Mark explains how creditors enforce judgments in Canada and which income, assets and situations are beyond their reach, including what makes a debtor judgment proof or nearly so.
Transcript
Today I'm going to identify several scenarios where a Canadian can avoid paying their debts. You might be worried that your creditors are going to sue you and that you might have to pay money to them. You might be concerned that they are going to place a lien on your property, garnish your wages, or seize your property or the money in your bank account. In Canada there are certain categories of income that are beyond the reach of your creditors. Furthermore, depending on your situation, some or all of your assets might be beyond their reach. Particularly for low net worth individuals, you might be judgment proof or near judgment proof, in which case, regardless of how much money you owe, you can avoid paying money to your creditors.
I'm Mark Silverthorn. Today I will be sharing my insights gained working as a collection agency lawyer for 12 years for some of the largest collection agencies operating in Canada. I managed the legal department at a number of collection agencies, so I am very familiar with how creditors and their authorized collection agents attempt to recover unpaid accounts from consumers. My goal today is to help you identify those scenarios where certain assets and some types of income are beyond the reach of your creditors. I am also going to give you some tips for gaming the debt collection process.
How creditors try to recover money
Before I describe the assets and income that are beyond the reach of your creditors, here is a quick overview of how creditors attempt to recover money from consumers. If your creditor cannot recover an unpaid account after months of making collection calls, then it might decide to sue you. If it successfully sues you and obtains a judgment against you, it does not magically receive money from you. You are under no obligation to voluntarily give money to a creditor that has successfully sued you. The onus is on your creditor to recover the money, and the more information it has about your employment and your bank accounts, the easier that is.
If your creditor has obtained a judgment against you, it is legally entitled to examine you at a court-appointed location, where you are obligated to answer questions under oath about your assets and your income. Creditors pay the costs associated with these examinations, so they are not common. If your creditor does not require you to attend such an examination, then it is critical that you do not disclose the name of your employer, or the name of your financial institution and the branch where you have a bank account. Furthermore, the name of your employer should not be available on social media to your creditor or its collection agent.
How a judgment gets enforced
Once a creditor has successfully sued an individual, it can take advantage of a number of extraordinary remedies to recover the money owing to it. Creditors prefer suing debtors who own a home or real property, and they are reluctant to sue renters. Some Canadian banks will sue homeowners for amounts as little as $4,000. Make no mistake: if you own a home, townhouse, condo, cottage or rental property in your name, then your creditor will be drooling, because it can simply sue you, obtain a judgment and slap a lien on your property. It will then recover its money plus interest when you mortgage or sell your property. Alberta, unlike other provinces, has a $40,000 exemption for a principal residence, so Alberta homeowners with relatively small debts might not have to worry about a lien on their principal residence.
If you are employed, your creditor can obtain a wage garnishment through the courts and receive a portion of your wages. The exact amount varies from one province to another. Your creditor cannot garnish your wages if it cannot identify the company you work for. If your creditor can identify your financial institution and the branch where your bank account is located, it might be able to seize the money in your account with a garnishment of your bank account. If it does that successfully, it is entitled to seize 100 percent of the money sitting in your account, up to the point where the judgment is satisfied in full.
If you own property other than real estate that has significant value, such as an RV or boat, and the asset is not financed, your creditor might attempt to seize it. This is not a common method of recovery. Your creditor might have to pay a significant amount in fees to have a court-appointed official seize your property, and it will be reluctant to seize property that you have financed.
Who creditors find hard to collect from
Creditors are going to have a much more difficult time recovering money from individuals who fall into one or more of the following buckets: they do not own real property; they support themselves on pension income or social assistance; they have a low-paying job or can switch jobs easily; they own very few assets in their own name and can take advantage of an exempt property provision in their province or territory; or they do not have a bank account. The number one obstacle for creditors arises where the debtor is a renter, and 32 percent of Canadians rent. If a creditor sues a renter and obtains a judgment, it is not in a position to put a lien on the debtor's real property.
There are some Canadian homeowners watching this video with a deteriorating debt situation who might be better off selling their home and renting. Failure to do so might result in the future loss of some or all of your existing equity in the property. If you owe money on a department store credit card with a 28 percent interest rate and your creditor successfully sues you on that debt, then your creditor will likely be entitled to 28 percent interest on its judgment. The amount you owe on a judgment with a high post-judgment rate of interest can snowball over a relatively short period of time.
In some instances a homeowner's entire equity can be wiped out in a few years. To protect the equity in your property, it might be necessary to sell your property and then rent. As a practical matter, this might put you in a position to put the proceeds of the sale of your home beyond the reach of your creditors. Please note that there are laws to protect creditors in circumstances where a debtor who has become insolvent sells their home or transfers title to their property to a family member.
Income and assets beyond creditors' reach
Some sources of income are simply beyond the reach of your creditors. It is estimated that five percent of Canadians support themselves on social assistance. These payments include welfare, unemployment insurance benefits and Canada Pension Plan payments. This income is not available to creditors, and they cannot garnishee these payments. Furthermore, some Canadians receive benefits under company pension plans, and as a general rule these benefits are beyond the reach of creditors. Finally, if you have an annuity, the income you receive from it is beyond the reach of your creditors.
If you are a salaried employee and your creditor has obtained a judgment against you, then it might be able to recover some money from you with a wage garnishment. Each province restricts the amount that your creditor is entitled to. There are a number of ways that you can terminate a wage garnishment. You can simply quit your job and look for a new job elsewhere. This means that creditors are reluctant to sue individuals in a variety of scenarios, because these individuals will quit their jobs upon learning of a wage garnishment. This includes people with low-paying jobs, people who earn a significant percentage of their income in tips, and people whose occupation is in high demand, such as dental hygienists, who can easily change employers.
Depending on your finances, you might also be in a position to negotiate a one-time lump sum settlement, where your creditor agrees to accept a payment somewhere in the 50 to 90 percent range of your outstanding balance as settlement in full. A negotiated settlement would terminate the wage garnishment. You can also terminate a wage garnishment by meeting with a Licensed Insolvency Trustee and making a consumer proposal or filing for personal bankruptcy.
Your RRSPs are beyond the reach of your creditors, and as a general rule so are company pensions. As a matter of public policy, Canadian governments do not want individuals in debt to be destitute. Accordingly, each province and territory has rules placing some assets beyond the reach of creditors. As a general rule, each provides an exemption for a few thousand dollars of clothing, household furnishings and appliances, a few thousand dollars for a motor vehicle, and a few thousand dollars for tools required to earn a living. Some provinces exempt some assets for farmers, and there is an exemption for medical devices.
Bank accounts and who holds your assets
If your creditor or creditors have obtained a judgment against you, you should avoid having a bank account, or keeping a significant amount of money in it. If your creditor can identify your financial institution and your branch location, it is in a position to enlist the assistance of the courts to garnish your bank account, and in that scenario it will be able to seize all the money sitting in the account to satisfy an outstanding judgment. A special word of caution if you owe money to the Canada Revenue Agency: it can arrange to freeze your bank account without even suing you.
In a perfect world, your pay from your employer will not be deposited into an account at a financial institution. If you are paid by cheque, you have a number of options. You can cash your cheque at a cheque cashing outlet. You might also be able to have your pay deposited directly onto a prepaid credit card obtained through a cheque cashing firm, and use it as a substitute for a traditional bank account. Some prepaid credit cards permit the card holder to pay recurring expenses. Finally, if your spouse does not have any judgments against them, then it might be prudent to deposit your pay into your spouse's bank account at the earliest opportunity.
In many marriages one spouse will have debts and the other will not. In this scenario, any assets that are acquired should be acquired in the name of the spouse without any debts. This will make it more difficult for creditors to seize assets acquired by a spouse with debts. In a perfect world, title to your home will be only in the name of the spouse without any debts or potential liabilities.