There is always a way out!

Living without debt is difficult. There is a reason folk wisdom has so much to say about it: a debt is honoured by repayment, debt can wrap itself around you like silk, and so on. But one day, a growing mountain of debt may simply collapse on top of us. How can we protect ourselves from that and continue living a normal life?

“Credit cards, lines of credit, and similar products are designed to give people the ability to pay for various purchases and services,” says Sergey, a debt relief and bankruptcy consultant well known to our readers as A Doctor Debt.

Unfortunately, we often use these tools carelessly, without thinking that debts will eventually have to be repaid — or, even worse, while already knowing that we cannot afford to repay them. Even when you make the minimum payment, that money often disappears into nowhere, while the debt and the interest continue to grow, gradually turning into a huge amount. And even if your credit history is still technically good, no one may be willing to give you anything anymore — not a mortgage, not a leased car. Ahead may be only a call from a collection agency with threats, penalties, or even a summons to court...

Day and night, the frightening word bankruptcy stands before the debtor’s inner eye, along with an image of himself homeless and despondent, pushing a supermarket cart filled with the remains of a former life. But in reality, it turns out that there is a way out of this situation — and more than one. You simply need to take the right, reasonable step and speak to a specialist, putting aside the hidden fear many people carry inside: fear of the government, of debts, of procedures, and of possible consequences.

“Only when a person comes to me,” says Sergey, “does he suddenly realize that, in most cases, everything is not nearly as bad as it seemed. People simply do not know that their debts can, to a certain extent, be written off — they just need to know how. So the first thing we look at is what the person has: what assets exist, how the so-called unsecured debts appeared — debts from lines of credit, credit cards, loans given on trust, based on good credit history or high income. Because how does a bank look at it? If a person is paying regularly — for example, for a leased or financed car — the bank thinks: fine, we can give him a little more, and then a little more again... In other words, these are debts that are not secured or guaranteed by anything.”

The only condition is that those debts must be greater than the person’s assets: real estate, an expensive vehicle, gold, stocks, securities, investments of various kinds — the list is long. If that is the case, or if the person has no assets at all, then those are the debts we may be able to write off.

But if someone owes, say, $100,000, while his assets — for example, the equity in his home — amount to $300,000, then the bank will say: my friend, refinance. If you cannot refinance, take a private mortgage. If no one will give you one, sell the house. Because you have an asset that could potentially be used to repay your debt. If you do not want to do that, then that becomes your problem...

“But what does it actually mean to write off debt? Miracles do not happen, and the creditor still wants to get what is owed...”

“There are quite a few different programs that can help with this. For example, there is a Debt Consolidation Loan, or an Informal Proposal, when a person goes to the bank on his own and tries to negotiate — at least to reduce the payment — although this is not always effective. What I mainly work with are Consumer Proposals and Bankruptcy. These are two government programs that work almost without fail. As an independent consultant, I act in the debtor’s interest, and I need to receive absolutely complete information from that person. I review the situation, prepare the file, and I know what needs to be done and how. Everything is legal; the client is not risking anything. I prepare all the documents, and the completed file goes to the Trustee for signing. They analyze everything, verify it, and after that, working together with them, I represent the debtor, while the Trustee acts as the administrator of the case. We bring the whole process to completion. Everything is transparent and clear, and the client sees exactly what is happening...”

There was a time, Sergey recalls, when private companies calling themselves debt settlement firms — or sometimes simply private individuals — would tell debtors: you will pay us, and we will work directly with your creditors and distribute this Consumer Proposal. In the end, after paying for five years, people would owe even more than before, while those companies either shrugged their shoulders or simply disappeared.

“So what exactly is a Consumer Proposal?”

“This is when we take the full amount of the debt — for example, $100,000 — and offer the creditors, let’s say, 25 to 27 percent. The amount is divided into a maximum of 60 payments, and the client pays a little over $400 a month for five years, or faster if such an opportunity suddenly appears. There are no restrictions on paying it off sooner. As soon as the person pays his agreed portion, the bank writes off the balance. It is a very beneficial program: the creditors recover at least some money, while the debtor writes off the majority of the debt — roughly 75 percent. Of course, sometimes it happens that a person suddenly cannot pay at all, or abandons the Proposal. Then there are only two options left: bankruptcy or nothing. But that is a separate topic. The only downside is damaged credit history. Although, to be honest, by the time people come to me, their credit history is often already in very poor shape.”

“And how does a person live during all this time?”

“Of course, while a Proposal or bankruptcy process is underway, it is unlikely that anyone will give you much credit. Nevertheless, it is still possible to lease a car on the secondary market. As for assets, there are certain exemptions: a person is allowed to keep household appliances and furniture up to $14,180, tools and equipment, or, if he is a farmer, up to $31,370, and a vehicle up to $7,177. Tools are also protected — for example, if a person works in construction, or if a photographer owns expensive professional equipment. If something is worth more than the allowed exemption, we are forced to add the difference to the debt amount. Once the person has paid everything, the record remains in the credit bureau for three years, and then it disappears. Even with a low credit score, many things become possible again. I had clients who, four months after completing payment, obtained a mortgage — yes, at a high interest rate, but already as free people. In other words, life does not end. It continues...”

“And what if it still comes to bankruptcy?”

“Bankruptcy is, in essence, a semi-legal process. As soon as a person signs the documents with the Trustee, a so-called Estate is created, and they will look for money wherever possible in order to distribute something to the creditors, who in practice often receive little or nothing. Ideally, this process — Automatic Discharge — lasts nine months, and the bankruptcy ends automatically. But the bankrupt person must complete a certain program: pay the Trustee’s fee, prepare a budget, and account for such a concept as Surplus Income — surplus net income. For each individual, for a family of two, three people, and so on, there are Superintendent’s Standards, meaning maximum income thresholds. For example, if a person lives alone, his net income after taxes and deductions may be $2,243. But if he earns $3,000, then the difference, minus permitted deductions, will have to be paid for 21 months instead of nine.”

The issue becomes more complicated when it comes to home equity. To put it simply, equity — the owner’s share in a property — is the difference between the current market value and the secured, registered debts attached to that property, such as a mortgage. The difference lies in how realizable equity is calculated — that is, how much the Trustee and creditors would receive if the property were sold.

With a Proposal, certain deductions are allowed from the total equity — for example, real estate agents’ commissions. There is a special formula for calculating this, which reduces the realizable equity. But in bankruptcy, there was a case where the judge said: if you want to live in the house, pay the equity — there will be no discounts for you.

If creditors discover questionable facts involving the obtaining of credit — for example, if the client transferred or withdrew large sums of money, or inflated declared income in the Notice of Assessment when submitting an application — they report this to the Trustee. The Trustee then says: this amount cannot be removed through bankruptcy; you must pay it. Although even then, a Settlement may be offered: pay at least part of it... But if the person cannot do even that within nine months, he will not receive an Automatic Discharge and will have to go to court.

When creditors agree, the next stage — and for some people the most difficult — is the Examination, a three-hour interview conducted by the Superintendent’s Office. This usually happens when debts begin, say, at $60,000 and higher, and there are certain doubts or questions.

I once had a case where a woman filed for bankruptcy while paying for two leases, together about $1,700 a month, from her own account. Her husband, meanwhile, was working somewhere for cash. The declared family income was low enough to raise questions about how they could afford two car leases, and the authorities became interested: how is this possible? She was called in for an Examination, where they asked difficult, probing questions to make sure that the person was honest, was not trying to enrich herself somehow, but had truly fallen into a difficult situation. It is good if the Superintendent agrees to the Discharge, because it is better not to let the matter reach court: it takes a long time and sometimes ends badly. Besides, many people do not speak English fluently. It is sad to watch them trying to do everything themselves because a friend, or a fellow countryman, supposedly managed to negotiate something at 20 percent.

“That may be true,” I explain to the client, “but your friend is on welfare and has no income. You have a good salary and a good car. If the bank sees that a person has some property and is making payments on it, that means there is money somewhere. Pretending to be poor and helpless will not work. So let us think about how we can actually help you...”

“I have been working in this field for thirteen years now, and 100 percent of my clients have successfully completed their programs,” says Sergey. “That is my motto and my goal. I enjoy my work every time a person leaves my office with a sigh of relief. Because a way out can always be found!”