Archives for July, 2007

Question:

You bought a bedroom suite from a local store. You were loaned money by the store for the bedroom suite and pledged the suite as security for the loan. If you are filing for bankruptcy in Toronto, and haven’t finished paying for the suite, is the bedroom suite considered an asset or a debt?

Answer:

In your bankruptcy, all of your assets and all of your debts will be taken into consideration. When you meet with us, we’ll review the list of everything you own and everything you owe. Once that is done we’ll take a look at who has claim on what assets – you, the trustee, or a creditor.

In the above case, the finance company still owns the bedroom suite until it has been paid for, meaning the creditor has claim to this asset for the amount borrowed. Since the bedroom suite was pledged as collateral for the loan, the creditor can take back the asset to satisfy the debt if the borrower defaults on the loan by falling behind in payments.

So how would this debt be handled in a bankruptcy proceeding? Although secured debts must be disclosed when you file for bankruptcy, they are not dealt with during the proceedings if you want to keep the asset. Only unsecured debts, like those from credit cards and bank loans, may be forgiven during your bankruptcy.

If you can’t afford to keep paying a secured debt, like the one above, you can include it in your bankruptcy by surrendering the item back to the creditor. In the question above, the person would have to return the bedroom suite. But how does that work?
When you return the item, the creditor will try to sell it for the amount still owing on the debt. If the creditor can sell it for the amount owed, then the debt is satisfied and nothing further happens. But if the creditor sells it for less, you now owe the difference between what was left on the debt and the money the item sold for. This shortfall is considered an unsecured debt – there is now nothing pledged as security. This means that it can be included in your bankruptcy and will be discharged, or forgiven, when your bankruptcy is completed.

For example, if the creditor sold the bedroom suite for $1,500, but there was still $2,000 owing, there would be a $500 shortfall, which would be included in the bankruptcy.

When dealing with secured debts, things can get tricky. If you’re wondering whether or not the items you own are considered assets or debts, contact us at 310-PLAN (no area code required). We will walk you through the process of figuring out what you owe, and what will and won’t be included in you bankruptcy. You can also email me any questions you may have. Together we can deal with all of your debt, so you can enjoy a healthy financial future.

A lot of people that I meet with in our Toronto office feel that their car is a necessity, used to get to work and make a living. Essentially their cars are not an asset they can afford to lose.

During a bankruptcy proceeding, though, you are required to hand over certain assets to your trustee to sell in order to pay your creditors. Your car is one of the assets that are considered. But before you start to worry about losing your car, remember the following things:

-You need to own your car outright. You can only hand over assets that you own, not ones that you lease or have used as security for a loan. If you drive a leased car, or your car is financed, then you technically don’t own the car, and therefore you don’t have to hand it over to the trustee.

-Your car has to be worth more than $5,650. You are allowed to own a car valued up to $5,650 according to Ontario law. If your car is worth less, you get to keep it. If it is worth more, than you need to pay the difference to your trustee. For example, if your car was worth $6,000, then you would owe your trustee $350 if you wanted to keep your car. Your trustee will help you work out a schedule of repayment if you end up owing money.

When you meet with me, we’ll discuss your assets, including any and all vehicles you currently own. You will need to get each vehicle appraised by a mechanic or a car dealer, so that we can determine the value of the car. Unfortunately, the black book value will not be accepted, as it is only a guideline and can very often be inaccurate.

You also need to remember that the exemption applies to only one vehicle, not multiple vehicles, even if in total they are worth less than the exemption. For example, a woman I met with recently owned two vehicles – a minivan and a smaller car. When she got both appraised, we discovered that the minivan was worth $1,000, and the car was worth $3,500. Together, her vehicles were valued at $4,500, over $1,000 under the allowed amount. Unfortunately, though, she can’t use the total value of both cars. By law, she will only be allowed to own one car under the set amount.

But what happens if you do own two cars and you need both? In the case of the woman, as with every multi-vehicle situation I deal with, we accepted her more expensive vehicle, the small car, as her primary car, and her less-expensive van as her second vehicle. In this way, she only had to pay $1,000 to me, her trustee, in order to keep both vehicles. If you own more than one car, we will try to work out the best payment scenario for you and your family.

In cities like Toronto, where many people use cars to commute to and from work, it’s hard to imagine life without a car. If you are experiencing financial difficulty and are worried about what will happen to your car, please do not hesitate to contact me at 310-PLAN. I can answer your questions and give you peace of mind about your financial future.

Something I keep coming across when I’m helping people file a consumer proposal or bankruptcy, concerns assets – what is included as an asset, and what is often not even thought of?

If you asked yourself, “What assets do I own?” you would probably list things like your car, house, furniture, and clothing. But what about assets that appear on paper only, like pension plans, registered education savings plans (RESPs), life insurance, deferred profit sharing plans, and company stock plans? All of those are considered assets too.
When you file for bankruptcy or do a proposal, you are required to list all of your assets. Typically it’s easy to remember the assets that you physically use and see every day. It’s the assets that you don’t use or think about all the time that often get forgotten.
The important thing to ask yourself about these paper assets is whether or not they have a cash surrender value, meaning can they be turned into cash that you could have now?

In many cases, pension plans are locked in, meaning you have no access to the money until you are 65 or retire from the company. If you leave the company before that, you transfer your pension to another institution, but it is still locked in. In this instance, there is no cash surrender value. If a portion of the plan is not locked in or has not vested then this portion of the plan may have a cash surrender value. It is best to speak to someone in your human resource department to verify the status of any pension plan.

When dealing with RESPs, you might assume that these aren’t your assets, but rather those of your children. Keep in mind, though, that until your child actually goes to school, a RESP is in your name. Before you start to worry, though, there is typically not a lot of cash surrender value in the plan – it usually depends on the age of the plan. Check with your bank or institution.
Life insurance is another asset to consider when filing for bankruptcy. Normally, term insurance doesn’t have any cash value, but some plans do have a cash surrender value as they earn a dividend. Again you need to review your policy paperwork.

And finally, other assets you need to think about are any deferred profit sharing or stock plans offered through work. These assets are easy to overlook because contributions are either made by you or on your behalf by the company, by taking it right off your pay. You need to remember that these have a cash surrender value that is considered an asset in bankruptcy procedures.

If you are thinking about filing for bankruptcy or completing a consumer proposal and are uncertain about your paper assets and their cash value, call me at 310-PLAN. We’ll sit down and figure out the best solution for your financial trouble and give you a fresh start.