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
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.
In addition to our usual commentary on bankruptcy in Canada, we occasionally review books that may be of interest to our readers. You can see all book reviews in our book review section.
Gail Vaz-Oxlade's Debt Free Forever: Take Control Of Your Money And Your Life
I must confess that I am biased, because I have appeared twice on Till Debt Do Us Part as an “expert”. My first appearance was back on Episode #36, that first aired in 2007, called Single Mom Shake Up. My job was to explain the bankruptcy option to Tammy, the person featured on that episode. She was able to cut her expenses, and with the support of her family she avoided bankruptcy.
I also appeared in Season 8, on episode number 103; you can watch the entire episode on the Till Debt Do Us Part section of the Slice web site. (Warning: This is a very emotional episode; I had to give some difficult advice, as did Ms. Vaz-Oxlade; sometimes our advice is not taken, and that’s a difficult reality when you are a professional advisor).
As anyone who was watched Till Debt Do Us Part will know, Gail Vaz-Oxlade has a very “no nonsense” approach to money problems. She strongly believes that ultimately you are responsible for your behavior, so only you can change your behavior to eliminate money problems. I like that approach.
That no-nonsense approach is easy to see in Debt Free Forever: Take Control Of Your Money And Your Life as Gail Vaz-Oxlade starts at the same place I start in every meeting I have with someone in financial trouble: Figure Out Where You Stand. She gives practical tips on how to analyze your spending, and, most importantly, how to face up to your debt.
In my experience facing up to your debt is the hardest step to take in your journey to financial freedom. It’s hard to make a list of all of the money you owe, but it’s absolutely essential if you want to go on the next step, which is Part Two of the book: Make a Plan.
Doug Hoyes, Bankruptcy Trustee, Appearing on 'Til Debt Do Us Part
Her advice is always practical; you don’t need a math degree to follow her advice. She keeps it simple, using her trademark “jar” method of saving, where you put cash in your food jar, gas money jar, and so on to keep budgeting simple.
Speaking of budgeting, that’s Chapter 4, Create a Budget That Balances. Again, Gail gives practical advice on how to create a household budget, and how to cut expenses to make your budget balance. She illustrates the concept with what she calls the “Life Pie”, where money is allocated to life’s expenses, and you have to learn to divide the pie up to keep your spending in check.
While Debt Free Forever: Take Control Of Your Money And Your Life focuses on budgeting, spending control, and setting goals, Chapter 11 does deal with subject matter near and dear to my heart: Cope When the Caca Hits the Fan. She starts the chapter off by telling it like it is:
One of life’s hard truths is that it doesn’t matter how carefully you plan, how hard you work, or how diligent you are in taking care of the details, crap happens!….It’s nice to think that life is predictable, but it’s not ………Having made a budget, made a debt repayment plan, made up your mind to live your life consciously and take care of your money, you may dream that it’ll be smooth sailing from here on in, but it is only a dream. Sometimes life sucks.
Yes, I couldn’t agree more. Every day I meet with Canadians who were doing well, but then they got sick, lost their job, got divorced, or had some other tragedy derail their dream of financial independence. Sometimes, stuff happens. Fortunately, Gail Vaz-Oxlade carries her “no-nonsense” approach to the discussion of bankruptcy in Canada as well. Here’s what she has to say:
Bankruptcy isn’t the worst thing in the world. Living in the hell you’ve created is….
For many people, the decision to go bankrupt isn’t an easy one to make. It’s a thorny path. But if that’s what it’ll take to get you out of hell, then do it.
Wow. No-one will ever accuse Ms. Vaz-Oxlade of “sugar coating” her opinions. She’s right: in my experience it takes the average person six months of soul-searching before deciding to file bankruptcy. Bankruptcy is a last resort for dealing with your debts, but sometimes it is necessary.
If you are looking for a book that contains practical, easy to understand advice, Debt Free Forever: Take Control Of Your Money And Your Life is just what you are looking for. The advice is easy to understand, but it’s not easy to implement. Making change is hard, and it takes sacrifice, but if you are up the challenge, this book can help.
The consumer proposal is probably the least known of the processes to deal with overwhelming debt, but it is the mechanism that has the greatest capacity for good given our current economic environment. Let’s face it, right now the number one biggest risk to the Canadian economy isn’t the high dollar, it isn’t our level of productivity, it isn’t the strength of our largest trading partner – it is the state of our personal finances.
Barton Goth, Bankruptcy Trustee
After that bold statement I must insert my disclosure. My name is Barton Goth, I am a licensed Trustee in Bankruptcy and Consumer Proposal Administrator here in Edmonton. So I definitely have a bias. However, this statement is not made based solely on observations made in my daily practice, but based on the current state of our overall economy. Let us review:
• During the 2000s, the average Canadian’s asset growth was less than half the pace of the 1990’s and the growth in debt was twice as rapid (Roger Suave, The Current State of Family Finances 2009)
• In recent years household debt has surged three time faster than income and now stands at a record high of more than $1-trillion (Canada’s Brewing Debt Storm, The Globe and Mail Apr. 16, 2010, by Paul Waldie and Steve Ladurantaye)
• The average Canadian owes about $1.47 for every dollar of disposable income (Certified General Accountants Association of Canada, CIBC Economics, National Bank economics and Statistics Canada)
• For many years, debt was rising about 2.5 percentage points faster per year than income, this gap had widened to 4 to 5 percentage points by 2005 and rising by approximately 9 per cent in 2008. (Defusing Canada’s debt bomb, Globe and Mail Apr. 17, 2010, by Don Drummond, Chief economist, TD Bank Financial Group)
As a result of these alarming trends I think the traditional focus of our finances is going to have to move away from the saving and investment side of things, and toward dealing with the debt that more and more people are becoming burdened by. This is why a consumer proposal currently is one of the most important financial tools available to Canadian families. It is a tool that gives Canadians the ability to regain control of their finances before they are forced to consider a bankruptcy. As a result, I predict that we will continue to see a major increase in the number of proposals filed as people begin to realize the gravity of their financial position and begin to investigate what can been done to resolve these difficulties.
For those of you unfamiliar with consumer proposals, you are not alone. The idea of a consumer proposal is relatively new (first introduced into the Canadian insolvency legislation in 1992), but has provided a way for many Canadians over the years with a middle of the road option that contains many of the advantages associated with a bankruptcy, while avoiding some of the more significant disadvantages. A consumer proposal is especially advantageous for those people who cannot afford to pay their debts in full but have enough money coming in each month that realistically they should not be forced into the filing of a bankruptcy, a reality that an increasing number of Canadians are faced with each day.
The consumer proposal is one of the options available through the Bankruptcy and Insolvency Act that provides a court sanctioned way to negotiate a settlement with your unsecured creditors (i.e. credit cards, personal loans, taxes etc.). There are many advantages to filing a consumer proposal. For instance, in a proposal you do not automatically lose any of your assets as you would in a bankruptcy. You are able to have a reduced impact on your credit over the long term than filing bankruptcy, and most importantly, you are able to bring the payments on your existing debt to a manageable level that will fit in your budget. At the same time, because the consumer proposal is a court sanctioned settlement, you only need a majority of your creditors to cooperate with the proposal and you benefit from court protection which mandates that all your unsecured creditors must participate in the proposal and can no longer collect on or charge any interest on these debts.
At a time when the average family is faced with waning savings, growing debt, aggressive lending practices and an uncertain economy, the consumer proposal may prove to be one of the most needed of all financial tools, and one that will assist many families in an effort to regain control of their finances and truly put their house in order.
If your one of the many Canadians who are currently struggling with your finances I have one word of advice, act now and schedule a time to review your finances with a consumer proposal administrator . If you are proactive, rather than reactive, you will be able to catch things early. The earlier you recognize the difficulties you face and the earlier you act, the more likely you will be able to qualify to file a consumer proposals and the quicker you will be able to regain control of your finances.
The Office of Superintendent of Bankruptcy is a special operating agency associated with Industry Canada, part of the federal government. The “OSB” regulates bankruptcy trustees (the people who administer bankruptcies and proposals, and ensure they comply with all aspects of the Bankruptcy and Insolvency Act). As the regulator, the OSB will often seek the input of various stakeholders to determine if changes to their regulations of trustees are required, and they have just announced a “Trustee Licensing Consultation” to review various aspects of insolvency regulation in Canada.
One of the items being considered is whether or not to allow non-trustees to serve as administrators of consumer proposals. As our regular readers will be aware, a consumer proposal is a legally binding settlement negotiated between a debtor and their creditors, with the assistance of a consumer proposal administrator. With the exception of the province of Nova Scotia, where provincial representatives may administer consumer proposals, all consumer proposal administrators in Canada are licensed bankruptcy trustees.
The issue being considered is this: should the OSB allow non-trustees to serve as administrators of consumer proposals?
Ms. Ross presented the argument that accredited credit counsellors (in addition to licensed trustees) should also be permitted to administer consumer proposals. She gave three main reasons:
To eliminate the “monopolistic approach that limits access to the consumer proposal”, since only licensed trustees can act as administrators;
To “provide Canadians with equality of access”; and
To increase OACCS member agencies revenue to allow them to provide their other services.
What’s my opinion?
First, let me start by stating my bias: I am a licensed bankruptcy trustee, and my firm files many thousands of bankruptcies and consumer proposals each year, so obviously I have a vested interest in maintaining the status quo; it’s what I do for a living.
Second, let me also say that I have personally met Ms. Ross on a number of occasions, and I have a great deal of respect and admiration for her, and for her organization. On a daily basis I interact with many credit counsellors who work at OACCS member agencies. I refer debtors to credit counsellors when I believe a credit counsellor can best solve their problems, and I refer debtors to OACCS member agencies for the counselling required when they file a bankruptcy or a consumer proposal.
In my twenty plus years in the insolvency business, I can honestly state that the accredited, not for profit credit counsellors I have worked with have all worked very hard in the best interests of their clients, and I would never question their competence or integrity.
I agree that these are difficult times to be a not for profit credit counsellor. As Ms. Ross correctly points out, many years ago the government provided funding directly to not for profit credit counselling agencies. When that funding stopped, as Ms. Ross eloquently stated:
Some agencies were forced to close, others narrowed their service operation and the larger agencies continued to operate by finding alternative revenue streams. Revenue came from voluntary fair-share contributions from creditors, educational seminars for employee groups, the sale of educational material and the bankruptcy counselling that we do.
Over the years not for profit credit counsellors began to offer Debt Management Plans, or DMPs, where creditors (like the banks and credit card companies) would agree to make a “fair share” contribution to the work of the counselling agency to fund their efforts. In a DMP the creditors are paid in full, without interest, so a successful DMP is good for the banks, because they get back all of their money, and it’s good for the debtor, since they don’t have to pay interest, and they are given time to pay.
Unfortunately a DMP is generally not as good a solution for most people as is a consumer proposal. Again, to quote Ms. Ross:
The debt management plans, DMPs, available through credit counselling provide consumers with a workable option to repay debt. Most people who undertake DMPs are technically insolvent, or close to it, but are determined to honour their credit obligations and repay their debt. DMPs are negotiated with creditors to provide full debt repayment over an extended time frame. Upon acceptance by the creditors, member agencies manage and administer these DMPs and are authorized to operate trust accounts to facilitate payments to creditors.
Voluntary DMPs do not provide court protection for consumers, nor mandate creditors to stop charging interest on the debt, nor mandate a specified time frame for creditors to respond to debt repayment proposals. They do not mandate that creditors accept a pro-rated share of the debtor’s ability to repay, nor do they address complex entitlement issues that may require a more formal plan.
On the other hand, consumer proposals are a court-supervised option to repay debt. A consumer proposal is an offer made by a debtor to their creditors to modify their payments in an effort to settle the debt. Under a proposal, a debtor may offer to pay a lower amount each month over a longer period of time or to pay a percentage of what they owe. A significant benefit to consumers of a consumer proposal is protection by the courts from unsecured creditors. This is important because it prevents creditors from taking legal steps, such as seizing property or garnishing wages, to recover debts.
I agree with Ms. Ross. A DMP is not binding on the creditors. If you have five creditors, and only three of them accept the DMP, the other two can still attempt to sue you and garnishee your wages. In a consumer proposal, if the majority of the dollar value of creditors agree, all creditors must accept the proposal. It is legally binding.
It is easy to see the problem faced by not for profit credit counsellors. The government withdrew their financial support many years ago, forcing the closure of many agencies. Debtors who need the services of not for profit credit counsellors generally don’t have the money to pay for those services, so it is difficult for agencies to cover their operating costs. DMPs were a great way for not for profit credit counselling agencies to generate revenue to cover their costs (through the “fair share” contributions made by creditors), but as debtors realize that a consumer proposal is often a superior alternative, the percentage of debtors filing a DMP has fallen, resulting in reduced revenue for credit counselling agencies.
Realizing that consumer proposals are the superior alternative, many not for profit credit counselling agencies began working with trustees to offer consumer proposals to their clients. They would meet the debtor, asses their situation, gather the necessary financial information, determine their debt load, and then prepare the files for the trustee. The trustee then only had to “show up” at the credit counsellors office to witness the debtor signing the paperwork. The trustee would pay the credit counsellor for their work, and it was a “win-win” for everyone. The credit counselling agency earned some revenue, and the trustee had access to a steady stream of clients without having to do very much work.
Unfortunately, the OSB has rules against this approach. Federal law requires a licensed trustee to personally assess the debtor before they file a bankruptcy or proposal. Directive No. 6R3 Assessment of an Individual Debtor, requires the trustee to personally meet with the debtor and review their assets, liabilities and income, and to review all of the options available for dealing with their debt problems.
Section 49 of the Bankruptcy and Insolvency Rules states that:
49. Trustees shall not, directly or indirectly, pay to a third party a commission, compensation or other benefit in order to obtain a professional engagement or accept, directly or indirectly from a third party, a commission, compensation or other benefit for referring work relating to a professional engagement.
Trustees therefore cannot pay a referral fee to a credit counsellor for assessing a debtor, or helping to prepare the file, as described in more detail in the OSB position paper on Referral Agreements between Trustees and a Third Party.
Unfortunately once the OSB realized what was happening, they had no choice but to enforce the rules and stop these practices, as noted by Ms. Ross:
For some time, the larger of the credit counselling services had prepared files for consumer proposals on behalf of certain trustees. This included statutory counselling, interviewing and assessing the debtor, and confirming the debt load. The Superintendent of Bankruptcy has recently determined that it is incompatible with the trustee’s responsibility to outsource this work. This decision has affected our agency’s revenue to the detriment of its ability to provide broader services as well as BIA proposals.
I both sympathize and empathize with the plight of accredited not for profit credit counselling agencies. They are trying to help people deal with their debts. Who else is there to fight for the little guy (which is the reason Ted Michalos and me, Doug Hoyes, went to Ottawa to testify in the first place, as I noted in my opening remarks):
Mr. Michalos and I and our bankruptcy trustees spend each day meeting with people in financial distress. These are real people who, in many cases, have lost their jobs, gone through a marriage breakup or suffered through an illness; and after these personal tragedies, they are faced with insurmountable debt.
These are not bad people. We believe it is important that when parliamentarians draft bankruptcy legislation, they remember that real people are affected.
About 100,000 Canadians file bankruptcy or a proposal each year.
Unfortunately, that group is not organized and so probably will not have anyone to speak on their behalf before this committee. We hope that our testimony will highlight some of the concerns of the average bankrupt.
Banks want you to borrow money on their high interest rate credit cards. Finance companies want you to get a high interest rate loan. Payday loan companies want you to get a very high interest payday loan. They all spend millions of dollars in advertising each year to encourage you to borrow and consume.
Not for profit credit counsellors fight against this onslaught of debt. They spend many hours each day helping people work out a budget. They provide education programs to help the average Canadian understand the world of debt, and how to avoid it. They are the only voice in the wilderness telling you to spend less, not more.
But they can’t pay the rent in their offices, and pay their staff salaries, and pay for the supplies to help you make a budget if they have no revenue.
And that’s one of the reasons why, as Ms. Ross freely admitted, that not for profit credit counsellors want to be given permission to administer consumer proposals. It would give them a source of revenue so that they can continue their good work. Who could argue with that?
I certainly don’t argue with doing good work. I agree that someone has to tell Canadians to spend within their means, and to stop borrowing to consume.
Unfortunately I can’t agree with the notion that credit counsellors should be permitted to act as consumer proposal administrators as a way to increase their revenue.
My main objection to allowing non-licensed trustees to administer consumer proposals is that it is a government requirement that the trustee, as stated in Directive No. 6R3 Assessment of an Individual Debtor, must advise the debtor of all of their options, and the implications of all of their options. That means that as a trustee I must explain to all debtors the ramifications of doing nothing, do a debt settlement, getting a debt consolidation loan, doing a debt management plan through a not for profit or for profit credit counsellor, and doing a consumer proposal or personal bankruptcy. I can explain the implications of a bankruptcy, because I am a licensed bankruptcy trustee. I fully understand the process, so I can explain it. How can a non-trustee have the same level of knowledge as a trustee?
The Directive requires me to explain: “transfers, preferences and settlements of real or personal property of the debtor.” Is that something all credit counsellors understand? Do all credit counsellors understand the new surplus income rules, and how they are calculated in practice? Do credit counsellors understand the discharge process, and the court process, in a consumer proposal or a bankruptcy?
Credit counsellors would argue that they can learn all of those things, and I agree. The best way to become knowledgeable about the entire process is to become a trustee. Currently the average trustee has a university degree, many years of practical experience, and they have passed a series of very complicated courses that take on average five or more years to complete. It takes a long time to become a trustee. But, if a credit counsellor wants to become a trustee, they can find a sponsor, enroll in the program, and become a trustee, and then they can administer consumer proposals.
I believe this discussion is missing the real issue. As Ms. Ross correctly stated, not for profit credit counselling agencies are suffering from declining revenue, which is why they want to administer consumer proposals. The solution is not to make credit counsellors into consumer proposal administrators; the solution is to find a way to increase their revenue, doing what they do best.
What credit counsellors do best is credit counselling. They are highly skilled in providing advice on budgeting and money management. They are excellent educators. They should concentrate on what they do best. But how do they generate the revenue to cover their costs to provide this un-biased money management education?
The most obvious answer is through the revenue they receive from the credit counselling that they provide to individuals that have filed a bankruptcy or consumer proposal in Canada. Every individual that files bankruptcy or a consumer proposal is required to attend two credit counselling sessions, as described in Directive No. 1R2, Counselling in Insolvency Matters. Many trustees in Canada, including my firm, Hoyes, Michalos & Associates, outsource the majority of our credit counselling sessions to external counsellors. We do this because we want our debtors to get the best possible counselling so that they learn proper money management skills, so that they don’t have any future money problems.
Rule 131 of the Bankruptcy & Insolvency Act Rules prescribes the rate that is to be paid for the two required counselling sessions: $85 for each individual session, or $25 per person if the counselling is provided in a group session. In other words, a trustee may “outsource” the counselling requirement to a licensed credit counsellor, and the trustee may pay the credit counsellor, from the funds in the estate, $85 for each individual credit counselling session.
While $85 may sound like a lot of money, it isn’t. Many counselling sessions can take an hour or more, and that $85 must cover the counsellor’s wages, and all other overheads (like rent, administrative costs to book the appointment, training costs, etc.). Even worse, that $85 amount has remained unchanged for many years. $85 in 1994 is the equivalent of more than $115 in equivalent dollars today.
So the first, and most obvious solution, is to increase the amount that is paid for credit counselling sessions. Increasing the rate to $115 per session would bring the tariff back to where it was in 1994. I would go one step further: I would increase the rate to $125, or even $150 per session. Those increased resources would provide greater revenue to not for profit credit counselling agencies, since trustees would have more resources to pay them.
In addition to increasing the rate, I would increase the number of credit counselling sessions required.
Currently the first session must be done in the first 60 days of the bankruptcy or proposal, with the second session completed before the 210th day. That timing makes sense for a bankruptcy that lasts for nine months, but it may not be sufficient for a bankruptcy that lasts for 21, 24, or 36 months, as they often now do under the new bankruptcy rules. It’s also not sufficient for a consumer proposal that can last for up to five years.
So, my second suggestion is that for all bankruptcies that are automatically extended past nine months, a third counselling session should be added, to occur at some point in the second year. In addition, for all consumer proposals that last for greater than twelve months, a third counselling session should be added.
This new third session could focus on a review of the techniques learned in the first two sessions, and could include a review of the budget the debtor should be keeping during their insolvency process. This extra counselling session could be used to review different methods of saving (like the new Tax Free Savings Account), and could cover more advanced budgeting techniques. Perhaps this new counselling session could include an interactive web based component, allowing debtors to track their budget information on line. There are many tools that already do this, such as Calendar Budget, so it would not be that difficult to develop the content for the new third credit counselling session. Credit Canada, a not for profit credit counselling agency, has created a Financial Coaching Series that costs $120 per session for six sessions, so the expertise and content already exists for this extra counselling session. In fact, I would seek the input of the not for profit credit counsellors, including the OACCS, to help design this third session.
By raising the counselling rate from $85 to $125, and by adding a third session, the revenue generated by each personal bankruptcy or consumer proposal would increase from $170 to up to $375. That increase in revenue would go a long way towards helping not for profit credit counsellors help the people they want to help.
Is this the perfect solution? Probably not. I’m sure with further consultation even better strategies can be developed. But with this approach the real problem of reduced revenue for not for profit credit counsellors can be solved, without creating a new problem of having non trustees administering consumer proposals.
Would your financial well-being be noticeably affected if your paycheque dropped by 10%? For most of us, the answer is “yes”. We tend to live paycheque to paycheque, so any drop in income can lead us down a slippery slope that often ends with a person filing bankruptcy in Canada.
Think about it: if you get a paycheque of $500 per week, what would happen if your paycheque was cut to $450 per week? Would you still be able to pay your living expenses, and service your debts? Obviously for many Canadians a 10% cut in pay would severely impact on their ability to pay their bills every month.
As a bankruptcy trustee in Ontario, I meet with many people each week who have experienced a reduction in their income since the recession started two years ago. For some, the income reduction is relatively minor. They went from averaging two or three hours of overtime a week, to no overtime. It hurts, but they still have a full 40 hour paycheque. For others, a long term or permanent layoff drastically reduces their income.
In a perfect world, we would all have no debts, and lots of money saved in our RRSPs and bank accounts. If we did, a job loss would be a minor inconvenience. With no debt to service and with cash in the bank, we could take our time looking for a new job. We might even take a vacation before we start our job search.
Unfortunately very few of us live in a “perfect world” of no debt, and lots of cash in the bank. As I reported two months ago in my article on Personal Debt in Canada: The Ticking Time Bomb:
Despite the recession, or perhaps because of it, Canadians continue to borrow at record levels. By the end of the third quarter of 2009 the average Canadian adult had over $40,000 in household credit, a record level. Household credit includes credit cards, bank loans, and mortgages, so $40,000 may not appear to be a large number. After all, many people have mortgages of greater than $40,000. That’s true, but many other Canadians don’t have any mortgages or debt, so to average $40,000 over all adult Canadians, many of us are obviously carrying a significant amount of debt. As the chart shows, back in the year 2000 we each had approximately $20,000 in debt, so in less than a decade the debt we are carrying has doubled.
That’s a staggering statistic. If you are the average Canadian, your debt has doubled. Has your income doubled? Are you making twice as much today as you were earning in the year 2000? Probably not. If you still have a job you may have received “cost of living” increases of 2% per year for the last decade, but that obviously does not add up to a doubling of your income.
And that’s the problem: In Canada our personal debt continues to increase, but our incomes are not increasing nearly as fast, so we are spending an ever increasing amount of each paycheque servicing our debts.
It is very common for me to meet with people who are spending a third, or even a half, of their total income just making payments on their debts! One hundred years ago there was virtually no debt. Fifty years ago the only common type of debt was a mortgage on a house, or perhaps a small amount of credit at the local department store. Today, most of us have a mortgage, car loan, line of credit, student loan, and one or more credit cards where we carry balances.
That’s a lot of debt, and it makes us very vulnerable to any shock to our income. Missing a day of work can literally, for many Canadians, put them over the edge and make them unable to pay their bills.
What’s the solution?
Obviously we must all start taking responsibility for ourselves. There are those that will argue that our high debt levels are the fault of the banks and finance companies that lent more money than we could ever hope to repay, all so they could earn huge profits. Others will argue that it’s the government’s fault: they should pass rules to protect us. Those are valid arguments, but I choose another explanation: I choose to believe that I am responsible for myself, and my family.
I believe we should all stop worrying about the banks and the government, and look out for Number One. Ourselves. We should each decide what we need to borrow, and we should not respond to high pressure sales tactics from banks, car dealers, real estate agents, or anyone else who is trying to get us to borrow to buy something we can’t afford.
I remember meeting a man about six months ago who was in way over his head in debt. He had a very nice house, two leased cars, and a very comfortable lifestyle. About a year ago he lost his job due to the recession. While he was working he could afford to pay the mortgage, car loans, and all of his living expenses, and he borrowed to take vacations and buy various luxury items. But when he lost his job, with no savings, he immediately started using credit to survive. By the time I met him he was deeply in debt.
After much soul-searching, he made two very difficult decisions: He sold his house and moved into a smaller rental unit, and he returned his two leased cars, and replaced them with a much less expensive used car. He cut back on eating out and other expenses he couldn’t afford.
He found a new job, that paid well, but not nearly as well as his old job. To deal with his debts he filed a consumer proposal, and expects to have it paid in full in under two years.
He told me that even though he no longer lives in a huge house, and no longer drives a new car, he is actually much happier. He knows that even if he was to lose his job, he could survive while be found another job, because his expenses are now much lower.
And that’s the key to dealing with debt and surviving during these difficult times: Reduce your living expenses so that they are as low as possible, so that if you suffer a 10% reduction in income, you are still earning enough to pay your bills. It’s not easy, and you won’t be “keeping up with the Joneses”, but you will have cash in your pocket at the end of the month, and that’s a great feeling. If you have more debt than you can handle, consider your options, and begin the process towards a debt free life.
This is a website devoted to discussing all aspects of bankruptcy in Canada, but today we will discuss the opposite of bankruptcy. Today I present my Top Three Ways to Avoid Bankruptcy in Canada.
Why would I, a bankruptcy trustee, want you to avoid bankruptcy? Because I strongly believe that bankruptcy should be a last resort, a strategy to be used only after all all other options have been evaluated and eliminated. I take every opportunity to encourage all Canadians to explore all financial options before making a decision. This week I was interviewed by the Globe and Mail for a story on How to Avoid Filing for Bankruptcy, and again I made the comment that bankruptcy is a last resort.
So what are my Top Three Strategies for Avoiding Bankruptcy in Canada?
3 Get help from family or friends. This is perhaps the most over-looked strategy. I have had hundreds of people over the years tell me that they are so embarrassed about their financial situation that they are afraid to discuss it with their family or friends. I’m not suggesting you should tell everyone you know that you are having financial trouble, but reaching out to your family or closest friends is often a good solution. Many times I have encouraged people, particularly younger people, to talk to their parents. While their parents may be disappointed that they are in financial trouble, they will often also try to work with them to solve their problems.
I’m not suggesting that you should borrow money from family or friends. Borrowing money is a good way to lose friends, and an even better way to make Christmas dinner very uncomfortable. What I am suggesting is that you should ask for advice from your family and close friends.
If you don’t ask, you don’t know how people can help. Perhaps a relative can help you find a better job, and with more income you may be able to repay your debts on your own. Perhaps a friend has an extra room at their house; you could rent a room and reduce your living expenses, which will free up cash to help you deal with your debts. Moving back in with your parents may not be fun, but as a temporary measure while you get back on your feet it may not be a bad solution.
Even if they can’t help you directly, getting some advice and empathy from a trusted family member may help you decide on your next steps.
2 My second best strategy for avoiding bankruptcy is to fix it yourself. In fact, this is the strategy used by the vast majority of Canadians who experience money problems. If friends and family can’t help, and if you don’t want to file bankruptcy, you need to take matters into your own hands, and attempt to fix the problems on your own. Here’s how:
Start by making a personal budget. Your budget should list all of your expenses each month. Some will be easy, like your rent and car insurance, because they are the same each month. To ensure that you don’t forget any, review your bank statements and credit card bills for the last few months to see where you spend your money. That should give you an accurate picture of your monthly spending. There are lots of on-line budget tools that can help, like Calendar Budget, an on-line tool where you enter your purchases each day, on a calendar. There are lots of budgeting tips on line as well.
Once you have a list of your expenses, review it. What can you cut? Can you reduce or eliminate your cable bill? Car pool to work? Make your own coffee? Once you see your expenses on a list, you can take steps to cut your expenses. That will tell you how much money you can free up to repay your debts faster.
Your debts are the final piece of the puzzle: Make a list of all of your debts, and arrange them from highest interest rate to lowest, so that the top of the list has your most expensive debts. Those are the debts you want to repay first.
Now, fix it yourself by making a plan to take whatever cash you can free up each month and apply that to your highest interest rate debts first. As one debt gets paid off, use that extra money to attack the principal on the next highest debt, and so on until all of your debts are repaid. If you can keep your expenses as low as possible, you may be able to repay all of your debts on your own.
1 But what if, even with drastically reducing your expenses, you still have more debts than you can repay on your own? You need outside help, and that brings me to my top strategy for avoiding bankruptcy in Canada: filing a consumer proposal. A consumer proposal is a legally binding deal that a consumer proposal administrator negotiates with your creditors. If it’s accepted, you make one monthly payment, your debts are dealt with, and you avoid bankruptcy.
A proposal will work best if you have a job, or a stable source of income, so that you can commit to monthly payments. The good news is that, in most cases, a consumer proposal can be negotiated for less that the full amount owing on your debts, and you avoid bankruptcy.
Which option is best for you? Or do you have no choice but to file bankruptcy? Start with some research: Read our articles on consumer proposals, or read questions posted on our anonymous question and answer blog about consumer proposals. You can even join our on-line support group that allows you to discuss consumer proposals and other options. These posts are real, and people just like you post both the pros and cons about proposals, so you can hear both sides of the story to help you make a decision.
My advice: talk to your family and friends, but also talk to an expert. A consumer proposal administrator and bankruptcy trustee will give you a free, no obligation initial consultation to help you make an informed decision, so do your research, contact a trustee today, and make an informed decision.
The bankruptcy rate in Canada increased by 31% in 2009, the largest increase in recent memory. In 2009 116,381 Canadians filed personal bankruptcy in Canada, and a further 35,331 filed a consumer proposal. That’s a total of 151,712 filings, as compared to 115,789 in 2008. These are obviously massive growth numbers, which raises the logical question: why?
The first and most obvious reason is that Canada suffered through a recession in 2009, and a recession leads to high unemployment. In fact, if you create a graph showing both the growth in consumer insolvencies and the changes in unemployment, you will find that they are very closely correlated. In other words, if unemployment goes up, the rate of bankruptcy filings goes up. If Canadians start finding jobs, the rate of bankruptcy filing will decrease.
The second obvious cause of bankruptcy is high debt. You don’t need to go bankrupt if you lose your job, but you have $1 million cash in the bank. With that kind of money, you would probably just retire, and not bother looking for another job. But, if you are carrying a lot of debt, and your income drops, you may have no choice but to file bankruptcy to deal with your debt. Unfortunately in Canada, as we discussed last week, personal debt in Canada is a ticking time bomb, with the average Canadian carrying more debt than ever before. High debt is a very big problem.
But there is more to the story than simply high debt and a serious recession. On September 18, 2009 new bankruptcy rules came into force in Canada, and that caused a spike in personal bankruptcy in the weeks before September 18, and a drop in bankruptcies after September 18. Under the new rules if you have excessive surplus income, your bankruptcy is automatically extended for an extra year, so many Canadians rushed to file under the old rules (so their bankruptcy would be quicker and cheaper). The new rules caused a drop in personal bankruptcies in the last quarter of the year, but as the chart shows, consumer proposals continued to increase.
The increase in consumer proposals will continue to be the story in 2010. Canadian debtors will avoid bankruptcy where possible, and instead file a consumer proposal. From 2006 through 2008 there were approximately four bankruptcies filed for every consumer proposal filed. In 2010 we expect the ratio to be only two personal bankruptcies for every consumer proposal. That’s a significant change.
If you have debt, the good news is that consumer proposals are now more popular than ever before, so you now have a way to deal with your debts and avoid bankruptcy. In a consumer proposal your unsecured creditors (like credit cards, lines of credit, bank loans, payday loans, and income taxes) are contacted with a deal. The deal generally involves you paying less than the full amount you owe. For example, if you have $50,000 in debts, the creditors may agree to a proposal where you pay $20,000, or $400 per month for 50 months. They may ask for more (say $400 per month for five years), or they may settle for less. The exact amounts will depend on your family income, your ability to pay, and what assets you own. Consult a licensed consumer proposal administrator for more information.
What will happen in 2010? If the unemployment remains high, personal bankruptcy and consumer proposal filings will remain high. If interest rates increase, and the cost of servicing debt increases, insolvency filings will also increase.
Our advice is to not worry about that which you cannot control. What happens with the economy is out of our hands. However, we do control our own debt, so if you are carrying more debt than you can handle, and if you are worried about job loss or reduced income, we strongly recommend that you contact a licensed trustee for a free initial consultation to determine your options, and do what you can to avoid becoming another statistic.
As we celebrate Team Canada’s men’s and women’s gold medals in hockey at the Vancouver 2010 Olympics, we are all feeling good. Our country is back on top of the hockey world, and things are looking up. While we may be feeling good about our hockey teams, we aren’t feeling as good financially. Why? 2009 was a record year for personal bankruptcy filings in Canada, and the causes of the spike in bankruptcies have not gone away. The economy remains weak, and we are still carrying record levels of personal debt. That’s our biggest financial problem: debt. Debt continues to grow, and, like a ticking time bomb, high debt levels get us closer to the point of no return.
Despite the recession, or perhaps because of it, Canadians continue to borrow at record levels. By the end of the third quarter of 2009 the average Canadian adult had over $40,000 in household credit, a record level. Household credit includes credit cards, bank loans, and mortgages, so $40,000 may not appear to be a large number. After all, many people have mortgages of greater than $40,000. That’s true, but many other Canadians don’t have any mortgages or debt, so to average $40,000 over all adult Canadians, many of us are obviously carrying a significant amount of debt. As the chart shows, back in the year 2000 we each had approximately $20,000 in debt, so in less than a decade the debt we are carrying has doubled.
That’s a staggering statistic. If you are the average Canadian, your debt has doubled. Has your income doubled? Are you making twice as much today as you were earning in the year 2000? Probably not. If you still have a job you may have received “cost of living” increases of 2% per year for the last decade, but that obviously does not add up to a doubling of your income.
With these massive levels of debt, why hasn’t everyone gone bankrupt in Canada? Part of the reason is that interest rates have remained low.
In fact, mortgage rates, and consumer loan rates are lower today than they were three years ago. Low rates are partially due to governments around the world deliberately keeping rates low to stimulate spending, but low rates are also the result of the recession, where fewer people are borrowing to buy new houses, cars, and other goods.
Of course debt alone is not a problem. If I have a million dollar mortgage, but I have a job that pays me $2 million per year, my large mortgage is not really a problem. However, even if I have a small $50,000 mortgage, if I’m not working I won’t be able to make my mortgage payments on even a small mortgage. The key here is serviceability: your ability to service the debt you have.
Our ability to service our debt is a combination of the amount of debt we have (which is high), the interest rates we are paying (which are low today on most forms of debt), and our income (which for many Canadians has decreased during the recession). As the chart shows, our household debt as a percentage of our personal disposable income continues to rise.
In fact, by the end of the end of September 2009 (the most recent numbers available), the average Canadian adult was carrying household debt of 140.8% of their personal disposable income. That’s the highest level in history. Three years ago that level was “only” 120%. Stated another way, for every dollar you earn, you have $1.41 in debt, if you are the average Canadian. Obviously during this recession our debt has increased much faster than our income, and Canadians are spending more of each dollar they earn servicing their debts.
If you have a good job, and if interest rates stay low, you will probably be able to continue to service your debts. But the numbers prove that we are standing on the edge of a cliff, and all it will take is a slight breeze to knock us over the edge.
Ask yourself this: if you were to lose your job, or have your hours cut back at work, or go through a divorce, or have a medical problem so you couldn’t work, would you be able to continue paying your mortgage, your car loan, your line of credit, and your credit cards? For most people, the answer is “no”.
So what can you do to protect yourself?
First realize that your situation is precarious. Unless you have a very secure job, be very careful taking on new debt. Now may not be the time to buy a bigger house, or a new car.
Second, take steps now to reduce your expenses. You probably don’t control your paycheque, but you can control your expenses. Think about moving to a smaller house or apartment to save money. Trading in your car for something with a lower monthly payment, and a vehicle that’s better on gas, may be a good idea. Review all of your other expenses: do you really need 500 channels on T.V.that you never watch? Do you need to buy your coffee each day at the coffee shop, or can you learn to make your own? If you reduce your expenses, you will have more money to use to pay down your debts.
Finally, take steps to reduce your debt. Sell your second car and pay off the loan. Put a freeze on new spending, and start paying down your debt. Don’t just pay the minimum monthly payment on your credit cards; actively work to pay them off completely. If you can pay off your debts while you are still working, you will be in a much better position to weather the storm if you do get laid off, or if your hours are cut.
If you have already suffered through a job loss, or reduced hours at work, and if you already have more debt than you can service, it’s time to be pro-active and look for ways to eliminate your debt. That may mean you need to consider a consumer proposal or personal bankruptcy in Canada. The numbers prove that our debt problems are getting worse, not better, so there is no better time than the present to take action to reduce our debts.
The Liberal Party says it is committed to changing Canadian bankruptcy laws so former employees of failed companies like Nortel don’t lose their pensions and disability benefits when their employer goes bust.
“You gotta know that I’m hearing you loud and clear — the Bankruptcy Act must be changed,” Liberal Leader Michael Ignatieff told Nortel pensioners at a rally on Parliament Hill Wednesday.
Ignatieff said his party will be meeting Monday to discuss new proposals for the pension system. Liberals are committed to changing bankruptcy laws “so that you are not left at the back of queue in insolvency and bankruptcy,” Ignatieff said. “It’s not right; we agree with you.”
The basic point being made by Mr. Ignatieff is that it’s possible for a company to go bankrupt, and as a result workers can lose their pensions. He uses Nortel as an example, a once proud Canadian company that is now bankrupt.
The second story was written by David Olive, in the Toronto Star, and he took the opposite view: Pension Crisis: Not So Fast. He makes the point that Canadians have many sources of retirement income, including company pensions, and the Canada Pension Plan, and RRSPs. Outside experts have determined, in fact, that Canadians have pension protection as good or better than anyone else in the world.
In the third story the Globe and Mail discusses the Illusion of Pension Security in Canada, and makes the point that only 30% of Canadians have employer sponsored defined benefit pensions, so the “pension crisis” is nothing new.
So which view is correct? Should Canada’s bankruptcy laws be changed, or are we on the right track?
Unfortunately for Mr. Ignatieff, changing Canada’s bankruptcy laws is not a practical solution. First, as readers of this weekly column are very well aware, Canada’s bankruptcy laws were amended back in 2005, and 2007, but the final changes did not come into force until September 18, 2009. You can read all about the new rules in our posts on the new bankruptcy rules in Canada. Given the speed the government has worked in the past, if he wanted to make changes, it would be years before any changes were implemented.
Second, changing the bankruptcy laws misses the point. First, if only 30% of Canadians have a pension plan through work, that means most of us don’t have one, so changing rules to protect something we don’t have serves no purpose. In addition, the employee’s pension plan is not an asset of the company. It is a separate fund, entirely for the benefit of the employees. When a company goes bankrupt it’s assets are liquidated, and the proceeds go to the creditors. The pension is not liquidated; it’s not part of the company’s assets.
In simple terms, each pay period the company contributes money to a separate fund, and it is that fund used to fund the employees retirement. The best way to protect an employee’s pension is to protect the fund. The government should enforce rules to ensure that pension plans are adequately funded. If they are, even if the company goes bankrupt, the money will be in a separate fund to continue to pay retirement benefits to the employees.
The answer, then, is not to change bankruptcy laws, but instead to ensure pensions are properly funded. That can be done by enforcing the existing rules.
I’m not opposed to changing bankruptcy rules. Unfortunately, when a company goes bankrupt, there is usually very little money to distribute, so even if the pension plan got whatever money was available, it may not be enough. So, changing the bankruptcy rules would offer little protection to workers. Enforcing existing rules to ensure that pensions are fully funded is a more logical solution.
Even more important, however, is that you must look out for yourself. Every day I meet with people in financial trouble, and I give all of them the same advice: I can show you how a consumer proposal or a personal bankruptcy will deal with your debts, but only you can adjust your spending or increase your income so that you don’t have debt problems in the future.
The same advice applies to your pension. You can rely entirely on your employer, or the government, to take care of you when you retire. Or, you can take some of the responsibility yourself. If you were to start at the age of 35 and put $200 per month in a savings account, you would contribute $72,000 to your savings account by age 65. If you contributed that money to an RRSP, and re-invested your tax refund each year, and if you earned interest on your savings, you could easily have a quarter of a million dollars, or more, by the time you retire. But that’s up to you. You have to decide to save $200 per month; no-one else will do it for you.
I realize that some people simply cannot save $200 per month. Some can save more, some can save less. But when you calculate how much you spend on coffee, or fast food, or smokes, most people can find a few dollars each month to save. (There are lots of great money saving tips on the internet to give you ideas).
But what about you? Should you rely on the government to fund your retirement? No, you should rely on yourself.
The maximum benefit paid by the Canada Pension Plan at age 65 is $908.75 per month. If CPP will be your only source of income when you retire, and if your living expenses are more than $908 per month, you will have a problem.
My advice? Make a decision, right now, to plan for your retirement. Here’s what you should do:
1 Start by making a personal budget. Make a list of what you spend each month, and decide what expenses you can cut to increase your savings.
2 Eliminate your debts. There is no point in putting money in a savings account earning 1% interest if you are paying 20% interest on your outstanding credit card balance. Review your debt management options, and make a plan to start dealing with them. You may be able to deal with your debts on your own, or you may need to file a consumer proposal or personal bankruptcy to get a fresh start. Regardless of the solution, the sooner you start, the sooner you will have a solution to your money problems.
3 Start saving. Once you know what you spend, and you have eliminated your debts, you can start a savings plan. The sooner you start, the more you will save. Set up two bank accounts: one for purchases you need to make within the next year (such as for Christmas, or car repairs), and the other will be long term savings for the future (for your children’s education, or to buy a house, or to fund your retirement).
If you decide that your future is up to you, you can start making positive changes now, and you won’t have to rely on the government changing bankruptcy laws in the future to protect your retirement.
“Younger Canadians More At Risk from Debt” was the headline of a news release I received from the Canadian Association of Insolvency and Restructuring Professionals (CAIRP). This article emphasized that those most at risk of filing bankruptcy in Canada during this recession are Canadians age 35 and younger. There are many factors that CAIRP identifies that contribute to this, including:
Unprecedented Low interest rates
Easy availability of credit
Favourable job market
Never lived through a “real” recession
Lived during a time of unprecedented wealth
Cost of student loans
Lack of seniority
Regardless of the risk, age, or demographic profile, if you feel you are at risk, the best thing you can do is to immediately step back and take stock of your situation. Here are some helpful steps to help you gain control of your finances and give you the greatest chance of surviving this current recession and any other economic storm.
1Reduce your cost of living.
Regardless of what type of income you make, there is no better advice than to learn to live on less. We will all be much better off in the long run — this effort will be even more crucial in the years ahead than it has been in the past. Now this doesn’t mean you need to cut everything out. But if we can learn to reduce our expectations and learn to be a little thriftier, we will have a much greater ability to handle whatever situation we confront. Remember, we have just lived through one of the most prosperous times in history and it would be a mistake to assume that things will always remain as good as they have been. There is nothing suggesting we will return to this level of prosperity. This type of faulty thinking has been one of the biggest reasons our economy has slid into its current downturn.
2Start a habit of saving and make it a lifelong pursuit.
There is no security like money in the bank. This is the best insurance you can have against disruptions in employment or income. If this is done in combination with a concerted effort to reduce the cost of living, you will be able to handle the current crisis as simply a temporary hiccup.
3Pay down your debt.
Debt has become far too common. Our society is now so dependent on debt that even a small adjustment in the interest rates can have catastrophic effects on tens of thousands of people. We all need to reduce our dependence on debt. Gradually pay down your debt, when it is paid off, avoid getting back to the same position you are in today. This includes your mortgage.
4Invest in yourself.
We need to adopt the practice of lifelong learning. The better you are at what you do, the more valuable you are in general. This will give us greater job security, more marketability, and protection against job loss. And if we do lose our jobs, it will help us to get back on our feet quickly, and open doors for future opportunities. This learning and skill development does not even need to be related to our normal employment; the more diverse our skill set, the more prepared we will be for unforeseen events that could occur in the future.
5Build up an emergency fund.
This is a lost art. We all need a cash reserve to help if an emergency should occur. An available line of credit may appear to be helpful, but it is not as good as cash in the bank. This is true at any time, but especially true when dealing with an economic slowdown or recession. Of course most people are not in the position where they can run down to the bank and simply set aside sufficient monies to cover the suggested three to six months’ of living costs. The only way to get there is to start. Start a reserve, every little bit helps and you never know when this reserve is going to be just what you need to overcome one of those temporary hiccups we all experience.
6Learn to live off a budget
A budget is an essential tool. It is not meant to restrict you, but to keep you on track. If you don’t already have a budget, begin by keeping receipts for everything you spend, at the end of the month summarize those receipts and group them in to major categories (i.e. food, housing, utilities, recreation etc.). Then sit down and review this at the end of the month to determine what was essential and what wasn’t, where you benefited from the capital spent, and where you spent money but really had nothing to show for it. Then use this information to establish a plan. Plan how you and your family are going to spend your money, put limits in place to ensure that you don’t overspend, and lean to live by this plan. Most importantly, learn to distinguish between wants and needs. Society tends to encourage us to blur the line between these, but we need to make sure we clearly understand the difference. We should be modest in our wants; it is not what we have that brings us happiness in life.
If we all learn to follow these six steps, regardless of our age, we will be in a much stronger financial position. While many of these steps seem like they should be second nature, they are not. If we don’t make a point of focusing on each of these steps on a regular basis, they are very easily neglected. Make your finances a focus; prepare yourselves for the future. The sooner you begin, the easier it will be.
posted by Ted Michalos @ 
as Gail Vaz-Oxlade starts at the same place I start in every meeting I have with someone in financial trouble: Figure Out Where You Stand. She gives practical tips on how to analyze your spending, and, most importantly, how to face up to your debt.
This article emphasized that those most at risk of filing