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who can’t pay their debts now, and consumer debtors who know they won’t be able to pay them in the near future, need financial assistance.

      There are two well-known tests for bankruptcy. First, there is the cash-flow test; that is, whether the debtor is generally unable to pay the bills as they come in. Most suppliers of credit give their customers some time to pay the bills. Usually it is about 30 days from the time the supplier sends the bill. Give or take a few days either way, the debtor has about 20 days to pay the bill in full. If the debtor does not pay the bill, virtually all suppliers charge interest on overdue accounts which can range from 12 percent to more than 40 percent per annum. Take Bell Canada, for example: At the time of writing this book, if an individual does not pay on time, Bell Canada charges 42.58 percent per annum! With interest rates that high, it is easy to see how one can face financial instability quickly.

      The second test to determine whether the consumer debtor is headed for bankruptcy is called an asset test; namely, the debtor would not have sufficient assets if all his or her assets are sold at a fairly conducted sale under legal process to pay the debts.

      Let me give three examples of the asset test. First, everyone knows that when you drive a new car off the lot, the value of the car depreciates significantly in excess of 20 percent minutes later.

      Likewise, with jewellery which is often marked up 300 to 500 percent of its wholesale value: It’s one thing to buy an engagement ring at a jewellery store for $1,000 plus tax and it’s another thing to pawn it for a few hundred dollars months later.

      Last, there is no value in used clothing. While a new suit may have cost more than $1,000, it has virtually no value on resale. So, when adding up a debtor’s assets, the debtor must be fully aware that his or her assets will fetch a very low dollar.

      Most consumer debtors who are unable to pay their bills tend to be thoroughly optimistic that their problems will go away or that tomorrow will be different and that things will change. Unfortunately, almost all of these consumer debtors are wrong. Tomorrow comes and goes and the problems surrounding the debtors continue to increase to the point where the debtors want to be put out of their misery. This rarely happens to the personal debtor as the creditor usually stands back and attempts to collect from the debtor by some lawful means. Consumer creditors seldom force the consumer debtor into bankruptcy. Instead, they assign their accounts to a collection agency which is paid a commission on collections. Collectors are notorious for harassing people, suing in Small Claims Court, and then garnisheeing or attaching the debtor’s wages. Collectors do not earn a living by putting consumers into bankruptcy. Their job is to squeeze the consumer into paying something every month under the threat of seizure and/or threat of bankruptcy.

      Sometimes, a consumer debtor is lucky. A creditor will put the debtor into bankruptcy. But this costs money and creditors are very reluctant to “spend good money after bad” (meaning there is little or no chance of recovery). A creditor will force a consumer debtor into bankruptcy if the creditor believes that the debtor has stashed away money or other assets, or if the debtor has recently gifted some property, such as a summer cottage or RRSP, to a spouse, partner, or children. Most other times, the consumer debtor has to take the steps to go bankrupt; that is, file for voluntary bankruptcy, or technically, file an assignment in bankruptcy as the pressure becomes impossible to bear.

      How does the individual consumer know that he or she is insolvent or soon to be bankrupt under the bankruptcy system? There are many early warning signs, each of which may not be the final straw that forces the issue, but added up, the signs generally point to a course of direction which is virtually irreversible: bankruptcy.

      Early warning signs for consumers include:

      • Loss of a job.

      • Marital or partnership separation.

      • Over-extension of credit cards.

      • Use of one credit card to pay the other (“robbing Peter to pay Paul”).

      • Running out of money just after payday.

      • Unanticipated large expenditures.

      • Failing to pay the credit card balances in full each month.

      • Harassment by several creditors or collection agencies.

      • Impulse buying for merchandise that is really unnecessary, and using credit cards for payment.

      • Garnishment of wages.

      • Gambling or substance addiction.

      If the consumer is having difficulty in making ends meet on a regular basis, then he or she will qualify to go bankrupt. Unless the consumer takes proceedings authorized by the Act, the consumer is not technically bankrupt: The individual is insolvent. Insolvency means the person is unable to pay his or her debts in the ordinary course. All bankrupts are insolvent persons, but not all insolvent persons are bankrupt. An insolvent person can continue to work, be employed, or carry on business until creditor harassment becomes intolerable. Then the debtor may take protection under the Bankruptcy and Insolvency Act. Bankruptcy generally lasts for a minimum of nine months, and in serious cases where creditors object to the bankrupt’s discharge, for several years, and in some cases, the bankrupt never gets discharged. See Chapter 3 for the time sequence involved in bankruptcy.

      The following are ways that a consumer can go bankrupt under the Bankruptcy and Insolvency Act.

      First, the consumer can make an “assignment.” An Assignment is the document that transfers or conveys all of the consumer’s assets to a person called a trustee in bankruptcy. This trustee in bankruptcy is licensed by the federal government in Ottawa, namely the Department of Industry, pursuant to the Bankruptcy and Insolvency Act. The trustee in bankruptcy administers the consumer’s affairs by collecting and selling all the assets and ultimately paying the proceeds to creditors under a prescribed formula. More about the trustee in bankruptcy and distribution later.

      The assignment is a voluntary act by the consumer debtor; that is, the debtor does it by himself or herself without going to the courts. Much of this book is devoted to assignments by debtors.

      The second way a person can go bankrupt under the Act is by being put into bankruptcy by one or several creditors. If this happens, it is called an involuntary bankruptcy. The creditor issues a legal proceeding called “an application for a bankruptcy order.”An application is like a statement of claim issued by a creditor in the Superior Courts in each of the provinces and territories to collect a debt, except in the case of an application, the creditor is suing on its own behalf and on behalf of all creditors. In fact, it is really a class action of all creditors against the consumer debtor.

      The application alleges that the debtor owes a sum of money, that the debt has not been paid, that there are other creditors who are also owed money, and that for the benefit of all creditors, the consumer debtor should be placed into bankruptcy. The consumer debtor has the right to defend the application, and after a short period of time, there is a trial to determine whether the consumer debtor should be placed into bankruptcy. If the application is successful, the court then makes what is called a “bankruptcy order”against the consumer debtor; in other words, the court issues an order that simply places the consumer debtor into bankruptcy.

      This remedy is used by creditors who do not get paid and who take the legal steps to put the debtor into bankruptcy. The process is adversarial; that is, there is a legal dispute which is heard before a judge. After the hearing, the judge decides one way or another. This hearing or trial can be costly for both sides if the consumer debtor can and wants to defend on good grounds. Creditors do not generally force consumer debtors into bankruptcy as there are rarely substantial assets to administer and the expense of doing so would be borne by the application creditor. However, a consumer debtor will rarely defend the application for a bankruptcy unless the consumer debtor is concerned about some asset or assets that may have questionable exemptions.

      Last, a consumer debtor may consider making a deal or settling with his or her creditors. Governed by the Bankruptcy and Insolvency Act, this process is called a “proposal.”A proposal is a

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