by admin | Consumer Proposal, Credit Counseling, Uncategorized
A lot is said about recognizing when you’re in financial trouble, with the idea being that you can fix your situation if you recognize early enough that you’re in trouble, but not much is written about how to know that you’re financially healthy or that your money woes are behind you.
Ironically, in order to know that you’ve put your financial problems behind you, you have to understand and recognize the signs when you were sailing into financial dire straits, so you can avoid them and “do the opposite.”
Overcoming financial difficulties is a bit like overcoming cancer — early detection gives you a better chance of a successful recovery. Having ignored, or not recognized, those signs, you found yourself trying to stay afloat in rough financial waters. Regardless of what you’ve done to reach safe harbour, you now want to enjoy the calm seas for a while, and preferably forever. So what are the signs that you’ve turned the corner?
The slush fund — that cash stash that will help you weather a financial storm is a must. Most analysts suggest having at least three-months’ worth of living expenses (rent, groceries, utilities, gas money … the essentials) in an emergency fund. Having this emergency fund means that even if a life-altering event were to happen (lose a job, have to take on heavy medical costs, relationship break-up, etc.), you could survive for three months during which you can enact a turnaround (find a new job, downsize your living arrangements, etc.). When you consistently start to see the balance in your savings account going up every month, instead of constantly being taken down to zero, you could be on your way to financial recovery. It may take some time to set aside that three-month slush fund, but every step forward means you’re on your way.
Credit card payments — once you start making more than the minimum monthly payment on your credit card, it means that you’re paying off your debt instead of just keeping your head above water. Many people don’t know that paying only the minimum on $1,000 costs you almost as much to finance that amount and takes you over a decade to pay off. It’s not cause to celebrate your financial independence just yet, but every journey of a thousand miles starts with a single step.
Sticking to a budget — it may seem like a simple thing, but a lot of people who get into financial difficulty don’t have a budget, and if they do, they don’t pay attention to it. They don’t always do it out of ignorance or apathy but in many cases they don’t even bother with a budget because they’re always in the red. Consciously drawing up a budget makes you realize you are in control of your spending, and then looking at your financial comings and goings on a regular basis will not only keep you on track but help you see how relatively easy it is to stay ahead of the game.
Finally, you’re answering the phone again — when things start going bad, creditors start calling; once they do, you find yourself ignoring phone calls or being selective about answering the phone. After all, creditors don’t usually leave messages and anybody from whom you want to receive calls will either leave a message or get hold of you some other way. And in this day of caller ID, it’s easy to see on the display if it’s a call you want to take or ignore. Once those bills are being paid regularly and you’re on the road to recovery, you’ll find yourself answering the phone a lot more often.
by admin | Bankruptcy, Uncategorized
When contemplating drastic action to resolve your financial woes, it is important to consider what you get to keep and what you have to give up.
One of the first things a trustee in bankruptcy does is figure out if you are insolvent. In other words, if you liquidate assets, are you able to pay off some of your debts and still be able to carry on with some comfort in life. If you are deemed to be insolvent, then you relinquish your assets (except your house) for liquidation and the proceeds pay off a certain percentage of your debts. Then, you pay a monthly amount over a certain period of time to make restitution on the balance owing, until your creditors are satisfied with the amount you paid back in relation to what you owed.
This is where the differences between a bankruptcy and a consumer proposal become important. In a consumer proposal, you do not have to liquidate your assets, meaning you get to keep the money in your Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account (TFSA) while you make a monthly payment to make restitution on your debts. Creditors decide whether they want to accept your payment plan or not, and as long as you continue to follow the payment schedule, you can keep whatever you have.
In a bankruptcy, you may get to keep your RRSPs (except whatever contributions you made in the 12 months leading up to filing for bankruptcy, and even some of those may be exempt from liquidation) but a TFSA is not protected, meaning the money you have in there will be used to pay off some of your debts.
The difference lies in how the two filings behave. In a bankruptcy, you are basically saying “OK, I’m selling all my stuff and here’s what I am able to give you against what I owe you.” In a consumer proposal, you are saying “Let me keep my stuff and although I can’t pay you everything I owe you, I’ll pay you this much a month for the next five years.”
In a consumer proposal, creditors are getting more from you than they would in a bankruptcy; that’s why many don’t want you to go bankrupt and will likely not contest your proposal, if it’s structured properly.
It should be noted that a TFSA holds no special standing and all your bank accounts will be treated in the same way under both a bankruptcy and a consumer proposal. What a TFSA has done for you, though, is allow you to earn interest without paying tax on it, so over the course of contributing to it, you’ve made money you can then use as you see fit … even if that is to help you pay off your debts.
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by admin | Consumer Proposal, Credit Counseling, Uncategorized
If you run your own business, you’re familiar with Entertainment Expenses. That’s the category to which you can assign money you spend entertaining clients or potential new clients, with the final resolution that you drum up some business.
The idea is that you spend a little to make your clients feel appreciated, and they give you back more than the cost of a dinner, sports tickets or a break at a café. Canada Revenue Agency generally allows you to claim 50% of a reasonable dinner/entertainment bill. The idea is that you consume half of what your total bill is, and they’re not going to pay for your meal. There are exceptions for occupations such as long-haul truck driver or bike courier, because they are required to eat in order to continue doing their jobs. For the average entrepreneur, the CRA doesn’t usually bat an eye if you spend $650 per year on entertaining.
But what about in terms of your household budget? Should you factor in some “entertainment” expenses if for nothing else than to feel as if you’re not spending everything you make on the drudgery of staying afloat financially?
Most experts agree that you should. But how much of your monthly budget should you assign to it?
If you work with the CRA figure, a person may think about spending $55 a month on entertainment (movies, fast foods, afternoon lattes, etc.). That’s for one person. If you want to budget for your wife or children, you may want to expand on that. Most experts agree that you shouldn’t be budgeting more than 5% of your paycheque, though, since there are other things that should take priority in your spending (utilities, debt repayment, rent, etc., and yes, even savings).
So, if you’re bringing home $1,000 every two weeks, for example, and you’re effectively covering off your house payments and debts, you may consider putting $50 into the “fun” jar.
You may think that doesn’t allow you much fun outside of your everyday routine, and so vacations are out of the question, but vacations are probably best included in your long-term planning, a separate budget category that is taken care of by your savings.
Your savings is money for your future, so in effect you’re stocking money away today for future fun — short-term financial pain for longer-term financial fun, if you will. Some people put savings away for their retirement and forget about having fun until then. There are examples of couples investing heavily in their retirement, with hopes of travelling the continent in a motorhome, only to have one of the spouses pass away suddenly and the surviving one wishing they had spend more money on living with each other now, rather than waiting for a tomorrow that now will never come.
Say you put away 10% of your paycheque into a high-yield savings account (which these days is about 3%). At the end of the year, you’ll have over $2,600. That’s a pretty good vacation for two every couple years, even at today’s prices, and you’re still contributing toward your retirement (albeit, not much).
As with any budgeting, the idea is to make your paycheque cover the essentials and plan for the things you want to do, rather than build up more debt living unsustainably.
So, figure out what you can afford to put away for “fun” and be regimented in making sure you put that money away. And be patient about spending it. The money will eventually be there to take off for Cuba, or buy a big screen TV, or just have a meal at a fancy restaurant and perhaps spend the night away at a downtown hotel. You just have to wait for it to arrive.
by admin | Bankruptcy, Uncategorized
One of the consequences of declaring bankruptcy is that the value of your assets is distributed among your creditors. There are some exceptions in limited amounts, such as food and heating fuel, clothing, furniture, and a vehicle you need to get to work (to name a few); their value limits are set by your province.
Fortunately, while RRSPs used to be subject to creditor distribution, a law passed in 2008 now means that you won’t lose most of the funds in your RRSP, even if you declare bankruptcy. Only those funds you contributed in the year prior to declaring will be subject to seizure and distribution, so for example, if you have $10,000 in an RRSP and in the last year contributed $1,500, that amount would be withdrawn and distributed, and you’d and keep $8,500. Taxes are levied when the money is withdrawn, and the net amount distributed to your creditors, rather than you taking a tax hit at the end of the year.
If you continue to make contributions to your RRSP before your bankruptcy is discharged, those amounts become part of your “surplus income,” which may still be distributable to your creditors, so make sure you discuss your RRSP thoroughly with your bankruptcy advisor.
Remember, too, that your assets are assigned to your trustee until your bankruptcy is discharged, so you won’t be able to access those funds. Besides, once you cash them in, they’re no longer protected under any RRSP exemptions.
If you took a loan to purchase your RRSPs, and the loan amount is included in your bankruptcy, the lender may be entitled to take back your investment, so make sure you discuss that too.
Registered Retirement Income Funds (RRIFs) are similarly exempt under Ontario law.
If your debts have gotten out of control, it may be tempting to cash in your RRSP in an effort to repay them, but you may still find yourself headed for bankruptcy, only now without your retirement savings. Don’t do anything that may have long-term consequences before you talk to a credit counselling professional.
