The Keys to a Financial Fresh Start

So what does a fresh start really mean?

The online dictionary vocabulary.com defines a fresh start as "an opportunity to start over without prejudice".

More specifically, an article written by the CEO of the Canadian Debtors Association, states that a financial fresh start “entails obtaining relief from existing debt so that debtors can regain control of their finances”.

In other words, it involves removal of debt and other future financial obligations, so that the individual can start their financial lives over.

Why is it so important to provide an opportunity for a fresh start?

According to a parliamentary 2014 report by Minister James Moore (Industry Canada) “[r]ules governing personal insolvency play an important socio-economic role. They allow honest but unfortunate individuals who experience difficult financial distress to release their debts and obtain a fresh start”, “[a]n efficient, well-functioning insolvency regime is vital to Canada's continued economic prosperity” and “the fresh start provided by bankruptcy offers a safety net that promotes entrepreneurship”.

Those are great reasons, but here's our view: a fresh start provides hope. It allows those that have been feeling that they can never get out of the debt they’ve accumulated to believe that they can create a life that is more financially stable and successful. The ability to look forward to the future and see opportunity instead of despair is what makes success (and not just financial success) possible. And with that success comes an increased contribution to society in so many ways.

People who have the tools to become successful and aren't weighed down by debt are usually better able to provide for themselves and their families, reducing their reliance on public assistance. They may also find that the reduction in stress caused by debt improves their mental and/or physical health, making it easier to work or volunteer or take care of children. Getting out from under unsustainable debt also allows individuals the opportunity to try something new, such as going back to school or starting a business, while having learned some lessons that will help them do so more successfully. 

Avoiding impediments to a fresh start

The most important feature of the fresh start provided by a formal insolvency filing is the removal of continuing debt obligations. The Bankruptcy and Insolvency Act (BIA) requires that all unsecured creditors are included in the individual’s bankruptcy or proposal. This way, the entire debt problem is addressed rather than just dealing with pain points.

However, there are a few exceptions to the ability to get forgiveness from debt:

• There are certain unsecured debts listed in section 178 of the BIA that are specifically excluded. These debts, which include child support payments, certain student loans, and debts obtained as a result of fraud, and have been determined by the government as being too important not to be paid, regardless of the individual’s financial situation.
• Secured creditors do not have to be included, so an individual’s requirement to pay their mortgage or car loan will continue if they reaffirm the debt by making payments after an insolvency filing. It’s important that the individual seriously consider releasing these assets as part of their insolvency filing so that they can truly move on from these obligations, though sometimes keeping the asset and maintaining the payments is the best financial decision in the circumstances.
• Sometimes, as part of the process of making an insolvency filing, an individual will agree to take on new debt immediately after the filing. This could be a result of taking a loan from family or others to pay a lump sum settlement. Or it could be an agreement to pay a debt consultant* additional funds after the insolvency filing. Sometimes we even see people taking out a new loan as a credit-rebuilding tool, often at the advice of a debt consultant. Great care should be taken and advice from an LIT sought before making such arrangements, as they can negate the benefits of the insolvency filing.

*A debt consultant (sometimes referred to as a debt advisor or a for-profit credit counsellor) is a party who sometimes assists individuals with debt advice, for a fee, before directing the individual to file a bankruptcy or proposal with an LIT, although engaging a debt consultant is not a requirement to file a Consumer Proposal or a bankruptcy.

When it comes to advice from debt consultants, we note that the Government of Canada’s website cautions that LITs "are officers of the court who must carry out their functions honestly and impartially. They are bound by federal insolvency legislation and regulations". On the other hand, the website notes that other service providers within the debt advisory marketplace who are not LITs "may be driven by profit motives to engage in practices that pose risks to the integrity of the insolvency system, impeding debtors from finding the right solutions for their financial situations. They are not subject to the same advertising restrictions that govern trustees, allowing them to engage in marketing activities that may create confusion for debtors or cause debtors to pay unnecessary and costly fees”.

In other words, be careful about the advice you receive from debt consultants and consider consulting an LIT for a second opinion before you agree to anything. And when you speak with an LIT, you can get trusted advice on potential impediments to a fresh start and how to avoid those impediments where possible. 

Charla Smith & Company Ltd. is a Calgary-based Licensed Insolvency Trustee, serving the southern Alberta region. We regularly provide advice to individuals who are looking for a fresh start. If you would like advice on options, contact us for a free, no-commitment consultation.

Disclaimer: This publication provides general information and should be seen as broad guidance only. The information contained herein cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon this information without obtaining specific professional advice relating to your particular circumstances. Charla Smith & Company Ltd. does not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.