, April, May.

Scott Terrio: Because they were like this, right? We were doing tons of files. Because the Canadian consumer was already in a bad spot before this happened. This is the worst possible case that could have happened. So what's going to happen is there'll be a big dip in filings. And later, in the summer and the fall, they're going to be off the charts.

Scott Terrio:Because all the people who ended up realizing that they didn't get their jobs back, are the ones that we told to wait. Because you don't want to get into a five year commitment when you don't know if you have income. And then come the summer, a whole swath of them is going to not have jobs to go back to. So now they're going to have to do something because creditors, aren't going to wait once the courts are open again. Right? I think that you're going to see a dip, and then you're going to see an outrageous spike.

Jason Pereira:Yeah. It's definitely going to be a symptom of the times, unfortunately.

Scott Terrio:Yep.

Jason Pereira: So Scott, thank you very much for spending the time to help explain this to people. And hopefully-

Scott Terrio:You're welcome.

Jason Pereira:The listeners, if they do find themselves in this position, will reach out to you. First of all, where can people find you?

Scott Terrio: Well? So I'm at STerrio@Hoyes.com, is the email. That's S-T-E-R-R-I-O, @Hoyes.com. Hoyes.com, our website is massive, man. Like it's a rabbit hole. We got YouTube stuff. We've got video, we've got tons of blog posts. It's fantastic. If you want to find stuff out without talking to somebody, which I get a lot of people do. And after this situation, even more people will be doing that.

Scott Terrio:I'm on Twitter @ScottTerrioHMA, is the handle.

Jason Pereira:Definitely follow Scott on Twitter. He's I would say like this subculture of personal finance Twitter experts that I think are on there. And Scott posts quite a lot and shares a lot of interesting stories.

Scott Terrio:Yeah, I can't resist it. So I'm perfect. Because, I just say what's on my mind. Get in trouble sometimes, but that's fine. But yeah. And then if you follow guys like me and Jason, you'll also find all kinds of other guys that are really good at stuff in different fields. Right? That's the nice thing about it. Is you can learn a ton from the kind of the corollary contacts that you make.

Jason Pereira:Excellent. Well Scott. Yet again, thank you for taking the time to come in.

Scott Terrio:Thank you, Jason.

Jason Pereira:My pleasure. And a stay safe.

Jason Pereira:For everybody out there, this has been Financial Planning for Canadian Business Owners. Thank you yet again for taking the time to chime in. And please, if you enjoyed this podcast, leave a review on iTunes, Stitcher, wherever it is you get your podcasts. As it does help people discover it. Until next time, take care.

Speaker 1:This podcast was brought to you by Woodgate Financial; an award winning financial planning firm, catering to high net worth individuals, business owners, and their families. To learn more, go to Woodgate.com. You can subscribe to this podcast on Apple podcast, Stitcher, Google play, Spotify and SoundCloud. For more episodes, go to JasonPereira.ca. You can even ask Siri, Alexa or Google Home to subscribe for you. .