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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

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

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

Debt Settlement Plans

by Ted Michalos

I have written quite a few pieces were I am critical of the “debt consulting” industry and persons presenting themselves as credit counsellors when they have little or no formal education or credentials. It’s not that I begrudge any of these people a livelihood – I just wish they’d pick a career that doesn’t involve gouging an already desperate portion of the population.

Ted Michalos, Bankruptcy Trustee

Ted Michalos, Bankruptcy Trustee

If you are unfamiliar with the term debt settlement it generally means some sort of negotiated deal to repay a portion of your debt. The service is real – most creditors will accept a partial repayment, particularly in a lump sum, once your debt has gone into collections. The trick here is one of timing. The debt settlement companies charge an upfront fee plus a percentage of the settled debt. They pay themselves first before they actually settle with your creditors and they can’t settle with your creditors until they have “saved up” enough of your payments to offer a deal.

That’s a bit confusing, so an example might help. Let’s say you owe $50,000 on your credit cards. The debt settlement company tells you they can settle with your creditors for $25,000. The upfront fee is $2,000 and they’ll charge another 20% of the settled amount – $5,000. Let’s say you agree to $1,000 a month. So the first 7 months will go to pay them and then your payments will go into a savings account until they accumulate enough to offer one of your creditors the 50% deal. During this time you have no legal protection and in many cases the creditors simply proceed to collections and then take legal action against you. To stop the legal action you end up filing a consumer proposal or perhaps bankruptcy (of course you won’t get any of the money back from the debt settlement company).

An alternative might be a consumer proposal whereby you offer the same settlement (50%), but it would play out quite differently. A consumer proposal can be spread over five years which would give you a much lower payment. Just to keep the comparison similar though, we’ll say you can pay the $1,000 per month. Your proposal will run for 25 months (the debt settlement plan would run for 32 assuming the creditors don’t cut it short). By law, the fees for the trustee are taken directly from the settlement; they are not added on top. In addition, after the preparation fee has been paid, $1,500, a trustee only receives payment when the creditors are paid – not in advance. Further, all of the creditors receive payments at the same time – you don’t settle with one, then save up and settle with the next. Most importantly, if you file a proposal you have legal protection from wage garnishees, collection agents and other legal actions.

If you’ve responded to a debt settlement ad and/or are actively considering this solution for your financial difficulties please make certain you understand the process that the company you will be dealing with is going to follow. As long as you understand the risks and the pitfalls of a debt settlement plan then you can add itn to the list of options to deal with your debts. Most people don’t take the time to “read the fine print” and as such go into these plans with high expectations only to have their creditors continue to pursue them, including collection actions and wage garnishees.

Be careful and consider all of your options before you sign.

Posted on Monday, August 16th, 2010
Filed under: Bankruptcy Alternatives andDebt Options
posted by Ted Michalos @ 4:08 am No Comments

Are Credit Card Companies Evil?

by Doug Hoyes

Douglas Hoyes, Bankruptcy Trustee

Douglas Hoyes, Bankruptcy Trustee

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

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

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

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

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

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

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

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

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

No.

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

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

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

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

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

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

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

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

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

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

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

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

Posted on Monday, February 1st, 2010
Filed under: Bankruptcy Alternatives andbankruptcy Canada andConsumer Proposal andDebt Options
posted by Doug Hoyes @ 3:37 am 1 Comment