Bankrupt, Belly Up
BC Business Magazine

By Jane Mundy

Gale Winkleman and her partner (let's call him Brad) had a garbage disposal business together in Surrey until 2000. Then Brad discovered cocaine. He took a lot of cash out of the business and eventually spent it on crack cocaine. Winkelman has no idea exactly how much Brad took -- in cash and crack -- because he did so many cash jobs. She also didn't know about his drug problem, "because I was in denial; the kids knew and I didn't," she says. "I made him go to a doctor due to his abnormal behaviour. He had manic highs and paranoid lows and the doctor thought he had some kind of mental illness, but it was the crack," she says.  

When they finally split up in April 2000, the company's debt load was $180,000 and their house was in foreclosure. Winkleman was left a single mother with four kids to support.
But Winkleman saw potential in the company. She got control of the business in July 2000 and legally got it signed over in Jan. 2001, when she became the sole proprietor. But given her staggering debt, she wondered if she could salvage it and still hang onto her house.

She found a trustee in the Yellow Pages. He offered her only one option: declare bankruptcy. "He told me how to go bankrupt and open the business the next day under another name,”" she said. “"I didn't know how -- it was too complicated for what I was capable of.”

"It seemed crooked to me," says Winkleman. "Even though I knew people did it, I didn't feel safe. I thought down the road something would come back to haunt me. I was worried about what would happen to the business because my customer base hadn't been affected. Ninety percent of my business is with property management companies and I didn't want to do anything that would affect them. I was afraid that if I changed the name, I would lose their contracts because they could just go somewhere else," she says.

"I don't think I could have pulled it off. At that time even doing the consumer proposal was scary, I was living day to day."The trustee explained to her that if she went bankrupt, being a director of a company would mean that she would be personally responsible for the GST that the company owed. She also had a personal guarantee on monies owing the GVRD (municipal government).

Winkleman asked around and a good friend took her to Deane Gurney, a trustee at Sands & Associates in Surrey. Gurney saw that Winkleman's cash flow was sufficient in order to do a consumer proposal. This would result in a significant return to the creditors as opposed to a minimal return in a bankruptcy. And a proposal also had a social issue involved:  by preserving the business, she was able to keep a home and contribute to society by paying taxes etc. and maintain her self-esteem.

“I owed $180,000, mostly to GST and the GVRD from our landfill dumping. There were no credit cards in the company, but I had a few personal cards,” she says. “[Gurney] went over everything with me and decided I should do a ‘proposal’ rather than a bankrupt, because then I could keep the business operating.”

Winkelman thought she would be better off keeping the company and going through a consumer proposal rather than a bankruptcy because she had done cash flow spread sheets (she did the bookkeeping for the company) and there was money left over at the end of each month, so there was money to pay part of the debt. But it was going to take time.

In a nutshell, a consumer proposal allows you to pay back your debt over a period of time and write off some of the debt.  A proposal is made to your creditors to modify the payment of your debts. For your proposal to be acceptable to your creditors, it must give them more money than they would get if you filed for bankruptcy. In addition, you must be employed and able to cover daily living expenses, and you must have a third party willing to guarantee the proposal.

Winkleman was able to repay $108,000 of the total amount owing. She wrote a check to Sands & Associates each month over a period of three years with no interest in increments of $3,000 per month. A portion of each check pays the trustee's fees and the remaining monies are distributed to the proven creditors on a percentage basis on the amount of indebtedness that is claimed.

She was able to make her $1,200 mortgage payment each month because one of the terms in the proposal is that the creditors accept this. Part of the debt was forgiven by the GVRD, GST and some smaller businesses. She was able to write off $72,000 and she made her last payment in June, 2004.

“It was tough at times,” Winkleman recalls, “but I survived.”
"It had been tougher before the proposal when there was not enough money to pay the bills. There was often no money for groceries. I had been doing without for a long time, so now that I had control of the money, it was better. I knew what I had to live on and I could control it," she says.

If the creditors hadn't agreed with the proposal, Winkleman would have been forced into personal bankruptcy. Canada Revenue would have seized her assets to recover the GST she owed, leaving slim pickings for the remaining creditors. She certainly would have lost the family home.

Every year, this is what happens to thousands of Canadians who accumulate too much debt. It took a lot of courage for Gale Winkleman to talk about her financial difficulties publicly. What was her motivation? She wants people to know that you can go through a consumer proposal or a bankruptcy and still maintain a semblance of dignity and self-esteem. Many people opt for more dangerous and confusing ways to try to get out of debt. Money marts offer payroll loans at high interest rates; offers from credit card companies to pay off other credit card companies but at a much higher interest rate are delivered to your door, and some people still believe in Nigerian scams…"but all of them are short-term solutions to long-term problems," says financial adviser David Wood. Kiting is another pervasive problem -- taking cash advances to make minimum payments from one credit card to pay minimum payments on another. "People don't realize that you pay interest from the date of the cash advance," says Wood. "So in reality they are becoming worse off, they think they are making headway but losing ground without realizing it."

"The easiest way to get out of debt is when you don't hear from your creditors," says lawyer Stanley Kershman.  He has heard comments such as "I didn't hear from them for two years so I wrote it off" And "My husband was going to write it off so I didn't worry." But he went bankrupt.
"Well, I thought it was his responsibility."

Wood's advice: Be pro-active rather than reactive. For example, the bank will give you options before your home is in foreclosure. "The same goes for creditors," says Wood. "There's more goodies in my toolbag now, and I would rather do a proposal over a's better for everyone," he says.

There are two kinds of bankruptcies, consumer (personal) and business. According to Statistics Canada, consumer insolvencies grew by 0.3 percent last year with a total of 101,084 new cases. In British Columbia, out of 10,642 total bankruptcies and proposals reported in 2004, 8,378 were consumer bankruptcies. Less than nine percent of debtors who went into a trustee's office filed a consumer proposal.

And who are these debt-ridden souls? In the past, bankrupts consisted mainly of small business owners and farmers because those were the only individuals to whom banks would lend large amounts of money. Then in 1968 Chargex was introduced and credit (largely frowned upon by those raised during the Depression) was suddenly available to almost everyone. Low- and middle-income earners began to accumulate personal debt. Spending habits changed dramatically.

Stanley Kershman is an Ottawa-based lawyer and specialist in bankruptcy and insolvency law and the author of Put Your Debt on a Diet. He observes that most people who find themselves deep in debt have underlying problems and spend to satisfy low self-esteem. “Whether it's a big car or diamonds, expensive clothes or luxury vacations, shopaholic disease is a common trait and it accounts for about 20 percent of all bankruptcies,” says Kershman. “Marital breakdown is the main reason, next job loss, then disability and emotional problems due to death of a spouse or child.”

Personal troubles can certainly lead to financial woe. But Canada's 40-year low in interest rates may be the key factor in our rush to take on a heavier debt load: the debt-to-personal-disposable-income ratio is now 117 percent. Five years ago it was 96 percent. And the personal savings rate -- what's left over each month after the bills have been paid -- declined to 0.5 percent in the second quarter of 2005, the lowest rate since the 1920s.

“There are many people overextended. People are leasing vehicles because they don't want to put down a deposit,” says John DeRose, a senior branch manager at Vancity, a credit union in Vancouver. An increase in leasing means a higher debt load. “Even though leasing allows them to lower their monthly obligations, the downside is that you are renting. You don’t have an asset at the end of the day,” says DeRose.

He is also seeing a lot of members taking equity out of their homes to pay debts accrued through charge cards.  “Debt consolidation is scary because what if interest rates go up a few percent, will [they] be able to pay the debt? If rates go up three percent, which could be anywhere up to 100 percent of the interest payment they are making today, that will put people in a financial bind,” Derose says. He also says that history suggests that rates will go up a full percentage point next year.

Bonita Lewis-Hand, an insolvency lawyer in Vancouver, thinks that bankruptcies also may be on the increase due to the competitive nature of lending, “Fifteen years ago, if you had a bad credit rating, it stopped lenders from lending to you. Today, because of all the competition, you can get credit, due to the money paid on high interest charges,” she says. In other words, credit companies and financial institutions are willing to take a risk because anyone is a money-maker for them.

And even after you've exceeded your limits and dropped into the debtor's abyss, there's money to be made on your misfortune. Everywhere you turn, “easy” credit solutions beckon like neon signs on the Vegas strip. The Internet is rife with sites offering easy solutions to become debt-free. “Never Repay What You Owe, Legally,” promises one website called Financial Solutions. In its television ads the Canada Debt Hotline proudly displays a Canadian flag and states, “You are protected by the laws of Canada." They are simply referring to the National Bankruptcy Act. And just in case they can't reach you on the Internet, radio or TV, ads for credit counselling services are plastered all over Vancouver’s SkyTrain.

There is a difference between a trustee and a credit counselor. You can only go through a trustee to claim bankruptcy or a consumer proposal. Credit counsellors set up programs to make orderly payments of debts by consolidation. They amortize payment structures based on your income and expenses and what you can afford. You in turn pay the credit counsellor and they disburse money to the creditors.

There are no official certification programs, diplomas or degrees to be a credit counsellor. Some of them will have banking or finance backgrounds.

Consumer proposals don't work for everyone. In just under 10 years, Terry Forester (not his real name) went from being a successful Vancouver developer with a multi-million dollar business to a bankrupt.

His spiral downward began in 1996 when he went through a series of health problems, including a bout of cancer, and spent much of his time back and forth from hospital undergoing operations, 13 in total. Although the provincial healthcare plan (MSP) paid for his medical bills, his lack of disability insurance meant there was no coverage for lost wages. Forester began to use his seven credit cards to cover such expenses as groceries, car payments and operating activities for the company. It didn’t take long to hit the limits; within five months his interest payments alone totaled $3,250 per month.

Finally, after six months, he went to see David Wood.Forester sent a letter to the credit card companies explaining his predicament. He asked them to consider lowering their interest rates so that he could pay down the principal not just cover the interest. None of them replied.At this point his debt total was $1.1 million.

. “I was embarrassed to knock on David’s door and reveal the extent of my misery,” he says. But he knew he couldn’t get out of financial trouble by himself. Wood advised him to go the bankruptcy route, “So you and your wife can get some sleep and get a fresh start.”  

For Forester a proposal wasn't feasible, mainly due to his age – he was 62 at the time -- and his health issues. Not to mention that he no longer had an income. Fortunately, the house he had lived in was in his wife’s name, as were most of the couple's assets.  “
My concern was that I would wake up in the morning and actually make some money and have the creditors take it all. If I died, what would happen to my wife? I knew that the only way I could leave my wife with anything was to declare bankruptcy -- I do have life insurance,” he says.

"It would have been better for my wife to have had me dead than alive," says Forester. "If I hadn't gone bankrupt and did die, the insurance would go to the creditors."

The biggest loss he has incurred was the damage to his self-esteem, Forester says, but that’s coming back. Bankruptcy has meant a “huge, huge weight off my shoulders,” he says. "I've lost the ability to have credit for a long time but that isn't necessarily a bad thing."  

Forester's cancer is in remission. But it is the type that recurs. And he also had a heart attack, post bankruptcy. Forester says that it wasn't because of the bankruptcy - he had an artery that was completely blocked . He is also recovering his business of 35 years, which was pretty much in tatters. “You have to put up huge sums of money but the rewards can be large,” he says. “I have the greater majority of my investors back, although a few would like to shoot me. When your career is a gamble and you take risks, the leap to bankruptcy is not that wide.”

Insolvency lawyer Bonita Lewis-Hand believes society is more understanding when businesses fail compared to a few decades ago. It's acknowledged that people make mistakes, learn from them and carry on. “There are honest but unfortunate mistakes, and [a proposal or bankruptcy] can be a wonderful tool that is available for unfortunate debtors. But for that people would be in strangleholds, burdened for the rest of their lives,” she observes.

After 25 years in the business, both in Ontario and other provinces, fellow lawyer Stanley Kershman agrees. But he warns that bankruptcies are on the increase, mainly due to easy credit, the cost of living and, to a certain extent, instability in the economy.

“Go into a town like Kitimat and when a whole mill shuts down, 300 or so lose their jobs, from an economic point it could be catastrophic,” he says. Kershman uses the town of Kitimat as an example because he appears on the radio show To the Point there.  Most of his callers ask how their credit rating will be affected if they don’t pay their bills.

Negatively, of course.
"After you are discharged [from a bankruptcy or proposal] it isn't easy to obtain a secured card but it is hard to get a new loan," says Kershman You can get a card provided you follow terms of the agreement, "But the only people who should get a card are when they need to use it for travel, renting a vehicle, airline ticket, or a hotel. If someone has been discharged from bankruptcy or proposal, they shouldn't get a card," he says. "They will get caught in the same trap, looking for another lifeline -- not a good sign."

Today, Gail Winkleman has her home, a business and three full-time employees. To operate the business on her own has been a challenge, and her stress level was high in the beginning when her consumer proposal was first enacted. “I sat my kids down and told them that these are the choices: rent an apartment and make a lousy hourly wage or give this [proposal] a go…” she says.

Winkleman still has to be careful with her finances. But because she finally got them under control, she says. “I feel secure and don't have the worries that I did. I know I can feed my kids.”