Busting the 5 myths of insolvency

Busting the 5 Myths of Insolvency
Kunjar Sharma and Associates Inc.
The Debt Lifter ™ Pending
Licensed Insolvency Trustee
Paul Franchi, LL.B. MBA
Realtor© Quest May 2018
P (416) 975-0910
C (647) 484-5225
1

Kunjar Sharma & Associates Inc.
“A Country Whose Parliament Enacts
Laws To Protect Honest But
Unfortunate Debtors … To Give Them
The Chance to Get Back to Being
Productive And Creating Wealth Once
Again … Is a Country That Is Worth
Living In and Paying Your Taxes To”
KMS The Debt Lifter ™ Pending
Kunjar M. Sharma, MA, MBA, Mcomm, PhD
Licensed Insolvency Trustee Since 1976
ह िंदी 中文 ‫اردو‬ Español русский ஸ்ரீ லங்கன்
2

 We are entrepreneurs, privately owned business
 Federally Licensed – Office of The Superintendent In Bankruptcy
 Officer of the Court – Multiple Statutory Roles
 Bankruptcy Trustee
 Proposal Administrator
 Receiver-Manager, Liquidator
 Monitor
 Construction Lien Trustee
3

Myth #1
I NSOLVEN CY I S
IRRELEVANT
To
ME
4

 The fundamentals supporting this market may have run their course
 Government is on the side of slowing the boom
 Insolvency is not cocktail chatter today … but it may become soon
 A better understanding may allow you to see opportunities where others
do not
 And to better position you and your clients defensively
5Myth #1- Insolvency Is Irrelevant to Me
Insolvency Is indeed relevant to Me Because …

Source: Marisha Robinsky (with Permission), Bosley Real Estate, TREB
Has This Market Run It’s Course?

Regulators Firing All Their Canons At Once
 OSFI Guideline B-20 – stress test
 Central Bank Rate Increases
 Maximum Amortization 40 to 25 years
 Homes over $1,000,000 not eligible for mortgage insurance
 Refinancings no longer guaranteed by mortgage insurance
 Foreign buyer restrictions 15% tax
 HELOC maxed at 65% of property value
 Ontario Rent Control Rules expanded to private homes / condos

Famous Words:
This time it’s different ! ….
Immigrants will continue to power the trend

 Immigration as a Percentage of Total Canadian Population
Source: Statistics Canada: Immigration, Population Series

Long Term Decline in Mortgage Rates Fuels The Trend

Increasing Access To Mortgage Funding Through The Capital Markets … more fuel

Will Rising House Prices Finance My Debt?

 Price gains took only a
short breather 10
years ago
 Other Countries
trended sideways since
 It Might be Our Turn
Next
Source Kunjar Sharma & Associates
Research, Dataset Mack and Martínez-
García (2011)

Regulators … Be Careful What you Wish For !!
Source: Office of The Superintendent Of Bankruptcy
Insolvencies Spiked When
House Prices took a
breather in 07-09

Canadian House Prices Increase - Consumer Insolvencies Moderate
Insolvencies died down
once House Prices
resumed march upward

Japanese
Home
Prices
Japanese Bankruptcies
Japan (An Extreme Example)
*Corporate
bankruptcies
including business
stoppages
Source Dataset
Mack and
Martínez-García
(2011) Tokyo
Shoko Research,
TradingEconomic.c
om, KSAI Research
JapaneseHomePriceIndex
ThousandsBankruptcies

A Price Drop Alone Does Not Trigger Insolvency
 Job Loss
 Business Failure
 Illness
 Marital Breakdown
 Failed Loans to Adult Children
 Unanticipated Tax Assessments

Myth #2
Insolvency
Is
THE END
20

Myth #2 Insolvency Is THE END
Why do LARGE BUSINESSES get treated positively when they
successfully restructure?
But Small Business owners are made to feel they are “Giving
UP”
Insolvency is a Safety Net for the Entrepreneur
FRESH STARTS for Small Business Benefits
the Economy
21

Myth #2 Insolvency Is THE END 22
Small Business Powers the Canadian Economy

More Famous Words
If you restructure enough times …
You may grow to become famous …
And you may just become …
(next slide…)
24Myth #2 Insolvency Is THE END

The President of the United States
 1988 Purchase of Atlantic Casino for $273 INSOLVENT
 1989 Trump raises $675 Mil using 14% High Yield (Junk) Bonds
 1990 Opening of Trump Taj Mahal – 3000 Jobs, 120,000 Sq Ft (largest)
 1991 Recession – Fall in Revenue – INSOLVENT (US Term “Prepackaged
Bankruptcy”) – 50% equity to bond holders
 1996 Trump buys back 50% equity in deal valued at $875 Million
 2000 “The Simpsons” Season 11 Episode 17 “Trump Will Be President”
 2004 Season 1 “The Apprentice”

2011 – Obama Speech “Imagine a Trump White House”

 2014 Trump Taj Mahal Files for Bankruptcy
INSOLVENT
 2015 June Trump announces his bid for
Presidency
 2017 Trump Inauguration
 2018 Sale and Restructure Complete
 Hard Rock Hotel opening June 2018

Myth #3
You Give Up EVERYTHING
28

Myth #3 You Give Up Everything
Not All Assets Are Handed To Creditors
 CAR: One personal automobile up to $6,600
 HOUSE: Equity in personal residence up to $10,000
 RRSP: Except contributions 12 months preceding bankruptcy
 Tools of the Trade: E.g. Work Automobile Up to $11,300
 Life Insurance: Where a Preferred Beneficiary is Designated
 Household Furniture / Appliances $13,150
 Pain and Suffering Settlements
29

Not All Assets Are Handed To Creditors
 Income during bankruptcy Period: Debtor receives income earned during
bankruptcy
 Debtor may be required to pay a portion (Surplus Income) to the Trustee
 Depends on
 # of people and income of household
 Income earned during bankruptcy period
 Non-discretionary expense burden, Medical, Support
 Incentive is for debtor to maximize income during bankruptcy
30

 E.g. 1 – 20% interest in farmland in Keswick
 E.g. 2 – Equity Interest In Residence
 $50,000 Net Equity (after notional selling
costs)
 $25,000 Debtor’s 50% Share
 Can be repurchased without affecting
partner
 E.g. 3 – Children’s RESP
31
Assets Might Be Purchased from Estate

Proposal – Assets Remain With Debtor
 Proposal A court sanctioned offer to creditors of payment terms
- (can be as low as 5 cents to more than 100 cents)
 A financial contract with Creditors
 Debtor’s assets are not affected
 Payments (typically) 5 years – Certificate of Completion
 Interest on filing stops and disappears upon completion
 Can pay full proposal at any time
 3 years on credit report
32

Proposal – Assets Remain With Debtor
One debtor’s (untypical) comment to Trustee at the sign up of his
Proposal to Creditors!
33
I know ... I know, it is like a Second Mortgage given to me
for 5 years and I don’t EVEN pay interest!

Myth #4
It Pays To Be Sneaky
34

Panicked Debtors Make Unnecessary and Painful Mistakes
 Transferring ownership of Real Estate / Bank Accounts
 Cashing out RRSPs (exempt) before a formal proceeding
 Concealing asset transactions – disclosure is a remedy
 Incorrectly naming beneficiaries on Insurance Policies
 Preferring one creditor without proper legal advice / guidance
Myth #4 It Pays To Be Sneaky 35

 Full disclosure creates a powerful ally in Trustee
 LIT can help debtor to understand, explore options prior to proceeding
 Truth Comes from the Dandiest of Places
 Creditors share information / databases
 All documents filed with CRA form part of the record Trustee reviews
 Disgruntled employees, former relations, well meaning citizens

 Licensed Insolvency Trustee “Sheriff” who “levels the playing field”
 There is a legal process to bring things back to a fair outcome
 Powers of the Sheriff
 Financial Assessment: of Assets and Liabilities
 Investigation: Discovery of Assets and prior financial transactions
 Monitor: Ongoing review of After Acquired Property and Income
 Mediator: Resolve objections raised by creditors and other stakeholders
 Communicator: Directly requiring actions on the part of debtor and
stakeholders

Investigating and Monitoring
The Trustee Looks For
 Transactions Prior to Bankruptcy
 Gifts or settlements lacking in adequate consideration - 5 years
 Transfers at Undervalue “TUV”
 Preferences given to one creditor over others
 Non-disclosed assets
 Undisclosed Income
 Income of household
38Myth #4 It Pays To Be Sneaky

Consequences for Non-Compliance
Discharge can be opposed
 Bankrupt omitted to keep books and records
 Continued to trade when knowingly insolvent
 Put creditors to unnecessary expense
 Gave undue preference to creditor
 Committed offence under Bankruptcy and Insolvency Act
 Failed to Comply with Duties

 Offenses Under the Bankruptcy Act
 Indictable offenses can include fine or imprisonment
 Fraudulent disposition of bankrupt’s assets
 Lying under Oath
 Concealing, destroying, omitting records
 Obtaining credit or property by false representation
 Offenses under Criminal Code – Referral to RCMP
 Quick Access to Courts
 Fraud, Theft

Myth #5
This Doesn’t Drive Sales
41

 Case Study – York Region Real Estate Agent (name withheld)
 2011 Prospect/Client: Husband and Wife two small children
 Insolvent due to family illness and legal expenses
 Evicted from Home they could no longer finance
 Agent found a landlord/buyer
 Coordinated a sale on a 1% commission basis to another agent
 Terms - Clients could remain 6 weeks as “licensees”
 Agent understood the red flags Introduction to Licensed Insolvency Trustee
 Debt restructured by way of Consumer Proposal
Myth #5 This Doesn’t Drive Sales 42

Business generated from dealing from Insolvent Household
 Lease – ½ month $850 Commission
 Referral #1 Richmond Hill, $579,000 3/31/2014 - commission $14,475
 Referral #2 Vaughan $999,998 4/27/2014 - commission $25,000
 Referral #3 Richmond Hill $579,000 5/24/2014 - commission $14,475
 Referral #4 Toronto $1,615,000 08/06/2014 - commission $40,375
 Referral #5 Toronto $510,000 6/4/2015 - commission $12,755
 Referral #6 Mississauga $599,888 7/17/2015 - commission $15,000
 Referral #7 Vaughan $849,000 7/272016 - commission $21,225
 Referral #8 Vaughan $635,000 2.5% commission (2016)- commission $15,875
 Total Commissions: $160,055

 Case Study – Century 21 Heritage Richmond Hill (with permission)
 Client injured working on a ladder
 Total loss of family income home was scheduled for Power of Sale
 Broker of Record discussed directly with Bank Manager
 Involved conversation of insolvency options available to client
 Impressed upon Bank Manager that private sale ensured best outcome
 Bankruptcy / Consumer Proposal was AVOIDED
 Numerous referrals resulted from grateful client

 Previously successful people become successful again
 They remember most those who helped during a time of need
 Referral to a Licensed Insolvency Trustee earlier is a lifesaver
 Greater access through private lending
 Discharged debtors buying homes sooner

 Trustees recommend Agents to Secured Creditors
 Informed Agents do not "stick their head in the sand"
 Agents with established relationship with debtor are often the best fit
 Mortgage Lender Approved Lists
 Large referral source in down cycle
 Agents benefit from knowledge of insolvency procedures
 Avoiding Insolvency Also Lucrative
 Debtors well served by downsizing or renting to change debt service

47

Appendix 1
 If You Think Toronto Is Expensive …. Look At New York …
 OK Will Do
 Manhattan (An Island)
 Population: Day 3.9 mil
Night 1.7mi
 Area 87 km2
 GDP: $1,700 Bil USD
 Residential: $1,600USD
Sq/ft
 Toronto (City of)
 Population: 2.7 mil
 Area 630 km2
 GDP: $304 bil CAN
 Residential: $1,000 CAD
Sq/ft
48

Appendix 1
1) Squeeze All Torontonians South of Eglinton
between The Beaches and High Park
2) Move all Businesses also
3) Triple the GDP
4) Cut out the New Chunk of Toronto
5) Move it 1 km into Lake Ontario
 Toronto is Directly Comparable to Manhattan Provided that you …..
49

Appendix 2
Bankruptcy Mechanics – Surplus Income Test
 Monthly payments required if Income exceeds “Surplus Income” Threshold
 E.g. 1 Household of 4
 First Time Bankrupt – Automatic Discharge
 $6,000 Household Income – NET of non-discretionary expenses e.g. Support, Medical
 $3,998 Surplus Income Threshold for family of 4
 $1,001 Monthly Surplus Income payments (1/2 of the difference)
 Automatic Discharge 21 Months
50

Bankruptcy Mechanics
Surplus Income Test
 E.g. 2 Household of 3 – First Time Bankrupt –
Automatic Discharge
 $3,000 Household Income – NET of non-discretionary
expenses e.g. Support, Medical
 $3.293 Surplus Income Threshold for family of 2
 $Nil Monthly Surplus Income Automatic Discharge 9
Months
Appendix 2 51

Busting the 5 myths of insolvency

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