Rule 1: To trust is good – not to trust is better!
Some insolvency trustees advertise that they can “solve” your debt problems. That may or may not be the case but be careful because they have a built in conflict of interest. This is confirmed in Bennett, the recognized “bible” dealing with proposals and bankruptcies which states:
“A licenced insolvency trustee is a representative of both the debtor and the creditor. The trustee’s role is to gather in the insolvent person’s assets and then to distribute them to the creditors according to the priorities under the Act.” (Bennett on Bankruptcy 12thEdition, page 68)
Therefore, if a debtor is seeking impartial advice from an insolvency trustee, there is a clear and acknowledged conflict of interest. Even worse, the more the trustee collects for your creditors, the bigger his/her fee.
Rule 2: Engage your own advisor before consulting a trustee
You need someone who is 100% on your side. Therefore, it is wise to engage your own counsel to assist in planning for a proposal or bankruptcy. Only after an acceptable plan is worked out, will it be time to hire an insolvency trustee. A knowledgeable lawyer, who only acts for you, will make sure your interests are protected.
Rule 3: Protect your assets from creditors
In both a proposal and a bankruptcy, the objective of the Canada Revenue Agency (CRA) is to achieve maximum recovery of your outstanding taxes, interest and penalties. You want to pay less than the full amount due and achieve maximum flexibility as to repayment. If you are in business, another important object is to ensure future operation of your business. The planning may involve a reduction of debt, interest and penalties, deferral of payments, liquidation of assets, restructuring and whatever else seems to make commercial sense to the debtor, the CRA and other creditors.
Rule 4: Restructuring using a proposal
If your tax bill has grown so large that you have no ability to pay, it is wise to explore the options of obtaining debt relief through the use of a proposal or, only as a last resort, a bankruptcy.
MAKING A DEAL
A Consumer Proposal allows you to offer a deal to repay your unsecured creditors who are owed up to a total amount of $250,000, including the tax collector, an agreed upon amount by way of monthly payments for up to 60 months. This is usually slightly more than the total sum your creditors would expect to receive if you declaredbankruptcy. To succeed, you must be able to demonstrate that the monthly payment will be made without fail. If your creditors do not accept the proposal, you may then opt to file for bankruptcy – or, depending on the amount, just walk away and deal with it another day.
If you owe more than $250,000 and if your creditors reject the proposal, you are deemed to have filed for bankruptcy. If you owe less than $250,000, there is no automatic bankruptcy.
Rule 5: Get representation to protect your interests
As noted an insolvency trustee is obliged to represent both sides, meaning you and your creditors. The trustee is not permitted to cut you a good deal. They must recover as much from you as is possible to present as payment to your creditors. An insolvency trustee is definitely not on your side.
Your tax lawyer acts only for you. During planning sessions before a proposal is made and in subsequent negotiations, your lawyer is solely in your corner to make sure you get the best possible terms.
As soon as your Notice of Intent for a Proposal is filed,creditors are stayed from collection actions against you. This means the tax collector must immediately stand down on any bank or wage garnishments that they have levied against you for your tax arrears. They also cannot file a lien against your home during the period of the proposal.
© The foregoing provides only an overview and does not constitute legal advice. You are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained in the context of your own particular circumstances.