Michael & Deborah: Consumer Proposal & RRSPs, a Unique Payout

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‘Michael & Deborah’ a Case History: Consumer Proposal with a Unique Payout

Many Consumer Proposals contain similar conditions, the most notable of which is 60 months of monthly payments. For the vast majority of people needing a Consumer Proposal, this is their best option. However, there are cases where a different method of payment can sometimes be used.

Cathy Lewis is an Estate Administrator with David Sklar and Associates who is both a Certified Insolvency Counsellor and a Certified Insolvency Administrator. With over 15 years of diverse experience, Cathy has worked with clients in all types of financial situations. Her expertise was to prove invaluable when she worked with Michael and Deborah (not their real names), a married couple in their late fifties who were experiencing serious financial issues.

Michael and Deborah owned a small, incorporated consulting company where they were the sole directors and eventually, the only employees. Their company had been prosperous for many years, and had provided them with a nice standard of living. Early in their marriage, Michael and Deborah had decided to not own a home, preferring to rent. This decision had enabled them to build up their RRSPs and stock investments.

Beginning in 2004, their business experienced a turndown. By 2005, they had cashed in all their non-RRSP investments and put the money towards the company. By 2006, they had let go of all their staff and were putting borrowed money into the company to keep it afloat (using their personal credit cards and unsecured personal bank loans). By 2007, they were unable to continue paying their credit cards and loans at the required level – and began to receive collection calls and notices. They sought help from a Credit Counselling Agency, where they were able to set up a repayment plan with their creditors that required them to make monthly payments of $3,000 on their just under $100,000 of unsecured debt.

Within 12 months, although the company was starting to turn around, Michael and Deborah were having difficulty making their payments, and eventually were unable to continue on the plan. At this point, they decided to get help from David Sklar & Associates.

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Michael and Deborah met with Cathy Lewis in mid 2009 and reviewed their situation with her. At that point in time they owed:

9 Credit Cards Totalling $68,500
2 Unsecured Bank Loans Totalling $24,000
Total Unsecured Debt: $92,500

Since they did not own their home, their car was on a lease with no equity, and their business had no resale value – the only things of worth they had, were $150,000 of RRSPs. However, in July of 2008, the Bankruptcy and Insolvency Act had been amended to protect RRSPs, which meant that Michael and Deborah’s RRSPs were exempt and they therefore, they had no assets that could be distributed in a Bankruptcy.

Note: contributions made to the RRSPs in the 12 months prior to filing can be ‘clawed back’ and made part of the bankruptcy estate. However, Michael and Deborah had not made contributions for several years.

Several additional factors were considered:

    • If they declared Bankruptcy, they would no longer be legally allowed to be the directors of their own incorporated business
    • While they earned $40,000 per year in combined income – their income was not steady, which made paying a Consumer Proposal in regular monthly installments, very difficult.
    • Michael and Deborah sincerely wanted to pay back their creditors a reasonable portion of their debt.

After reviewing all the facts, Cathy Lewis introduced an alternative: cashing in some of their RRSPs and filing a Consumer Proposal that offered to pay creditors a portion of the outstanding debt in two lump sum payments over a period of seven months. This seven-month period would enable Michael and Deborah to cash in RRSPs over two tax years.

While this solution would significantly reduce the amount of their RRSPs, both Michael and Deborah felt that they could no longer deal with the pressure of ongoing collection efforts. As well, this decision would enable them to pay back over 50% of their debt, and keep their business going. After discussing it with the Trustee, they decided to go ahead with the lump sums Proposal.

DSAI filed their Consumer Proposal and presented it to their creditors. It was accepted, and all collection efforts stopped immediately. Michael and Deborah made both of the payments in full and on time, completed all the terms of their Proposal, including attending Credit Counselling – and their Proposal was finished within seven months.

While Michael and Deborah’s case is unique and would not be possible for most of the people who file for a Consumer Proposal, it shows the flexibility and fairness of the Bankruptcy and Insolvency Act. The creditors received far more than they would have in a bankruptcy and Michael and Deborah were able to earn a ‘fresh start’ and keep their sole source of income – their business, running.

To protect our clients’ privacy, details of this case have been altered.

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