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Supreme Court Decision – Will it Lead to Changes in Bankruptcy Law in Canada

by Doug Hoyes

On July 14, 2011 the Supreme Court of Canada released its decision in the case of Schreyer v. Schreyer. Why are we discussing a Supreme Court of Canada decision in a blog about bankruptcy in Canada? Because this case confirms a long held principle of bankruptcy law, but it also forces us to consider whether changes to bankruptcy law are required.

You can read the entire case on the Supreme Court of Canada’s website, but here’s a simple summary:

Doug Hoyes, Bankruptcy Trustee

Doug Hoyes, Bankruptcy Trustee

Mr. and Mrs. Schreyer divorced in 1999, and as is standard procedure, their assets were to be divided amongst them. Mr. Schreyer was to make an equalization payment to Mrs. Schreyer of about $41,000.

Where both parties own assets, and one of the parties will be retaining one of the assets, that party pays the other their share.

For example, if the wife’s only asset are shares in a business worth $100,000, and the husband has no assets, upon divorce the wife may be required to make an equalization payment of $50,000 to the husband. By doing so, after the divorce, they both end up with $50,000 in assets, so they each have half of the total assets they had while married.

In the case of Schreyer v. Schreyer the asset was a family farm, and Mr. Schreyer was ordered to pay $41,000 as an equalization payment to his wife.

However, before that payment was made, Mr. Schreyer declared bankruptcy. Mrs. Schreyer therefore became a creditor of his in his bankruptcy. Under Manitoba’s The Judgments Act, the family farm was exempt from execution by creditors.  That meant that Mr. Schreyer kept the farm when he went bankrupt, and his wife got nothing.

(It should be noted that the law is different in each province. For example, in Ontario there is no exemption for real estate, so in Ontario if the bankrupt owned a farm worth $80,000, the trustee may sell the farm and distribute the proceeds to the creditors, so had this happened in Ontario, Mr. Schreyer would have lost the farm when he went bankrupt, or he would have been required to pay into his estate the value of the farm).

Is this fair?

According to bankruptcy law, your debts are extinguished when you go bankrupt, so on that basis yes, it’s fair.

However, the Bankruptcy & Insolvency Act does give special treatment for child support, in section 178 (1) (c), which states that the following debt or obligation is not discharged in a bankruptcy:

any debt or liability arising under a judicial decision establishing affiliation or respecting support or maintenance, or under an agreement for maintenance and support of a spouse, former spouse, former common-law partner or child living apart from the bankrupt;

In other words, if you go bankrupt, you are still required to pay child and spousal support.

So, why, if you file bankruptcy in Canada, are you not required to make equalization payments to your former spouse? That’s a good question, and I suspect that the law will be changed to close this loophole; it’s certainly received a lot of press since the decision was released, including these articles:

Parliament moves slowly, so we shall see how long it takes for the government to act.  Regardless of their speed, I believe that it is time for the government to change the rules regarding divorce and bankruptcy.

Posted on Monday, July 18th, 2011
Filed under: bankruptcy Canada andbankruptcy reform
posted by Doug Hoyes @ 3:22 am 1 Comment

Gift Cards are Worthless if the Store is Bankrupt

by Doug Hoyes

Gift cards are a nice, convenient gift, but what happens if the store declares bankruptcy in Canada? The answer: you’ve got a problem.

Last week Global TV News ran a story about the bankruptcy of Tabi, a large women’s clothing retailer with 78 stores across Canada. All stores are being liquidated, and the liquidator is not allowing customers to spend their gift cards. You can watch the entire story here:

Have you ever wondered why almost every store, including grocery stores, have a gift card program? Obviously they want to encourage you to shop at their store, but that’s only part of the story. They have gift cards because they are very profitable, for two reasons:

First, statistics show that if a gift card is not redeemed within the first few weeks, it’s likely that it will not be redeemed at all. Gift cards can be easily forgotten or lost. That’s great for the store, because they sell a $50 gift card and in many cases don’t have to provide any product. That’s a 100% profit for the store.

Second, even if the gift card is used, it’s common for the gift card not to be used in full. If you have a $100 gift card and buy something for $95, what are the chances that you will go back to the store later to redeem the final $5? It’s unlikely, and in that case the store increased their profits by 5%, so again, stores love gift cards.

What can you learn from this story?

A gift card is not something you want to keep for a “rainy day“. If you get a gift card as a gift, spend it. It won’t increase in value, and there is always the chance that the store will go bankrupt, so the sooner you spend it, the better. Tabi was in business for 30 years, so if they can go bankrupt, anyone can.

The prudent approach is to use the gift card for something you were going to buy anyway. If it’s for clothing, decide what clothing you will need to purchase in the next few months, and purchase it now. You can use the gift card for luxuries, but by buying what you need you save your money.

Finally, think twice before giving a gift card as a gift. Is it likely that the recipient will use it, or is it to a store they don’t shop at so it might not be used? If in doubt, give gift cards that are redeemable at many different locations, and at stores that sell a wide variety of goods, so they are most likely to be used.

If in doubt, and you can’t think of a gift, give cash. Bankruptcy in Ontario, or anywhere in Canada can happen. Losing a $50 gift card is easy; it’s much less likely that someone will forget about a fifty dollar bill. Gift cards are convenient, but spend them quickly.

Posted on Monday, April 4th, 2011
Filed under: bankruptcy Canada
posted by Doug Hoyes @ 7:34 am 3 Comments

Bankruptcy Rate Drops in Canada

by Doug Hoyes

The bankruptcy rate in Canada dropped in 2010, according to statistics recently released by the Office of the Superintendent of Bankruptcy. That’s good news, right? Yes and no.

First, let’s review the numbers. In 2010 a total of 135,008 Canadians filed a consumer proposal or personal bankruptcy. That’s an 11% drop from the 151,712 who filed in 2009. That’s a drop of 16,704 people, and yes, that’s good news. Fewer Canadians declared themselves insolvent in 2010. Now let’s take a look behind the numbers.

Personal Bankruptcy Rate Falls, By Consumer Proposals Increase Dramatically

Personal bankruptcies dropped from 116,381 to 92,694, a drop of over 20%. But consumer proposal filings increased by almost 20%, increasing from 35,331 to 42,314.

So why did personal bankruptcy filings drop, while consumer proposal filings increased? Two reasons:

First, the economy in Canada was somewhat better in 2010 than it was in early 2009, as we were still in “recovery mode” after the credit crisis and stock market correction in late 2008. A better economy generally means lower unemployment, higher consumer spending, and generally fewer personal bankruptcies. So it’s not surprising that the total number of insolvencies (bankruptcies and proposals) dropped, and that the number of personal bankruptcies also decreased significantly.

It’s also not surprising that, in a good economy, Canadians in debt are more likely to choose a proposal over bankruptcy if they can’t pay their bills. In a proposal you make a payment each month, and that money is distributed to your creditors. If you don’t have a job or a source of income, a proposal probably isn’t possible. If you are working and do have an income (just not enough to pay your bills in full), then a consumer proposal is a great solution. Clearly there is a greater chance of Canadians having jobs during good economic periods, so during recessions proposal filings are likely to drop, while in good times they may proportionately increase.

Second, the government changed the bankruptcy rules in 2009, making bankruptcy more expensive for Canadians with surplus income. As a result, in 2010 more Canadians chose to file a consumer proposal as a way to avoid bankruptcy.

So yes, it’s good news that bankruptcy numbers are down, but you have to take the numbers with “a grain of salt”, since part of the decrease in bankruptcy filings was due to a change in the rules.

Also, let’s not forget that debt in Canada remains a ticking time bomb, and massive credit card debt continues to lead to bankruptcy in Canada. Year to year bankruptcy numbers may rise and fall, but over the long term, as long as our debt remains high, Canadian will continue to file bankruptcy.

If you are interested in 2010 bankruptcy statistics for other areas of Canada, here’s list of other articles on bankruptcy statistics

If you are experiencing financial problems and think bankruptcy might be the answer, use our free debt options calculator to review your options, and then contact a licensed bankruptcy trustee today for a free initial consultation, and be sure to ask about a consumer proposal, the number one alternative to bankruptcy.

Posted on Monday, March 28th, 2011
Filed under: bankruptcy Canada
posted by Doug Hoyes @ 7:44 am No Comments

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

Cost of Filing Bankruptcy in Canada

by Doug Hoyes

What does it cost to file bankruptcy in Canada? As a trustee I have handled thousands of personal bankruptcy filings, and that may be the most common question I am asked. For many, the answer is also somewhat confusing.

Doug Hoyes, Bankruptcy Trustee

Doug Hoyes, Bankruptcy Trustee

In simple terms there are three costs to filing. There is a minimum contribution, there is a surplus income payment, and then there is the money you lose in the process due to your assets.

1 Most trustees in Canada will require you to make a minimum contribution each month towards the administrative charges of your bankruptcy. That may be in the range of $200 to $250 per month, and they may require a month or more of contributions to be contributed when you sign the bankruptcy paperwork. As each case is different, your trustee can explain this to you in more detail.

2 Surplus income is a more complicated concept, but in simple terms the government allows you to earn a base amount each month. If you earn over that amount, you are required to pay more. We have lots of details on this site, including our post on Surplus Income and Bankruptcy in Canada, and surplus income in the bankruptcy process in Canada. There are a number of surplus income worksheets available on the internet as well.

3 Finally, if you file bankruptcy you will lose any non-exempt assets. For example, you will lose any money you have contributed to your RRSP in the last twelve months. You also lose your tax refund, HST credits, and any equity you have in a car or house. More details can be found in our article on bankruptcy exemption limits in Canada.

For more information, please see our article on the cost of filing bankruptcy in Canada, or review other articles on the cost of bankruptcy.

Two final comments:

First, the calculations to determine the cost of bankruptcy are confusing, so we strongly recommend that you arrange a no-charge initial consultation with a bankruptcy trustee in Canada.

Second, if you are concerned about the cost of bankruptcy, a consumer proposal may be a better option for you, because often the monthly payment in a consumer proposal is less than the monthly payment in a bankruptcy. Please see our free, interactive debt options calculator for more information.

Posted on Monday, January 17th, 2011
Filed under: Bankruptcy Alternatives andbankruptcy Canada andConsumer Proposal
posted by Doug Hoyes @ 5:06 am No Comments

Why are More Seniors Filing Bankruptcy in Canada?

by Doug Hoyes

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

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

So why are more seniors declaring personal bankruptcy?

Doug Hoyes, Bankruptcy Trustee

Doug Hoyes, Bankruptcy Trustee

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

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

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

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

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

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

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

What’s the solution?

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

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

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

Posted on Monday, October 18th, 2010
Filed under: Bankruptcy Alternatives andbankruptcy Canada andConsumer Proposal
posted by Doug Hoyes @ 5:34 am No Comments

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

by Doug Hoyes

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

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

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

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

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

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

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

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

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

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

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

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

Credit Cards: The Fast Route to Bankruptcy in Canada

by Doug Hoyes

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

Douglas Hoyes, Bankruptcy Trustee

Credit cards.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

by Doug Hoyes

Doug Hoyes, Bankruptcy Trustee

Doug Hoyes, Bankruptcy Trustee

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

The New Credit Card Regulations in Canada

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

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

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

What The New Credit Card Rules Mean for You

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

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

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

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

You should not be paying interest on credit cards!

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

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

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

Do not carry a balance on your credit cards.

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

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

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

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

Use our free debt options calculator to review your options.

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

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

Bankruptcy and Consumer Proposal Rate in Canada Increases

by Doug Hoyes

Personal bankruptcy filings in Canada increased in June, 2010, according to personal bankruptcy statistics released by the Office of the Superintendent of Bankruptcy. In the month of June 11,900 Canadians filed a bankruptcy or a proposal, up 7% from the 11,123 filings in May, 2010. Over the twelve months ending in June, 145,233 residents of Canada filed a proposal or bankruptcy, up 6.2% from the 136,749 who filed over the twelve months ending in June, 2009.

For the twelve months ended June 2010 the rate of filings increased everywhere but in Manitoba and Nunavut. Here’s a summary of the rate of increase in personal insolvencies (which includes bankruptcies and proposals) filed by consumers in Canada for the twelve months ended June, 2010:

What does the increase in insolvency filings in Canada mean for the average Canadian?

A quick review of the number shows that in virtually every province the number of insolvencies filed increased, but a more detailed look at the number reveals a very important trend: personal bankruptcy filings in Canada are actually decreasing, while the number of consumer proposals filed is increasing dramatically.

As noted above, over the last twelve months in Canada the total number of residents of Canada declaring insolvency increased by 6.2%, to 145,233. However, the number of personal bankruptcies actually decreased by 1.5%, from 106,933 to 105,360. So why are total filings up 6.2%? Because the number of proposals filed by consumers increased by an astounding 33.7%, from 29,816 to 39,873 filings in the last twelve months.

These numbers prove that the average Canadian is increasingly choosing to file a consumer proposal as an alternative to personal bankruptcy.

Why are consumer proposal filings increasing in Canada?

Bankruptcy numbers are falling, and consumer proposals are increasing for two reasons:

First, the economy in Canada is still showing weakness, which is why overall numbers are still increasing.

Second, and most importantly, in September 2009 the federal government implemented new bankruptcy rules that make filing bankruptcy a longer and more expensive process for many Canadians. The most significant new rule involves the calculation of surplus income. In simple terms, under the new surplus income and bankruptcy in Canada rules, if your family income is higher than the allowable limit set by the government, your bankruptcy will last for an extra year, and you will be required to make extra payments for that extra year. That means that a first time bankrupt, instead of being discharged in nine months, may not be discharged for 21 months.

Clearly, many Canadians with debt problems have analyzed their options, and have decided that a consumer proposal is a better option than bankruptcy for dealing with their debts, and that’s why consumer proposal numbers continue to increase.

With a consumer proposal you make one fixed monthly payment, and that payment doesn’t increase even if your income increases. You know exactly what you are required to pay to discharge your debts, and that’s a great feeling.

To find out if a consumer proposal is right for you, contact a licensed consumer proposal administrator today for a no charge initial consultation. The numbers don’t lie; a consumer proposal may be the right option for you.

Posted on Monday, August 30th, 2010
Filed under: bankruptcy Canada andbankruptcy reform andConsumer Proposal
posted by Doug Hoyes @ 5:35 am No Comments

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