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Massive Credit Card Debt Leads to Bankruptcy in Canada

by Doug Hoyes

Look in the mirror. It’s likely that you have more in common with the average person who files bankruptcy in Canada than you may think.

My name is Douglas Hoyes, a trustee with Hoyes, Michalos & Associates Inc. in Ontario, and today we released Joe Debtor, The Face of Bankruptcy, a comprehensive new research study profiling the average person who files a consumer proposal or bankruptcy in Ontario. We call this average person “Joe Debtor”.

Who is Joe Debtor? What does he look like?

Joe Debtor looks just like the average Canadian. He has a job, and may also own a home. He is very similar to the average person. The only difference between Joe Debtor and the average Canadian is that Joe Debtor has a huge amount of debt.

Here are some facts:

Comparison of Joe Debtor to Average Canadian
Personal Information:
Joe Debtor
Average Canadian
Male1 58% 49%
Female1 42% 51%
Average age2 41 41
Married or Common-law3 45% 52%
Divorced or Separated 26% 10%
Widowed 2% 6%
Single 27% 32%
Average family size3 2.3 2.6
Average monthly income4 $2,240 $2,419
Total credit card debt5 $24,390 $3,709
Total unsecured debt6 $59,814 $16,399

 

The Big Difference: Debt

Joe Debtor Debt Canada

Joe Debtor's Unsecured Debt

 

As you can see, the most significant difference between Joe Debtor and the average resident of Canada is debt. (That’s not surprising to readers of this blog; the most read post here on Trustees Talk is our post on Personal Debt in Canada: The Ticking Time Bomb.

The average Canadian has about $16,400 worth of consumer credit (debt excluding mortgages), while Joe Debtor has almost $60,000 in unsecured debt. That means that Joe Debtor has more than three and a half times as much debt, so it’s no surprise that Joe Debtor gets into financial trouble.

Simply put, debt is very dangerous.

To find out if you may have a debt problem, take this quick four question survey:

1 Are my debts, not including my mortgage, closer to the Canadian average of $16,400, or closer to Joe’s average of almost $60,000? If your debt is close to, or higher than $60,000, you owe more than Joe Debtor, and that’s an indicator that you may have a debt problem.

2 “Joe Debtor” owes $24,390 spread out over more than four credit cards. In other words, the typical bankrupt person in Canada has a lot of credit card debt. If you owe near that amount, and you are having trouble making your payments, you have a debt problem. If you are carrying a balance each month on any credit cards, you have a debt problem, because credit cards are the most expensive form of borrowing.

3 Am I afraid to open my mail? If you have bills that you haven’t opened because you know you can’t pay, you probably have a debt problem.

4 Am I “robbing Peter to pay Paul”? Do I take a cash advance from my line of credit to pay my credit card, and then next month will I take a cash advance from my credit card to make the minimum payment on my line of credit? If you are simply borrowing from one place to pay another, your debt, with interest, is gradually increasing, and you probably have a debt problem.

How can you solve your debt problem?

Start by taking inventory. Make a list of all of your debts, and the amount you owe. Make a budget to see where your money goes each month. If you can cut expenses and use the extra money to pay off your debts, great; that’s the perfect solution for you.

If you are like Joe Debtor and you have more debt than you can handle, consider filing a consumer proposal. You make one manageable monthly payment, and your unsecured debts are eliminated. If that’s not possible, filing bankruptcy in Canada may be your final option.

To find out more, use our free, on-line debt options calculator to review your options, then contact a consumer proposal administrator or bankruptcy trustee for a no-charge initial consultation.

 

1. Statistics Canada: Percentage of population over the age of 20, July 2010

2. Statistics Canada: Median age 2010

3. 2006 Census of Canada: Ontario

4. Statistics Canada: Personal Disposable Income per capita

5. Trans Union

6. Statistics Canada: Consumer Credit, Seasonally Adjusted per adult (18+)

Posted on Monday, February 28th, 2011
Filed under: bankruptcy Canada andConsumer Proposal andDebt Options
posted by Doug Hoyes @ 8:07 am No Comments

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

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 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

Credit Cards: Why The New Rules May Not Be Good News For You

by Doug Hoyes

Doug Hoyes, Bankruptcy Trustee

Doug Hoyes, Bankruptcy Trustee

On September 1, 2010 new credit card regulations took effect in Canada. What are the new rules, and what will they mean to you? Here are the three new regulations:

The New Credit Card Regulations in Canada

First, credit card issuers must offer a minimum 21 day grace period, during which they can’t charge you interest on new credit card purchases, provided you pay off your balance in full by the due dated. Under the old regulations grace periods varied, and the card issuer could charge interest on purchases from the date of the purchase if you had not paid last month’s bill in full.

Second, when you make a payment on your credit card above the minimum amount, that payment must be applied to the balance with the highest interest rate first, or proportionally to all transactions. Under the previous regulations credit card issuers could apply payments however they wanted, such as applying payments to the lower interest balances, resulting in higher interest payments.

Third, your monthly credit card statement will be easier to understand, and must include disclosure of how long it will take you to pay off a balance if you only make the minimum payment. They must also give you advance notice if they are increasing your interest rate.

What The New Credit Card Rules Mean for You

On the surface, these new regulations appear to be good news for consumers. You are now guaranteed a 21 day grace period when you make a purchase on a credit card, so if you pay your balance in full at the end of the month, you now have a 21 day interest free loan. Your payments will be applied to your highest interest rate balances, which may reduce the interest you pay, and you will be notified of interest rate changes in advance.

But a closer review of the new rules reveals that this may not be a good news story for you.

First, as reported in the Globe and Mail, when similar regulations were introduced in the United States, card issuers responded by raising the interest rates they charge. Whether or not that will occur in Canada remains to be seen, but it’s easy to see why it happened: if the credit card issuer is making less money due to a longer interest free grace period, they can recover that lost income by raising the interest rates they charge. So, in the end, consumers may not benefit from the new rules.

But there is an even greater reason why these new rules are not good news for you:

You should not be paying interest on credit cards!

Credit cards are a very expensive way to borrow. A “low interest” credit card may have an interest rate of 12%; a standard card has an interest rate of 19%, and a department store or gas company card may have interest rates of 25% or higher. Contrast that with mortgage rates in Canada of around 5%, and you can see that credit card interest rates are very high. And yes, I realize that a mortgage is a loan secured by real estate, and therefore will carry a lower interest rate than an unsecured credit card balance, but even a comparison to loan rates charged by banks for unsecured lines of credit will show that credit cards have very high interest rates.

As consumers, we pay for convenience. A credit card is very convenient. Swipe it, and you’re done. But you are paying a huge price for that convenience.

So here is my new credit card rule, that you can implement for yourself, immediately, today:

Do not carry a balance on your credit cards.

That’s it. It’s a simple rule, and it means you will never pay another cent in high credit card interest.

If you must borrow, borrow at lower rates by getting a home equity debt consolidation loan (if you own a house), or a debt consolidation loan at a lower interest rate, and save money.

What do you do if you can’t qualify for a debt consolidation loan? What can you do if you owe so much on your credit cards that the bank won’t lend you money to pay off your credit cards? You have a few choices:

  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 review your options.

Don’t be fooled into believing that the new credit card regulations will help you. The best credit card debt is no credit card debt, so make a plan today to eliminate your credit card debt, because with no debt you don’t need to worry about grace periods or interest rates. Be debt free.

Posted on Monday, September 6th, 2010
Filed under: Bankruptcy Alternatives andbankruptcy Canada andConsumer Proposal andDebt Options
posted by Doug Hoyes @ 4:27 am No Comments

Bankruptcy in Canada for Seniors With Tax Debt

by Doug Hoyes

An interesting debate has emerged in the pages of the Financial Post over the last two weeks regarding the need for senior citizens to file bankruptcy in Canada. The debate started with an article by Jonathan Chevreau published on August 11, 2010 titled No Immunity to Bankruptcy. That day Mr. Chevreau also published a blog post titled Freedom 60? 33,516 Canadians 60 or older filed for bankruptcy from 2008 to 2010. I was interviewed for both the newspaper column and the blog post; here’s a quote from the newspaper:

Between 2006 and 2010, between 7% and 9% of the debtors handled by Toronto bankruptcy trustees Hoyes Michalos & Associates Inc. were 60 years of age or over, says principal Doug Hoyes.

In the two and a half years between January 2008 and May 2010, 33,516 Canadians age 60 or over filed for bankruptcy, according to Industry Canada.

That quote is accurate. In fact, after holding steady in the 7% range between 2006 and 2009, in the first seven months of 2010 the percentage of people aged 60 or over who have filed a consumer proposal or a personal bankruptcy has increased to 9%. That statistic clearly indicates that more seniors are experiencing financial difficulty, and are making the decision to formally deal with their debt.

Here’s the key problem, as quoted in the Financial Post article:

Of course, the problem with carrying debt into retirement is that it must be serviced with less income than when working full-time. Some adapt by making only the minimum monthly payments on credit cards, which leads to a downward debt spiral, a journey that often ends with a trip to offices like Hoyes.

In the past, most seniors were able to retire with no debt. The fortunate ones owned their own house with no mortgage, so when they retired they were able to live comfortably from their savings and pensions. Unfortunately today an increasing number of seniors are retiring with debt, so when their income drops at retirement it often becomes impossible to both service debt and pay normal day to day living expenses. I’ve met with a number of seniors who retired in good financial shape, but as the recession worsened they ended up helping their grown children deal with their money problems, and that often depletes their retirement nest egg, and can even lead to new debt.

But there’s more to the story than that; here’s another excerpt from the Financial Post article:

Hoyes guesses half the seniors he sees choose bankruptcy, although he lays out four less extreme options. He points out that most retirees don’t need to file for bankruptcy because the main reason for considering it is to ward off creditors that threaten to garnishee wages or seize assets. Retirees have no full-time wages, so don’t have significant wages that can be seized. Also, “it is very difficult, if not impossible, for a creditor to garnishee a pension,” Mr. Hoyes says.

This is where it gets interesting. On the day the article was published, Mr. Chevreau was contacted by a reader who said that he was 70 years old, and he owed a significant amount of back taxes, and CRA was taking all of his Canada Pension Plan income each month. As any good journalist would do, Mr. Chevreau contacted me to ask for my side of the story, since Revenue Canada’s actions to seize pension plans would appear to contradict my statement that “it’s very difficult for a creditor to garnishee a pension.”

My response to Mr. Chevreau was that yes, it is very difficult for a typical creditor, like a bank or credit card company, to garnishee a pension. However, Canada Revenue Agency is not a “typical” creditor. CRA has more power than your typical credit card company or other creditor.

On August 18 Mr. Chevreau reported on this continuing story in an article in the Financial Post titled Government gives with one hand, garnishees with other, where he tells the story of “Sam” (not his real name), the 70 year old who is not getting any CPP or OAS benefits because CRA is taking all of it, and applying it against his tax debt. Here’s an excerpt from the story:

Generally, if you owe money on credit cards or other unsecured debt, there’s no mechanism for creditors to garnishee a pension, says Doug Hoyes, a principal with Toronto based bankruptcy trustee Hoyes Michalos & Associates Inc.

According to Hoyes, the Ontario Wages Act only permits creditors to garnishee up to 20% of a person’s wages or 50% for child support. However, he says, “standard garnishment rules don’t apply to the CRA. They can do whatever they want.”

Hoyes regards the legal definition of garnisheeing wages as a court order to take some of your paycheque. But the rules are different when the government is itself the creditor. “It doesn’t go to court. They can just decide to take CPP and OAS until they get what they want.”

He has seen cases similar to Sam’s in the past, but they were “rare circumstances, generally where the tax debt was large and often where the taxpayer was delinquent in filing tax returns on time.”

CRA spokeswoman Caitlin Workman confirms the tax agency can garnishee “all types of pensions,” both government and private. This is permitted under Section 224.1 of the Income Tax Act, with similar provisions in five other acts. However, she says it’s rare to garnishee more than 20% of such benefits. “It’s very much a last resort after the taxpayer’s ability to pay has been determined.”

So there you have it. If you owe taxes to CRA, and if you get Canada Pension Plan or Old Age Security payments, Canada Revenue Agency can withhold some or all of your monthly pension payments in satisfaction of your tax debt.

As I said in the article, while I have seen cases like Sam’s, it is generally very rare that CRA would take all of someone’s pension. They will typically only take everything if you owe a significant amount in taxes, and if you were delinquent in filing your taxes on time. As the CRA spokeswoman stated, it is rare that they will garnishee more than 20% of pension benefits, but it is possible.

What Can You Do if CRA is Taking Your CPP Pension For Taxes Owing?

If you owe back taxes and CRA is taking your pension, you have a number of options.

First, you can contact CRA and work out a re-payment plan. If you have other assets that you can sell to raise cash, you may be able to pay your taxes with that money, at which point CRA will stop taking your pension. You may also be able to negotiate a monthly payment plan to free up some of your pension.

If you can’t make a plan directly with Canada Revenue Agency, you could try to get a debt consolidation loan; you borrow from a bank, and use the money to repay CRA. If you pay your taxes in full, CRA will release the flag on your pension payments.

If you don’t qualify for a loan, which is often the case once you retire because your income has dropped, your next option is a consumer proposal. In a consumer proposal a settlement is reached with all of your creditors, including CRA. In many cases you may end up paying less than the full amount owing. If your largest debt is taxes, CRA must agree to your proposal, so a consumer proposal is not always an option where tax debts are involved.

If a consumer proposal isn’t possible, your final option for dealing with tax debt is personal bankruptcy. Upon your discharge from bankruptcy in Canada your tax debts are discharged.

Owing money to the tax man isn’t fun at any age, but it can be even more stressful if you are a senior citizen on a pension, so if you have tax debts, contact a licensed bankruptcy trustee for a no charge initial consultation to review your options.

Finally, my thanks to Mr. Chevreau and the Finanicial Post for bringing this issue, and possible solutions, to the attention of senior Canadians.

Posted on Monday, August 23rd, 2010
Filed under: Bankruptcy Alternatives andbankruptcy Canada andConsumer Proposal
posted by Doug Hoyes @ 2:17 am 2 Comments

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