What happens to Canadians who can’t repay their payday loans? Today, I will explain what steps to take if your payday loan is in collections.

What happens if you don’t pay back your payday loan?

Failing to repay your payday loan will make your financial situation worse and can have severe consequences, including:

Collection calls: If you don’t pay your payday loan, it can be sent to a collection agency, subjecting you and your references to collection calls from debt collectors. Once a payday loan is in collection, it will appear as a negative item on your credit report.

A second attempt to collect from your bank account: Payday lenders typically have you sign a pre-authorized debit against your bank account with the amount due when or shortly after you receive your next paycheque. Depending on the province, the lender might retry an automatic payment if there was not enough money in your account to repay the loan the first time. Some provinces do not allow repeat payment processing (Ontario), while others limit processing attempts to two.

Additional fees and interest costs: You will face additional fees from your payday lender at a very high interest rate on your outstanding balance. This further increases the cost of borrowing in an already financially strained situation. In Ontario, regulations governing late fees from payday lenders cap the maximum interest rate at 2.5% per month on the balance due. If you owe $1,200 on a payday loan, that is an additional $30 in interest costs the first month, increasing from there as interest charges compound.

Bounced payment charges: Both your payday lender and financial institution will charge an insufficient fund (NSF) fee for a bounced payment unless you have overdraft protection. Ontario law limits bounced fees from payday lenders to $25 per missed payment.

Potential lawsuit: While a collection lawsuit from a payday lender is rare, it remains a possibility, with potential consequences including the seizure of funds from your bank account or a wage garnishment in which they may contact your employer.

Harm your credit score: Ultimately, missed, late, or non-payments on your payday loan can severely harm your credit score, creating long-lasting repercussions for your financial health.

Strategies for dealing with payday loans in collection

When dealing with payday loan collections, knowing your rights and having a plan for communicating with debt collectors is important.

Familiarize yourself with what debt collectors can and cannot do. In Ontario, for example, collection agencies must notify you by letter or email before they can contact you to collect. They can contact you by phone or text on a Sunday between 1 p.m. and 5 p.m. local time and on a Monday to Saturday between 7 a.m. and 9 p.m.

If you speak with a debt collector, remain calm and professional. If they threaten or bully you, hang up and consider reporting them for harassment.

If you negotiate a payment agreement, document everything and get any repayment plan or settlement in writing before making any payments.

The debt collector may accept a debt settlement if you can’t pay the full amount.

If you cannot come to an agreement or the amount is more than you can afford to repay, consider options like a consumer proposal or bankruptcy.

Once you have paid off a payday loan, avoid payday loans in the future by considering alternatives to payday loans, including taking out a small loan from a credit union, getting a cash advance on your credit card, borrowing from friends or family and finding ways to reduce expenses so you can build a small emergency fund.

FAQs about payday loan collection

Let’s take a look at some of the most frequently asked questions regarding collections and payday lending.

Do payday loans show up on a credit report?

Payday lenders usually do not report payday loan activity to the credit bureaus, but they do report installnent loans or lines of credits. Since payday loans typically do not appear on your credit report, borrowing a payday loan is unlikely to affect your credit score. If you default on a payday loan and it is assigned to a third party collection agency, the collection account will be reported to TransUnion or Equifax, negatively impacting your credit rating.

Can payday loan lenders take you to court in Canada?

In Canada, payday loan lenders have the legal right to take borrowers to court, garnish wages or seize personal property if they default on the loan. While the decision to pursue legal action varies among lenders, some payday loan lenders may choose to sue you in small claims court to recover the debt.

It’s important to note that each province in Canada has laws and regulations regarding payday loans and debt collection. The Limitations Act outlines the time frame for creditors to pursue legal action to collect unsecured debts – two years in Ontario.

In Ontario, payday lenders must be licensed and follow the rules of the Payday Loans Act. Debt collectors must be registered under the Collection and Debt Settlement Services Act.

Can payday loans contact your employer?

A payday lender can contact your employer to confirm your employment but cannot tell anyone you owe money, which means they cannot contact your employer, friends or family to try to collect.

If the payday lender obtains a garnishment order, they can contact your employer to withhold money from your paycheque and direct it to the lender.

Can a payday lender take money from my bank account without my consent?

In Canada, payday lenders are generally not allowed to withdraw funds directly from your bank account without your consent or a court order. However, some payday loan agreements may include a voluntary wage assignment clause where you permit the lender to garnish your wages to repay the loan if you default. You can rescind this permission anytime if you signed such a clause with a payday lender.

Can you go to jail for a payday loan?

You cannot go to jail for defaulting on a payday loan. While payday lenders may take legal action to recover the debt, such as suing you in court, defaulting on a payday loan is not a criminal offence in Canada.

Can I delay or extend a payday loan?

Payday loans are typically short-term loans, although you may have up to 62 days to pay them back, depending on your loan agreement.

In most provinces in Canada, payday loan rollovers, also known as loan extensions or renewals, are not allowed by law. You cannot delay a payday loan by rolling it over with the same payday lender.

Some provinces in Canada have rules regarding successive payday loans. For example, if you have taken three loans within 63 days in Ontario, the payday lender must offer you an extended payment plan.

Can I take out a loan with another payday lender?

While you can’t get another payday loan from the same lender, nothing stops you from taking out a loan with another payday lender, either in person or online.

Taking out a loan with another payday lender to cover an existing debt is unwise and leads to a payday loan cycle that is difficult to break. Owing money on multiple payday loans often leads to bankruptcy.

Should I use my credit card to pay off my payday loan?

Most people who take out a payday loan have done so because they no longer have any available credit limit on their credit cards. However, credit cards charge a much lower annual interest rate than a payday loan. If you can refinance your payday loan with your credit card, paying less interest might make sense and help you repay the loan amount sooner.

Taking a cash advance on your credit card to pay off a payday loan will result in cash advance fees and increase your credit card debt. Make sure you have a repayment plan for your credit card bill so you don’t end up reborrowing from the payday loan company and end up in a payday loan cycle of debt.

Can you do debt consolidation on payday loans?

You can consolidate payday loans if you have enough good credit to qualify for a new debt consolidation loan.

Taking out a line of credit or personal loan from a bank or credit union to pay off a payday loan can be a good idea due to the lower interest rates of these types of loans.

By consolidating high-cost payday loan debt into a lower-interest loan, you can save money on interest payments, lower your monthly payment and pay off your total debt balances faster.

The key, however, is to ensure that your consolidation loan has a low interest rate and that you can afford the monthly payments. Many payday lenders now offer high-interest lines of credit. We do not recommend these loans due to the high cost of borrowing.

Another option is to talk to a credit counselling agency about doing a debt management plan. Not all payday lenders will agree to repayment through a DMP, but this is worth exploring if you only have a small amount of payday loan debt.

You can also consider filing a consumer proposal if you struggle with high payday loan debt and other unsecured debt like credit cards, lines of credit, tax debts or student loans.

Can I file bankruptcy for payday loans in Canada?

Yes, Canadians can file for bankruptcy to deal with payday loan debt. Bankruptcy is a legal process allowing individuals to discharge most of their debts, including payday loans, providing a fresh financial start.

Seeking advice from a licensed insolvency trustee can help you understand your options for debt relief regarding bankruptcy or alternative solutions such as a consumer proposal.

How to get out of payday loan debt

If you have payday loans in collection and find you can’t pay back your payday loans, you have options for payday loan debt relief.

Reach out to one of our licensed insolvency trustees for a free consultation. We will help you develop a strategy to deal with high-interest payday loan debt.

Know that you are not alone in your struggle. More than 40% of our clients have at least one payday loan, and most have multiple payday loans. (ask sharon about this) – significant instead of number.

Our team will review your financial situation, look at your budget and help you create a path towards becoming debt-free.

You can break free from the payday loan trap and regain control over your finances by exploring your options.

The post Payday Loan in Collection? What to Do Next. appeared first on Hoyes, Michalos & Associates Inc..

According to our 2023 Joe Debtor study, higher house prices have resulted in a decline in homeowner insolvencies. As a result, insolvent debtors are currently predominantly renters (96% in 2023).

One proposed solution in the renter’s bill of rights is to mandate credit reporting for rent. While this sounds like a good idea, we fear it may have unintended consequences.

Proposed government measures around credit teporting

The government has proposed a Tenant Protection Fund that would put $15 million over five years toward legal services for tenants. They propose to crack down on rent increases and renovictions, introduce a country-wide standard lease agreement and require landlords to disclose the history of an apartment’s rent through the credit bureau. 

The theory is that for years, tenants have had to pay rent every month, but unlike other financial obligations that boost credit scores, rent payments haven’t counted toward credit history. This gap has caused issues for tenants who pay rent on time but have low credit scores, making it hard for them to find housing because landlords often rely on credit scores to judge trustworthiness. As a result, tenants haven’t had the chance to use their rent payments to improve their credit.

The Credit for Paying Rent Initiative will now allow tenants to build credit through their monthly rent payments. By including renters’ timely payment history in mortgage assessments, the government hopes to make it easier to qualify for mortgages, maybe even at lower rates. This move has support from industry groups like the Canadian Bankers Association and Credit Canada. 

However, we wonder if the implementation is feasible and whether it will make a difference in terms of the ability to buy a home.

How credit bureaus work

In Canada, your credit information is reported to credit bureaus by lenders and creditors with whom you have financial relationships, such as banks, credit card companies, and mortgage lenders. They provide details about your credit accounts, payment history, credit inquiries, and public records like bankruptcies. This information is compiled by major credit bureaus like Equifax and TransUnion into your credit report, which lenders use to assess your creditworthiness when you apply for new credit. 

To file payment history with the credit bureaus, creditors must establish a service agreement with each credit bureau. Currently, credit bureaus require a minimum number of active accounts and consistent monthly reporting. Creditors must also provide data in a technical format that the credit bureaus, or an intermediary processor, will accept. These technical requirements are very specific; it’s not just about sending a note that John Smith didn’t pay this month. 

How long does it take to have your debt reported to the credit bureau? In a recent episode of Debt Free in 30, Blair DeMarco-Wettlaufer, the Chief of Operations Officer of Kingston Data & Credit, explained the process, “Ideally, we reach out to the person, and they pay. If they don’t pay, a collection agent’s biggest leverage is reporting debts to the credit bureau. We don’t want to do that on day one. That’s not legal. We don’t even want to do it on day seven. We want to give the person a chance to connect with us and work with us. And we tell them if you take care of this, we won’t report this to the bureau and then everybody wins.”

Concerns

The idea of receiving good credit for paying rent on time could help renters, however we have concerns about how this would work.

As noted earlier, providing information to the credit bureaus requires both time and technical expertise. Who is going to enforce landlords’ reporting to the credit bureau? How are mom-and-pop landlords going to handle this extra task? Will they end up having to hire help, and if so, how much will that cost them? Will we see the entrance of a new, fee-for-service, intermediary. Who will pay that cost? Will tenants see a rent increase to offset the extra costs?

We also wonder if this could lead to unfair practices by landlords who may take advantage of the situation for their benefit. As Blair mentioned, reporting to the credit bureau is a useful collection tool. It’s a pretty forceful hammer. Coud unscrupulous landlords use this tactic to by offering to give you a good credit score on your credit report in response for a payment penalty or rental increase. How will The Landlord and Tenant Board handle disputes if this gets out of hand?

The question also remains: how this will work for student or shared housing?If five people live under one roof, who will receive the credit? How does it work for couples who pay rent but only one name is on the lease? 

Also, a credit score is a proprietary calculation made by each credit bureau.  It will be up to each credit bureau to determine how much value rent payments have on your credit score. For example, currently, major cell phone carriers report to the credit bureau. If you pay on time, that reporting doesn’t help your score that much, but if you don’t pay on time, it can hurt your score a lot! If this is the way they plan to handle rent reporting, it could do more harm than good for some Canadians who are struggling.

At the end of the day how many people is this going to help vs potentially harm? If the government’s goal is to help young Canadians purchase their first home, I don’t think having rent reported on a credit report will help very much. A bad or no credit score is not what is stopping people from getting a mortgage. The real issue that is being faced is high home prices due to inflation which makes it hard to save for a down payment.

Using rent to establish a credit history might help people borrow other debt. For example, insolvent debtors (who are primarily renters) might be able to use their rent to rebuild their credit rather than take on new debt. However, again, it will all depend on the weight credit bureaus and prospective lenders put on rental payments vs payment history on actual credit like credit cards and bank loans.

While the concept of incorporating rent payments into credit scores holds promise, its impact may be limited in addressing the broader challenge of housing affordability and credit building. The pressing issue of soaring home prices due to inflation remains a significant barrier for aspiring homeowners, overshadowing the potential benefits of rent reporting on credit scores.

It’s great that the government wants to help young Canadians buy homes but a more comprehensive approach addressing the root causes of housing unaffordability may be necessary for meaningful change.

The post Should Rent Be a Part of a Credit Score? appeared first on Hoyes, Michalos & Associates Inc..

But what do you do when one credit card is maxed out, and you struggle to make your credit card payments on that card? Or what if an alternative credit card company offers you a credit card with a lower interest rate? Should you pay your credit card debt with a different credit card? That’s what we are exploring today – when paying a credit card with a different credit card is a good idea and when it’s not.

Can you pay off one credit card bill with another credit card?

Settling one credit card bill with another isn’t an option, as credit card companies won’t accept another credit card as a form of payment. Accepted payment methods usually include cheque payments, electronic bank transfers, or money orders.

However, there are workarounds including:

• balance transfers, or

• using cash advances.

How to pay off a credit card with another credit card

Although you can’t directly pay one credit card with another credit card, here are some options to transfer balances and the pros and cons of each.

Balance transfer

One method to pay off a credit card with another involves leveraging multiple credit card issuers. Applying for a new credit card that offers balance transfers allows you to move balances from one credit card to another.

Depending on the card, you may qualify for a lower or zero introductory interest rate, which will help you save money on interest charges, at least during the promotional period. Switching from a high-interest credit card to a low-interest card can reduce your interest charges in the long run.

Cash advance

Another option to pay off your credit card debt is to take out a cash advance on one card, place those funds in your bank account, and then make your regular monthly payment on your second credit card bill. Be aware that cash advances have no grace period. You will pay interest charges on the card you took the advance on beginning immediately.

Using a cash advance on one card to pay off another is not paying down credit card debt. You are simply transferring balances between cards.

Pros and cons of paying a credit card with another credit card

So, is it worth paying off a credit card with another credit card?

The main benefits of paying a credit card bill with another card are avoiding late payment charges and lowering your interest rate.

There are certainly some risks with using a credit card to pay off another credit card, including:

Multiple payments

It’s crucial to understand billing cycles if you are going to be juggling multiple credit cards. Having more than one credit card means you may have multiple monthly payments with different due dates. Juggling many payments can lead to missed payments, resulting in higher interest costs and a hit to your credit score.

More credit card debt

Having more credit cards means having a higher overall credit limit. While the available credit on a balance transfer card may be tempting, resist the urge to put additional purchases on your new card and focus on repaying your remaining balances first.

When dealing with credit card debt, taking on additional debt is not always the best idea, as it can perpetuate the cycle of borrowing and may not effectively resolve the root issue.

No credit card rewards or points

You won’t earn points or receive cash-back rewards when using balance transfers to pay off balances on another credit card. Credit card balance transfers are a payment, not a credit card purchase, so do not earn rewards. Cash advances also do not earn reward points.

Balance transfer fees

Some credit cards will charge a balance transfer fee, and most will charge a fee for a cash advance. This fee could cost you between 3% and 5% when you transfer your debt from one credit card to another. Some balance transfer offers may also come with an annual fee, so check the terms and conditions.

Higher interest charges

Unless you have a promotional interest rate, you may pay more in interest charges in the long run.

The primary benefit of a balance transfer credit card is the introductory APR offer. Promotional periods typically limit the interest-free periods. If the outstanding balance from the transferred debt isn’t settled completely before the intro 0% offer ends, the remaining balance will incur the card’s standard annual percentage rate, which might be even higher than the interest rate of the card you’re transferring from.

The interest rate for a cash advance usually averages around 24%, significantly higher than the average APR.

If you are not paying down your balances, you will continue to pay more interest as credit cards are a high-cost borrowing option.

No grace period

There is no grace period with a balance transfer or cash advance unless you have a 0% interest offer. Interest charges begin the day you make the transfer or advance.

Credit score impact

Every new credit card application is a hard inquiry by lenders or credit card companies on your credit report, which can lower your credit score.

Credit utilization is the ratio of your outstanding balance on a credit card to your credit limit, expressed as a percentage. A higher ratio can negatively impact your credit score. Obtaining a new card with a higher credit limit can lower your utilization rate, but only if you don’t increase your spending.

Alternative ways to pay off a credit card

Paying off one credit card with another may seem convenient, but it’s not always wise. Even using the best balance transfer strategies may not be the best approach to paying down your credit card debt.

There are alternative methods and smarter strategies beyond making the minimum payment and paying one credit card off with a different credit card.

Debt consolidation

Combining balances onto a single balance transfer credit card combines multiple credit card bills into a single monthly payment with a potentially lower interest rate, making it easier to manage.

You will need a good credit score and stable income to qualify for a debt consolidation loan. There are debt consolidation loans for people with bad credit. However, these types of loans carry a very high interest rate.

Using a line of credit

Another option is a line of credit, which offers a lower interest rate than credit cards. If you are a homeowner, you may qualify for a low rate through a home equity line of credit.

Personal loan

Additionally, personal loans provide the flexibility of spreading out payments with installment plans and fixed payments, often at lower interest rates than credit cards.

If you have bad credit, we do not recommend using a payday loan or high-interest fast cash installment loan to make credit card payments. Consider the annual interest rate of the new loan and ensure that it is less than the annual percentage rate on your credit card.

Emergency fund

Building an emergency savings account can provide a financial safety net, allowing you to cover unexpected expenses without resorting to high-interest credit card debt.

What if you can’t pay your credit card debt?

Using one credit card to pay off balances on another may seem like a quick fix for credit card debt, but unless you’re paying off your entire balance, all you may be doing is moving debt around.

If you are struggling to pay off credit card debt, consider exploring your options for credit card debt relief. This may include seeking assistance from a licensed insolvency trustee and considering options like a consumer proposal, bankruptcy, or a debt settlement plan.

Contact us for a free, no-obligation consultation if you need help with your credit card debt.

The post Should You Pay Credit Card Debt with Another Credit Card? appeared first on Hoyes, Michalos & Associates Inc..

Until recently, homeowner insolvencies have been depressed due to rising home prices, allowing heavily indebted and vulnerable homeowners to tap into the resulting rising home equity to refinance rather than file insolvency.

Changes in the mortgage and housing market, which we will look at shortly, have resulted in a slight rise in homeowner insolvencies over the past two years. Given these changes, we expect to see an increase in homeowner insolvencies over the next two to three years.

What does the typical insolvent homeowner look like?

The average homeowner files insolvency with significantly more unsecured debt than a non-homeowner. In 2023, the average insolvent homeowner owed $98,754 in unsecured debt, almost double (1.8 times) that of Joe Debtor. That debt is more likely to be traditional bank loans and credit card debt (74%) than Joe Debtor (60%), likely due to a better credit score and average higher income.

While rising housing values slowed homeowner insolvencies in recent years, that same increase contributed to a steady rise in unsecured debt among homeowners.

To keep up with mortgage payments, heavily indebted homeowners will drive up credit card balances and borrow from other sources until their credit capacity runs out. Once they can no longer access new unsecured credit, they must refinance or file insolvency.

What makes an indebted homeowner vulnerable to insolvency is not only rising consumer credit but also insufficient home equity to refinance their unsecured debt.

As house prices increased, while homeowner insolvencies declined, the average net realizable value in home equity available to creditors rose. However, we’ve seen a significant drop in net realizable value (as a percentage of home equity) to 7% in 2023, returning to levels not seen since 2017.

When high mortgage indebtedness becomes an insolvency driver, we also see a high percentage of negative home equity among insolvency homeowners. This rate fell to 0% in 2022 but has risen rapidly to 10% of all homeowner insolvencies in 2023.

Finally, homeowners filing insolvencies are much more likely to file a consumer proposal as a way to keep what home equity they do have.

So, what we know is that homeowner insolvencies were in freefall while interest rates were low, mortgage payments were low, and housing prices were on the rise. Consumer credit was still increasing, but homeowners could generally access the equity in their homes to refinance. That trend is shifting, but the question is, how much?

Housing market trends – how will they affect vulnerable homeowners?

Debt servicing costs are up, and we are unlikely to see any significant relief until mid-2024.

We can see a slight correlation between the impact of mortgage rates and debt servicing costs on homeowner insolvencies. However, interest rate changes need to be sustained to have a long-term impact. Additionally, the impact of rate increases is lagged a year or more. This is why homeowner insolvencies have only risen slightly despite a sharp increase in debt servicing costs in 2023.

The reason for this lag? As mentioned earlier, homeowners will do anything to keep up with rising mortgage payments including taking on increased consumer debt. It is only after their access to additional credit runs out that mortgage delinquencies rise, followed by homeowner insolvencies. The lag between mortgage delinquencies and homeowner insolvencies is much shorter.

According to the Canada Bankers Association, mortgage delinquencies are already rising, coinciding with the uptick in homeowner insolvencies we are currently experiencing.

The final question mark is what will home prices do?

Housing prices have fallen since 2022, and we’ve begun to see a modest uptick in homeowner insolvencies, although levels are not anywhere near historic norms.

As mentioned earlier, what we have seen is a return to overall negative equity in homeowner insolvencies. In these cases, homeowners are more likely to walk away from their homes, abandoning an underwater mortgage, and including any shortfall in their consumer proposal or bankruptcy.

A number we continue to monitor is the share of all new mortgages with an amortization greater than 25 years. This is an indicator of the health of homeowner’s equity in a stagnant or declining price market among recent new home buyers. This number remains elevated at 47% of all new home purchases at the end of 2023.

So, in summary, we expect to see a rise in homeowner insolvencies in the next 12 to 18 months. Even homeowners who are not in trouble today may be soon. Without a corresponding increase in home equity, rising consumer debt among homeowners will lead to more homeowner insolvencies.

However, how much they will rise is uncertain and will depend largely on the housing market.

The post Will Homeowner Insolvencies Rise and By How Much? appeared first on Hoyes, Michalos & Associates Inc..

Understanding the mortgage renewal process

The mortgage renewal process in Canada typically involves renegotiating the terms of your mortgage loan with your current lender during renewal time. Homeowners often seize this opportunity to secure a more favourable interest rate. However, since your mortgage term may range from a few months to five years, multiple renewals occur during the lifetime of a mortgage, and the process doesn’t always go smoothly.

There is a possibility that your mortgage renewal will be denied because of missed mortgage payments, a poor credit score, changes in your financial situation or the market, or because you’ve taken on too much new credit.

Why was my mortgage renewal denied?

The ability to renew your mortgage is not guaranteed, as a lender reassesses your credit as a borrower at the time of renewal. Common reasons why your mortgage renewal was denied might include:

1. Missed mortgage payments: Consistently missing payments or having a problematic payment history can lead to denial. If you have a mortgage in arrears at the time of renewal, there is a high likelihood that your renewal will be denied.
2. Bad credit score: Lenders often examine your credit report, and a poor credit score may result in a denied renewal. If you have never missed a payment, they may overlook a slightly lower credit rating.
3. Drop in income: During the renewal process, lenders may assess your income. If you have experienced a recent job loss or a decrease in earnings, your mortgage lender may feel you will struggle to meet your monthly mortgage payments, potentially leading to a denial by the lender.
4. Negative market conditions: A decline in home prices can cause traditional lenders to tighten credit policies. If your home equity and loan-to-value ratio falls, you may move from a low-ratio mortgage to a high-ratio mortgage requiring mortgage insurance or a denial by your current lender.
5. Too much debt: Excessive credit card debt, car loan payments and other new loan expenses can lead to a higher debt service ratio. If your DSR exceeds 40%, your lender may feel you don’t have the money to make your future mortgage payments.
6. Higher interest rates: Renewing a mortgage when interest rates rise can lead to unaffordable monthly payments, which may contribute to denial.
7. Failing stress test with a new lender: Refinancing with a new lender will involve a stress test. If interest rates are higher, a new test can negatively influence the renewal outcome.

What to do if your mortgage renewal is denied

If your current lender does not approve your mortgage renewal due to bad credit or other reasons we discussed, here are some steps to take to deal with a denied mortgage renewal:

• Talk with your current lender: Find out why your mortgage renewal was denied. Ask them what the minimum changes they might expect to improve your odds of a renewal.
• Extend your amortization. If the reason was affordability due to higher interest rates or loss of income, ask if you can change your mortgage amortization period to make your monthly payments more affordable. Remember that a longer amortization means your payments will go down, but it will take longer to pay off your home.
• Improve your credit score. Lower credit scores need to be addressed long before your mortgage renewal date. Take steps to address any missed payments and improve credit utilization on your credit report.
• Consider a different lender: If institutional lenders have denied your renewal, you may want to explore options with a B lender and see if you can refinance with a new mortgage lender. B lenders are smaller specialized monoline lenders, credit unions, trust companies and mortgage investment companies. Be aware that changing lenders means refinancing, requiring a stress test.
• Consult with a mortgage broker: Mortgage brokers can play a pivotal role in securing alternative lenders and better rates. Even if your mortgage renewal was approved, talking with a mortgage broker can help you achieve lower mortgage rates.
• Consider a private mortgage lender: If the B lender has denied you, you may want to consider a private lender for your mortgage renewal application. Keep in mind they may not be licensed, and it can come with higher risk and higher interest rates.
• Get a cosigner: Bringing in a cosigner may improve your chances of approval if your guarantor has a good credit score.
• Clean up other debt: If you’ve taken on a lot of new credit cards or other unsecured debt since your last mortgage renewal, clearing bad debt may help your odds at renewal time.
• Downsize or sell your home: If you’re a homeowner and all financial institutions have denied your mortgage renewal, it may be time to walk away from your mortgage.

Where to find professional help with mortgage renewal

Seeking professional assistance is crucial when navigating mortgage renewal challenges.

What can a mortgage broker do?

Consult with mortgage brokers to access better rates and mortgage terms and to help find alternative lenders. Contact them early so they can work with you to improve your chances of approval and find a mortgage at the best mortgage rate possible for your situation.

How can a Licensed Insolvency Trustee help with your mortgage?

If you can no longer afford your mortgage or your mortgage may be denied due to too much other debt, consider contacting a Licensed Insolvency Trustee.

Even with a bankruptcy or consumer proposal, there are options to keep your home and make your mortgage repayment easier. If you have filed a consumer proposal, your mortgage renewal should go smoothly if you have made your mortgage payments in full and on time.

Understanding the details of the mortgage renewal process, being proactive in addressing potential issues, and seeking professional guidance if you are concerned about your mortgage being denied is essential.

If debts like credit cards, payday loans or lines of credit affect your ability to afford your mortgage payments or may affect your mortgage renewal, book a free consultation with a local Licensed Insolvency Trustee for advice and mortgage debt relief.

The post What to Do If Your Mortgage Renewal is Denied in Canada appeared first on Hoyes, Michalos & Associates Inc..

Based on reporting from CBC Ottawa, on January 12, 2024, the City of Ottawa signed a five year collection agreement with Financial Debt Recovery (FDR), to collect old accounts, including outstanding parking fines and unpaid water bills.

It is standard practice to hire a collection agency to collect outstanding debts. Collection agencies will use many collection tools to induce payment, including reporting debts under collection to one or both of Canada’s credit bureaus – TransUnion and Equifax.

The way I see it, there are three possible problems with the collection agencies’ approach on behalf of the City of Ottawa.

1. Is FDR, the new collection agency, required to send fresh notifications before reporting 103,000 accounts to the credit bureau? I think so.
2. The age of the debts appears to exceed the limitation period.
3. Many debts were too old to be reported to the credit bureau.

Notice of debt collection requirements

Under the Regulations to the Collection and Debt Settlement Services Act of Ontario, a collection agent must send a letter to the debtor at least six days prior to commencing collection action (bold by author):

21. (1) No collection agency or collector shall demand payment or otherwise attempt to collect payment of a debt from a debtor or in any other way contact the debtor before the sixth day after sending a notice described in subsection (2), except as permitted under subsection (3), section 21.1 or 21.2. O. Reg. 460/17, s. 11.

(2) The notice shall be a private written notice to the debtor setting out the following information:

1. The name of the creditor to whom the debt is owed and, if different, the name of the creditor to whom the debt was originally owed.
2. The type of financial or other product that incurred the debt, described in sufficient detail to distinguish among different products offered by the same creditor.
3. The amount of the debt on the date it was first due and payable and, if different, the amount currently owing.
4. The statement that the collection agency will provide a breakdown of the current amount owing, if requested.
5. The following mandatory statement:

“Should you have any questions or would like further information regarding the current amount of your debt or the amount of your debt when it was first due and payable and, if applicable, would like a breakdown of the difference between those amounts, please contact our office at the number below as this information is available upon request.”

6. The identity of the collection agency and collector who are demanding payment of the debt.
7. The authority of the collection agency to demand payment of the debt.
8. The information that if the debtor notifies the collection agency or collector that a particular method of communication causes the debtor to incur costs, or if the collection agency or collector otherwise becomes aware of that fact, the collection agency and collector are prohibited from subsequently contacting or attempting to contact the debtor using that method of communication.
9. The contact information of the collection agency, including the full mailing address and toll-free telephone number and, where available, e-mail address and fax number. O. Reg. 460/17, s. 11.

(3) Despite subsection (1), a written demand for payment may be included with the written notice. O. Reg. 460/17, s. 11.

(4) The written notice may be sent by ordinary mail or by e-mail, except where the debtor has withdrawn his or her consent to the use of e-mail and provided a current address for ordinary mail. O. Reg. 460/17, s. 11.

FDR was hired for one purpose (to collect payment of a debt). Therefore, they are required to provide written notice before commencing collection activity. It appears that many debtors did not receive written notice from FDR.

NOTE: Thanks to Blair DeMarco-Wettlaufer of KINGSTON Data and Credit, a collection agent who has an excellent post on his blog explaining in detail how credit bureaus work and what can be reported.  He notes that collection agencies are not required to send a notice if they don’t have a current address.  Given that some of these debts are twenty years old, it’s likely that they don’t have a current address.  However, if FDR is reporting to Equifax and TransUnion, they can check the credit bureaus to see if there is a current address on the bureau, and use that address to send the notice.  Regardless, a creditor cannot report to the credit reporting agency until they have sent a notice and waited six days.

The City of Ottawa (specifically Joseph Muhini, the deputy city treasurer revenue) stated, “Prior to the debt being referred to the Collections Unit in Revenue Services, individuals are provided with an invoice, bill or a ticket and a deadline to pay the debt through regular channels.” While the City may have previously provided notice, I believe the law still requires any new collection agency to send out a fresh validation notice with their contact information.

It could also be argued that reporting a debt to Equifax or TransUnion is not an attempt to collect a payment of a debt. However, the City freely admits that reporting to the credit bureaus is a collection tactic:

“The most recent competitive process was completed in January, and one of the successful bids was Financial Debt Recovery (FDR). FDR has chosen credit bureau reporting as a collection method.”

So, clearly, reporting to Equifax and TransUnion is a collection method.

Limitation Periods

The City of Ottawa issued a memo stating that, “There is no statute of limitations for a conviction of a set fine.”

I’m not a lawyer, so they may be correct, but here’s what the law says:

The Provincial Offenses Act, section 76, says:

76 (1) A proceeding shall not be commenced after the expiration of any limitation period prescribed by or under any Act for the offence or, where no limitation period is prescribed, after six months after the date on which the offence was, or is alleged to have been, committed.

It appears that the limitation period may be six months. However, the Limitations Act also sets a basic limitation period of two years:

4 Unless this Act provides otherwise, a proceeding shall not be commenced in respect of a claim after the second anniversary of the day on which the claim was discovered

Again, I’m not a lawyer, but it appears that if the City wants to commence legal proceedings to collect unpaid parking tickets, they must commence legal proceedings either within six months or two years. It would appear that 20 years is well over the limitation period.

Credit bureau retention laws

The third issue is reporting very old debts to the credit bureau, some of which date back to 2003.

Under the Consumer Reporting Act of Ontario, a credit report cannot contain information about a debt that is more than seven years old.

Specifically, Section 9(3)(f) states that (again, bold by author):

(3) A consumer reporting agency shall not include in a consumer report….

(f)  information regarding any debt or collection if,

(i)  more than seven years have elapsed since the date of last payment on the debt or collection, or

(ii)  where no payment has been made, more than seven years have elapsed since the date on which the default in payment or the matter giving rise to the collection occurred,

It appears that some of the debts were for traffic tickets from 2005, which is quite obviously more than seven years old.

I spoke to a person today who attended university in Ottawa between 2001 and 2007, and his credit report just started reporting a debt from the City of Ottawa for $198 which appears to be from 2005.

He told me that last month, his credit score was 825. Today, because of this one small newly-reported debt, his credit score has dropped to 713.

(You may wonder how a credit score can drop by more than 100 points due to a small debt, but it’s a common occurrence).

The illegal reporting of an old debt has serious real-life consequences.

What if you are applying for a car loan or mortgage or you are renting an apartment? With a credit score of 825, qualification is easy. Qualification is more difficult if your credit score is 100 points lower. The situation worsens if your credit score starts at 700 and drops to 600. What was a “good enough” credit score may no longer be sufficient.

So, what’s my advice for people with old City of Ottawa debts on their credit report?

First, I suggest you contact the Mayor or your local representative to express your displeasure at these illegal collection tactics. If enough people complain, the politicians may make a change.  Of course calling a politician may make you feel better but it won’t fix your credit report, so please read the final section below for my practical advice, but first, let’s address another important question:

Should you pay an old debt?

Second, if the debt is more than seven years old, may general advice is don’t pay it. You may think, “It’s only $200, I owe the money, I’ll pay it.”  That’s understandable, but by paying the debt, you are admitting that you owe it, and you will restart the clock for how long the bad reference (an account sent to collection) can remain on your credit report. The seven-year period typically runs from your last payment. If the account is more than seven years old, the credit bureaus should not be reporting it. If you make a payment to FDR, it will potentially remain on your credit report for another seven years, negatively impacting your score in the long term.

In a memo, the City of Ottawa states that:

When all debts are collected by a private collection agency, the agency will report the item as paid through their regular reporting cycle and remove it from the credit report.

Is it true that FDR will “remove it from the credit report” when it is paid? I don’t know. Credit reports report history, so even if an old debt is paid, the fact that a debt was in arrears when it was paid may mean it will remain on your credit report and will impact your credit score. The City relies on FDR’s telling them the account will be removed from credit reports once it is paid. We will have to see if that is the case. That’s why my standard advice is to NOT pay a very old debt, because paying a debt that should not appear on your credit report may restart the seven-year-clock and negatively impact your credit score.

However, if FDR does agree, in writing, to remove all evidence of the debt from your credit report if you pay it, you can decide if paying the debt is worth it to restore your credit rating (which should not have been impacted in the first place).

Check your credit report

I advise you to immediately get your credit report directly from Equifax and TransUnion. I suggest you start with the free version of your credit report; it doesn’t include your credit score, but that’s not important now. Once you access your credit report, you can select the incorrect debt and immediately file a dispute. Your explanation will say, “debt from 2005, too old to display on a credit report, please remove,” or something to that effect.

By removing the debt from your credit report, it will no longer negatively impact your credit score.

If this old debt is your only debt, follow the instructions above, check back in a month to confirm that your credit report is updated, and you are good to go.

I will emphasize this point again, because this is the most important step you can take to protect your credit rating: Contact Equifax and TransUnion and dispute the debt.  If the debt is older than seven years, it should not appear on your credit report.  If Equifax and TransUnion receive enough complaints, they may take steps to correct the data proactively.

If you have many other debts, I suggest you contact our office, and we can review your credit report with you and determine if any other steps are required.

The post How Old Tickets and Fines Can Destroy Your Credit Score appeared first on Hoyes, Michalos & Associates Inc..

Secured vs Unsecured Debt

Before discussing the impact of a consumer proposal on secured debt, it’s essential to distinguish between secured and unsecured debts. Unsecured debts include lines of credit, personal loans, credit cards and income taxes. Secured debts are those tied to specific assets, like a mortgage for a house or a car loan.

When you opt for a consumer proposal, you offer to settle your unsecured debts. This process allows you to manage your unsecured financial obligations, such as credit cards and personal loans, lines of credit, and income taxes, by proposing a repayment plan that fits your budget.

Filing a consumer proposal will help you pay back your unsecured debt with a payment that fits your budget and can free up room to make payments to your secured creditors.

Are Secured Creditors Included in a Consumer Proposal?

As in a bankruptcy, all your assets and liabilities must be listed on the documents you sign. Secured debts are acknowledged in the consumer proposal documents but are not inherently part of the proposal unless you decide to surrender the secured asset. If you wish to keep your secured asset, like a car or a house, you must continue to make payments to the secured creditor. The payments to the secured creditor are not part of your consumer proposal.

If you cannot afford your payments to the secured creditor or do not want to keep your secured asset, you can return the asset to the secured creditor, and the shortfall will be covered in the consumer proposal.

Your proposal administrator will notify your secured creditors you have filed a consumer proposal. However, if you keep your asset, the secured creditors do not participate in your proposal. Your agreement with them continues unless you stop paying the secured creditor.

In a consumer proposal, the secured creditors’ rights are not affected. They have the same rights after you file as they did before you filed. This means that the secured creditor has the right to realize the asset if you do not continue with your agreed-upon payments to them.

Consumer Proposal and Mortgages

Homeowners struggling with their unsecured debt often will file a consumer proposal as they can keep their home in the consumer proposal process. The equity available in the property will be considered when making an offer to your creditors. What about joint assets? If one spouse files and you own your home jointly, only the filing spouse’s share of the equity is considered as part of the consumer proposal value available to creditors.  

During the term of the proposal your mortgage may come up for renewal. If it is auto renewed, there will likely be no changes. If you are asking to refinance the mortgage, your mortgage company may request that you pay off the proposal before processing the refinancing request.

Consumer Proposal and Car Loan/Lease

Many individuals rely on their vehicles daily, and a consumer proposal accommodates this need. If you have a car loan and file a consumer proposal, you can keep your secured vehicle by ensuring your payments are current before filing the proposal. Even after the consumer proposal is filed, you must continue making payments on the car loan.

For those with high car payments or an over-encumbered vehicle (owing more than its worth), surrendering the car to the secured creditor might be an option. The shortfall on the car loan becomes part of the consumer proposal.

If you decide to return the car, you’ll likely need an alternative means of transportation. This could involve purchasing a more affordable vehicle or securing a different vehicle loan. The advantage here is that the new loan won’t have negative equity, allowing for a more budget-friendly arrangement.

Final Thoughts

In conclusion, a consumer proposal can provide relief for unsecured debts, allowing individuals to manage their financial obligations while navigating the complexities of secured debts by either continuing payments or surrendering the asset with the shortfall covered in the proposal.

Speak to a Licensed Insolvency Trustee to help you decide if filing a consumer proposal is the right decision for you.

The post How a Consumer Proposal in Canada Affects Secured Debt appeared first on Hoyes, Michalos & Associates Inc..

Consumer proposal eligibility: Do you qualify?

I. Who can apply for a consumer proposal?

To be eligible to file a consumer proposal:

1. You must be an individual. An incorporated business cannot file a consumer proposal but can file a Division 1 proposal as an alternative.

2. You must be insolvent, meaning you cannot pay your unsecured debts as they come due.

3. Your total debts, excluding your mortgage, cannot exceed $250,000. If you exceed this debt threshold, you can file a Division 1 proposal.

4. You must have a stable income to afford the monthly payments.

5. You cannot be in an active consumer proposal already.

II. Types of debts covered

A consumer proposal deals with unsecured debts. This includes credit card debt, student loans, lines of credit, payday loans, personal loans, and even tax debt.

Secured debt, like a car loan or your mortgage, is not affected by a consumer proposal. As long as you continue making loan payments to your secured lender, you can keep these assets. You can, if you choose, voluntarily surrender a secured asset and deal with any residual or shortfall through your consumer proposal.

III. Common financial situations eligible for a consumer proposal

A consumer proposal is a debt solution for Canadians facing financial difficulties looking to avoid personal bankruptcy.

Typical financial scenarios might include:

1. overwhelming debt

2. debts with very high interest rates

3. missed and overdue debt payments

4. a wage garnishment

5. collection calls and legal action by creditors

6. a CRA requirement to pay

7. asset protection while you negotiate a debt settlement and payment plan with your creditors

The process of filing a consumer proposal

Here is a brief overview of the consumer proposal process:

I. Consultation with a Licensed Insolvency Trustee (LIT)

A consumer proposal is a serious financial decision to be considered carefully. The process begins with a consultation with a Licensed Insolvency Trustee.

The role of the LIT is to review your specific circumstances, including income, expenses, and debts. This assessment helps determine if a consumer proposal is a suitable option to deal with your debts. In a consumer proposal, the LIT is sometimes called the consumer proposal administrator.

II. Developing the proposal

The Licensed Insolvency Trustee will work with the debtor to develop a realistic repayment plan. Your offer will depend on any assets you own, how much debt you owe and to whom (some creditors expect higher settlements), and any surplus income you might have.

The objective is to negotiate a settlement offer that results in monthly payments that are significantly less than the debt payments you are making today.

The formal proposal to creditors outlines how much you can afford to pay and the terms of the proposal. Proposal payments can be monthly, tied to your pay period or lump sum.

One final note: The cost of a consumer proposal is covered by your agreed upon proposal payments.  There is no upfront fee and no separate charge.  The trustee is paid out of the funds distributed to the creditors.

III. Protection and legal implications

A consumer proposal is a legal, legislated debt solution available through the Bankruptcy and Insolvency Act. It can only be filed with a Licensed Insolvency Trustee.

One key advantage of a consumer proposal is the automatic stay of proceedings, providing legal protection against creditors’ legal actions. Again, a consumer proposal can stop unsecured creditors but not secured creditors (unless you return the secured asset).

While a consumer proposal will impact your credit score, the impact is shorter than for bankruptcy. Most people can obtain a new credit card while still in a consumer proposal. This new card can help you rebuild your credit rating after filing, by establishing a new and better payment history on your credit report.

IV. Creditor consideration and voting

Once the paperwork is signed, your Licensed Insolvency Trustee submits the consumer proposal to the Office of the Superintendent of Bankruptcy (OSB) and sends a copy to your creditors.

Individually, your creditors review your proposal and can decide to:

• Accept your terms as filed (vote yes)
• Reject your terms (vote no)
• Reject your terms and ask for a creditors’ meeting
• Do nothing

Your creditors have 45 days to vote on the proposal. If the majority of creditors vote (in dollar value) to accept your proposal, it is binding on all unsecured creditors.

Creditors can request a meeting of creditors, although this is rare. Before that first meeting, your trustee may work with you and any dissenting creditors to renegotiate acceptable terms.

V. Debt repayment and counselling

Your responsibilities in your consumer proposal are to make your required payments and attend two financial counselling sessions. During these sessions, your credit counsellor will discuss budgeting and rebuilding your credit after a consumer proposal.

Other things to know:

• You can pay off your proposal early.  Your total payments are fixed. But, once your creditors accept your proposal terms, you can make additional payments or pay the balance off at any time. The sooner you complete your proposal, the sooner the recovery process begins.

• You can defer up to two payments. If you fall three payments in arrears, your proposal will be deemed to be annulled.  If this happens, your debts are reinstated, and creditors can take legal action to pursue the outstanding debt.

• No income reporting is required.  Unlike bankruptcy, you do not need to report your income and expenses every month.

It is critical to complete your requirements in order to obtain your certificate of full performance, which will wipe out your debts.

A consumer proposal example

Mark owes $65,000 in credit card and other unsecured debts. He owns a home with $14,000 in equity (after paying all potential selling costs), and his household income is $5,000 a month. Mark is married and has one child.  With this information, the trustee determines that Mark’s potential bankruptcy costs would be $20,600.  This includes the equity value in his home and potential surplus income payments.

In this scenario, Mark could make an offer to pay his creditors $21,000 rather than file for bankruptcy. If he pays this amount over the maximum of 5 years, his payments would be $350 a month.

The end result of all this is that Mark pays back only $21,000 of his original $65,000 in debts, and he pays no interest.

If you’re wondering what your possible payment plan could be based on average settlements, try our consumer proposal calculator.

Conclusion

While this article explores the process, eligibility criteria, and potential outcomes of a consumer proposal, take the next step towards being debt free and contact us to book a free consultation with a Licensed Insolvency Trustee about your debt relief options. We’ll explain more about a consumer proposal and also review other options like debt consolidation and credit counselling.

The post How Does a Consumer Proposal Work appeared first on Hoyes, Michalos & Associates Inc..

We first wrote about the problem with unregulated debt consultants back in 2011. Our stronger fight against unlicensed debt advisors dates back to 2017 when Ted Michalos and I first discussed the issue on our Debt Free in 30 podcast. Fast forward to 2018, when a guest shared a personal story of being scammed by these individuals. Despite efforts to shed light on the problem, these consultants persist, as highlighted in a recent interview I did in November with Pat Foran from CTV News.

Why the Fight Against Unlicensed Debt Consultants Matters

Debt consultants levy a fee for their advice, a practice common in many professions. However, the crucial distinction lies in their need for more expertise in insolvency. 

In Canada, only a Licensed Insolvency Trustee possesses the authority to file a bankruptcy or consumer proposal on behalf of consumers. This exclusive designation requires that Licensed Insolvency Trustees hold in-depth knowledge of the process and have a documented history of successfully guiding individuals through insolvency. The examination and accreditation process to become a Licensed Insolvency Trustee is quite onerous and the obligations of a Trustee are regulated by the Office of the Superintendent of Bankruptcy.

In contrast, these debt consultants do not have the experience to assess your situation correctly. It’s like talking with your neighbour or co-worker about whether you should file a consumer proposal because they read something about it and know all the right words. The people you talk with on the phone are trained in selling consumer proposals but have no real experience when it comes to getting consumer proposals filed or approved. They also have no verified training or knowledge of The Bankruptcy & Insolvency Act which outlines the rules and regulations for consumer proposals.

Would you pay some unlicensed stranger to give you medical advice if you are sick? No, you would not. So why pay some salesperson to sell you their ‘help’ collecting information to send you to a Licensed Insolvency Trustee?

A Conversation with the Superintendent of Bankruptcy

On September 12, 2023, while attending a conference I had a quick chat with the Superintendent of Bankruptcy, Elisabeth Lang. She assured me that her team had diligently worked on the issue and promised imminent action. True to her word, on December 7, 2023, she published a comprehensive position paper titled “The Adverse Effects of the Debt Advisory Marketplace on the Insolvency System.”

The paper dissects the problems including:

• the deceptive portrayal of unlicensed consultants as licensed and qualified professionals in advertising and in practice,
• the solicitation of consumers into insolvency who perhaps should not be filing but pursing other options (which a Licensed Insolvency Trustee is required by law to disclose),
• potentially higher proposal payments and certainly extra debt consultant payments, amounts which result in an additional cost to the consumer and potential loss to his or her creditors.

Over the last two years, consumers have fallen victim to these dubious consultants, paying a staggering $21 million in fees. Shockingly, in 2022 alone, debtors committed to paying $7.6 million in fees after filing their proposals. Imagine paying a “medical consultant” a hefty fee after the surgery is complete—outrageous!

Superintendent Lang asserts her commitment to addressing non-compliance, including the consideration of licensing measures, civil, and criminal proceedings. A bold move, but will it be effective?

What Would I Do if I Were the Superintendent of Bankruptcy?

First, I would gather all the data on these offenders and their not-so-legal practices.

Next, I would speak with the senior Licensed Insolvency Trustees from the offending firms in private one-on-one meetings. No beating around the bush. I would give them fair warning to clean up their practices and say, “This ends now.” Ms. Lang might have done the same; I can’t confirm, but I am hopeful that that was her first action in her attempt to eliminate this egregious practice.

After “playing nice”, I would take a more direct approach. I would not bother with investigations (since I already have the data to know what’s happening)or legal battles.

Instead, I would use some bureaucratic tricks. I would “gum up the works.” A trustee needs a Letter of Comment from the Office of the Superintendent of Bankruptcy (OSB) to get paid. These comment letters are issued quickly and automatically, but the OSB could decide to do a manual review, which slows down the process and results in slowing down the trustee’s cash flow. If they want their cash flow to speed up, they will be forced to do the right thing. Simple as that.

I would also request creditor meetings and debtor examinations on files of firms suspected of working with debt consultants. Creditor meetings are rare but effective in stirring the pot as they can be quite time intensive. If a trustee dedicates an hour to a hundred creditor’s meetings convened by the OSB each month, their schedule would be overwhelmed, leaving little time for other tasks. That would significantly impede their workflow.

The OSB could also ask debtors what they paid prior to filing a consumer proposal. Most of them might not know upfront fees are not legally part of their consumer proposal. If debtor’s understood that they paid unnecessary fees, they could demand refunds, and demanding refunds could spread the word and may force the debt consultants (and the offending trustees) out of business.

Finally, while I blame Licensed Insolvency Trustees for teaming up with these crooks and the OSB for not dealing with this issue sooner, I also blame the large creditors for allowing this to happen. If you’re aware that debtors are tapping into credit card advances to pay these consultants, it’s time to rethink your voting process. Instead of voting for inappropriate proposals, they should vote to reject them, which puts both the trustee and the debt consultant out of business.

(I have discussed the “vote no” approach with the major creditors in Canada, and while they understand the issue, they are reluctant to “punish” a debtor by voting against the proposal when the debtor perhaps was unwilling duped by the debt consultant).

Avoid Debt Relief Scams

For consumers wondering how to avoid debt relief scams, here are some recommendations to ensure you don’t become the next victim.

Check if the person or company you’re talking to is a Licensed Insolvency Trustee. If you need more clarification, look them up on the OSB list of Licensed Insolvency Trustees.

Only sign agreements that ask for payments after you meet with a Licensed Insolvency Trustee, sign proposal documents, and have them filed with the government.

Ask the person you’re dealing with about their charges. You shouldn’t have to pay someone to help with the process or prepare paperwork for a consumer proposal. If you’re unsure, get a second opinion from another Licensed Insolvency Trustee. Reputable firms provide free consultations and request payment only after your proposal is officially filed.

Be concerned if the company you originally contacted, or person you speak with about your debt situation, works for a company that is different that the company you file your consumer proposal with. This is a glaring warning sign that you have been scammed with additional fees. Seek advice immediately, before filing your consumer proposal, with another Licensed Insolvency Trustee to ensure the proposal you are entering into is fair and necessary.

Looking Ahead

How will this play out? Although Ms. Lang’s position paper is a positive initial step, my past experiences indicate that government position papers often fall short of actual action and can be seen as a mere substitute for tangible measures. Nevertheless, this could mark the beginning of real change.

The unfolding events remain uncertain, and only time will reveal the outcome. Let’s hope today signifies the commencement of resolving this predicament for Canadian debtors. Stay tuned for further updates and valuable insights on the Debt Free in 30 podcast.

The post Will the Federal Government Finally Put an End to Unregulated, Unlicensed Debt Consultants? appeared first on Hoyes, Michalos & Associates Inc..

In my year-end post, I will outline what is behind the average Canadian debtor’s re-accumulation of consumer credit and how that will impact consumer insolvency levels in the coming year.

Consumer Insolvencies Rising Rapidly

Total consumer insolvencies in Ontario increased by 27.2% in the first ten months of 2023, while Canadian insolvencies increased by 23.3%. Ontario insolvencies are now just 3% below 2019 volumes, while Canadian filings remain 11% below pre-pandemic levels. 

The pace of growth has slowed in recent months as we move further away from the pandemic bottom of mid-2020, yet growth remains well into the double digits. October volumes were up 29.5% in Ontario and 25.8% Canada-wide. 

Consumer insolvencies per capita remain below pre-pandemic levels but are increasing as more Canadians struggle with debt repayment. We estimate that 2023 will see a consumer insolvency rate of 3.8 per 1000 adults, up from 2.9 in 2021 and 3.3 in 2022.

Credit Card Debt – Canary in the Coal Mine

The issue? While some debt indicators look better, Canadians continue borrowing problem debt.

Total household debt is at an all-time high, reaching $2.89 trillion in the third quarter of 2023. Having said that, the pace of growth slowed considerably throughout 2023 due in large part to rising interest rates and a slower housing market.  

Per capita balances are up an average of 2.1% in the first three quarters of 2023, the lowest annualized growth in recent history and slower than in 2019 amid the pandemic. 

In more good news Canada‘s debt–to–income ratio has declined, falling to $1.82 in the third quarter, down from $1.85 in Q3 2022. The average for 2023 remains below pre-pandemic highs. 

The problem, however, is that revolving credit is on the rise.

Credit card debt balances in aggregate and per capita are rising and have surpassed pre-pandemic norms. 

Credit card debt per capita rose 11.4% in the first half of 2023 and is now 5.8% above 2019 balances.

Our annual bankruptcy study shows that 88% of insolvent debtors have credit card debt, with an average balance of roughly $15,800 (2022 study). For this reason, rising credit card debt is an excellent predictor of a future rise in consumer insolvencies.

More Canadians are turning to credit cards as any liquid savings they accumulated during the pandemic have been depleted.  

While the average savings rate in Canada has risen slightly over the past two quarters, it has declined considerably from pandemic highs, and the average for 2023 is below 2022. 

Worse, the recent quarterly rise masks an upward financial pressure on household budgets. When we look at the components of Canada‘s household savings rate, we can see that Canadians are saving much less of their disposable income after paying for household expenditures, that is, living costs. Household expenditure as a percentage of disposable income averaged 98.4% in the first three quarters of 2023, up from 97.3% for 2022. 

So, while the overall savings rate is still healthier than the three years before the pandemic when consumer insolvencies reached all-time highs, the increase in household expenditures as a percentage of income, especially when financed by revolving credit, is concerning. 

Also, with an average annual household income of $38,500, most insolvent debtors are among the income groups experiencing more significant drops in savings.  

Affordability Crisis and Cash Flow Crunch

Although the pace of inflation is slowing, the impact on household finances remains high. 

Canadian consumers spent an increasing share of their disposable income in 2023 on essential living costs. Food inflation, rising rents and higher mortgage payments are straining household budgets. 

Food costs as a share of disposable income increased to an average of 9.4% in the first three quarters of 2023, up from 9.2% in the prior two years and a level not seen since 2009. 

Similarly, housing costs as a percentage of disposable income increased to 24.8% in the first three quarters of 2023. A perfect storm of rising mortgage rates and escalating rental costs has driven housing costs to eat up paycheques at levels not seen since 1996.  

Higher groceries and housing costs make it harder to make ends meet without relying on credit. These are essential costs which can only be reduced so far. Credit card debt has become the de facto emergency savings account for many Canadians. The result is a rise in the use of credit to supplement household cash flow.  

Looking at this another way, Canadians are borrowing more to fund essential living costs. As we can see, when Canadians are net borrowers, consumer insolvencies tend to rise.

And more borrowing means more debt-servicing costs in a rising rate environment. The total debt service ratio reached a high of 15.22 % in Q3 2022. 

The non-mortgage debt service ratio increased to an average of 6.88% in the first three quarters of 2023, up from 6.69% in 2022, and has been trending upward due largely to rising credit card balances and higher rates on lines of credit. 

Combined, rising living costs and debt payment requirements are straining household budgets. Cash flow problems eventually lead to higher loan delinquencies. Except for mortgages, which I‘ll discuss below, loan arrears (90 days and older) are rising. 

Credit card delinquencies are creeping upward and have returned to pre-pandemic levels of 0.87%.  

However, the significant rise in past-due installment loans is more interesting (and worrisome). Delinquencies for installment loans in the third quarter of 2023 were 2.4 times the previous low of 0.92% in Q4 2017. Like credit card debt, insolvent debtors are heavy users of high-interest installment loans. As our 2022 insolvency study pointed out, over half of insolvent debtors (53.1%) carry at least one high-interest rapid loan. A rise in delinquency among sub-prime loans will also push insolvency rates up in the coming year. 

And What About Homeowners?

Our homeowner bankruptcy index has risen from historical lows, albeit very slowly. Our annual index is 4.0% (year to date, November 2023), up from 1.6% in 2022. 

Mortgage rates have risen, with the Bank of Canada target rate rising to 5.0% in 2023, an increase from 4.25% at the end of 2022 and up significantly from the low of 0.25% in March 2020.  

Interest rate increases have already begun to impact many homeowners. Even if the Bank of Canada lowers rates, higher rates will continue to be passed through to residential mortgage payments as a wave of mortgage renewals is forthcoming. 

We have already seen an increase in the mortgage debt service ratio to an average of 8.18% in the first three quarters of 2023, up from a low of 6.71% in 2020.  

Canadians will do what they can to stay on top of their mortgage payments, including borrowing via other credit. While mortgage delinquencies remain low, high mortgage payments create financial pressure, and that financial pressure can drive up credit card balances even further. 

The share of vulnerable homeowners is increasing. The Bank of Canada reports that almost one third (32.4%) of new mortgages in the first three quarters of 2023 carry a debt service ratio greater than 25%. Households with this level of mortgage payment stress are much more likely to fall behind on debt payments once other credit options run out. 

Another risk factor for future homeowner insolvencies is over-leveraged home equity. It is not the size of an individual’s mortgage payment relative to their income that dictates whether they will file insolvency but rather the amount of equity they carry relative to their unsecured debt. A homeowner with sufficient home equity to cover unsecured debt can refinance. 

A homeowner may choose to file a consumer proposal if: 

1. Their total unsecured debt exceeds their home equity or 
2. They cannot refinance and may try a 100% consumer proposal repayment plan to reduce their ongoing interest charges. 

In either case, they can choose to keep their home if restructuring their unsecured debt through a consumer proposal will fix their finances sufficiently to allow them to keep up with their mortgage payments. 

However, a concerning trend for homeowner insolvencies is the recent rise in negative amortization risk. The share of new mortgages with an amortization period longer than 25 years has risen and is now at levels not seen since 2016.  

In addition, banks and financial institutions have been willing to extend amortizations as rates rise, sometimes creating negative amortization mortgages. Homeowners with negative amortization mortgages will see their mortgage balance increase rather than fall as they continue to make payments. 

In a market with falling housing prices, long or negatively amortized mortgages will increase the risk that an indebted homeowner will choose to walk away from their home if they cannot make their mortgage payments. Any shortfall in the mortgage can be eliminated through a consumer proposal. 

Combine high home ownership costs, low home equity and rising revolving credit, and you have a recipe for increasing homeowner insolvencies. 

Conclusion and Future Outlook 

So, we have rising credit card debt, increasingly squeezed household budgets and a rising risk for homeowners. 

Economic factors like rising credit card debt and interest rate changes generally have a 12 to 18-month lagged effect on consumer insolvencies. Even ignoring a potential uptick in homeowner insolvencies, I suspect we will maintain the current growth trajectory of consumer insolvencies for at least 2024 and into 2025. 

If you want to hear specific predictions on how much higher insolvencies will rise in 2024, tune in to the podcast with myself and my co-founder, Ted Michalos, airing on December 30, 2023. 

Top 2023 Debt Statistics 

1. Insolvencies – rising – up 27.2% YTD Ontario, up 23.3% Canada 
2. Consumer insolvencies per capita (Canada) – rising – 3.8 per 1000 adults estimated 2023 
3. Household credit – slow growth – $2.89 trillion September 2023 
4. Debt to disposable income – improving – $1.82 Q3 2023 
5. Credit card per capita – rising – up 11.4% YTD 
6. HFCE as % disposable income – rising – 98.4% YTD 
7. Food spending as % household disposable income – rising – 9.4% YTD 
8. Housing costs as % household disposable income – rising – 24.8% YTD 
9. Total debt service ratio – record high – 15.22% Q3 2023 
10. Credit card delinquencies – rising slightly – 0.87% Q3 2023 
11. Homeowners Bankruptcy Index – rising slowly – 4.0% YTD 
12. Mortgage debt service ratio > 25% – rising – 32.4% YTD 
13. New mortgage amortizations greater 25 years – rising – 45.95% Q3 2023 

External Sources: 

• https://ised-isde.canada.ca/site/office-superintendent-bankruptcy/en/statistics-and-research 
• https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=3610063901 
• https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=1710000901 
• https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=3610011201 
• https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=3610058701 
• https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=3610010701 
• https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=3810023801 
• https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=3610066201 
• https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=3610066401 
• https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=1110006501 
• https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=1010013901 
• https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=1810000401 
• https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=1410028701 
• https://www.bankofcanada.ca/rates/indicators/indicators-of-financial-vulnerabilities/ 

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