This is a regular question we get when we meet with people to review their financial situation. Some people are disappointed with our answer and some people are happy when we can figure out a way.
Let’s take a look at some of the factors that we have to consider to answer this question;
- We are Licensed Insolvency Trustees (LITs) regulated and licensed by a federal government agency that has, as their main job, the regulation of how LITs manage all of the options in the Bankruptcy and Insolvency Act (BIA).
- LITs have an obligation to be fair to all parties which means the person in debt (the debtor) and all of the creditors.
- We meet with the debtor and explain all the options including ones not covered by the BIA, answer the debtor’s questions, give them information to take home and read, and let the debtor decide what they want to do.
- The BIA is designed to treat all creditors the same and in a fair manner according to the law. This means one creditor or group of creditors cannot receive a payment that other similar creditors are denied. The exception is secured creditors where you intend to keep the asset pledged as security such as your financed vehicle or the mortgage on your home.
- If you choose a proposal or bankruptcy to deal with debt, all creditors have to be listed. This means unsecured creditors as well as secured creditors.
- In a bankruptcy, all your credit cards have to be given to the trustee, even credit cards with nothing owed.
- However, in a proposal, you do have a choice of keeping a credit card where there is nothing owed. But if you recently paid a large amount to pay off this credit card in order to keep it you have a problem. Look again at number 4 above. Paying a creditor a large amount soon before starting a proposal (or bankruptcy) is treating that creditor better than the other creditors and is considered a preference payment. Preference payments have to be described to all of your creditors when the proposal is sent to creditors for them to consider.
If the amount you paid that creditor was large, the other creditors will feel cheated and they are more likely to vote against your proposal.
- In a bankruptcy, if you have made a recent large preference payment to a creditor the trustee is obligated to get the creditor to pay back the payment to the trustee for all of your creditors.
If it is necessary to have a credit card, possibilities include arranging the use of the credit card of a friend or relative (with permission of course!) or arranging a secured credit card. Seek the advice of a LIT in your area for more information.