Help clients through bankruptcy

Consumer or personal insolvency can befall anyone. As an advisor, you’re best suited to spot troubling patterns in your clients’ financial behaviour. That’s the first step to steering them away from the brink.

First, help clients realize bankruptcy can happen to them. On average, people facing personal insolvency are in their mid-30s, with $35,000 worth of debt.

But “we see all sorts of people,” says Zaki Alam, CIRP, Trustee, CA and senior VP of insolvency and restructuring for MNP. “We do have some clients who don’t have much financial acumen, but we also work with doctors, lawyers and chartered accountants. Our clients encompass the whole gamut.”

Read: Personal bankruptcies fall…for now

Prep them for help

Unfortunately, many people wait too long to voice their financial concerns or visit a trustee to learn about their options. Yet filing a consumer proposal or declaring bankruptcy should be seen as a fresh start for an honest debtor.

Read: Legislation makes bankruptcy more expensive

To get your clients to work with you—or a trustee—help them change their perceptions of what insolvency would mean for them. Many of your clients may be worried dealing with insolvency will mean losing everything and living austerely; that isn’t always the case. For instance, their RRSPs will be protected.

8 warning signs

Share this list with clients.

• Living beyond your means: Look at what you make each month and track your expenses. Even a little overspending can quickly snowball.

• Misuse of credit: Don’t use it to buy necessities or pay another card.

• Poor money management: Balance your chequebook every month and ask for advice if you’re borrowing to make ends meet.

• Lack of budgeting: If you don’t have an emergency fund, proper insurance, RRSPs or RESPs, you could be on track to insolvency.

• Personal issues: These include marital issues, job loss, reduced income, illness or medical problems, and addiction.

• Poor records: They’re especially key for the self-employed.

• Increasing collection activity: Creditors are calling; your bank account or wages are being garnished; etc.

• Co-signing: If you’ve co-signed anything and cannot cover the full balance of the loan, you could be in trouble.

A credit rating establishes credibility, and dealing with insolvency is the first step toward getting that back on track. When clients declare bankruptcy or file consumer proposals, their credit ratings will drop to R9 (bankruptcy) or R7 (consumer proposal). The best possible rating is an R1.

After completing their proposals, they can rebuild their credit right away.One benefit of working with a trustee or proposal administrator is he or she will be your client’s first line of credit, and act as reference at other institutions.

Spot the signs

It can be difficult to get the full sense of your clients’ situations, and more so to get them to honestly assess what’s happening. Provide them with a checklist of common warning signs for personal insolvency (see “8 warning signs,” right).

If your client wants to deregister an RRSP, it could be an indicator of financial distress. Another warning sign is when clients start skirting the issue of financial instability, or stop making planned contributions. Insolvency doesn’t always happen overnight. Often it’s a cyclical pattern of behaviour that leads people down the path of a financial crisis.

Read: Court urges closure of bankruptcy loophole

Start a budget

If you’re working with someone teetering on the verge, but not yet at the point where he or she needs to speak to a trustee, you can help by suggesting rigorous bookkeeping. It’s the quickest way to get a clear view of how they’re spending their money.

But make sure they put together a real budget, not one built on best intentions.Advise the client to keep every single receipt; and track any non-receipt purchases or transactions for a whole month.

They should compare debits with credits and get a clearer picture of where their money is going. They can also look at how much of what they’re putting in credit-card payments is going toward clearing interest and principal. Declaring bankruptcy is not the end, but it can be scary. With the right information, you can help your clients address their issues.

Grant Bazian, Trustee, CIRP, is President and CEO of MNP Ltd.