By Selina Jacobson, BIA Insolvency Counsellor
When an individual or couple files a consumer proposal or an assignment in bankruptcy, the Bankruptcy and Insolvency Act requires the completion of two financial counselling sessions with a Registered Insolvency Counsellor.
Many people are initially skeptical about financial counselling and wonder why they're obliged to participate. They may perceive it as a punishment for taking on too much debt or feel ashamed they need someone else to teach them about money management.
This is absolutely not the case.
As part of the financial rehabilitation of a bankrupt or consumer proposal debtor, financial counselling provides a safe non-judgemental forum to learn new ways to manage finances, recognize what changes are necessary to achieve financial goals and prevent falling back into the same cycle of unmanageable debt.
The financial costs, measured both in dollars and impacts to one's credit report, are significantly higher for second and additional bankruptcies and consumer proposals. Financial counselling is a pre-emptive measure to help avoid these damages.
Inside a Session: Simon and Molly
Simon and Molly are a fictitious couple who recently filed for a joint bankruptcy. Their debt troubles began when Simon lost his job. With only one income stream in the household, the couple began using credit cards and lines of credit to cover many of their living expenses. Their story picks up immediately prior to their first financial counselling session.
Simon and Molly are waiting nervously in the lobby. Neither of them know what to expect. They're both worried, stressed out and have been struggling to get their household budget back on track. When their counselor Joan enters the room, she offers a warm greeting and directs the couple to a meeting room where she provides them with a counselling booklet.
"How are you both today? "Joan begins, smiling.
The couple look at each other and then back at the counsellor. "We're so overwhelmed. And nervous," Molly confesses. "We have no idea what to expect today. We don't even have our budget in place.
"I know we were supposed to fill in a budget form for you, but I lost track of our expenses and work's been all over the place for Simon. So even trying to budget with what little is coming in doesn't make sense."
Joan's empathetic smile persists. "Don't worry," she replies. "You'll get there. That's what this process is all about. Let's begin with a quick review of your file."
She spends a few minutes thumbing through some paperwork and offers to answer any questions Simon and Molly may have about their bankruptcy. After gaining a better idea of their situation and with the tension in the room noticeably eased, she shifts her focus to the day's materials.
"There are four main topics I would like to discuss with you this afternoon," Joan explains.
"We'll start with money management skills and knowledge. Then we'll look at your shopping and spending habits, identify the warning signs of financial difficulties and I'll give you a brief introduction on how to obtain and use credit moving forward.
"First, let's talk about your budget."
Joan returns to the budgeting worksheet that she'd requested Molly and Simon fill out prior to their first meeting. With the couple agreeing to redouble their efforts for the next meeting, Joan offers some tips and techniques to make the process less intimidating. She asks them about methods they have previously used to manage their expenses and offers suggestions for how to create a more structured and sustainable budgeting strategy moving forward.
Joan then turns her focus to effective financial goal setting strategies – explaining how financial goals will strengthen their ability to manage money better, how to set clear and attainable short- and long-term goals and how to use their budget to measure their progress and achieve success. She offers examples of financial goals Simon and Molly may want to consider and hands them several worksheets to complete together before the next meeting.
Shopping and Spending Habits
Shifting to the next topic, Joan offers Simon and Molly a word of caution.
"While budgeting and money management skills are the foundation for your financial success," she explains, "whether you achieve your goals or not will ultimately depend on how closely your actions align with your plan."
Offering practical examples of how quickly unplanned expenses can add up to completely overshoot a budget, Joan reminds Simon and Molly about the dangers of impulse purchases. To drive the message home, she asks them both to discuss the areas where they have fallen prey to overspending and to consider how they could avoid those urges in the future.
Not wanting it to be all bad news, however, she also reveals some valuable money saving insights she believes the couple might benefit from – including how to reduce their food and household expenses, cut down on monthly bills and even entertainment costs.
Warning Signs of Financial Difficulty
"Money troubles rarely ever happen overnight," Joan warns as she passes Simon and Molly a sheet of paper. It's a list of financial red flags. She asks them to read it over and identify anything they believe may have contributed to their bankruptcy.
As they do, she encourages them to be honest about any poor habits and to consider what they could do to change them. She reminds the couple that changing their behaviours will be an ongoing process and they may have to try several strategies before they find something that works. She encourages them to review the list every month when they create their budget, to use it as a benchmark to review their progress and as a reminder of their priorities whenever they feel the urge to spend outside their plan.
"It's not about beating yourself up," she reminds the couple. "It's about seeing where things could go off the rails and course correcting to prevent things from spiraling out of control."
Obtaining and Using Credit
"It's been a struggle to adjust to only using cash," Simon laments. "Without credit to fall back on, we constantly feel like we're on the verge of collapse."
Thanking him for the transition to the final topic of the afternoon, Joan immediately sympathizes with Simon's point of view. She's watched dozens of clients go through a similar transition and is aware of how difficult it is to lose such a significant financial vehicle – especially so suddenly.
But she's also quick to temper her compassion with a word of warning: "Credit is a financial tool designed for a specific purpose," she says. "And that purpose is never to offset an unbalanced budget."
She then explains some of the more productive and healthy ways the couple could use credit in the future if they choose. She re-assures Simon and Molly that their dreams of someday owning a house or buying a new car are entirely within reach, though it will take some effort to rebuild their credit. She promises they will learn more about that process in the next session.
"Do either of you have any questions before we wrap up for the afternoon?" Joan asks.
"I don't think so," Simon replies.
"You've given us a lot to think about," Molly echoes. "I'm sure we will have several the next time we meet."
"I'm sure you will," Joan says as she looks down at her calendar. "Our next appointment will be one month from today. Does the same time work for you?"
The couple nod in agreement.
"Perfect," she says as she hands them a card with the details for their next meeting. "How are you both feeling now?"
Molly sighs. Both she and Simon look much more relaxed. "Much better, thank you. This was far less stressful than I think either us anticipated."
Stay tuned for the second installment where we'll continue with Simon, Molly and Joan during their second counselling session. They'll learn contributing factors to insolvency beyond their budget, how to rebuild their credit and helpful resources that can prevent future financial difficulties.
This article was originally written for, and published by, MNP. To view the original post, click here.