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Cambridge Life Solutions article in Maclean’s Magazine

by Douglas Hoyes

Cambridge Life Solutions was the subject of an interesting article that appeared in the March 26, 2012 issue of Maclean’s Magazine (on page 39).  The headline of this article reads Cambridge Life Solutions offers a lifeline to indebted Canadians – using practices just banned in the U.S.  Needless to say, a headline like that grabbed my interest.

Each week I meet with someone who has heard the Cambridge Life Solutions ads on the radio, and wonders if it’s true that they can settle your debts by “up to 70%” as they advertise.  The answer is yes, it is true, if you follow their program, and if your creditors agree.  Here’s how Maclean’s describes their debt settlement program:

When you register for a Cambridge Life plan, you agree to set up what it calls a “set aside fund” and pay into it for 12, 24 or 36 months.  Once you have at least 30 per cent of your outstanding debt in your account, the company will approach your creditors and offer them deals to settle for less than you originally owed.

Sounds great, and it’s all true.  You stop paying your creditors, start saving money, and if after 12, 24 or 36 months you have saved up enough money, Cambridge Life can get your creditors to agree to a debt settlement, often for only 30% of what you owe.

So what’s the catch?  The catch is that for 12, 24 or 36 months (or for whatever other period of time it takes for Cambridge Life Solutions to strike up a deal with your creditors) you are not paying your creditors, so it’s quite possible that during that time period they will take you to court, sue you, and attempt to garnishee your wages.  There’s another problem: upfront fees.  To quote from the Maclean’s article:

Clients also agree to pay service fees equal to about 15% of their original debt.  Most of those fees get paid up front, before Cambridge Life strikes a deal with creditors.  For the first three months of some programs, every penny customers pay into the plan goes to the company.

In other words, you could be paying fees for three months and not know whether or not the creditors will accept your debt settlement offer.  Back to Maclean’s, referring to debt settlement complaints in the U.S.:

In response, in 2010 the FTC made it illegal for debt settlement companies to charge fees before they reached a deal with creditors.  This February, Manitoba followed suit, passing a regulation – modelled on an existing Alberta law – that limits settlement fees to 10 per cent of debt and bans upfront fees entirely.

There’s the problem: you pay money up front, but don’t know if the plan will work, and that’s why in the U.S., and in Manitoba and Alberta, large upfront fees are not allowed.

So what’s my opinion?

I have no problem with debt settlement in theory.  If you are not worried about potential court action, and if you either have a lump sum of money or you have the discipline to save money over the next 12, 24 or 36 months (or whatever other period as directed by the debt settlement company), debt settlement might be a good solution for you.

However, I recommend that you consider all of your debt management options before making any decisions.  For many people a consumer proposal is a better option.

For example, if you have $50,000 in debt, a debt settlement company like Cambridge Life Solutions may be able to “cut your debt by up to 70%”, so you save $35,000, or pay $15,000.  Over a 36 month term, that means you need to save just over $416 per month.  However:

  • according to the Maclean’s article, “in the vast majority of cases Cambridge contacts creditors within 30 days of a client signing up…. However, under the Cambridge Life contract, it isn’t obliged to contact creditors until clients have at least enough money saved for settlement.” That means it’s very possible your creditors will still call you.
  • until your debt is actually settled, you have no legal protection; your creditors can sue you at any time;
  • according to the Maclean’s article, “For the first three months of some programs, every penny customers pay into the plan goes to the company.”

If you file a consumer proposal, it’s very possible that the creditors would also accept $15,000.  Over a five year term (the maximum period allowed under Federal law) your monthly payments would be $250.  Even better, as soon as your proposal is filed:

  • your consumer proposal administrator is required, by law, to notify all creditors within 5 days;
  • as soon as your consumer proposal is filed you have immediate legal protection; unsecured creditors are not permitted to sue you during the 45 day period when all creditors may consider and vote on the proposal;
  • a licensed consumer proposal administrator is not permitted to charge upfront fees.  You don’t start making your monthly payments until the proposal is filed, and the legal protection has commenced.

Does that mean a consumer proposal is a perfect solution?

Of course not.  No solution is perfect.  It’s possible that your creditors will not accept your proposal, or they may ask for more than you can afford to pay.  However, you will know the outcome of the creditor vote at the end of 45 days.  You don’t need to wait 12, 24 or 36 months to find out whether or not the creditors will accept your consumer proposal.

So before you start any program, shop around.  Do your research.   By all means talk to Cambridge Life Solutions, and other debt settlement companies.  Talk to a not for profit credit counsellor.  Talk to a consumer proposal administrator and make an informed decision.

Don’t sign any paperwork until you have had a face to face meeting with your administrator or debt counsellor so you fully understand your options.

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Consumer Proposal Filings in Canada at Record Levels

by Consumer Proposal Administrator

Consumer proposal filings in Canada are at record levels.  According to statistics just released by the Office of the Superintendent of Bankruptcy, in the year ended October 31, 2011 consumer proposal filings increased 7.4%, from 41,634 to 44,702.

This is surprising, because in the same period the number of bankruptcy filings in Canada actually dropped by 15%, from 94,328 to 80,184.

Why would bankruptcy filings drop, while consumer proposal filings increase?

First, it’s a sign of an improving economy.  The unemployment rate in Canada decreased in 2011, so more people have jobs, and incomes, so more Canadians have the income to make settlements with their creditors.

Second, an increasing number of Canadians are realizing that consumer proposals are a better alternative than bankruptcy when dealing with debts.  If you go bankrupt and you have high income, you are required to make surplus income payments, which increases the length and cost of your bankruptcy.  That’s why many Canadians are choosing to avoid the surplus income trap in a bankruptcy by filing a consumer proposal.

Finally, even though they have debt, most Canadians don’t want to go bankrupt.  They want to pay what they can afford to pay towards their debts.  If they can’t pay in full, they want a break to be able to pay what they can afford.  That’s a consumer proposal, and for many Canadians it makes sense.

While it’s impossible to know the future, it’s likely that the number of consumer proposals filed in 2012 will continue to increase, and that’s good news for Canadians who are looking for affordable ways to deal with their debts.

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Five Reasons Why a Consumer Proposal is Better Than Bankruptcy

by Consumer Proposal Administrator

Here are five reasons why a consumer proposal might be a better solution to deal with your debts than personal bankruptcy in Canada.  The reasons are listed below, or you can watch the video:

1 Your bankruptcy payment each month is based on your surplus income.  If your income increases, you pay more.  In a consumer proposal, your payment is fixed, even it your income increases.  If you expect your income to increase, or if you simply want the certainty of knowing what your payment will be each month, a proposal may be the solution for you.

2 In bankruptcy you lose certain assets, like your tax refund, RRSP contributions in the past year, RESPs, investments, and possibly any equity in your house or car.  In a consumer proposal, you keep all of your assets.

3 A consumer proposal is simple.  Unlike a bankruptcy where you are required to submit proof of your income (paystubs and budgets) each month, in a consumer proposal there are no monthly reports required.  You will meet with your administrator to work out a plan, and once it’s approved, that’s it!  You simply make your payments each month until your plan is completed.

4 If a creditor objects to your bankruptcy ending (your discharge), you are required to attend a court hearing.  Since a proposal is approved by the creditors at the start of the process, there is no court hearing.

5 Bankruptcy is a last resort.  You file bankruptcy as a reaction when you have no other options.  A consumer proposal is pro-active.  You are taking charge of your situation.  You are deciding what you can afford to offer your creditors, so you know you can handle whatever you propose.

A consumer proposal is not the correct solution for everyone, but if you have more debts than you can handle, and you want to avoid bankruptcy, arrange a no charge initial consultation with a licensed consumer proposal administrator and find out if a consumer proposal is the right solution for you.

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Consumer Proposals – Three Rules (In Three Minutes)

by Consumer Proposal Administrator

As explained in this video, there are three rules for a successful consumer proposal:

1 You must offer your creditors more than what they would get than if you filed bankruptcy in Canada.  This makes sense.  If your assets in a bankruptcy are worth 10 cents on the dollar, your creditors have no incentive to accept 5 cents on the dollar in a proposal.

2 You have to be able to make the consumer proposal payment each month.  If you don’t have a job, or a source of income, it’s less likely that your proposal will be acceptable to your credits.  Start by making a household budget so you know you can make the payments.

3 Your consumer proposal must be filed by a consumer proposal administrator licensed by the federal government.  An un-licensed debt consultant can’t file a consumer proposal.

Follow those three rules, and your proposal will be a success, and your debts will be eliminated.

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Consumer Proposals Increase Again in 2011

by Douglas Hoyes

In statistics just released by the Office of the Superintendent of Bankruptcy, consumer proposals are on the rise, with filings in the first six months of 2011 increased by 8.7% over the same period last year.

Douglas Hoyes, Consumer Proposal Administrator

As I wrote earlier this year in my post on the massive increase in consumer proposal filings in 2010, this continues a trend to increased consumer proposal filings that started in late 2009 when the government changed the rules to make personal bankruptcy in Canada more expensive, therefore making consumer proposals more attractive.

In the first six months of 2010 there were 21,133 consumer proposals filed in Canada.  That number increased to 22,975 in the first six months of 2011.

This contrasts with a decreasing rate of personal bankruptcy filings in Canada, dropping by over 15% in the same period.

The trend is now well established, and the percentage of proposals filed will continue to increase.

In my experience, there are many reasons for this new trend.

1 First, as noted above, bankruptcy now costs more, so people are looking for an affordable alternative to deal with their debts.

2 Second, no-one wants to file bankruptcy, so reaching a negotiated settlement with your creditors is a preferable alternative.  We simply feel better about ourselves when we can reach an agreement on our debts.

3 Finally, a proposal gives certainty.  Once it’s accepted, you know exactly what you have to pay, which greatly simplifies your personal budgeting.

Unless the economy stages a dramatic recovery, I suspect that consumer proposal filings will continue to increase in the months ahead.

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Avoid the Surplus Income Penalty with a Consumer Proposal

by Douglas Hoyes

Most people who file a consumer proposal do it to deal with their debts while avoiding bankruptcy in Canada. Why would you want to avoid bankruptcy? Because in a bankruptcy the amount of money you are required to pay is based on your income. Each month you are required to provide your trustee with copies of your pay stubs and proof of any other income; the more you make, the more you pay.

It’s called surplus income, and if you earn more than the government allowed limit, you are required to pay half of the amount you are over the limit. The surplus income during bankruptcy in Canada limits for 2011 are as follows:

Family Size Income Limit
1
$1,926
2
$2,398
3
$2,948
4
$3,579
5
$4,059
6
$4,578
7
$5,097

So, if you are a family of three (you and your spouse and one child) and you earn $3,948 after tax in a month (and your spouse is not working), you are $1,000 over the limit, so you are required to make a surplus income payment of half of that amount, or $500.

At the end of the first six or seven months of your bankruptcy your trustee will average your income, so if you have one high income month followed by a low income month, you are not penalized for one or two high months. However, if your average income is more than $200 over the limit each month, your bankruptcy will be extended for an additional year.

In our example, if you were $1,000 over the limit for the first seven months of the bankruptcy, (and assuming it’s your first bankruptcy), you would be required to make surplus income payments of $500 per month for 21 months! That’s $10,500.

As you can see, it can get expensive if you expect your income to increase, or if you are expecting a bonus, or overtime. So what’s the solution?

File a consumer proposal.

In a proposal, once the creditors agree to the payment terms, that’s it. Even if your income increases, your payments in the consumer proposal are fixed.

Overtime may be mandatory where you work, but you know that in a bankruptcy you are paying half of your overtime to the trustee, so you don’t want to work overtime. A proposal solves that problem, since your payments don’t increase if your income increases.

In the example above, instead of filing bankruptcy and potentially paying $500 per month for 21 months or $10,500, you might consider offering a consumer proposal where you pay $200 per month for 60 months, or $12,000.

Why would you offer $12,000 when a bankruptcy may only cost you $10,500? Two reasons:

First, if your income increases in a bankruptcy, or if you get a tax refund, or have other assets, your bankruptcy could easily cost more than $10,500.

Second, payments of $500 per month might be a strain on your monthly budget, while $200 per month is easily affordable. So, for you, paying $200 per month for a longer period may be preferable to paying $500 per month for a shorter period.

Also, you can pay off a consumer proposal anytime, so if you do work overtime you can pay extra in your proposal, and pay it off quicker. It’s possible that you could have your proposal paid off even sooner than the bankruptcy would last, so you get the best of both worlds.

The cure for high surplus income payments in a bankruptcy in Canada? File a consumer proposal.

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Four Tricks to get CRA to Accept your Consumer Proposal

by Douglas Hoyes

Will Canada Revenue Agency (CRA, formerly Revenue Canada) accept a consumer proposal? Yes, they will, but only if certain conditions are met. Today I’ll explain the four most important “tricks” or tests that you must meet for a successful consumer proposal when CRA (the Tax Man) is involved.  It’s important to understand that while creditors like credit card companies and banks will almost always accept a reasonable proposal, CRA has their own set of rules, so they may not accept a proposal that would be acceptable to other creditors.

Why is CRA more “difficult” than other creditors? As many representatives of CRA have told me in the past, “Revenue Canada did not choose to be one of your creditors.” That’s true. You filled out a credit application with the bank, or the credit card company, and they decided to grant you credit. CRA never had the chance to make a credit decision; you didn’t pay your taxes, and now you owe them money, and that’s why they are never happy about being a creditor in a proposal.

Douglas Hoyes, Consumer Proposal Administrator

My name is Douglas Hoyes, and as the co-founder of Hoyes, Michalos & Associates Inc., one of the largest consumer proposal administrator firms in Canada, I have administered thousands of successful consumer proposals over the last 15 plus years, and I have had many proposals accepted by Revenue Canada, allowing debtors to avoid bankruptcy in Canada, and based on my experience, there are the four tests you must meet to get a consumer proposal accepted by CRA.

1 First, as is the case with all creditors, you must offer more than they would receive in a bankruptcy, you must offer them a minimum return (they won’t accept one cent on the dollar, even if it is more than bankruptcy), and you must demonstrate that you can make the proposal payments. I described these requirements in detail in my post on What Will My Consumer Proposal Cost, so I won’t repeat them in detail here.

2 The second test you must meet is the up to date test. CRA will automatically reject your proposal if all of your tax returns are not filed up to date. That makes sense, because it’s impossible for Canada Revenue Agency to know how much you owe if you haven’t filed your taxes. So, if you call my consumer proposal office and say you have tax debts and you want to file a consumer proposal, my first question will be quite simple: “Have you filed all of your tax returns?” If you haven’t, I’ll tell you to file them, and then call me back, because I know it’s impossible to get CRA to accept a proposal while there are tax returns outstanding.

3 The third test you must meet is what I call the honourable citizen test. This is a phrase I made up, but in my experience with CRA it’s very important. If Revenue Canada does not believe you have behaved in an honourable and honest manner, they will not accept your proposal, even if you are offering what would otherwise appear to be an acceptable amount of money.

I have had cases where the person went five years without filing taxes. They then filed them, so they met the requirements of Test #2, the up to date test, but CRA was not happy about the fact that they didn’t file taxes for five years. In my experience CRA representatives understand that there are cases where Canadians can’t pay their taxes, perhaps due to job loss, business failure, medical issues, or whatever. What they never understand is why you didn’t file your taxes. It’s not that complicated (in most cases), everyone else in Canada is required to do it, so why didn’t you?

If you are perpetually late filing taxes, they assume you are not an honourable citizen, and that makes it much less likely that they will accept your proposal.

4 The fourth and final test you must meet is the I promise to stay up to date test. You owe taxes because you either didn’t file your taxes on time, or didn’t pay them, or both. CRA may be willing to give you a break and accept your proposal, but only if they are confident that in the future you will file on time, and pay on time. How can you convince them that you will stay up to date?

If filing taxes was a problem in the past, showing that you now have an accountant helping you will help.

If paying was the problem, you must agree to make installment payments so that when you file your taxes next year, nothing is owing. You may be a “quarterly remitter”, meaning you are required to make installment payments every three months. In my experience CRA will be much happier if you make installments every month, or even more frequently (weekly, bi-weekly, or semi-monthly if that’s how you get paid at your job).

To prove that you are trustworthy, it’s wise to include a clause in your proposal demonstrating your commitment to staying up to date. Here are the standard clauses that I include where tax debts are a significant debt in the proposal:

The Debtor confirms that all tax returns will be filed as due, and that all required tax installments will be made when due. If tax returns and installments are not prepared and paid when due, such breach will be considered a default in the terms of this proposal.

In simple terms, this means that if you file your tax returns late, or if you don’t pay your required installments, CRA can kill the proposal.

To summarize, it is possible to file a successful consumer proposal even if CRA is a large creditor. However, before you file you must ensure that the proposal makes sense, and is affordable, and that all of your taxes are filed, and that you can demonstrate the ability to file and pay your taxes when due in the future.

For more information, please read my posting on consumer proposals and taxes. If you have debts, including tax debt, and you want to find out if a consumer proposal may be the solution for you, arrange a no-charge initial consultation by contacting a licensed consumer proposal administrator today.

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Massive Increase in Consumer Proposal Filings in Canada in 2010

by Consumer Proposal Administrator

The number of consumer proposals filed in Canada in 2010 increased by 20% over 2009, setting an all time high.  It appears that an increasing number of Canadians are realizing that a consumer proposal is a great alternative to bankruptcy, and a great way to deal with debt.

In Canada in 2009 there were 35,331 consumer proposals filed.  That increased to 35,331 in 2010, the largest number on record, and a 19.8% increase over 2009.  Even more surprising is that the number of bankruptcy filings in Canada dropped by over 20%!

A significant number of these filings are people who go bankrupt in Ontario, or file a consumer proposal.  In fact, there were 23,619 consumer proposals filed in Ontario in 2010, which is 56% of all proposals filed in Canada.

So why are proposals increasing, while bankruptcies are decreasing?  The answer is simple:

In September 2009 the government of Canada changed the bankruptcy rules, making bankruptcy much more expensive for Canadians with surplus income.  At the same time they made it easier to file a consumer proposal, by increasing the amount of debt (excluding the mortgage on your house) that can be included in a proposal from $75,000 to $250,000.

If bankruptcy is more expensive, and if a consumer proposal is a more viable alternative, it’s not surprising that more Canadians chose that as their debt management strategy.

Of course a proposal is not the correction option for everyone, so use our free debt options calculator to review your options and determine which option is right for you.

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How Much Will My Consumer Proposal Cost?

by Douglas Hoyes

How much will a consumer proposal cost? More specifically, how much do I have to offer my creditors to get them to accept my consumer proposal?

Douglas Hoyes, Consumer Proposal Administrator

My name is Douglas Hoyes, and as the co-founder of Hoyes, Michalos & Associates Inc., one of the largest consumer proposal administrator firms in Canada, I have administered thousands of successful consumer proposals over the last 15 plus years, so speaking from experience, here’s the general answer:

In order for your creditors to accept your proposal, you must meet three tests:

1 First, you must offer more than they would receive in a bankruptcy. This first test is critical. Here’s how it works: If you file personal bankruptcy in Canada, you are required to make payments based on your income. The more you earn, the more you are required to pay. It’s called surplus income, and it’s based on government of Canada guidelines that determine what you are required to pay, based on your income, certain expenses, and the size of your family.

We won’t explore the calculation of surplus income in detail, but let’s assume that in your case you would be required to pay $10,000 during your bankruptcy due to your income. To meet this first test, you will need to offer a proposal of more than $10,000, or else your creditors would prefer to get the $10,000 they would receive in a bankruptcy.

The cost of bankruptcy in your specific case will be determined by your surplus income, and also by any assets you may lose if you go bankrupt (such as your tax refund, equity in a car or house, or other assets). Most people file a consumer proposal because they don’t want to lose any assets like they would in a bankruptcy, but that’s also why you need to offer more in a proposal than your creditors would receive in a bankruptcy.

2 The second test you must meet is that most creditors will require a certain number of cents on the dollar in your proposal. For example, if you would be paying $2,000 in a bankruptcy, based on the first test you might assume that paying $3,000 would be sufficient. However, if your total debts are $100,000, most creditors would reject a proposal where they are only getting 3 cents on the dollar. Most creditors would require a minimum amount, often in the range of 15 to 40 cents on the dollar, even after test #1 is met.

Why is that range so large? There’s obviously a big difference between 15 cents and 40 cents. The answer is that each creditor sets different rules, and they will often change their rules over time. That’s why it’s critical that you deal with a consumer proposal administrator with a lot of experience. At my firm we maintain a database of all creditors, and we keep track of how many cents on the dollar each creditor requires, so that we can offer proposals that are most likely to be accepted.

This means that if most of your debts are owed to Bank ABC, and that bank always wants a minimum of 30 cents on the dollar, we know that offering a proposal of 10 cents on the dollar will most likely not be accepted. You want to know in advance how likely it is that your proposal will be accepted, and that’s why an experienced consumer proposal administrator is critical.

3 The final test is easy to understand: is the plan affordable for you? Based on the first two tests it may be determined that you will need to offer $500 per month in your proposal. If your monthly family budget shows that you can only afford to offer $200 per month, it’s unlikely that your proposal is viable. Before you file the proposal it will be necessary to cut your expenses, or increase your income.

The opposite is also true. If your budget shows that you can easily afford $1,000 per month, the creditors are unlikely to accept only $500 per month. In that case it may be prudent to offer the $1,000 per month, but over a shorter period of time. That may mean that instead of offering $500 per month for 60 months, you offer $1,000 per month for 30 months. The total you pay is the same, but you pay off the proposal quicker, and the creditors get their money faster, so that higher monthly payment proposal may be in the best interests of both parties.

Ultimately that’s the best test of a good deal: is it in the best interests of both you, and the people you owe money to? If you can afford the payments and get a break on your debts, and if the creditors get more than they would in a bankruptcy and they don’t have to worry about harassing you for the money, the proposal will probably be successful.

As you can see there are a number of factors that go into a successful proposal, so for more information, and to arrange your no-charge initial consultation, contact a licensed consumer proposal administrator today.

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Consumer Proposal and Taxes

by Consumer Proposal Administrator

Can you include money owing to Canada Revenue Agency in your consumer proposal? Yes, taxes owing are included in a consumer proposal, but here’s the trick:

Amounts owing for taxes to CRA are only automatically included up to the end of the previous year.  So, for example, if you file a proposal on February 1, 2011, all taxes owing are included up to the end of the previous year, 2010.  On February 1, 2011 you may not yet have filed your 2010 tax return, but that’s fine; when you file your taxes for 2010, those taxes will be included.  (Obviously you will want to file your taxes as soon as possible so that CRA is notified).

What happens if you file a consumer proposal in the middle of the year, say in July?  In that case your taxes for the prior year are included, but any amounts you owe to the government for the period January through July would not be included.  That’s different than what happens in a bankruptcy, because in a bankruptcy a tax return is done as at the date of bankruptcy, and all taxes owing up to the date of bankruptcy are included.

If you expect to owe a significant amount of taxes for the current year, it is possible for your consumer proposal administrator to prepare a “pre proposal tax return estimate” and submit it to CRA.  If the proposal is accepted, and if the numbers are reasonable, they will accept that “pre-proposal” amount as part of your proposal.  Here’s the key:

The tax “return” for the current year pre-proposal period was not truly a tax return. It was an estimate of the taxes owing for the portion of the year before the date of the proposal. Though it was submitted to the Canada Revenue Agency (CRA) for their review, it was not actually assessed by the government.

The purpose of doing this estimate is so that the amount owing can be included in the consumer proposal. A consumer proposal automatically includes income tax debts only from all prior years, as noted above.

You are still responsible for filing a normal return for the full year by the regular deadline of April 30. Once the CRA assesses that return, they will subtract the pre-proposal amount from the total amount owing. If the pre-proposal amount had not been estimated, you would be responsible for paying the full amount owing for all of  the current year.

Sound confusing?  It is complicated, so for further information in your specific situation we suggest you contact a consumer proposal administrator for a no charge initial consultation.

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