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Debt Options — Page 2

Credit Cards: The Fast Route to Bankruptcy in Canada

by Doug Hoyes

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

Douglas Hoyes, Bankruptcy Trustee

Credit cards.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

by Barton Goth

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

Barton Goth, Bankruptcy Trustee

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

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

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

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

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

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

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

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

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

1st - Higher interest rates

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

3rd -  Inflation

4th - Falling back into a recession

5th - Loss of job

6th Decline in value of house

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

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

So what does all this mean?

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

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

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

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

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

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

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

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

by Doug Hoyes

Doug Hoyes, Bankruptcy Trustee

Doug Hoyes, Bankruptcy Trustee

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

The New Credit Card Regulations in Canada

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

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

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

What The New Credit Card Rules Mean for You

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

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

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

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

You should not be paying interest on credit cards!

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

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

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

Do not carry a balance on your credit cards.

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

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

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

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

Use our free debt options calculator to review your options.

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

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

Debt Settlement Plans

by Ted Michalos

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

Ted Michalos, Bankruptcy Trustee

Ted Michalos, Bankruptcy Trustee

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

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

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

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

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

Posted on Monday, August 16th, 2010
Filed under: Bankruptcy Alternatives andDebt Options
posted by Ted Michalos @ 4:08 am 1 Comment

Consumer Proposal: One of the most important financial tools available to Canadians

by Barton Goth

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.

Posted on Monday, August 2nd, 2010
Filed under: Consumer Proposal andDebt Options
posted by Barton Goth @ 5:26 am No Comments

Pat Foran: The Smart Canadian’s Guide to Saving Money

by Doug Hoyes

On this web site we provide many tips for dealing with your debt. We have an interactive debt options calculator that tells you what it will cost to deal with your debts, and we have an on-line support group so you can discuss your alternatives anonymously with others in your situation. These tools are great, but sometimes you want advice from an old-fashioned source: a book.

Books are great. You can carry them with you, and if you drop them, you don’t need to re-boot! So, occasionally over the the next few months, we will provide you with some book reviews of books that can help you deal with your debts, and save money.

Today we review The Smart Canadian’s Guide to Saving Money, Second Edition, written by Pat Foran of CTV’s Consumer Alert. I was first interviewed by Pat Foran for the first edition of the book a few years ago, and he interviewed me again prior to the release of this second edition. He also interviewed me for a story that ran on Canada AM back in 2008 about how to financially survive the holidays.

When I was interviewed on Canada AM I was very impressed by Pat Foran’s preparation and professionalism. We all think of television as very glamorous, but it isn’t. On the day of the interview is was Pat himself who met me at the reception desk at the CTV studio in Toronto, and he walked me back to the studio. While we walked we chatted about some of the questions he wanted to ask me. He had already done his research, so he knew what he wanted to ask. We got to the studio and the camera operator was ready. Pat showed me where to sit (he wanted a shot with a Christmas tree in the background), and he helped me put on my microphone. He then glanced at his notes, and then asked my seven or eight questions in rapid succession, with barely a glance down at his notes again.

The final interview was brief and concise, no doubt due to his skill as an editor, taking the five minutes of my answers and editing them down to a few brief comments. He used graphics to give viewers a very concise “to do” list of how to avoid money problems. I thought is was a great piece.

Mr. Foran’s greatest skill, in my view, is his ability to take difficult concepts and “boil them down” to simple, easy to understand tips that everyone can use in their every day life.

The first version of this book was called The Smart Canadian’s Guide to Building Wealth, and it was a good book. The Second Edition, in my view, is much better, because it focuses on Saving Money, which of course is the first step to building wealth.

Pat Foran's The Smart Canadian's Guide to Saving Money

Part 2 of this book is about saving money, and covers topics like a Tax Free Savings Account, understanding interest rates, and trimming the grocery bill.

Readers of this blog will be most interested in Part 1, where Pat Foran discusses Reducing Debt. He gives a great summary of all debt management options, including chapters on:

Of course I am most proud of Chapter 24, Declaring Bankruptcy, because that’s the chapter where I was interviewed. I gave Mr. Foran some details on our study of “Joe Debtor”, the average person who declares bankruptcy in Canada. It turns out that Joe Debtor is very similar to many Canadians, carrying over $50,000 in unsecured debt, and earning about $2,100 per month after taxes. We also discussed the causes of bankruptcy in Canada, including unemployment, marriage break up, and many other causes.

I appreciated the fact that Mr. Foran gave a very balanced view of the process, both good and bad, and he also took time to discuss alternatives to bankruptcy, including a consumer proposal.

Of course the book only has a few pages on bankruptcy; most of the book discusses ways to increase your wealth, so I recommend it as a book for both Canadians in financial trouble, and for those who have finished the bankruptcy process and are looking to start building their wealth.

Bankruptcy is supposed to give you a fresh start, and Pat Foran’s book The Smart Canadian’s Guide to Saving Money, Second Edition, written by Pat Foran is a great first step in that process.

Posted on Monday, July 26th, 2010
Filed under: Book Reviews andDebt Options
posted by Doug Hoyes @ 5:05 am No Comments

Running the Numbers

by Ted Michalos

What does it mean to “run the numbers”? This is an expression that accountants and other financial professionals use to mean “look at how much it costs” to do a certain thing.

Ted Michalos, Bankruptcy Trustee

Ted Michalos, Bankruptcy Trustee

For example, when you buy or lease a car, you determine what the total cost of the car is and then look at how much the monthly payment will be based on your down payment, the length of time you will be making payments and of course the interest rate. You “run the numbers” to see what you can afford. If you are considering a debt consolidation loan, you can use an on-line debt consolidation loan calculator to “run the numbers.”

This same concept can be (and should be) applied to all of your living expenses. Most people know how much money they have coming in – they can add up their paycheques, their government cheques, and any other money they receive in a month. What many people don’t seem to know is how much money they have going out – what they are spending.

It is not complicated to figure out how much you are spending, but it does take some effort. The simplest approach to determining how much you spend is to write down every dollar that you spend. Start by doing this for a day, then a week, then a month, perhaps two. The longer the period of time you keep track of the better the numbers you have will be.

This means that you have to write down when you spend cash, when you use your debit card, when you write a cheque or use a credit card. If there are two (or more people) paying the bills then everyone needs to keep track of what they are doing. If you’re a husband and wife and only the wife writes things down then you’ll only have half the picture. Better than nothing, but not really useful in the long run.

Once you’ve recorded all of your expenses for a month you have to sit down and sort them out – which ones are for food, for rent, for your car or other travel, etc. It doesn’t matter how you group things together as long as you know what items make up each number. (In other words, if you decide to lump all of your rent and utilities together as one item then every month you need to do the same thing. You can’t include the cable bill this month and then put it someplace else next month).

Once you have all of your expenses sorted out you can decide whether on not that’s how you want to spend your money. In a lot of cases (things like rent) you don’t have a lot of choice, but for other items (such as groceries, or entertainment, coffee breaks, etc) you can decide how much you are willing able to spend.

This is “running the numbers” for your living expenses. If you write down the money coming in at the top of the page, list the money going out beneath it, you’ll have a monthly budget. By subtracting the money going out from the money coming in you can determine how much money you have left over to save, or pay down debt, or to buy the things that you need from time to time.

If your budget is in the negative (the money going out is larger than the money coming in) then you need to look at ways to either increase the money coming in – get a second job, rent a room, whatever – or you need to look at ways to reduce the money going out – cut back on your expenses.

The people that we speak to most frequently have determined that the item causing them the most difficulty every month is the money going out to deal with their debts. For many Canadians, this can be the largest part of their budget – exceeding the amount they pay for their rent or mortgage.

If after you’ve run the numbers you determine that you need to do something about your debt, that’s when you should consider speaking to a financial professional to review your debt management options.

Running the numbers gets you started – once you have a budget you can look at different debt management solutions to deal with your debts to see which one fits your budget and is right for you.

Posted on Monday, July 19th, 2010
Filed under: Debt Options
posted by Ted Michalos @ 4:59 am No Comments

Debt Management Plans

by Ted Michalos

A debt management plan, also referred to as credit counselling, is a voluntary repayment plan to deal with your debts. The most common alternatives to a debt management program are a debt consolidation loan, or a consumer proposal.

Ted Michalos, Bankruptcy Trustee

Ted Michalos, Bankruptcy Trustee

The idea behind a debt management program is simple – your debts are pooled together (they are not paid off like with a loan) by a not for profit agency so that you only have to make one monthly payment. In most cases, there will be no new interest charged to the debts included in a debt management plan. Instead your payments go directly towards reducing the debt.

Debt management plans are an excellent solution for people that can afford to repay their debt in full, but need relief from the interest they are being charged. They are not really an alternative to bankruptcy, but rather it is an option to consider while you still have the ability to make payments.

If you compare a debt management program to a consolidation loan what you will find is that the consolidation loan costs you more (since you will still be paying some sort of interest on the debt), but the consolidation loan is also better for your credit report. If you file a debt management plan your debts will be reported as an R7 – this designation simply means you have entered into a plan to repay your debts at less than the full amount of your original contracts (i.e. less or no interest). With a consolidation loan your credit might be rated an R1 – the highest possible rating, assuming you make all of the loan payments on time as required.

Interestingly, a consumer proposal receives the same credit rating as a debt management program, an R7. A consumer proposal is a legal procedure (administered by licensed trustees in bankruptcy) where you repay a portion of your debts. Like the debt management program there are no interest charges, but unlike the debt management program, in a consumer proposal you usually only repay 30 to 50% of the debt. Also unlike the debt management plan, consumer proposals are a direct alternative to bankruptcy.

So which should solution should you be considering?

Well, if you can afford to repay your debt in full and you qualify for a consolidation loan then this is probably the correct solution for you to use.

If you can afford to repay the debt, but the interest charges are killing you, or if you have applied for a consolidation loan and been rejected then a debt management program might be the place to start.

If repaying the debt in full will be difficult, or you know that you cannot afford to repay the debt in full, then a consumer proposal is likely the best route for you to consider.

The trick with all of these solutions is to consider each option carefully and then make a decision based on what you can realistically afford to repay. If after you “run the numbers” none of these options make any sense then you may have to consider personal bankruptcy, which is discussed in detail on this site.

Posted on Monday, July 5th, 2010
Filed under: Bankruptcy Alternatives andbankruptcy Canada andConsumer Proposal andDebt Options
posted by Ted Michalos @ 5:46 am No Comments

Avoid Bankruptcy in Canada and Survive the “False Economy”

by bgandossi

Bruce Gandossi, Bankruptcy Trustee

Bruce Gandossi, Bankruptcy Trustee

My name is Bruce Gandossi. I’m a chartered accountant and licensed trustee in bankruptcy with Sands & Associates in British Columbia. A few months ago I wrote an article asking the question: Will the Vancouver 2010 Olympics Impact Personal Bankruptcy Rates? Here’s what I said a few months before the Olympics about bankruptcy in Canada:

We may have a mini boom during the Olympics, as all of our hotels and restaurants will be full with visitors from around the world. But after that, incomes won’t be rising, and house prices won’t be rising, so debtors won’t be able to rely on overtime or a rising real estate market to deal with their debts.

As predicted, Vancouver residents were very busy in the months leading up to and including the Olympics. I live in Vancouver, and I work from my Vancouver bankruptcy office, and I can tell you from first hand experience that the Olympics were fantastic. Like many other Vancouver residents, I had the pleasure of experiencing the Olympics first hand. I went up to Whistler the week before the Olympics to see the preparations for skiing. I attended the opening ceremonies, and they were unbelievable. I watched the speed skating on the big oval in Richmond (my firm also has a bankruptcy office in Richmond), and I saw short track and hockey games in Vancouver.

Are we suffering a “hangover” from the Olympics? I’m happy to report that no, we Vancouver residents are not suffering a large let down. The Olympics were great, and we were happy to be a part of it.

However, there is no doubt that the Olympic jobs are now gone, and we are no longer living in the boom times created by the Olympics.  Obviously the end of the job boom can reduce income, and increase the risk of personal bankruptcy in Canada.

I’m not an economist, but I do meet with regular, hard-working Canadians every day, and based on what they tell me I worry that many are living in a “false economy.” The Olympics certainly helped us here in Vancouver, but all across Canada, and the world, government stimulus money has also helped bolster the economy, and keep our economy from sliding into an economic depression.

Government economic stimulus is somewhat like credit card debt. I use the credit card today to buy what I want, and I feel great. But, at some point in the future, I will need to repay what I borrowed, and that’s the “time of reckoning” that is not yet here. I hope the economy continues to recover, but as a trustee in bankruptcy I’m also a realist. We hope for the best, but prepare for the worst.

There is some great news when it comes to dealing with debt. Over the last eight months I have personally witnessed an increasing number of Vancouver residents choosing to avoid filing bankruptcy in Canada to deal with their debts; instead, they are choosing to file a consumer proposal. Recent changes in the rules make filing a consumer proposal a more attractive option for many Canadians. In a proposal I help you negotiate a settlement with your creditors, where you pay perhaps a third or a half of the total amount you owe over a three to five year period, and your creditors agree to write off the rest. If the creditors accept your proposal, you avoid filing bankruptcy in Canada. I tell people they need three things going for them to file a proposal:

  1. Age
  2. Health
  3. Income

First, you need to be old enough to understand a proposal, and young enough to have the time to make the payments over the next three to five years.

Second, your health should be sufficient so that you know you will be working for the next three to five years so that you can make your proposal payments.

Finally, to make payments you need a stable source of income. If you expect to get laid off next month, a proposal may not be your best option.

As my fellow residents of Vancouver look back fondly on our Olympic experience, I encourage everyone to look ahead to their future, and if you find you have more debt than you can handle, consider a consumer proposal as an option to deal with your debts. We will meet with all debtors initially without cost to assist you in the assessment of your options. Please contact a trustee today for your free initial consultation, and find out what options will work best to help you deal with your debt.

Posted on Monday, May 24th, 2010
Filed under: Bankruptcy Alternatives andbankruptcy Canada andConsumer Proposal andDebt Options
posted by bgandossi @ 6:05 am No Comments

Could you survive a 10% reduction in your income?

by Doug Hoyes

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.

The Certified General Accountants Association of Canada released a study this week titled: Where is the Money Now: The State of Canadian Household Debt as Conditions for Economic Recovery Emerge. They surveyed Canadians and discovered that 50% of Canadians believe that their financial well being would be noticeably affected by a 10% salary decrease.

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.

Posted on Monday, May 17th, 2010
Filed under: Bankruptcy Alternatives andbankruptcy Canada andConsumer Proposal andDebt Options
posted by Doug Hoyes @ 6:51 am No Comments

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