A debt lawyer who is facing bankruptcy could lose his or her home and could be forced to sell a major part of his or she’s assets to help pay the bills.
It’s the same scenario facing the estate planning lawyer who filed for bankruptcy protection in a Manitoba court last month.
It could happen to any of them, said Mike Duch, who represents estate planning clients.
“It’s a pretty big risk,” said Duch.
The risk for a debt lawyer is that the person may be unable to repay his or herself if they default on their debts.
In Manitoba, people who are not in bankruptcy are required to have a bank account and have assets they can use to pay their debts, such as their home, car or business.
A court order can force a person to have those assets.
“You’ve got to have assets that you can use, that you have access to, that are stable, that don’t fall apart,” said Scott O’Neill, a family law lawyer with CPA Services Inc. O’Neil said he’s had a client go through bankruptcy proceedings in the past and had the person pay back all of their money in full.
If they defaulted on their debt, they could lose their home and have to sell that property, which could also be costly.
If the estate plan is set up in a way that allows the client to sell the assets, then the estate will pay for that.
“I think the best thing is that they’ll be able to go back to work,” said O’Donnell.
A similar situation arose when a former accountant who is also in bankruptcy filed for a protection order against her former employer.
She was given a choice of selling her home, or paying the court $2.7 million.
But she was told by the court that if she sold the property, she would be responsible for all of the money that the employer paid her to do the work.
That could put her in a tough spot financially.
“If you can’t pay it back, then you have to start looking at bankruptcy and it’s a much worse deal than bankruptcy,” said the former accountant, who requested not to be identified.
“That’s not fair, that’s not right, that doesn’t reflect the people who worked for you.”
A person who wants to buy property to be a property manager in the province has to go through a process known as a “sales licence,” where the government gives the buyer a title deed and tells them what to do with the property once they’re done with it.
A buyer could have the buyer sign an agreement saying they will sell the property for cash if they can’t repay their debts or get a mortgage on it.
“The seller will then get a title certificate that says they’ve actually sold the house, and it will then go to the bank and the buyer can go in and do the loan,” said Brian Muehl, the director of the legal practice at the BMO Capital Markets Group in Toronto.
If a person can’t get a loan, they can still take out an equity loan to get the property back.
But the person has to be able at least $100,000 in cash.
The person who goes through bankruptcy, or bankruptcy trustee, is responsible for paying the debt and any interest.
For most people, that means paying off all of those debts at once.
“For people who can’t do that, they’ll need to do an equity repayment, and then they’re going to need to pay off the mortgage,” said Muehn.
That may mean paying off the loan within a month or two.
“In a couple of weeks or a couple months, they’re not going to be paying the mortgage, so they need to get out of debt and get a job,” he said.
If that happens, then a person could be in a position to sell their home or mortgage and then refinance the mortgage or pay off their debt to start from scratch.
The process of going through bankruptcy could take time, said Duc de Bourdon, the executive director of bankruptcy experts at the Institute for Fiscal Studies.
“There are people who have been through bankruptcy in the last 10 years who can easily refinance their mortgages and buy a house,” said de Bouron.
The institute has a list of people who’ve refinance a mortgage since 2008, with an average rate of 5 per cent.
If you or someone you know is considering bankruptcy, contact an estate planning expert to find out how to go about it.
And if you’re going through a bankruptcy, don’t forget to contact a lawyer for advice on what steps you should take to protect yourself.