Search

Bankruptcy Canada Trustees Talk — The insider's view of Bankruptcy in Canada — Page 2

The Wolf at the Door: What to Do When Collection Agencies Come Calling

by Doug Hoyes

Earlier this month we broke the story about Draft Statements of Claim – Collection Agency Dirty Trick Number One. Then, last week, we followed up with Draft Statements of Claim – More on This Questionable Collection Agency Tactic. In both articles we referred to the work of Mark Silverthorn, a former collection agency lawyer who is now working for debtors. Mr. Silverthorn is also a crusader against questionable collection lawyer tactics.

Mr. Silverthorn is the author of The Wolf at the Door: What to Do when Collection Agencies Come Calling, a new book that describes collection agency tricks and tactics, and how you can deal with collection agencies. In our on-going series of Book Reviews, today we review his new book.

I have interviewed Mr. Silverthorn (see the video in the upper right hand corner of this page), and he interviewed me for the chapters on Consumer Proposals and Personal Bankruptcy, so I am familiar with Mr. Silverthorn’s work. In our conversations he did make one comment that surprised me: He said that borrowers in Canada are often victimized three times.

First, borrowers often get caught in predatory lending practices, paying excessive rates of interest, or signing contracts they don’t understand. Interest rates in Canada are at historic lows, but interest rates on credit cards and finance company loans are as high as ever.

Second, if a borrower can’t pay, they are often victimized by abusive collection agency practices, such as the Draft Statement of Claim issue we discussed last week. In addition, collectors call at all hours of the day and night, and often make threats, and if you don’t know the rules, they can intimidate you, which is often unsettling.

Finally, borrowers are often victimized by “consultants”; people who earn their living by “helping” people, even though they really aren’t helping them at all. You have probably seen their advertisements: “We will reduce your debts by 70% without bankruptcy; call us today!” Unfortunately most of these ads are nothing more than Debt Management Scams. These unlicensed “helpers” take your money, but they have no legal ability to actually reduce your debt. They might be able to convince your creditors to accept a deal, but more often than not the only person who profits is the helper.

Mr. Silverthorn believes that an informed consumer has the knowledge to understand all options, and that’s the point of his book: education. He covers many topics, including:

  • how to stop, avoid, or discourage collection calls
  • why you might not even have to pay your debt
  • options to deal with your debts that might save you thousands of dollars
  • your legal rights and how to handle collection agency misconduct
  • the truth about credit counselling and debt settlement firms

As a bankruptcy trustee in Canada I am familiar with the various methods for dealing with debts, and I have heard every collection agency story imaginable. However, even I was able to learn many things from this book, and that’s why I recommend it for anyone looking to more fully understand how collection agents operate.

Some final advice from Mr. Silverthorn : if you meet with a debt management professional, ask them to explain all of your options, not just the option they are selling. I agree fully with that approach.

There are many debt management options. If you have access to a lump sum of money, a lawyer like Mark Silverthorn may be able to negotiate a debt settlement directly with your creditors. If you don’t have a lump sum of money, but you have an income and can make monthly payments, a consumer proposal may be your best option. In some cases personal bankruptcy is your best option. The key is that you understand all of your options, so that you can make an informed decision. The Wolf at the Door: What to Do when Collection Agencies Come Calling can help you understand your options, as can all of the information on our Bankruptcy Canada website. Or, to arrange for a no-charge initial consultation, contact a Canadian bankruptcy trustee.

Posted on Monday, November 29th, 2010
Filed under: Book Reviews andDebt Options
posted by Doug Hoyes @ 5:33 am No Comments

Draft Statement of Claim – More on the Story

by Doug Hoyes

Earlier this month Canadian bankruptcy trustee Ted Michalos published an article titled Draft Statements of Claim are a Common Collection Agency Trick, where he discussed the collection agency practice of sending a “Draft” Statement of Claim to debtors. A draft statement of claim looks like an authentic court document commencing a lawsuit against a consumer. Many Canadians who receive a draft statement of claim will think that they have been sued, when in fact, they have not. A draft statement of claim is simply a clever intimidation tactic used by collection agencies to bully Canadians, particularly individuals unfamiliar with seeing court documents.

Draft Statement of Claim

Laws regulating debt collection practices vary from province to province, and enforcement of these laws is not consistent across the country. In both Ontario and in British Columbia, provincial law prohibits anyone from using a draft statement of claim in the collection of a debt.

Unfortunately, in 2010 many collection agencies hire collection lawyers to send out draft statement of clams to the residents of these provinces despite the fact it is illegal to do so. If you have received a draft statement of claim from a lawyer’s office I would encourage you to contact a trustee to determine your options.

Since CBC News first ran this draft statement of claim story less than a month ago, this unfolding drama is gaining increasing media attention, so I decided to pursue this issue further.

Mark Silverthorn is the author of a new, controversial tell-all book about the collection industry in Canada called The Wolf at the Door: What to Do when Collection Agencies Come Calling.

He has described the draft statement of claim as “a collection letter on steroids”, and in his book he gives an insider’s view of many collection agency tactics.

Last week I interviewed Mark Silverthorn, a former collection agency lawyer, who now works exclusively on behalf of debtors.

You can watch the interview here:

As you will see in the interview, I couldn’t resist asking the obvious question: since Mark Silverthorn, many years ago, was a collection agency lawyer, and since he himself sent out tens of thousands of draft statements of claim on behalf of his clients, why is he so upset that the draft statement of claim continues to be used today when a few years ago his law firm was sending out thousands of these draft statement of claims to Canadians? I’ll let you watch the video to see his answer.

You can read Mr. Silverthorn’s side of the story on his website, or in the media.

If you are receiving calls or letters from collection agents then you probably have a debt problem. There are many strategies for dealing with collection agencies, including filing a consumer proposal or filing personal bankruptcy. Which strategy is correct for you? Contact a professional today to arrange a no charge initial consultation to review your options.

You do not need to spend weeks or months dealing with the stress of collection agency phone calls. There are options, so research your options today.

Posted on Monday, November 22nd, 2010
Filed under: Bankruptcy Alternatives andDebt Options
posted by Doug Hoyes @ 4:46 am No Comments

Credit Education Week Canada, and the Language of Money

by Doug Hoyes

Why do Canadians have problems with money? Why do we have too much debt, and no savings? Obviously the prolonged recession has not helped, but I believe one of the reasons we get into financial trouble is that we simply don’t fully understand money, credit and debt. In Canada, financial education is not a priority in our schools, or for adults once they are out of school.

That’s why I think that Credit Education Week in Canada is a great idea. It’s one week in the year when we can take the time to focus on money, and educating ourselves about credit.

Credit Education Week Canada 2010 starts today, November 15, and runs for the week, until November 19, 2010. This year’s edition is Canada’s fourth annual Credit Education Week, and the focus this year is on newcomers, and the theme is The Language of Money.

That’s an interesting concept: The Language of Money. As a bankruptcy trustee in Canada, I am very aware of how we use language to describe money, and our financial situation.

Some words are complicated; people get confused with words like “creditor” and “debtor”, and there’s little doubt that that confusion makes it difficult for people to talk about money. We don’t want to admit that we don’t know what the big words mean, so we just don’t talk about it.

(For the record, a “creditor” is someone you owe money to, like a bank or credit card company. A “debtor” is you, the person who owes the money).

Some words are easy, but they have hidden meanings. For example, what is a credit card? That’s easy, you say. A credit card is something that we use to buy things; it gives us access to credit. We all know that credit is a good thing. We all know that you should “give credit where credit is due”. When someone does something good, we should give them credit for a job well done. Credit is good.

Of course a credit card is neither good nor bad. It’s an inanimate object; it’s just a hunk of plastic. It’s how you use it that makes it good or bad.

But that’s the hidden meaning: we use the word credit card to convince ourselves that credit is good.

What would happen if we called it a debt card. Calling it a debt card makes sense; when you buy something with plastic you are incurring debt. You now have a debt that you have to pay at the end of the month, and if you don’t you will pay interest.

See the difference words can make? Calling something a debt card educates us on what it really is, and what it really does.

So, this week, as you read about Credit Education Week in Canada, pay attention to the language you use to describe money. It may give you a new perspective on how money works, and it may make it easier for you to spend less, save more, and deal with your debt.

If you can’t attend any Credit Education Week events, then educate yourself on the various methods for dealing with debt, including:

  1. Pay off your debts on your own. Make a budget, cut your expenses, and pay off your debts yourself. This works well if you owe a manageable amount.
  2. If you can afford to pay off your debts in full, but just need a break on the interest, credit counselling is an option.
  3. If you can’t afford to pay off your debts in full, but you can afford to pay back something, a consumer proposal is a logical option. Most credit card companies will accept a reasonable consumer proposal.
  4. If you can’t afford a proposal, personal bankruptcy in Canada may be your final option.

Use our free debt options calculator to educate yourself on the various options for dealing with debt.

You have the power to educate yourself, so use Credit Education Week as your opportunity to educate yourself about credit and debt. It will be time well spent.

Posted on Monday, November 15th, 2010
Filed under: Debt Options
posted by Doug Hoyes @ 2:48 am No Comments

Canadian Personal Debt A Cause for Concern

by Barton Goth

TD Economics released a report on Wednesday October 20, 2010 titled Canadian Household Debt a Cause for Concern that tried to answer many questions currently plaguing the Canadian consumer and the economy in general, including whether or not Canada is headed for a U.S.-style household debt crisis.

Barton Goth, Bankruptcy Trustee

Some of the key findings that were outlined were as follows:

1. Since the mid-1980s, total household debt as a share of personal disposable income in Canada has almost tripled – from 50% to 146%

2. Statistics demonstrate a rapid convergence in the Canadian household debt-to-income ratio similar to that of the United States.

3. At 146% of after-tax income, Canadian personal indebtedness has become excessive.

4. Economic and financial fundamentals suggest that the personal debt-to-income ratio should be in the range of 138% to 140%.

5. The past rapid growth in household indebtedness has been fuelled by both many factors, including lower borrowing costs, greater household confidence, stable inflation, relatively stable growth in the economy and labor market, increasing demand for credit, increased labor market participation by women, and a greater desire to consumer larger quantities of discretionary items.

6. Some Canadian households have become too leveraged and estimated that perhaps 10-11% of households could experience financial stress when interest rates rise in the future.

While the report’s findings appear somewhat bleak, the good news is that overall they concluded that “The Canadian debt imbalance is currently not as great as that experienced in the U.S.” They continue to say that at some point, when our current interest rates return to historically normal levels, the interest rate change will create financial stress on some Canadian households, but definitely not the majority. But this “relentless” rise of household debt in Canada is a growing cause for concern.

Is this new information? Absolutely not, one of the most cited risks to the Canadian economy is the indebtedness of the average Canadian. Is this the full story? Likely not. It is important to remember that statistics are often subjective and these statistics were designed to emphasize the negative, and I find the situation is typically not quite as bleak as is reported by the media.

However, the recent TD study identified a few positive things. For example, TD predicts that we are not on the verge of a collapse similar to what the US has suffered and demonstrated that the level of personal disposable income is still less than where the US was when everything collapsed. The key is that the average Canadian consumer has to recognize that the biggest threats to our finances, and in turn to the economy at large, are continued reliance on credit and the likelihood of future interest rate increases. The good news is we still have a time to insulate ourselves from these threats. As Canadians what we all need to take 3 steps.

1. Take Stock

2. Reduce our reliance on credit

3. Develop a plan to pay down our debt.

If you don’t already know where you sit financially it is time to find out. Begin by taking stock of your current financial circumstances. Compile a list of who you owe, approximately how much, the interest you are paying and your minimum monthly payment. Once you have done this, make note of your monthly net income and all your monthly expenses. How are you doing? Do you have enough to pay more than the minimum on each of your debts? If so, great! You are well on your way. If not, examine your expenses, establish priorities, and find a way to make things work. If your debts are too high you may have to consider the filing of a consumer proposal, a debt management plan , or potentially even a bankruptcy, depending on how severe things are. But you first need to find a way to make things work on paper.

Second, it is time to realize that credit costs. Remember, every time you use somebody else’s money, there is a cost. Sure it is nice to be able to buy anything at any time without worrying about how much cash we have in the bank. But is a sale really as good as it appears when we know we are going to have to pay 20% interest on that purchase? How many of the items that we buy on credit are truly essential? If you are going to reduce your family’s exposure to the looming interest rate increases that are inevitable, you need to move away from a credit-based lifestyle and focus on a cash-based one. After all, cash is always the cheapest way to manage your finances. It reduces the interest we pay, often forces us to consider our purchases a little more, and ultimately leads to a much healthier balance sheet. This is really a matter of discipline. Never allow yourself to purchase unnecessary items on credit. Try to only use debt to finance things that will have value at the end of the loan (i.e. car, house etc.). If this sounds difficult, then do yourself a favor by reducing the temptation. Try not carrying credit cards, detaching your line of credit from your bank card, or canceling your overdraft. Put hurdles between you and the access to credit on a daily basis. By making it more difficult to access credit, you will find that you will automatically use less credit.

Finally, it is not just enough to reduce your reliance on credit, you need a plan to pay down your debt. You will need to look at your budget and develop a strategy to reduce your debt. This may begin by consolidating your high interest debt so you can pay less interest and be out of debt quicker, or you may be able to simply by making larger payments to your debts with higher interest rates, and as each debt is paid, reallocate those debt payments to your next most expensive debt. For some you may need to consider formal avenues such as consumer proposal, a debt management plan, or a bankruptcy. Regardless of the method, your quickest way back to financial health and reduced exposure to the risk of interest rate changes, is to make a concentrated effort to pay down your existing debt.

By taking stock, reducing your reliance on credit and developing a plan to pay down your debts, you will be surprised how quickly you are able to improve the state of your finances and insulate your family from any potential difficulties down the road, whether this is increased interest rates, lapses in employment, or temporary health issues. The best advice is always to reduce your reliance on debt.

About the Author: This article has been written by Barton K. Goth of Goth & Company Inc., a licensed Edmonton bankruptcy trustee, member of the Canadian Association of Insolvency and Restructuring Professionals, and a managing editor of the Trustee Talks blog.

Posted on Monday, November 8th, 2010
Filed under: Debt Options
posted by Barton Goth @ 2:45 am No Comments

Draft Statement of Claim – Collection Agency Dirty Trick Number One

by Ted Michalos

You may be considering filing bankruptcy in Canada because you are getting telephone calls from collection agencies. Back in 2008 the Ontario Registrar of Collection Agencies wrote a letter of direction to all collection agencies operating in Ontario warning them against two specific collection practices when hiring lawyers to send out collection letters.

Draft Statement of Claim

In this letter he warned all collection agencies to stop using the “trick” of sending “draft” legal documents with their cover letters and claims to people they were contacting. These draft legal documents made it appear that the collection agency was just about to initiate legal action against the person receiving the letter – the truth was it was a simple computer template designed to scare people into making payments.

Over the years I have met with hundreds of people who have received these “Statement of Claims” from lawyers. They look real; they appear to have an official red seal on them, and they have the person’s name and address on them. They assume it’s an official court document, and that they will be required to go to court.

Here’s the truth: it is against the law for a collection agency to send out a “Draft” Statement of Claim. If you owe money to a bank or credit card company, and you don’t pay them, they are well within their rights to take you to court and sue you in an attempt to garnishee your wages.

The letter from the Ontario Registrar also warns collection agencies hiring lawyers to send collection letters to consumers that it is necessary for the lawyer to disclose the name of the entity that is paying the lawyer for the collection letter. The Registrar has taken the position that it is in the public interest to know if the creditor or the creditor’s collection agency is paying for the lawyer’s collection letter.

Collection agency laws vary from province to province, and enforcement of these laws is not consistent across the country. In January of 2011 a high-profile collection lawyer is facing a Law Society disciplinary hearing in connection with her firm’s collection practices and her firm’s use of draft statement of claims. We shall see if this disciplinary hearing results in the death of draft statement of claims in Ontario as we know it today.

If you are receiving calls or letters from collection agents then you probably have a debt problem. There are many strategies for dealing with collection agencies, including filing a consumer proposal or filing personal bankruptcy. Which strategy is correct for you? Contact a professional today to arrange a no charge initial consultation to review your options.

You do not need to spend weeks or months dealing with the stress of collection agency phone calls. There are options, so research your options today.

Posted on Monday, November 1st, 2010
Filed under: Debt Options
posted by Ted Michalos @ 5:34 am No Comments

Fixing Household Finances – The Thirty Day Challenge

by Barton Goth

For those who haven’t read any of my articles before, my name is Barton Goth. I am an Edmonton bankruptcy trustee with Goth & Company Inc. and a regular contributor to this Trustee Talks article forum. Now this article is significantly different than the typical ones I post, but it is an issue that I have been thinking lots about… the average Canadian household, the Canadian struggle with consumer debt and what can be done about it.

Barton Goth, Bankruptcy Trustee

As people regularly come to my office to discuss their finances, potentially a bankruptcy or various alternatives to bankruptcy, there is a very common pattern. The typical person I meet with does not have a good sense of their financial status. This isn’t to say they have no idea, but they are often in the dark as to how bad things have been, and for how long this problem has been present.

So what is one of the issues at the root of this problem? Tracking! Too many people fail to pay attention to their finances, far too many people fail to track their spending, and as a result too many people end up far too close to the edge. Of course there is the easy availability or credit, the aggressive lending practices, the continually increasing cost of living, but those are all realities that we don’t have control over, so I want to focus on things that we can change.

I questioned whether this is a big problem with my clients, or is this reflective of a larger problem that is plaguing society? To answer this I quickly reviewed some of the most recent headlines that relate to personal finance and I found the following:

• Oct. 12, 2010 – Half of Canadians struggling to save: RBC poll as was reported by the Canadian Business Journal

• Oct. 12, 2010 – Bankruptcies falling, but Canadians not yet ‘out of the woods’: expert as reported by CBC News

• Oct. 12, 2010 – Pain of recession to be felt for ‘long time’: Buffett as reported by The Financial Post

• Oct. 11, 2010 – CREDIT CRUNCH – More Manitobans seeking help to manage debt-load as reported by the Winnipeg Free Press

Clearly the average consumer is in a precarious position, and something must be done. The general problem will only be resolved if we first understand what is happening in our own household. So here is my challenge.

The Challenge:

Keep receipts for everything you spend for the next 30 days.

Now before you start to groan, hear me out. The typical family, at least financially, is further in debt than it ever has been before. The question is why? Of course there are a huge number of factors that play a role in this – everything from the availability of consumer credit, to the dramatic increase in the cost of real estate, to inflation. But what I think is a bigger part of the problem is lack of awareness. Not awareness of the overall economy, not awareness of Canadians indebtedness, but self awareness.

This is one of the biggest problems facing the economy today.

As a group, we are not aware of where we sit financially. Now I talk to a lot of people about their finances both inside and outside of work, and regardless of who I am speaking with, it seems that few people kept track of an monitor their finances. Think about it – do you know what it costs you to live each month? Do you know roughly what percentage of your income goes to housing costs? Do you know how much money you need to set aside each month for irregular and annual expenses (those expenses that only come up once a year, like Christmas). If you do, that is fantastic, but it is remarkable how many people either do not know, or think they know and then after 30 days of tracking their receipts realize that they had no idea: hence the challenge.

Why keep receipts?

Fundamentally we need to understand where our money goes. You cannot begin to talk about a budget or any sort of financial plan without a solid understanding of where you are now. So it is time to take back control of your finances. Determine if the choices you are making every day with your wallet are consistent with your other goals. That all starts with keeping receipts. But remember, once you have the receipts, you must do something with them. I would encourage you use a simple spreadsheet to categorize these receipts throughout the month. This doesn’t have to be fancy, you can use something as simple as the following, but the goal is to be disciplined and record things regularly.

Housing Utilities Food Clothing Child Care Vehicle Expenses Entertainment Restaurants/Eating Out Debt Repayment

Whether you want to do this budget spreadsheet electronically, or using on-line budgeting software like Calendar Budget, or simply with pen and paper, the result will be the same. At the end of the month you will be able to sit down and review how much you spent and where you spent it.

If this sounds overly simple, that is because it is. Everyone needs to know where their money goes each month and that becomes the fundamental principle that any financial plan must be based upon. In upcoming articles, I will discuss other steps we should all take to build upon this thirty day challenge and allow us to take back control of our finances.

Posted on Monday, October 25th, 2010
Filed under: Debt Options andThirty Day Challenge
posted by Barton Goth @ 4:42 am No Comments

Why are More Seniors Filing Bankruptcy in Canada?

by Doug Hoyes

This week the Office of the Superintendent of Bankruptcy released statistics stating that an increasing number of senior citizens are filing for bankruptcy in Canada. Here’s a quote from the report:

From 1989 to 2009, the proportion of insolvent consumers between 18 and 34 years of age has fallen steadily (from 12.9 percent to 4.4 percent among those 18 to 24 years of age and 43.0 percent to 22.3 percent among those 25 to 34 years of age). Over the same period, the proportion of insolvent consumers among older age groups has increased (from 11.3 percent to 24.7 percent among those 45 to 54 years of age and among those 55 years of age and above the proportion has more than quadrupled from 4.6 percent to 20.6 percent).

So why are more seniors declaring personal bankruptcy?

Doug Hoyes, Bankruptcy Trustee

Doug Hoyes, Bankruptcy Trustee

As a licensed bankruptcy trustee helping people file bankruptcy in Ontario, I have a number of thoughts on why the percentage of seniors filing bankruptcy is increasing.

First, as every resident of Canada is aware, we are in a recession. A recession hurts everyone. It’s possible that in the current economic downturn more seniors have lost their jobs, or had their incomes reduced, leading to serious financial problems. Often when a company needs to cut back, they cut their highest paid workers, which often are their older workers.

Second, a growing number of Canadians in their 40′s, 50′s and 60′s are carrying mortgages and other debts into retirement. Twenty or thirty years ago Canadians typically retired with little or no debt; they paid off their mortgage before they retired. That was possible because by the age of 65 most Canadians were able to pay off their debts.

However, today, it’s not uncommon to be laid off while you are still in your 40′s or 50′s, and if you are unable to find a similarly well paying job, you may be forced into early retirement before you are able to pay off your debts. That’s why it’s increasingly important to keep your debts as low as possible, in the event your job situation unexpectedly changes.

Third, many seniors assumed that their house or other real estate would be their “retirement fund.” They assumed that when their children were grown and they themselves retired they would sell their house and move to a smaller house, pocketing the difference. Unfortunately with the weak real estate market over the last two years house prices in many areas of Canada have declined, so seniors cannot sell their house for as much as they had hoped.

Finally, I meet with a significant number of seniors who were good money managers, and had little or no debt for most of their lives, but then they go into debt to help their adult children. If you are 60 years old with no debt and a paid off house, and your 30 year old son or daughter loses their job, and they have a young family to support, what do you do? Many parents help their children, and often they help them by re-mortgaging their house, or getting a line of credit. If your child is not able to pay you back, the senior, on a reduced income, is left with more debt than they can handle.

Does this mean you shouldn’t help your children or other friends and family when they have financial problems? No, if you want to help, you should, but it’s important to help with cash, and not to incur excessive debt to help others.

What’s the solution?

First, we should all strive to have little or no debt. You may not have a lot of savings when you retire, but if you retire with no debt you will probably be able to survive with your company and government pensions.

Second, seniors should be careful to only help others within their means; don’t risk bankruptcy for yourself by borrowing excessively to help others.

If you have more debt than you can handle, check out our free, interactive debt options calculator that calculates your different debt management options. It may be possible to work through your debts on your own, or perhaps file a consumer proposal to avoid bankruptcy, but professional advice is wise to fully explore your options.

Posted on Monday, October 18th, 2010
Filed under: Bankruptcy Alternatives andbankruptcy Canada andConsumer Proposal
posted by Doug Hoyes @ 5:34 am 1 Comment

Should you cash in your RRSP to avoid bankruptcy in Canada?

by Doug Hoyes

Last week we discussed Credit Cards: The Fast Route to Bankruptcy in Canada and we learned that the vast majority of people who file bankruptcy in Canada owe money on credit cards. Some of those people have money in RRSPs; should they cash out their RRSPs to avoid bankruptcy?

Under current bankruptcy laws in Canada, RRSPs are exempt from seizure by the trustee if you go bankrupt, except to the extent of your contributions in the twelve months prior to bankruptcy. In other words, if you go bankrupt, you only lose the contributions you have made to your RRSP in the twelve months prior to bankruptcy.

(The rules are somewhat more complex than this. For example, if an RRSP is locked in as a result of previous employment, or if there is a life insurance component, it may also be exempt. Consult a bankruptcy trustee to review your specific situation).

This means that in many cases you can declare bankruptcy, eliminate your debts, and not lose your RRSP. What should you do?

Your first option would be to cash in your RRSP and use the proceeds to repay some or all of your debt, thereby avoiding bankruptcy. Here are some thoughts to consider before cashing in an RRSP to repay debt:

First, all withdrawals from an RRSP are taxable in the year you receive them. If you make significant withdrawals, you may bump yourself into a higher tax bracket, leaving a significant tax liability at the end of the year. The bank may with-hold up to 30% on your withdrawal for tax, but if you end up in the 40% or higher tax bracket at the end of the year, you could still have a significant tax liability. So, before cashing in an RRSP, speak to a tax professional to determine exactly what you will owe in tax.

If you are in the 50% tax bracket and you take $50,000 out of your RRSP, you will only net $25,000, so be careful.

Second, cashing in your RRSP to pay only some of your debt may not be a wise move. It all depends on how much debt you have remaining. If you currently have $20,000 in debt and $100,000 in your RRSP, cashing in $25,000 (or whatever is necessary to net $20,000 after tax) is probably a prudent financial decision. You eliminate your debt, and still have money in your RRSP.

However, if you have $100,000 in debts and only $20,000 in your RRSP, cashing in your RRSP and paying the tax still leaves you with significant debt; in that case a consumer proposal or other debt management solution may be more prudent.

Finally, the interest rate you are earning in your RRSP, and the interest you are paying on your debts is also a consideration. If you are earning 1% interest in your RRSP, but you are paying 25% interest on your department store credit card, it may be wise to cash in your RRSP and pay down the high interest debt. Remember that credit card interest is after-tax interest, so it’s very expensive.

There is no one correct answer for everyone. If you have debts, and you have an RRSP, start with our free, instant interactive debt options calculator to review your options, and then consult a bankruptcy trustee to review your specific situation.

Posted on Monday, October 4th, 2010
Filed under: Bankruptcy Alternatives andbankruptcy Canada andConsumer Proposal
posted by Doug Hoyes @ 5:26 am No Comments

Credit Cards: The Fast Route to Bankruptcy in Canada

by Doug Hoyes

What’s the fastest way to accumulate so much debt that you have no option but to file bankruptcy in Canada? As a bankruptcy trustee I have handled thousands of personal bankruptcy filings over the last two decades, and the answer to that question, based on my experience, is easy:

Douglas Hoyes, Bankruptcy Trustee

Credit cards.

If you want to get into serious financial trouble, excessive credit card debt is a sure fire way to invite financial disaster.

Two years ago my firm did a study of “Joe Debtor”, the average person who declares bankruptcy in Canada. Our study showed that 93% of Canadians that file personal bankruptcy or a consumer proposal have credit card debt, and the average they owed on their credit cards at the time of filing was just under $20,000. (With other debts, like taxes and lines of credit, the total unsecured debt was just over $50,000).

The facts are clear: it’s unlikely that someone with no credit card debt will have a need to file bankruptcy. The more credit card debt you have, the more likely it is that bankruptcy may be in your future. Why is that?

First, in the past, credit cards were easy to get. We all remember the “boom times” up to 2008, when many of us received numerous credit card offers in the mail each week. We were all “pre-approved” for a $10,000 gold, or platinum, credit card with a “low introductory” rate. Remember? You said “great, I can transfer my balance from my high interest rate card to the low rate card, and save money!” And you did.

But then your car broke down and you needed money for repairs, or you were off sick from work, or some other problem occurred and you needed money. You had unused credit on the credit card you just paid off, so you used it. But now, of course, you have a problem: instead of just owing money on one credit card, you are now carrying a balance on two cards. That puts you in a cash flow squeeze every month.

Then you realized that the “low introductory rate” was only temporary, and after six months your interest rate went way up, so now you are paying even more each month.

High interest rates are a problem, but for most people who declare bankruptcy their financial problems became critical when something happened in their lives: job loss, a marriage break up, or perhaps a health issue that caused them to miss work and led to reduced income.

It’s now 2010, and ever since the “credit crisis” of 2008 the flow of credit card offers in our mailboxes has slowed to a trickle, or disappeared entirely. The days of easy access to credit are over, at least for now.

Even more challenging for Canadians with credit card debts is the reality that credit card issuers are tightening up their credit requirements. Based on the stories I have heard over the last few weeks from the dozens of people in debt I meet with each week, it appears that the credit card issuers are in the process of “culling” their credit card portfolios. They are identifying higher risk clients, and raising their interest rates to encourage them to go elsewhere. Here’s a typical story from a lady I met with this week, with her name changed to protect her privacy:

Jane is single, and has carried a large balance on her ABC Credit Card for many years. Over the years ABC has gradually increased her credit limit, and for many years they offered her what she believed was an attractive interest rate of 9.9%. Her minimum payment was about $430 per month, which was manageable based on her income. Last week she got her monthly statement, and the minimum required payment was increased to $750 per month.

She assumed that it was a mistake, so she called ABC Credit Card Company, and they advised her that no, it was not a mistake. Due to changes by the “regulatory board” her interest rate was now much higher, resulting in a higher minimum monthly payment.

When I met with her I explained that I had never heard of the “regulatory board” (although I am familiar with the new credit card regulations), but it’s easy to see what the credit card company is doing. The balance owing on her credit card was over $20,000; it is by far her largest debt. On her current income it is unlikely that she will ever be able to repay the debt. The credit card company realizes this, so they are attempting to get rid of her as a client before she defaults on the amount owing. Their hope is that her credit is still good enough to allow her to borrow from someone else, and repay them.

Unfortunately for Jane, she has no assets to pledge as collateral for a loan, and she has no family members that are able to co-sign for a loan. Based on a review of her situation, she decided that her best option is to file a consumer proposal, where she will offer her creditors approximately a third of the full amount owing, to be paid over the next four years (the amount offered varies based on your income and financial situation). With a consumer proposal Jane will no longer have any credit cards, and her credit score is damaged, but she will have a manageable monthly payment, and in four years (or less) she will be out of debt. For Jane, it’s the correct solution.

Is it the correct solution for the credit card company? It could be argued that they would be better off had they not raised her interest rate; she would have continued to muddle along, and they make have collected more money over the next few years. However, they decided that they wanted to reduce their risk, so Jane responded by filing a consumer proposal.

If you want to be proactive and deal with your credit card debt before your credit card company raises your rates, check out our free, interactive debt options calculator that tells you what it will cost to deal with your debts. The sooner you take action, the sooner you will be free of high credit card interest rates.

Posted on Monday, September 27th, 2010
Filed under: bankruptcy Canada andConsumer Proposal andDebt Options
posted by Doug Hoyes @ 3:15 am No Comments

Consumer Spending: the backbone to recovery… but at what cost?

by Barton Goth

There is no secret, the recession is technically over, and we can thank our friends, family and neighbors. As was correctly predicted by Bill Bonner in 2003, “the entire world economy rests on the consumer; if he ever stops spending money he doesn’t have on things he doesn’t need — we’re done for.” Who knew how true this pronouncement was, at least here in Canada?

Barton Goth, Bankruptcy Trustee

One of the most concerning studies that has garnered significant media coverage lately was done by the Canadian Payroll Association (CPA). On September 13, 2010 the (CPA) released the results of a survey of working Canadians they had recently conducted and some of the more interesting findings were as follows:

• 59% of respondents say they would be in financial difficulty if their pay cheque was delayed by a week.

• 62% of respondents expect a salary increase, but 83% of respondents also expect their cost of living will increase in the next twelve months.

• 47% of respondents are saving only 5% or less of their net pay.

• 81% say their first priority if they were to win $1 million from a lottery, would be to pay off their debt

• 59% of respondents feel the economy in their city or town will improve in the next year, but this was down from 67% in 2009.

• 69% of respondents say it would be difficult to find comparable employment with a similar salary if they lost their job.

So if these findings are representative, that means 6 out of 10 people would experience financial difficulty if their pay was delayed for 7 days, suggesting these people do not have an adequate emergency fund. Approximately half of Canadians are saving far less than is generally recommended by financial planners. Fewer Canadians are optimistic when it comes to their economic future, a finding that is surprising to most financial professionals, and debt continues to be a major concern for the majority of Canadians.

Another interesting component of this survey is the order in which respondents ranked the economic issues that were of greatest concern:

1st - Higher interest rates

2nd -  Not being able to save enough to retire comfortably

3rd -  Inflation

4th - Falling back into a recession

5th - Loss of job

6th Decline in value of house

As well, there were other notable findings. John Morrissy in the Financial Post referenced a warning made by Organization for Economic Co-operation and Development (OECD) that “record debt levels have left many Canadians vulnerable to future adverse shocks.” The major cause of these debt levels is an increase in household credit and mortgage debt that was associated with the flurry of real estate activity that largely helped to fuel our Canada’s economic recovery.

A similar article in the Monday’s Globe and Mail by Tavia Grant referenced a news release by Statistics Canada which reported that household net worth fell by a total of $34 billion, which is the first decline since early 2009, noteworthy because this is the first time since the recession that household net worth decreased.

So what does all this mean?

The recession is over. Canada has begun to raise interest rates. A recovery looks plausible, but it is the consumer who has suffered. If the government continues to raise interest rates, it is likely that the very people we have to thank for the economic recovery may end up dragging the country back into a recession. As a result, the Canadian government can no longer rely on the consumer, and the consumer needs to take responsibility for their finances, control their spending and set a little aside for a rainy day.

As consumers, we need to proceed with caution. If you haven’t already begun to look at your finances there are a number of steps you need to take:

Step 1: Take stock
Evaluate where you and your family sit. Look at your monthly income, review how much you spend each month, and on what you spend money on. If you are unsure, keep receipts for all your family’s purchases for the next 3 months. Determine if you are living on what you are making, how much you owe and who you owe it to. If you are not able to find room to cover all your necessary expenses, you may be in a position where you have to consult with a licensed trustee to discuss what options exist that will allow you to put things back in to a positive cash flow position.

Step 2: Establish a habit of saving
Everyone needs an emergency fund. Most define this as the equivalent of 3 months living expenses. If you don’t have this, and the statistics suggest that most of us do not, make saving a priority. Set up an automatic transfer at the beginning of the month to remove 10% of your net income into a separate account you have designated for emergencies. Be diligent. Be persistent.

Step 3: Pay down debt
Now is the time to pay down your debt. Don’t leave it until interest rebounds to historically normal levels. Select the loan or credit card that charges the highest interest and prepay that account as much as possible. Remember, it may not seem like a large payment, but even small payments can save a tremendous amount of interest. If the amount you owe is too significant and simply doesn’t leave you any room, consult with a professional. Review how the filing of a consumer proposals, a debt management plan or even a personal bankruptcy may allow you to reduce your exposure to risk, and allow you to meet your monthly obligations and prepare for the unexpected. xxx
Remember, personal finance is not rocket science, it is simple. If we all can learn to live on less than we earn, set aside something for a rainy day and reduce our dependence on credit, your finances will be more stable, less susceptible to economic swings and fundamentally better off.

About the Author: This article has been written by Barton K. Goth of Goth & Company Inc., a licensed Edmonton bankruptcy trustee, member of the Canadian Association of Insolvency and Restructuring Professionals, and a managing editor of the Trustee Talks blog.

Posted on Monday, September 20th, 2010
Filed under: Debt Options
posted by Barton Goth @ 4:23 am 1 Comment

← Previous Entries

Next Entries →