Insolvency and Alternatives: Belly up
In 1992 changes to Canada’s Bankruptcy and Insolvency Act were meant to reduce the number of insolvency cases, but many sleazy financial advisers regularly recommend filing for personal bankruptcy. There are alternatives to going belly up.
In the 1990s, Gail Winkelmann became co-owner of a commercial and residential garbage disposal business in Surrey. The client list, which included construction companies, grew steadily during the first two years, generating enough work to lease five trucks and hire five full-time employees. But a series of unfortunate circumstances involving a partner resulted in thousands of dollars being siphoned out of the company. The bills mounted and when Winkelmann and her partner finally split up in April 2000, the company’s debt load was $180,000, owed largely to the GVRD for landfill fees and to the Canada Revenue Agency for unpaid taxes.
Winkelmann’s house in Surrey was in foreclosure. She was now a single mother with four kids aged five to 18 to support and the sole owner of a company whose finances were bled dry. Given her staggering debt, she wondered if she could salvage the business without forfeiting the family home. A trustee she found in the Yellow Pages said that wasn’t possible and offered her only one option: abandon the business and declare personal bankruptcy. “He told me how to go bankrupt and open the business the next day under another name,” she says. “[But] it seemed crooked to me. Even though I knew people did it, I didn’t feel safe.”
Every year, thousands of British Columbians find themselves in Winkelmann’s shoes: wallowing in debt, unable to pay bills racked up through reckless personal spending and/or the failure of a business they either own or agreed to become liable for when they were named a director or signed a loan guarantee. For many of these debtors, “easy” credit solutions beckon like neon signs on the Vegas strip. The Internet is rife with sites offering painless solutions to becoming debt-free. “Never repay what you owe, legally,” promises one popular spam email. In its television ads, the Canada Debt Hotline proudly displays a Canadian flag and states, “You are protected by the laws of Canada,” a reference to the federal bankruptcy act. And just in case credit counsellors and debt poolers can’t reach you on the Internet, radio or TV, ads for their services are plastered all over Vancouver’s SkyTrain cars and stations.
Ironically, given that the changes made in 1992 to Canada’s Bankruptcy and Insolvency Act were meant to reduce the number of insolvency cases, sleazy financial advisers regularly recommend filing for personal bankruptcy. They earn a flat fee for very little effort; their clients end up in R7 purgatory (the lowest possible credit rating) for years, all their assets seized and sold.
Thousands of people declare personal bankruptcy every year in this country. From 1966 to 2002, the number of insolvency cases filed with the Office of the Superintendent of Bankruptcy Canada increased an average of 8.8 per cent annually. Since the mid-’70s, most of those have been personal or consumer bankruptcies rather than business bankruptcies, in which the assets of an insolvent corporation (as opposed to an individual) are liquidated for the benefit of the creditors. In B.C. in 2004, out of 10,642 total cases reported, 8,378 were personal bankruptcies. That represents a 56-per-cent increase in consumer cases in this province in the past decade (4,747 British Columbians declared personal bankruptcy in 1996).
As defined by federal law, bankruptcy refers to someone whose debts exceed his or her assets or ability to pay. Facing complete financial ruin, the bankrupt person agrees to a legal proceeding in which his or her financial affairs are placed into the hands of the bankruptcy court. A trustee is appointed. The credit bureau is notified. Assets are liquidated. Creditors line up to receive whatever remains after the Canada Revenue Agency (CRA) gets its share. The bankrupt person receives counselling. Barring objections from unhappy creditors, an automatic discharge of the bankruptcy takes place after nine months, cancelling any remaining debts. At least five more years must pass before the bankruptcy proceeding is wiped from the credit bureau record.
Winkelmann, though, was reluctant to throw in the towel, largely because she knew what losing the family home in a bankruptcy proceeding would mean to her children. “I also thought down the road something would come back to haunt me. Ninety per cent of my business is with property management companies and I didn’t want to do anything that would affect them. I was afraid that I would lose their contracts because they could just go somewhere else.”
Time for a second opinion. A friend took Winkelmann to Deane Gurney, a trustee at Sands & Associates in Surrey. Gurney pointed out that her garbage-collecting business was still viable and would produce sufficient cash flow to qualify her for a form of debt relief known as a consumer proposal. If she kept her customers and revenues remained steady, over time her first-in-line creditors (the CRA and the GVRD, among others) would receive a significant return on the $180,000 owed, as opposed to minimal return if she filed for personal bankruptcy. And most importantly, Winkelmann would avoid the emotional and financial blow of losing her home.
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Handling a business is not
Submitted by gerrard28 (not verified) on Sun, 2008-04-13 04:32.