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I have recently read a few articles written by debt consultants who discourage readers from going to see a Licensed Insolvency Trustee (LIT) first when they find they find themselves struggling with unmanageable debt. These debt consultants acknowledge that they are not LITs, and cannot offer the services that only LIT’s are legally authorized to provide, such as filing bankruptcies or Consumer Proposals. Still, many debt consultants will recommend that debtors come to see them first, seemingly to ensure that debtor’s interests will be protected if they later have to file a Proposal or bankruptcy through an LIT. Some debt consultants will even suggest that an LIT would only focus on the creditors’ interests or the LIT’s own financial benefit and apparent self-interest when recommending debt solutions.
There are approximately 1,100 LITs in Canada; all are licensed by the federal government. Whether it is a small personal bankruptcy or a large Companies' Creditors Arrangement Act (CCAA) company restructuring, an LIT is involved. The educational requirements to become an LIT are rigorous. In addition to comprehensive formal training, most LITs also possess accounting or law credentials. Our profession is regulated by both the federal government – The Office of the Superintendent of Bankruptcy (OSB) - and our professional association - the Canadian Association of Insolvency and Restructuring Professionals (CAIRP). We are held to a strict code of ethics, which are set out in both the Bankruptcy and Insolvency Act and our association’s Standards of Professional Practice. By comparison, many debt consultants have modest training and credentials (if any), are not held to any particular standards, and there is little oversight of what they do or how they operate.
When I (and the many LITs I know personally at MNP Ltd.) meet with someone with debt problems, we look for the simplest and least expensive way of solving the issue. Sometimes all that is needed is some improved budgeting or refinancing. Since most LITs charge no fee for the first consultation, that advice is free. We are prohibited by law from receiving any sort of “kickback” should we recommend that the debtor see a mortgage broker or another refinancing professional. If a more formal debt relief solution is required, such as a Consumer Proposal or bankruptcy, we will discuss those options in detail, so that the debtor can make an informed choice. The amount an LIT gets paid for administering a Proposal or bankruptcy, should that be the debtor’s choice, is set by law.
When a person files a Consumer Proposal or bankruptcy, they are required to provide full financial disclosure to the LIT. In fact, the legal documents which summarize their financial position are signed under oath. All things considered, this is a reasonable expectation. If a person wants their creditors to accept less than full payment on the credit they extended, that individual needs to show that they are truly unable to pay back what they owe in any reasonable timeframe.
A Consumer Proposal is essentially an offer to settle debts over time, often for less than the full balance. This is usually accomplished by monthly payments over a period of no more than five years. A “yes” vote by the creditors representing more than 50 per cent of the dollars owed is required for the proposal to be accepted.
The amount someone offers to their creditors in a consumer proposal is based on two factors. First, the Proposal should result in creditors getting more money than they would if the person filed a bankruptcy. Figuring out the estimated return to creditors in a bankruptcy is a fairly straightforward calculation, provided the LIT has been given the person’s full financial picture. Second, the monthly Proposal payment should be a fair and reasonable amount as compared to the person’s income, and taking into account normal (but not lavish) expenses. Creditors will review a proposal debtor’s expenses to see if any appear excessive and may vote against the Proposal or want an increase in the monthly payment, if they find the debtor’s expenses unreasonable. These two considerations result in an LIT recommending a debtor make an offer that he or she believes is both reasonable and one the creditors are likely to accept. In my experience, LITs who are provided with the same set of financial facts often arrive at a similar recommendation. The debtor is free to choose to offer another amount if they want, in spite of the Trustee’s recommendation. Ultimately, the choice to accept or decline the Proposal rests with the creditors.
Yes, it is true that the fees allowed by law to an LIT for administering a Proposal include a percentage of the payments made into the Proposal. One debt consultant’s article suggested that this would result in an LIT pushing a debtor to make a higher proposal offer so that the LIT could get paid a higher fee. Again, speaking for myself and the many LITs I know, our fees are rarely ever a consideration. First and foremost, the goal is to find a debt solution that both satisfies the creditors and fits the debtor’s budget.
Since determining a reasonable Proposal offer is largely mathematical in nature and that ultimately it is the debtor’s choice as to what sort of offer they make, it does make one wonder what advice a debt consultant would insist a debtor needs before consulting an LIT. A debt consultant will charge a fee for his or her advice. Assuming the information is fundamentally the same as what an LIT would provide (under a free consultation), the debtor may end up paying more than they should to arrive at the same solution.
How much a person has to pay in a Proposal or bankruptcy is determined by their financial circumstances. Those with lower incomes and who own fewer significant assets, are generally required to pay less back to their creditors. It is my sincere hope that the advice debt consultants offer their clients does not include encouragement to provide incomplete or inaccurate information to the LIT to avoid having to pay more. By swearing under oath on bankruptcy or Proposal documents that the information provided is complete and correct when it is not, the debtor risks a charge of perjury. Furthermore, Canadian law already gives people fair relief from their debts. Most debtors who file a bankruptcy or Proposal end up paying their creditors less than 50 cents of every dollar of debt they owed – and with no additional interest during the time they are making their payments. All in all, that’s a pretty good deal.
For more information about bankruptcies and Proposals and the role of Licensed Insolvency Trustees, consult the OSB publication “Consumed by Debt?” or visit mnpdebt.ca.
Wes Cowan is a Licensed Insolvency Trustee with MNP Ltd., serving the Kitchener, Ontario area. To learn more about how MNP Debt can help, contact our local office at 519.741.1999.
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