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Bankruptcy Canada Trustees Talk — The insider's view of Bankruptcy in Canada

Debt and the Recession Lead to Massive Increase in Bankruptcy Rate in Canada

The bankruptcy rate in Canada increased by 31% in 2009, the largest increase in recent memory. In 2009 116,381 Canadians filed personal bankruptcy in Canada, and a further 35,331 filed a consumer proposal. That’s a total of 151,712 filings, as compared to 115,789 in 2008. These are obviously massive growth numbers, which raises the logical question: why?

The first and most obvious reason is that Canada suffered through a recession in 2009, and a recession leads to high unemployment. In fact, if you create a graph showing both the growth in consumer insolvencies and the changes in unemployment, you will find that they are very closely correlated. In other words, if unemployment goes up, the rate of bankruptcy filings goes up. If Canadians start finding jobs, the rate of bankruptcy filing will decrease.

The second obvious cause of bankruptcy is high debt. You don’t need to go bankrupt if you lose your job, but you have $1 million cash in the bank. With that kind of money, you would probably just retire, and not bother looking for another job. But, if you are carrying a lot of debt, and your income drops, you may have no choice but to file bankruptcy to deal with your debt. Unfortunately in Canada, as we discussed last week, personal debt in Canada is a ticking time bomb, with the average Canadian carrying more debt than ever before. High debt is a very big problem.

Bankruptcy Canada growth in 2009

But there is more to the story than simply high debt and a serious recession. On September 18, 2009 new bankruptcy rules came into force in Canada, and that caused a spike in personal bankruptcy in the weeks before September 18, and a drop in bankruptcies after September 18. Under the new rules if you have excessive surplus income, your bankruptcy is automatically extended for an extra year, so many Canadians rushed to file under the old rules (so their bankruptcy would be quicker and cheaper). The new rules caused a drop in personal bankruptcies in the last quarter of the year, but as the chart shows, consumer proposals continued to increase.

The increase in consumer proposals will continue to be the story in 2010. Canadian debtors will avoid bankruptcy where possible, and instead file a consumer proposal. From 2006 through 2008 there were approximately four bankruptcies filed for every consumer proposal filed. In 2010 we expect the ratio to be only two personal bankruptcies for every consumer proposal. That’s a significant change.

If you have debt, the good news is that consumer proposals are now more popular than ever before, so you now have a way to deal with your debts and avoid bankruptcy. In a consumer proposal your unsecured creditors (like credit cards, lines of credit, bank loans, payday loans, and income taxes) are contacted with a deal. The deal generally involves you paying less than the full amount you owe. For example, if you have $50,000 in debts, the creditors may agree to a proposal where you pay $20,000, or $400 per month for 50 months. They may ask for more (say $400 per month for five years), or they may settle for less. The exact amounts will depend on your family income, your ability to pay, and what assets you own. Consult a licensed consumer proposal administrator for more information.

What will happen in 2010? If the unemployment remains high, personal bankruptcy and consumer proposal filings will remain high. If interest rates increase, and the cost of servicing debt increases, insolvency filings will also increase.

Our advice is to not worry about that which you cannot control. What happens with the economy is out of our hands. However, we do control our own debt, so if you are carrying more debt than you can handle, and if you are worried about job loss or reduced income, we strongly recommend that you contact a licensed trustee for a free initial consultation to determine your options, and do what you can to avoid becoming another statistic.

Posted on Monday, March 8th, 2010
Filed under: Consumer Proposal and bankruptcy Canada and bankruptcy reform
posted by Doug Hoyes @ 6:05 am No Comments

Debt in Canada: The Ticking Time Bomb

As we celebrate Team Canada’s men’s and women’s gold medals in hockey at the Vancouver 2010 Olympics, we are all feeling good. Our country is back on top of the hockey world, and things are looking up. While we may be feeling good about our hockey teams, we aren’t feeling as good financially. Why? 2009 was a record year for personal bankruptcy filings in Canada, and the causes of the spike in bankruptcies have not gone away. The economy remains weak, and we are still carrying record levels of personal debt. That’s our biggest financial problem: debt. Debt continues to grow, and, like a ticking time bomb, high debt levels get us closer to the point of no return.

Despite the recession, or perhaps because of it, Canadians continue to borrow at record levels. By the end of the third quarter of 2009 the average Canadian adult had over $40,000 in household credit, a record level. Household credit includes credit cards, bank loans, and mortgages, so $40,000 may not appear to be a large number. After all, many people have mortgages of greater than $40,000. That’s true, but many other Canadians don’t have any mortgages or debt, so to average $40,000 over all adult Canadians, many of us are obviously carrying a significant amount of debt. As the chart shows, back in the year 2000 we each had approximately $20,000 in debt, so in less than a decade the debt we are carrying has doubled.

That’s a staggering statistic. If you are the average Canadian, your debt has doubled. Has your income doubled? Are you making twice as much today as you were earning in the year 2000? Probably not. If you still have a job you may have received “cost of living” increases of 2% per year for the last decade, but that obviously does not add up to a doubling of your income.

With these massive levels of debt, why hasn’t everyone gone bankrupt in Canada? Part of the reason is that interest rates have remained low.

In fact, mortgage rates, and consumer loan rates are lower today than they were three years ago. Low rates are partially due to governments around the world deliberately keeping rates low to stimulate spending, but low rates are also the result of the recession, where fewer people are borrowing to buy new houses, cars, and other goods.

Of course debt alone is not a problem. If I have a million dollar mortgage, but I have a job that pays me $2 million per year, my large mortgage is not really a problem. However, even if I have a small $50,000 mortgage, if I’m not working I won’t be able to make my mortgage payments on even a small mortgage. The key here is serviceability: your ability to service the debt you have.

Our ability to service our debt is a combination of the amount of debt we have (which is high), the interest rates we are paying (which are low today on most forms of debt), and our income (which for many Canadians has decreased during the recession). As the chart shows, our household debt as a percentage of our personal disposable income continues to rise.

In fact, by the end of the end of September 2009 (the most recent numbers available), the average Canadian adult was carrying household debt of 140.8% of their personal disposable income. That’s the highest level in history. Three years ago that level was “only” 120%. Stated another way, for every dollar you earn, you have $1.41 in debt, if you are the average Canadian. Obviously during this recession our debt has increased much faster than our income, and Canadians are spending more of each dollar they earn servicing their debts.

If you have a good job, and if interest rates stay low, you will probably be able to continue to service your debts. But the numbers prove that we are standing on the edge of a cliff, and all it will take is a slight breeze to knock us over the edge.

Ask yourself this: if you were to lose your job, or have your hours cut back at work, or go through a divorce, or have a medical problem so you couldn’t work, would you be able to continue paying your mortgage, your car loan, your line of credit, and your credit cards? For most people, the answer is “no”.

So what can you do to protect yourself?

First realize that your situation is precarious. Unless you have a very secure job, be very careful taking on new debt. Now may not be the time to buy a bigger house, or a new car.

Second, take steps now to reduce your expenses. You probably don’t control your paycheque, but you can control your expenses. Think about moving to a smaller house or apartment to save money. Trading in your car for something with a lower monthly payment, and a vehicle that’s better on gas, may be a good idea. Review all of your other expenses: do you really need 500 channels on T.V.that you never watch? Do you need to buy your coffee each day at the coffee shop, or can you learn to make your own? If you reduce your expenses, you will have more money to use to pay down your debts.

Finally, take steps to reduce your debt. Sell your second car and pay off the loan. Put a freeze on new spending, and start paying down your debt. Don’t just pay the minimum monthly payment on your credit cards; actively work to pay them off completely. If you can pay off your debts while you are still working, you will be in a much better position to weather the storm if you do get laid off, or if your hours are cut.

If you have already suffered through a job loss, or reduced hours at work, and if you already have more debt than you can service, it’s time to be pro-active and look for ways to eliminate your debt. That may mean you need to consider a consumer proposal or personal bankruptcy in Canada. The numbers prove that our debt problems are getting worse, not better, so there is no better time than the present to take action to reduce our debts.

Posted on Monday, March 1st, 2010
Filed under: Consumer Proposal and Debt Options and bankruptcy Canada
posted by Doug Hoyes @ 4:18 am No Comments

Debt Consultants and Debt Management Plans: Scams, or a Good Alternative to Bankruptcy in Canada?

Debt consultants and for profit credit counsellors have become very aggressive over the last few years. In some cases they may be able to help you get out of debt, but in most cases they can’t do anything for you that you can’t do for yourself. Here’s how they work:

Douglas Hoyes, Canada Bankruptcy Trustee

Douglas Hoyes, Bankruptcy Trustee

They run big advertisements in the newspaper promising to reduce your credit card and other debt by up to 70%. Debt relief sounds great, so you start making monthly payments to them, and they promise to use that money to negotiate a debt settlement with our creditors. I’ve met with many people over the years who assumed that the money they were paying each month was being distributed to the creditors, but that’s not how it works. What’s actually happening is your money is building up in the debt consultant’s bank account, and when they have enough money to propose a settlement, they make the deal with your creditors. Here’s an example:

Joe and Mary owe $30,000 on five credit cards. The debt settlement company promises to settle all of their debts for $20,000, with no further interest. Joe and Mary think that’s a great deal, because if they were to pay off their debts on their own, with interest, it would cost much more than $30,000. They agree to pay $400 per month for 50 months to the debt consultant.

The debt consultant can negotiate a lump sum settlement with the credit card companies, but they can only do it once they have a lump sum of money. The first ten payments Joe and Mary make go directly to the debt consultant for their fees. Once their fees are paid, the money builds up in the consultant’s bank account until they have approximately 40 cents on the dollar to make the settlement. If Joe and Mary owe $10,000 on one of their credit cards, the consultant will wait until they have $4,000, and then approach the credit card company with the settlement offer.

What’s wrong with this strategy? Why are these deals in most cases nothing more than a scam?

First, if the debt consultant wants the first 10 monthly payments for their fee, and then wants another 10 payments for the settlement offer to the first credit card company, it will be 20 months before the first credit card company gets any money. It is unlikely that a lender will sit around and wait for 20 months to get their money. In most cases they will continue to call you, and perhaps even sue you, to get their money.

Second, debt settlements will not work on all types of debts. The government will not accept 40 cents on the dollar, paid 20 months from now, to discharge your tax debt. Credit card companies may accept a plan, but governments won’t.

Third, the debt consultant has no way to force all creditors to agree. He may get one or two of your credit card companies to agree to a deal, but if the others don’t agree and sue you, the deal will fall apart. You need relief for all of your debts, not just some of them.

Fourth, in many cases the debt consultant is not doing anything that you couldn’t do on your own. Accumulating money in a bank account for two years, and then sending it to the credit card company does not take a lot of professional expertise. If you want to wait two years and then make settlements on your debts, you can do it on your own.

Fifth, many debt consultants will meet with you, review your situation, charge you a fee, and then refer you to a bankruptcy trustee or consumer proposal administrator! They don’t actually do anything for you, other than provide an opinion that you need to see a trustee. I’m a big believer in getting a second opinion, but since a trustee or consumer proposal administrator will NOT charge you for an initial consultation, you should start with a free initial consultation, and then get a second opinion if you are not satisfied.

Finally, in most cases debt consultants do all of their work over the phone. That keeps their costs down, but it also means you never get to meet them. Do you really want to turn over your hard earned money to someone you will never meet in person?

Many of you who are reading this will probably be thinking that I am exaggerating the pitfalls of debt settlement. After all, I’m a trustee in bankruptcy, so I’m biased. It’s natural to assume that I think bankruptcy in Canada is the solution to your problems, not debt settlement, because that’s what I do for a living. Fair enough, but let me give you two actual examples. Here are the stories of two people I met with on one day last week. These are not unusual stories. I did not need to go looking through my files to find examples. I personally met with both of these people last week, and I have met with hundreds of other people with the same story. (I have changed the names of the people to protect their privacy).

Case #1: John Smith entered into a debt management plan with a well know debt management company eleven months ago to deal with $27,000 worth of debt, because he wanted to avoid bankruptcy. He has been paying $300 per month for the last eleven months, to deal with his three credit card debts. Two of the credit cards have not bothered him, but one of credit cards, from Bank X, took him to court three months ago and obtained a garnishment order against him. Starting next week they will be in a position to garnishee his wages. When he met with me last week I reviewed his situation, and based on his income he has decided to file a consumer proposal. With the consumer proposal he will be paying $300 per month, and he will be paying for a shorter time period than was proposed under his debt management plan.

Key Message: The lesson here is that a debt management plan is not binding on all creditors, so even though he has paid $300 per month for a year, he has nothing to show for it. If one creditor doesn’t agree, they can garnishee his wages, making it impossible for him to continue with the plan. He will file a proposal, for $300 per month, and had he done that originally he would already have paid for a year, instead of starting over.

A consumer proposal, once accepted by a majority of the creditors, is legally binding on all unsecured creditors. A debt management plan isn’t.

Here’s the second story:

Case #2: Joyce and her husband Fred started a debt management plan with a company for $2,000 per month for 42 months, or $84,000 in total. Their total debts are $70,000, so they are paying $14,000 in fees and interest, since one of their creditors did not agree to a reduced rate of interest during the plan. When I met with them I calculated that based on their income a consumer proposal would cost approximately $800 per month for 50 months, or about half the cost of the debt management plan. The consultant did not explain to them how much they were paying in fees, and they did not realize that one of the creditors, a large bank, is still charging them interest, so they are not getting a deal; they could have negotiated to pay the full amount owing with interest on their own. They have paid for three months in the debt management plan, but they will now stop it and file a consumer proposal.

Key Message: The lesson here is don’t agree to anything unless you fully understand what you are agreeing to.

If all the consultant is doing is charging a fee and then sending the money to your creditors, they aren’t really providing much of a service. You can do that on your own.

Does this mean that all debt settlement companies are bad? Are they all scams?

I have not researched every company in Canada, so I will not make any general statements about all companies. I will tell you this: do your own research. Ask questions. Here are some good questions to ask:

  • Do I get to meet with anyone in person? If not, where are you located? Are you in my city?
  • Are you licensed by the federal government? What professional qualifications do you have?
  • What is the total cost of the service?
  • When will creditors start receiving money? Does the consultant get paid before the creditors get paid?
  • Will all creditors agree to the deal? What can I do if one of them doesn’t agree? Can they still sue me?
  • What will this do to my credit report?

If you are comfortable with the answers you receive, then you can make the decision to hire a debt settlement firm to deal with your debts.

There are cases where debt settlement is the correct solution, such as when you have a small amount of debts, or you have access to a lump sum of money for the settlement, or you are not insolvent. There are lawyers, that are regulated by the government, that can act on your behalf.

However, in most cases if you want to avoid bankruptcy, and you have the ability to make payments each month, a better option is a consumer proposal. In a consumer proposal all unsecured creditors vote on your proposal, and if a majority of the dollar value of your creditors accept it, it is legally binding on everyone. That means you won’t have the same problem that John Smith had, where two creditors agreed and one didn’t, and that one dissenting creditor sued him.

All consumer proposal administrators are licensed by the federal government, and they will all meet with you in person. The cost of a consumer proposal is set by the federal government, so all fees are standard regardless of which consumer proposal administrator you use, and all fees will be explained to you in advance. (All fees are included in your monthly payment; there are no extra charges). Unlike with some debt settlement companies, a consumer proposal administrator receives most of their fees when the creditors get paid, so everyone is working to make the proposal work. A consumer proposal, credit counselling and debt settlement all appear as negotiated settlements on your credit report.

You have options. You can avoid bankruptcy, but you must do your research, understand your options, and make an informed decision.

Posted on Monday, February 22nd, 2010
Filed under: Consumer Proposal
posted by Doug Hoyes @ 4:40 am No Comments

Do You Play to Win, or Do You Play Not to Lose?

Doug Hoyes, Bankruptcy Trustee

Douglas Hoyes, Bankruptcy Trustee

In the 2010 Super Bowl, the Indianapolis Colts played not to lose. They didn’t take any unnecessary chances. In contrast, the New Orleans Saints played to win. In the first half, with two yards to go on fourth down, they tried to score, and were stopped, turning the ball over to the Colts. At the start of the second half they attempted an on-side kick, a very risky play, but it was successful, they recovered the ball, and went on to win the game.

The 2010 Vancouver Olympics had many examples of “playing to win”: skiers going so fast that a crash is inevitable, and speed skaters pushing it to the limit. Some of them win gold; others don’t finish and don’t win.

So why am I talking about sports on this Bankruptcy Canada Trustees Talk blog? Because there are two approaches to dealing with debt problems: you can avoid the problem and hope it won’t get worse, or you can deal with it head on. You can play not to lose, or you can play to win.

I’ve met hundreds of people over the years who play not to lose. They assume that if they ignore the phone calls they get from collection agents and bill collectors, the problems will go away. Sometimes they are right. If they keep switching jobs, and if they move from town to town it’s quite possible that bill collectors will lose track of them, and no further collection activity will result. Their credit report won’t look great, but if no-one can find them, they feel that the problem is under control. Playing not to lose means you never win; you just avoid your debts; you don’t actually eliminate them, and you never get a fresh start.

I’ve also met with thousands of people who play to win. They know that they incurred the debt, but they are sick and tired of putting up with calls from collection agents. They want to deal with their debt problems. They realize that there are risks to filing a consumer proposal or personal bankruptcy in Canada. One risk in a consumer proposal is that the creditors will vote against the proposal. In both a proposal and bankruptcy your credit score is negatively impacted, and there will be a note on your credit report for many years.

Why were the New Orleans Saints willing to risk losing the game by attempting an on-side kick at the start of the second half? Wasn’t that a crazy, risky, strategy? Not really. By taking the safe route, by doing nothing, it was likely that the Saints would have lost the game. If they were going to lose anyway, what did they have to lose?

Why does a skier go so fast that they risk crashing? Because if they go slowly, they are guaranteed not to win. They really have nothing to lose, so the correct strategy is to play to win.

What will you gain by ignoring your debts? Is it worth the risk to do nothing, or is the correct strategy to get some professional advice and deal with your debts once and for all?

If you know that you will never be able to repay your debts on your own, you have nothing (but your debts) to lose, so play to win. Yes, there are risks. You risk being embarrassed admitting to yourself that you have more debt than you can handle. You risk having to confront your spending habits, and making changes to stay out of debt in the future. You won’t be able to borrow for a period of time.

But you will deal with your debts, and get a fresh start.

You will win.

Many people believe that bankruptcy is the only way out.  It’s not.  A consumer proposal may be a better strategy.  You decide what you can afford to pay to settle your debts, and offer that to your creditors.  They may agree.  They may not.  It’s risky.  But if you are committed to making a fair settlement and offer your creditors a fair deal, they will most likely accept it.  Do your research, offer a fair deal, and play to win.

Only you can decide to play to win. Only you can decide that you want a fresh start. What’s your decision? To start, contact a professional today for a no charge initial consultation to review your options, and find out if a consumer proposal or personal bankruptcy in Canada is the solution for your debt problems.

Play to win.

Posted on Monday, February 15th, 2010
Filed under: Bankruptcy Alternatives and Consumer Proposal
posted by Doug Hoyes @ 6:00 am No Comments

If a Consumer Proposal is Better Than Bankruptcy, Why Would a Creditor Ever Say No?

Ted Michalos, Bankruptcy Trustee

Ted Michalos, Bankruptcy Trustee

As readers of this weekly Trustees Talk feature are well aware, in September of 2009 the federal government decided to implement changes that had been approved by Parliament (quite literally years ago) that had the affect of increasing the length and cost of filing bankruptcy in Canada. One of the effects of these changes was to make the filing of a consumer proposal a more attractive solution than it may have been previously.

The changes worked – the number of persons filing consumer proposals now, as opposed to filing for bankruptcy, has seen a marked increase. Unfortunately, it is unclear if the government consulted with the major lenders in Canada before making these changes. Many of the lenders take a decidedly different view (and by that I mean more negative) to proposals than the government.

This may be a little difficult to accept, but the banks and other lenders in Canada know that a certain portion of their customers won’t be able to repay their debts. To the lenders this is a cost of doing business and it is factored in to the fees and interest rates that all of us pay when we borrow.

So, if you are a bank and you know some of your customers won’t pay, your attitude to those accounts is “how do we get rid of them as quickly as possible”. In their minds, a bankruptcy provides that quick relief.

Looked at from another angle, if they agree to a multi-year repayment plan via a consumer proposal then they have to keep the account active and open, and they have the added cost of administering the bad debt over a longer period of time. In the lender’s eyes, in order for this to make sense financially, they need to be recovering enough money to justify the added cost of keeping the account open.

What does this mean to you? If you are thinking about offering your creditors a consumer proposal then you need to pass two tests. The first is simple: the proposal must offer your creditors a greater benefit than they would receive in bankruptcy. The second test is a little less precise: you need to offer your creditors enough of a repayment that they think it is worth their while.

Being “worth their while” is a tricky proposition. That means you have to be offering to repay them enough money to justify keeping the account open.

Let’s try an example or two.

Let’s say you’ve met with a trustee and determined that if you file for bankruptcy you will have to pay about $1,500 – this is the basic cost for filing in most areas of Canada, although the cost of bankruptcy in Canada will vary based on your circumstances. Instead of filing for bankruptcy, you would prefer to offer your creditors a consumer proposal to repay $6,000 of the $30,000 that you owe.

You certainly pass the first test as $6,000 is greater than the $1,500 that would be available in a bankruptcy, but do you pass the second? I am sorry to say, probably not. After fees and other costs the creditors might receive half of the money you are offering in your proposal, $3,000. In a lender’s mind, it is not worth keeping the file open in order to recover $0.10 for every dollar they were owed.

Let’s change the example by lowering the amount of your debt to $12,000. It appears you are offering to repay 50% of the debt, but again, after costs the creditors will receive $3,000 and that probably is not enough of an incentive for them to keep their files open.

When you are selecting a trustee to administer your proposal, ask enough questions to be certain that they are familiar with the various lender’s criteria for voting in favour of a proposal. The last thing you want to do is offer a number that is obviously too low simply because the administrator you decided to deal with doesn’t handle enough proposals to know how the creditors will react to your offer.

Posted on Monday, February 8th, 2010
Filed under: Consumer Proposal and bankruptcy Canada
posted by Ted Michalos @ 4:09 am No Comments

Are Credit Card Companies Evil?

Douglas Hoyes, Bankruptcy Trustee

Douglas Hoyes, Bankruptcy Trustee

There’s a loaded question for you: Are credit card companies evil? Judging by the comments I’ve heard from many different people in my bankruptcy office over the last few weeks, the answer from many Canadians would be “yes” Why are people making these comments? A few years ago everyone loved their credit card. Today, as credit card interest rates go up, and as we owe more on our credit cards, our love affair with credit cards may be turning sour. Canadians are gradually realizing that it’s not a credit card (credit is a good thing, like giving someone “credit” for a job well done); it’s actually a debt card; the more you spend, the more debt you have, and debt is generally not considered to be good.

I’ve heard the same story from many people: They are good customers, they always pay their minimum balance, and they just got a notice from their credit card company that their interest rate is increasing. The typical story involves someone who had a card with a low interest rate, say 11%, and now the rate is going up to 19%. For cash advances, the rate is going up even higher, to perhaps 23%.

When I ask questions, I discover that most of these people owe money on other credit cards as well. They owe $15,000 on Card A, and another $30,000 on Cards B, C and D. Card A has presumably done a credit check and discovered how much they owe in total, and they are getting worried, so they have decided to increase the interest rate in the hopes that you will pay off the credit card now, while you still have decent credit.

The credit card company sees that your debt level has increased. You are still making payments; you are not on the verge of default, yet, but they see your situation getting worse, so they are doing a “preemptive strike”. They assume that if they are the first card to increase your interest rate, you can use your still good credit to take cash advances from your other credit cards and pay them off. That way, if your situation does get worse, they have already received all of their money, so they don’t suffer a loss.

Does that make credit card companies evil? Is it wrong to give Canadians access to easy credit when times are good, and then as the recession deepens and people start losing their jobs to all of a sudden start increasing interest rates to get rid of customers on the verge of financial trouble?

Many would argue that credit card companies made a lot of money when times were good, so they should give their loyal customers a break when times get bad. That’s not a bad argument, and it may even be good business.

I met with a man recently who owed money on three credit cards. One of the credit card companies was willing to work with him. They agreed to lower his interest rate for the next six months, provided he stopped making new purchases on the card and he paid more than the minimum balance each month. He agreed, and is satisfied with the arrangement. His other two cards won’t work with him; they have raised his interest rates, so now he can’t afford the minimum monthly payments, so he has simply stopped paying them.

Which credit card company has the correct approach? Obviously he was sitting in my office because he can’t pay his debts, so it’s likely he will be filing either a consumer proposal or a personal bankruptcy at some point in the next few weeks, so the credit card companies will not get all of the money they are owed. If they had all worked with him, he would not have come in to see me. In the end, the credit card companies will lose money because they were not willing to work with this person.

So what do I think? Do I think credit card companies are evil?

No.

A credit card is a piece of plastic. It is an inanimate object. It is neither good nor evil, and the companies that issue credit cards are not good or evil; they are businesses that, like all business, exist to make a profit.

Is fire evil? No, but fire can be used wisely, or used poorly. On a cold winter’s night, a warm fire in the fireplace is a welcome addition to any home. A runaway fire that burns down your house is a tragedy. In either case, it’s still fire.

Credit cards are the same. Carrying a credit card is often much safer than carrying cash. Credit cards are also convenient; it’s nice to be able to fill up my car with gas, even if I don’t have cash in my pocket.

But, because credit cards are so convenient, just like a match or a lighter is convenient, it is very easy to get burned with the improper or careless use of credit cards. Just because I have a $10,000 credit limit does not mean I should carry a $10,000 balance on my credit card.

When times are good, credit cards are very convenient. When times are bad, and credit card issuers decide to start raising interest rates and tightening up on credit, credit card debt can become worse than inconvenient: credit card debt can become financially fatal. Your budget can afford the minimum payments when you have the “low, introductory rate” of 11%, but when the rate goes up to 22%, which is twice as much, your minimum payment doubles, and now you are in over your head. Increased rates can be a financial disaster.

So should you use credit cards, or not? Should you play with fire, or not?

I think the answer is simple: You should be the boss. You should decide, for yourself, whether or not you should use credit cards, and whether or not you want to pay high fees and interest rates for the convenience of using your credit cards.

The credit card companies cannot force you to use your credit cards. They cannot force you to carry a balance and pay high interest every month. They can’t force you to do anything, because you are the boss.

My challenge to you is this: decide who’s the boss. If you want control over your financial future, decide, right now, to change your credit card behavior. Decide to stop using credit cards, and only pay cash or use your debit card. If you don’t use credit cards, the credit card companies won’t earn a penny from you, and you will never have to worry about high interest charges again.

Not ready to go credit-card-cold-turkey? Start by deciding to never again carry a balance on your credit cards. Use your credit card as a convenience, but pay the balance in full each month. If you do, you pay no interest, so your credit card is virtually free. But remember, fire is dangerous, so don’t let the fire spread by carrying a balance. Credit cards should be a substitute for cash, not a way to borrow, so if you need to borrow money, go to the bank and get a loan at reasonable interest rates.

What do you do if you are already in over your head with credit card debt? Be the boss: cut up your cards, then work out a plan to pay them off on your own, or file a consumer proposal or a personal bankruptcy, and start living without credit card debt.

I’ll repeat it again: you are the boss. Whether or not you use credit cards is up to you. Whether or not you carry a balance each month, and pay high interest rates, is up to you. Credit card companies are neither good nor evil. They are providing a service, and it’s up to you to decide whether or not you want to pay the price for carrying a balance on your credit cards each month.

Posted on Monday, February 1st, 2010
Filed under: Bankruptcy Alternatives and Consumer Proposal and Debt Options and bankruptcy Canada
posted by Doug Hoyes @ 3:37 am 1 Comment

Four Tips to Recession Proof Your Job

Barton Goth, Canadian Bankruptcy TrusteeWhen it comes to the economy there seems to be more questions than answers. The Canadian Government has begun announcing that we are out of the recession, but they are pledging to continue to support the economy through a combination of low interest rates and capital spending (which doesn’t exactly sound like we are out of the recession). The government just recently announced that we are on pace for an estimated $56.2 billion deficit and as we struggle along the road to recovery we seem to continually be looking over our shoulder at the United States, wondering how our largest trading partner is going to react to our strengthening currency. The manufacturing sector still appears to be in shambles, although for now the latest reports seem to be more optimistic than in months past.

The news reports have been focusing on the return of consumer confidence, yet unemployment rates are still at very high levels and the quality of the available jobs seems to be questionable. The only certainty that appears to exist is that no one is quite sure where the economy is going, nor how things are going to end up.

So where does that leave us as consumers? We need to be wary. While there is nothing wrong with cautious optimism, we need to prepare for the worst and pray for the best! It is times like these we need to make sure that we have control of the areas in our life that are within our circle of influence. Now is the time to be proactive so we don’t have to be reactive somewhere down the road. For me this always starts with employment. We need to recognize that the biggest threat to anyone during a recession or any time of economic uncertainty is employment, or more importantly the lack thereof.

It is no secret that during these times of uncertainty job loss is common. Whether this is because companies do not have enough work to support the existing labor force or companies are looking at reducing unnecessary expenses and streamlining the workforce, the net result is higher unemployment. When there is this looming threat it is important for us to make every possible effort to ensure that we are not the ones at risk. So if you haven’t already taken a good look at you and your employment situation, now is the time to start. By employing four simple rules you will not only reduce your exposure to job loss, but at the same time increase the chances of promotion. Here are my four rules for job preservation:

1 Be Visible and Valuable. The first part of this rule is visibility: you need to stand out. You want management to recognize that you are the one that can be relied on regardless the task or the time. This all begins by arriving early. It is the early hours of the work day that you have the greatest likelihood of being seen by the key decision makers in the office. It is the early moments of the day that can allow for chance conversations with your boss when no one is around without being interrupted by telephones or other co-workers. These early morning minutes are what help management recognize you are there, you are committed, and you are different than the typical employee who simply arrives with everyone else. The same rule applies at the end of the day. If you stay a few minutes late, poke your head in and ask questions of your supervisor just after everyone else has left, it may not take a significant amount of time, but very soon your presence will be recognized and appreciated.

The second part of this rule is you must be providing value. Once your employer recognizes your presence the next step is to make sure they know your time is of value. Your goal is to become indispensable to your organization. This is very simple to do, but takes some effort. Make sure you attend all meetings, prepared and armed with constructive input. Look for opportunities to take on extra projects, to assist with duties outside of your own department, jump any opportunity you can find to demonstrate your competence. When a challenge presents itself, don’t shy away from it. Be the first one to volunteer and do your best. If you think the task it might be over your head, don’t panic and don’t hesitate to ask for help when you need it. One of the most refreshing things for an employer to see is willingness to take the initiative, but at the same time a willingness to seek help when it is needed.

As you are looking for these additional opportunities, identify areas where essential expertise is lacking, and become the expert. Not an expert, the expert. If you can become known as the “go to guy (or girl)” in your chosen area, you will have employment for life. Make sure you make this a passion, read all you can about the subject, and look for opportunities to speak on the subject wherever possible.

Clearly the goal is that you want to be indispensable to your employer. This is one of the best ways to ensure both job security and a bright and positive future.

2 It is all about attitude. A positive attitude is essential. While some people are blessed with this naturally, there are others of us who have to work on this. But it is absolutely necessary despite the stressful uncertainty that comes with challenging economic times. If this is something that doesn’t come naturally to you there are a few things you can do to compensate for this. First of all, minimize your negative comments. There is negativity in every workplace, so do’’t get caught up in it. While it might feel good to periodically vent, do not let this happen at the office. Try to avoid situations where members of your office are involved in this and make an effort to do the opposite. Keep a list in your desk drawer of all the things you appreciate or enjoy about where you work. Try to write down three new things every day and if you are feeling overly negative, review this list. Remember, negativity in the workplace drags you and everyone around you down and that is the last thing you want when presented with a challenging attitude.

Along with this it is a good idea to avoid downtime. The temptations towards negativity dramatically increase if you take time to dwell on those things that get you down. So if you have downtime, make yourself useful. If these periods of down time exist they can often be used to prepare for upcoming meetings, research something applicable to your job, brush up on the competitive environment in which your company competes. Downtime is one of the primary ways you can separate yourself from fellow employees and judicious use of this time helps us to maintain the positive outlook that is necessary for success.

3 Build Positive Relationships with everyone at the office. One of the most important aspects of our work environment is our relationships with those around us. Remember, there is no downside to these positive relationships with everyone at the office. Now this doesn’t mean that you have to be best friends will all your colleagues, but there is far more to gain from positive relations than negative. This is a rule that runs through every level of your organizations from the highest level of management to the custodial staff. If you are friendly and respectful to everyone people will notice. People will enjoy having you around and it will be easier for them to respect your input. So make an effort to be considerate to all those you come in contact with, ask how their day is going. Find some common interests and talk about them. The more people you develop positive relationships with (both up and down the hierarchy), the better off you’ll be.

In connection with this, when you develop a relationship at work, you need to make sure you keep in touch and above all, don’t burn bridges. You never know in the future when you may be in need of assistance, and it is often surprising how frequently people in our own immediate network can be of help. Don’t let your friends and contacts dwindle. You don’t have spend hours developing your contacts, but it never hurts to send them off a quick email or a phone call every once in a while just to see where they are at and what they are up to.

4 Invest in yourself and your Career. You are the most important aspect of your professional life. You must invest in yourself, and this starts with education. This is not suggest that you need to quit your job and return to school, but it does mean that you should adhere to the principle of lifelong learning. You need to find ways to continually improve yourself. You need to regularly learn new things. If you find an area that interests you, read a book about it or take an evening class. There is no better way to make yourself valuable to your employer than to improve yourself. If there are job specific skills that will enhance your productivity or value to your organization then talk to your boss, see if there are any courses that the company would be willing to sponsor you for.

Improving yourself is not just reading and study. Get some exercise and improve your diet. Not only will this increase your energy but it will increase your confidence and very quickly you will find that you are able to function better at work. There are always ways to better ourselves, and while not all of these have direct implications on your employment, they will help you become healthier, happier, better rounded, and all of these will have a dramatic impact on your ability to function in the work place.

When faced with economic uncertainty it is important to do all we can to ensure we are exposed to as little risk as possible. While there are never any guarantees, by following these four simple principles you can help to reduce the risk of finding yourself without work. Ideally these four principles have long been a part of your work persona, if not it is never too late to start. By simply assessing where you are on these four areas and committing yourself to doing better you will find that in a very short time you will be able demonstrate your value, endear yourself to your organization, dramatically reduce the likelihood of being out of work, and reduce your exposure to the greatest threat during times of economic stability.

Posted on Monday, January 25th, 2010
Filed under: Bankruptcy Alternatives
posted by Barton Goth @ 4:12 am 1 Comment

What Does “Reasonable” Mean When You File a Consumer Proposal or Bankruptcy in Canada?

Ted Michalos, Bankruptcy Trustee

Ted Michalos, Bankruptcy Trustee

There is a new trend in the insolvency world. The term “reasonable” has always been a part of our lexicon, but until recently, very few creditors were bothering to define it. That is all changing.

When you offer your creditors a consumer proposal, (a legal procedure whereby you offer and your creditors agree to accept less than 100% of what you owe them on your debts) the creditors are provided with enough information to determine how much they may be likely to receive if you filed an assignment in bankruptcy in Canada. The creditors will want more money in a proposal than they would get in a bankruptcy, otherwise it would be in their best interests to simply let you go bankrupt. A proposal is still a good deal for the debtor, because they can stretch the payments out over a longer period of time to make the monthly payments more affordable. The information presented to the creditors will include a monthly budget showing your household income and expense. You and your trustee attest that the proposal and your budget are “reasonable”.

In the past, very little attention was paid to the line by line expenses listed on a person’s budget. The reasonable test seemed to mean you were offering a greater benefit (more money) to your creditors with your consumer proposal than they would receive if you filed for bankruptcy – which made it reasonable for the creditors – and on paper you could afford to make the monthly payment – which made it reasonable for you.

It has become apparent that due in part to the dramatic increase in the number of proposals being filed these days, the creditors are reviewing the budgets in detail for items that, in their opinion, may not be reasonable.

For example, a typical single person household spends anywhere from $150 to $300 per month on food. If a single person’s budget included $600 for food, the creditors may question that expense.

A more obvious example: the family budget includes $400 for smoking. The creditors won’t tell you to quit smoking, but they may point out that if you cutback or quit then you could afford to repay more of your debt.

Any and all expense items seem to be fair game for creditor review. The term “reasonable” has evolved to mean “necessary to maintain a standard of living”. Items that might be classified as luxuries or extravagant are being singled out. Keep in mind that one person’s luxury might be another person’s necessity. What matters now is whether or not your budget reflects a certain frugality towards your own living expenses so that you can repay a greater portion of your debts.

This may be a temporary change in attitude – a way of trying to slow down the rate at which people are filing proposals. Or it may represent the new “reality” that we have to live with.

So what does this mean to you? If you are filing a consumer proposal and expecting your creditors to accept less than 100% repayment of your debts, you must demonstrate that you are cutting back on your own living expenses as well.

What is reasonable? Each creditor has different standards, so contact a licensed bankruptcy trustee in Canada for more information (they will all provide you with a no-charge initial consultation).

Posted on Monday, January 18th, 2010
Filed under: Consumer Proposal and bankruptcy Canada
posted by Ted Michalos @ 4:40 am No Comments

Will The Bankruptcy Rate in Canada Plummet in 2010? A sign of economic recovery or something else completely?

Barton Goth, Canadian Bankruptcy TrusteeThe media has recently carried stories that that the Consumer Bankruptcy Rate in Canada is Starting to Ease, which sounds like good news. In October, 2009, bankruptcy filings across Canada fell a whopping 27.7 percent in October when compared to the previous month, which is the largest monthly drop on record. This figure softens when you include proposals filed in the same months to 19%, but it is still the largest monthly decrease in the last two years.

On the surface this could be taken as a great indication of where our economy is headed, as the total insolvency rate is an excellent indicator of a nation’s fiscal health. But we all must be cautious in the way we interpret statistics. Before we draw any conclusions it is important to examine a few more details:

  • Based on a 12 month year to year comparison as of October 31, 2009 there has been a 31.9% increase in the total number of insolvency filings in Canada
    •
  • Of the 156,255 total filings in Canada 149,350 of these are consumer filings (i.e. individuals) and the remaining 6,905 are business filings over the same period. So the consumer filings represent 95% of the total filings in Canada
  • The total consumer filings are up 34.5% from the previous year
  • The total business filings are down 7.7% from the previous year.

As we look at these statistics there are a few things that jump out at me.

First, it is very clear that the brunt of the recession has been born on the backs Canadian consumer as the business community has actually seen a reduction in the number of total insolvencies year to date.

Second, there are a great number of people who are having significant difficulties and likely will continue to struggle with their finances for some time.

Third, if we consider this in light of Statistics Canada’s most recent statistics on Canadian household debt, which put the Canadian debt-to-income level at 145%, the highest level since quarterly reporting started in 1990. For those of you who are not familiar with this economic indicator, 145% means that for every $100 of disposable income we carry $145 of debt. Clearly, while we have to question the current state of our economy, this still doesn’t explain the drastic decrease in total insolvency filings.
So how can we account for this dramatic decrease? Realistically this is a question that the statistics can’t adequately explain. So we have to look beyond the number and appreciate the context of these statistics.

For those of you who are unaware, September 18, 2009 was a very significant day for those who are currently struggling with their finances. On September 18, 2009 major amendments to the Bankruptcy and Insolvency Act became law, and this legislation had some very dramatic changes. Some of the more significant changes were as follows:

  • Consumer proposal debt limit has been increased
  • RRSPs are now exempt from seizure in most cases
  • Secured loans and leases cannot be terminated due to bankruptcy
  • Bankruptcies involving surplus income will last longer
  • Large tax debts may cause a longer bankruptcy
  • Student loans will be discharged after seven years

The implementation of these changes was first announced to the insolvency community early in August 2009, and while it took a little time for the changes to be digested and communicated to the rest of the country, the net effect was a dramatic increase of people rushing to file a bankruptcy in an effort to file prior to these changes coming into effect. Again, I can’t prove that the reason for this rush was these changes, but I can tell you that not only was there was a dramatic increase in the volume of my calls, emails and blog postings during that period, but a vast number of those inquiries expressed a need to proceed prior to the implementing of those changes.

Now that the changes are implemented, we have definitely seen a decrease across the insolvency community of total filings in each month, but on average the overall trend of the number of people suffering from economic instability has continued to increase steadily over the course of the last few months. For now this is something that appears to be continuing, but we anticipate that as the economy stabilizes the pace of insolvency filings should also settle in line with historical norms.

Regardless of the economy, people always have trouble with their finances. Whether these troubles are due to our dependence on credit, the aggressive lending practices employed by the lending community, health and employment issues, the lack of financial education provided or for reasons that are completely different, it is important is to recognize that there are governmental programs that are designed to assist people when finances get out of control and whether we are looking at the filing of a consumer proposal, a bankruptcy, or one of the other available options, there are many ways that can allow you to regain control of your finances. Contact a bankruptcy trustee for further information.

Posted on Monday, January 11th, 2010
Filed under: Consumer Proposal and Debt Options and bankruptcy Canada and bankruptcy reform
posted by Barton Goth @ 4:18 am No Comments

Don’t Make a Financial New Year’s Resolution This Year

Doug Hoyes, Bankruptcy Trustee

Doug Hoyes, Bankruptcy Trustee

At the start of every year we are all tempted to make our financial New Year’s Resolutions. Perhaps you already have. My advice: don’t bother.

According to researcher John Norcross in the Journal of Clinical Psychology in 2002, approximately 50% of the population makes resolutions each New Year. Among the top resolutions are weight loss, exercise, stopping smoking, better money management and debt reduction. The problem is that we do great for the first few weeks, but by the month of February we are starting to slip, and our resolutions are forgotten.

Why do we fail? In some cases our New Year’s Resolutions are unrealistic. (I probably can’t lose 50 pounds by the end of the month).

A bigger reason for failure is that we try NOT to do something, instead of trying to DO something. If I decide to NOT eat one meal a day as a way to lose weight, I probably won’t be successful. My brain is hard-wired to eat, so going against my natural instincts won’t work. However, if I try to DO something positive, like exercise or eating healthy foods, I’m much more likely to be successful. Human nature wants to accomplish something positive, not avoid the negative.

So what if I have more debt than I can handle? What if I spend too much? Should I make a resolution to “stop spending so much”? No, that probably won’t work, because I am trying to NOT do something. Here’s a better approach:

Start by deciding that this year you are not making any financial New Year’s Resolutions. Since most resolutions fail, there is nothing to be gained by trying something that won’t work.

Next, decide to take three positive actions. These are not New Year’s Resolutions; they are actions that can be taken at any time of the year.

1 My first positive action is that I will make a household budget, so I know where my money goes each month. It doesn’t have to be fancy or complicated. I can use a pen and a piece of paper, or a spreadsheet, or I can use one of the many excellent computerized software tools on the internet (Calendar Budget is a very easy to use tool, and it’sweb based, so there is no software to install on your computer).

2 My second positive action is that I will use my brain! I will think! I will write down everything I spend money on, and put it in my budget, and I will read it. I will analyze it. I will use my brain and I will ask myself questions about my budget, like “should I really be spending $400 on coffee at the coffee shop each month, or is there a better way to spend my money?” With the numbers in front of me, it will be easy to decide what changes are necessary.

3 After taking control of my finances and crunching the numbers, it may be obvious that I can’t solve my debt problems on my own. Cutting back a few dollars per month on coffee will help me pay off the $2,000 I owe on my credit card, but it won’t make a big dent if I have $50,000 in credit card and bank debt. If that’s the case, my third positive step will be to get professional help. If my teeth hurt I talk to a dentist; if I break my leg I go to a doctor; if I have financial problems I should go to a credit counsellor or meet with a licensed bankruptcy trustee. A credit counsellor or bankruptcy trustee will give you a free initial consultation, and help you understand your debt options.

If you really want to make New Year’s Resolutions, that’s fine. But I believe that we can improve our situation at any time of year, so if you have financial problems, don’t make a resolution, just take three positive steps, and look forward to a better future.

Posted on Monday, January 4th, 2010
Filed under: Bankruptcy Alternatives and Debt Options
posted by Doug Hoyes @ 4:19 am No Comments

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