Who is eligible to file a consumer proposal or personal bankruptcy?

To answer your question: who is eligible to file a consumer proposal or personal bankruptcy? Let’s look at a case study – I just met with a very nice gentleman […]

To answer your question: who is eligible to file a consumer proposal or personal bankruptcy? Let’s look at a case study – I just met with a very nice gentleman today in our Brampton location – let’s call him Jake (not his real name).

Jake had $12,000 in credit card debt and he was unable to make his monthly minimum payments because he just lost his job. He is now self-employed selling scrap metal, but this does not provide him with a steady income.

Jake contacted our office to inquire about filing a consumer proposal so he can make a settlement with the credit card companies. Upon inquiring him further, it turns out that he owned a home in his name. The home had a fair value of $290,000 and  a mortgage of $150,000. He had no other assets and no other debts other than the credit card debt.

If we were to calculate Jake’s net worth, this is what it would look like:

Home at fair market value:    $290,000

Mortgage debt:                          -150,000

Credit card debt:                         -12,000

Net worth:                                 $128,000

I told Jake that we were unable to help him with a consumer proposal because he wasn’t insolvent.

What “insolvent” means in Jake’s case is that what he owns (i.e., his assets – the home) is worth more than what he owes (i.e., his debts – being the mortgage and credit card debts). If he were to sell his home, he’d be able to pay off all his debts by himself and still have $128,000 left over for himself. That is, he has a net worth of $128,000.

A consumer proposal (and a bankruptcy) is a proceeding under the Bankruptcy and Insolvency Act. In order to legally file a proposal or bankruptcy, a debtor must be insolvent. This is why we were unable to help Jake with his problem.

Let’s suppose that the home was only worth $130,000. How would this have changed my answer to Jake?

Home at fair market value:    $130,000

Mortgage debt:                         -150,000

Credit card debt:                         -12,000

Net worth:                                 $-32,000

In this scenario, Jake would have a negative net worth of $32,000. That is, if he sold his house, he wouldn’t have enough money to pay off all his debts. He would still owe $32,000 to his creditors.

In this case, Jake would clearly be insolvent. As such, he would be eligible to file a consumer proposal.

So what were Jake’s other options? We discussed the possibility of him obtaining a 2nd mortgage so he could use the loan proceeds to pay off his credit card debt, but his credit score was bad and he didn’t earn enough income. We also discussed the option of him voluntarily selling his home. The problem with this was that his mother, sister, wife and children resided in this home with him. It would be too expensive to find a rental unit to house a family of this size.

At the end, I referred him to Credit Canada, a credit counselling agency operating in the Greater Toronto Area which would put him on a Debt Management Plan (“DMP”), allowing him to pay off his credit card debt over 60 months in monthly affordable payments. A DMP is not a legal proceeding, therefore, there is no requirement for a debtor to be insolvent in order to participate in a DMP.

© Fong and Partners Inc 2013

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