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..

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..

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..

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/ 

The post 2023 Debt Statistics and What It Means for Consumer Insolvencies appeared first on Hoyes, Michalos & Associates Inc..

The result is that both consumer debt and insolvencies have turned sharply upward again.

What’s contributing to this shift? Are record-high interest rates to blame? Inflation? Or are we just picking up where we left off pre-pandemic?

In my year-end analysis, I will again outline the factors affecting the average Canadian’s ability to manage consumer credit and explain where I believe insolvencies are headed into 2023. Let’s dive in.

Consumer Insolvencies on the Rise Again

Total consumer insolvencies in Ontario were up 13.5% in the first ten months of 2022 (Canada up 10.5%), returning to growth after two years of declines. The pace of growth was stronger in the second half of the year, up an average of 24.7% in Ontario and 19.8% Canada-wide.

While volumes are still below pre-pandemic levels, economic conditions are driving insolvencies upward again.

Cost of Living Continues to Outstrip Wage Growth

Whiling living paycheque to paycheque does not mean someone is insolvent; higher living costs, combined with pre-existing consumer debt, can be a tipping point towards insolvency.

In 2022, the rise in the cost of living continued to outstrip any gains in wage growth. The Consumer Price Index rose 6.9% in October 2022, while employees saw their hourly wages increase only 5.6% year-over-year in October 2022. The gap between prices and wage growth averaged 2.6% for the ten months ended October 2022.

Our 2021 insolvent debtor profile study noted that the average insolvent debtor had just $203 a month available after living costs to meet debt obligations on consumer credit, a record low. High inflation over the past year will, I expect, drive this number much lower and push more financially vulnerable households toward a debt default.

Two primary areas of concern are increased food prices and rents, necessities which take priority over debt repayment.

Food costs increased 10.1% year-over-year in October and are expected to rise another 5% to 7% in 2023.

The vast majority (98%) of insolvent debtors in 2022 are renters, and rents continue to surge across Canada. According to Rentals.ca, rents rose 11.8% in October 2022 to an average of $1,976 across all property types.

Rising Interest Costs Affect Loan Affordability

It is not the amount of debt one carries that determines who has too much debt, but rather affordability relative to income. And all measures of loan affordability deteriorated significantly in 2022.

Interest rates rose in one of the fastest tightening cycles in Canadian history – adding another shock to household budgets. The Bank of Canada overnight rate rose 400 basis points to 4.25% by the end of 2022.

Not all credit products are sensitive to interest rate changes in the short term. Credit card rates, while they can change, seldom do. Existing term loans are locked in for the duration of the loan, although new loans, like car loans, will be at higher rates. Variable-rate mortgage holders may have a fixed payment which will remain in place until they reach their trigger rate.

However, rising rates do have an immediate effect on cash flow for many indebted Canadians:

1. Those with a line of credit or adjustable rate mortgage saw an immediate increase in interest payment costs.
2. Rising inflation and declining loan affordability will force many to reduce their monthly credit card payment towards the minimum payment, increasing the amount they will incur in long-term interest and adding circular pressure to their household finances.
3. We may see a further reliance on high-interest loans as traditional banks tighten credit policies and consumer cash and credit reserves run out.

Rising interest payments mean more budget pressure. The debt service ratio (total debt payments as a percentage of disposable income) increased to 13.97 in Q3 2022 – the highest rate since Q4 2020. However, even this ratio appears better than it is. Households can control the principal portion of consumer credit by reducing their payment toward the minimum. This gives the perception that debt affordability is better than it is. In fact, the interest-only portion of the debt service ratio increased to 51.3% in Q3 – the highest since Q1 2011.

Total interest paid on household debt increased an astounding 29.6% year-over-year in Q3 2022, beating the previous peak back in 2006.  After years of both a low and steady interest burden, consumers have been hit fast and hard with rising interest costs.

And it’s not just mortgage debt that is to blame.  Non-mortgage consumer debt interest is also rising again, up 23.5% in Q3 2022 compared to a year earlier.

We already saw a connection between increasing household interest burden and rising consumer insolvencies during the two years just prior to the pandemic. There is no doubt the rapid rise in interest costs in 2022 will spur a similar trajectory of growth in consumer insolvencies.

Savings Rate Declining as Cash Reserves Run Low

Both inflation and rising rates are putting pressure on household savings, with the household savings rate falling to 5.7% as of Q3 2022. While still above pre-pandemic levels, consumers are using up any cash reserves.

While homeowners may (currently) have sufficient home equity to borrow against to cover the rising cost of living and any potential income shock, renters (the bulk of insolvent debtors today) are quickly running out of liquidity.

Household Credit Still Growing, It’s Now Shifting Towards Consumer Credit Products

Despite rising interest rates, Canadians continue their love affair with debt. Total household debt reached $2.8 trillion in September 2022 – another record high. While growth rates are slowing, they are still historically high, and I must point out, growing on already very high balances. Total household credit grew 7.2% in September 2022.

And Canadians are once again growing debt balances faster than income growth.

Household debt as a ratio of disposable income has returned to pre-pandemic levels. Canadians owe $1.83 for every $1 they earn.

What has changed is that we’ve switched from increasing mortgage growth to a return to rapidly growing consumer debt.

Mortgage growth slowed to 8.4% in September 2022, while non-mortgage loans went from declines during the pandemic to a growth of 3.8%.

In other words, Canadians building balances are doing so across primarily unsecured products – credit cards, lines of credit and personal loans. These are the types of loans dealt with through a consumer insolvency filing.

Credit Cards – Record Balances

Credit card balances are back to pre-pandemic levels. Any gains borrowers made in repaying their credit cards amid the lockdowns of the last two years are now lost.

Canadians now owe a whopping $89.9 billion in credit card debt as of September 2022 – the most we have ever owed.

Worse, the current credit card debt total is above the pre-pandemic peak in December 2019, when we owed $89.6 billion. Historically, December is when annual credit card debt peaks, and it’s alarming that Canadians are already near the $90 billion mark in September 2022.

Balances are rising due to a perfect trifecta:

• Rising credit card spending due to inflation as Canadians use credit to pay for living expenses. Equifax reported that average monthly credit card spending was up 17.3% in Q3 compared to Q3 2021.
• Increased demand and new credit growth as consumers look for more credit capacity (originations / new cards for Q3 2022 are up 35% per TransUnion).
• Credit card payment-to-balance ratios are falling as people lower their payments toward the minimum. Equifax also reported that average payment rates for those who carry a balance are lower than 12 months earlier.

Credit cards are troubling because they are an easily accessible form of revolving credit when cash flow becomes a problem and can be an early step in the events leading to insolvency.

Rising balances also mean growth in the minimum payment required, putting even more pressure on an indebted person’s budget.

Lines of Credit – Climbing Again

Line of credit debt is also climbing quickly, although we are not yet at pre-pandemic peaks.

Once again, non-mortgage (unsecured) lines are growing faster than secured HELOC lines. While all lines of credit balances increased 4.2% year-over-year in September 2022, non-HELOC lines increased 6.5% while HELOCs were up 3.4%.

Unsecured lines of credit are another driver of insolvency. Canadians now owe $67.6 billion in non-mortgage line of credit debt, the highest level since April 2020.

Consumer Credit Delinquencies Begin To Rise

Delinquency rates (90 days or more) on consumer lending products – auto loans, credit cards, and installment loans – are also rising again.

Installment loan delinquencies have surpassed pre-pandemic levels. These include high-interest alternative loans from payday and fintech lenders, a source of borrowing we are increasingly seeing in consumer insolvencies. Since most of these loans are unsecured and non-revolving, consumers are likely to skip these loan payments before their rent, mortgage, credit card, line of credit or car payment. As a result, early delinquencies here may be a warning sign of even more trouble ahead for other credit products.

Auto loan delinquencies are also rising quickly, returning to pre-pandemic levels. Given that a car can be necessary for many Canadians to get to work, rising auto loan delinquencies are a strong indicator of a household’s lack of liquidity and inability to keep up with debt repayment.

Credit card delinquencies climbed to 0.81% in Q3 2022, a year-over-year increase of 12.5%. During periods of financial distress, consumers rely on credit cards to pay for everyday living costs. After mortgage payments, credit cards are one of the last loan payments people in financial trouble will miss. They will continue to do what they can to maintain minimum payments, including looking for new credit options to borrow more.

Two Big Unknowns –Unemployment and Housing Prices

Unemployment Decouples From Insolvencies

Historically, consumer insolvencies have trended closely with unemployment. However, this connection has decoupled in recent years.

It’s easy to understand the disconnect during the pandemic. Skyrocketing unemployment due to the lockdown was temporary. Further, government monetary support to consumers during the pandemic contributed to a sharp drop in consumer insolvencies.

However, even before the pandemic, we began to see a change in this pattern. In 2018 the unemployment rate in Canada fell by 8.0%, yet insolvencies increased by 2.5%. In 2019 we saw consumer insolvencies increase by almost 10% per year while unemployment fell a further 2.9%.

Why were consumer insolvencies rising so rapidly before the pandemic despite low unemployment? The likely answer: rising overall consumer debt levels, particularly non-mortgage consumer credit and a trend towards more subprime debt options.

What’s clear from our earlier analysis is that the pre-pandemic trend toward consumer debt growth has returned. In my experience, unsecured consumer debt does not build wealth. It generally grows to fund consumables, and a return to high unsecured debt balances is a precursor to insolvency growth. And any recession and a resulting rise in unemployment combined with the pent-up impact of all this extra debt will further accelerate any growth in consumer insolvencies.

Homeowners still have equity

In recent years, few homeowners filed insolvency despite carrying high consumer debt for two reasons: low interest rates and rising home prices.

We’re at the end of 2022 with a Bank of Canada overnight rate of 4.25% – the highest interest rate since 2008.

Home prices have declined somewhat as demand softened due to interest rate increases. Yet, homeowner insolvencies remain low. Our Hoyes Michalos Homeowners Bankruptcy Index remained historically low in 2022, averaging 1.6% in the first 11 months and, in fact, reaching zero in August.

There are a few reasons why homeowner insolvencies remain low, at least for now.

Chief among them, mortgage payments will not rise immediately for most. Borrowers with a fixed-rate mortgage will not see their mortgage payments rise until their mortgage is renewed. For variable-rate mortgage holders who have reached their trigger rate, lenders are likely to extend amortization and even allow negative amortization before provoking a potential mortgage default.

It is worth noting that the composite house price index is falling. In October 2022 it was 302.21, 7.7% below its peak in April 2022.

Current home price drops will not trigger an avalanche of homeowners insolvencies, as most still have enough home equity to refinance. However, refinancing may become impossible or too expensive depending on how high interest rates rise and how long they stay elevated. We do expect to see a slight rise in homeowner insolvencies in 2023.

More Insolvent Debtors Filing Consumer Proposals

Another trend worth highlighting is that consumer proposals, as a share of all consumer insolvency filings, has reached record highs in 2022.

In October 2022, Ontario consumer proposals accounted for 81.6% of all filings, compared to 77.2% Canada-wide.

While homeowners are not filing for insolvency in 2022, low unemployment and the cost-benefit of filing a consumer proposal over bankruptcy for higher-income earners are likely driving this trend. A consumer proposal allows the insolvent debtor to spread the cost of their insolvency proceeding over five years, lowering the monthly payment and making a consumer proposal more affordable.

In conclusion, and what’s to come:

The past two years have been interesting in the consumer insolvency world, with overall insolvencies dropping to 20-year lows during the pandemic. Even today, consumer insolvencies have only returned to 2007-2008 levels, with the last three months’ volume remaining 23% below pre-pandemic highs.

My take is that in terms of economic drivers, we are close to pre-pandemic pressures. I expect we will return to a similar growth trajectory that we saw pre-pandemic, which means double-digit consumer insolvency increases continuing into 2023. However, I do not see us reaching pre-pandemic highs in terms of volume until 2024 at the earliest.

If you want to hear specific predictions on how much higher insolvencies will rise in 2023, tune in to the podcast with myself and my co-founder, Ted Michalos, airing on December 31, 2022.

In 2022, these are the top 10 debt statistics I believe impacted (or will impact) the affordability of unsecured consumer debt and consumer insolvencies:

1. Ontario consumer insolvencies up 13.5%, Canada up 10.5% – year-to-date to October 2022
2. Inflation to wage growth gap 2.6% – year to date October 2022
3. Bank of Canada interest rate 4.25% – as of December 2022.
4. Total interest paid on household debt up 29.6% – Q3 2022 vs Q3 2021
5. Household savings rate 5.7% Q3 2022 – and declining
6. Debt-to-income ratio $1.83 Q3 2022 – back to pre-pandemic levels
7. Credit card debt $89.6 billion September 2022 – above pre-pandemic highs and rising
8. Unsecured line of credit growth 6.5% September 2022 – and rising
9. Homeowner Bankruptcy Index 1.6% YTD November 2022 – still low (November 2.3%)
10. Consumer proposals as share of all insolvencies in October 2022 81.6% Ontario, 76.1% Canada – a record high

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=1810000401 
https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=1410032001
https://rentals.ca/national-rent-report 
https://www.bankofcanada.ca/rates/interest-rates/canadian-interest-rates
https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=3610063901 
https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=1110006501
https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=3610011201
https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=3810023801 
https://www.globenewswire.com/news-release/2022/12/06/2568012/0/en/Total-Consumer-Debt-Climbs-to-2-36-Trillion-as-Consumers-Lean-on-Credit-Cards.html 
https://www.bankofcanada.ca/rates/indicators/indicators-of-financial-vulnerabilities/#Household-credit-performance
https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=1410028701
https://housepriceindex.ca/2022/11/october2022/
https://www.hoyes.com/press/homeowner-bankruptcy-index/
https://www.bankofcanada.ca/2022/11/staff-analytical-notes-2022-19/

The post Top 10 Debt Statistics For 2022 and What’s Ahead for Consumer Insolvencies appeared first on Hoyes, Michalos & Associates Inc..

Yet despite rising interest rates, particularly mortgage rates, homeowners are still not filing insolvency (either a bankruptcy or consumer proposal). In fact, our Hoyes Michalos Homeowners Bankruptcy Index (HBI) was 2.0% in December 2022.

To understand what triggers a homeowner to file insolvency rather than refinance, let’s look at some historical data. In 2011, when our HBI was at its peak, 29% of an insolvent debtor’s total household debt was consumer credit and 71% was mortgage debt.

For the next few years, it was rising consumer credit that was driving homeowner insolvencies, not necessarily unaffordable mortgages. By 2017, consumer credit as a percentage of total debt for insolvent homeowners had risen to 39% of their total debt.

Two of the biggest drivers were rising credit card debt and unsecured lines of credit.

A homeowner heavily indebted with consumer credit reaches a wall eventually. To restructure high unsecured debt balances, homeowners have two primary options, refinance or file a consumer proposal.

In recent years, few homeowners were filing insolvency despite rising consumer credit due to two factors: low interest rates and rising home prices. These economic conditions allowed more Canadians to consolidate unsecured debt through their home equity. Suddenly, their budget became balanced again, mostly due to mortgage refinancing.

In recent years, however, those few homeowners filing a consumer proposal or bankruptcy are doing so due to heavy mortgage debt. In 2021, when our HBI was only 2.80%, mortgage debt accounted for 76% of the average insolvent homeowner’s total household debt, the highest we’ve seen since starting our study in 2011. These were homeowners with large high-ratio mortgages who had no credit capacity to refinance.

OK, so if high mortgage debt is driving insolvencies, let’s get back to why we don’t think we will see a sudden uptick in homeowner insolvencies.

The truth is, we do not expect a significant rise in homeowner insolvencies until mid- to late-2023. Why? Because there is a significant time lag between when interest rates rise and when the resulting costs become financially unbearable.

First, payments won’t rise immediately for most. Homeowners with a fixed mortgage rate will not see their mortgage payments rise until their mortgage comes up for renewal. Variable payment holders may also have a static payment, and while many are reaching their trigger rate, some will extend their amortization by putting little, or nothing, towards equity so they can keep their monthly mortgage payment manageable for as long as possible.

Second, history shows us that homeowners will do anything and everything to keep up with their monthly mortgage payment, including borrow more. And homeowners in 2022 have more ability to withstand interest rate shocks than they did pre-pandemic.

The reason lies once again in credit capacity and much of what happened during the pandemic to consumer credit. Both credit card balances and outstanding non-mortgage lines of credit fell dramatically in 2020 and most of 2021 as Canadians, including homeowners, paid down credit balances. This trend is reversing, with credit card and lines of credit balances increasing again however they are not yet as high as they were pre-pandemic.

And here’s the thing. While people paid down balances, it is unlikely many cancelled or lowered their credit limits. This provides a lot of credit room to weather rising mortgage and debt payments. However, eventually a budget crunch will happen. Homeowners will once again max out unsecured credit borrowing and that is when we will begin to see a rise in homeowners filing consumer proposals again.

Even for those facing rising mortgage rates today as their variable rate mortgage reaches a trigger, the banks are provided additional credit capacity to weather the storm. While most maximum amortization periods are 25 years for insured mortgages and 35 to 40 years for non-insured mortgages, most lenders are currently allowing borrowers to make interest only payments, or principal payments of just 1 dollar, extending the amortization almost as much as need to accommodate, at least for now.

In summary, it will take a while before homeowners’ crumble under the weight of their mortgage payments. However, the longer rates remain high and the more likely we see a rise in unemployment as  a result, the sooner the tide will turn.

The post Homeowners Not Filing Insolvency Despite Rate Hikes – Why Not? appeared first on Hoyes, Michalos & Associates Inc..

That’s even more staggering when you consider that Canadians paid down non-mortgage debts at the fastest pace in 30 years during the initial months of the pandemic. While non-mortgage debt fell through the early months of the pandemic, balances have been creeping up again since March 2021 and are now 0.8% above pandemic lows. 

In our annual year-end review, I’d like to explore why insolvencies have not been on the rise and look at how recent trends in consumer credit are likely to impact household credit and insolvency risk in the coming months.

What happened with insolvencies in 2021?

2021 was a relatively uneventful year for Canadian consumer insolvencies. Year-to-date to October (the most recent month reported by the Office of the Superintendent of Bankruptcy), insolvencies declined 11.9% in Ontario and 7.4% across Canada. Much of this decline was in the first quarter over pre-pandemic volumes. Since March 2020 overall consumer insolvencies have largely stagnated. Across Canada, 2021 insolvencies were up only 2.9% from pandemic lows from March through October, while Ontario volumes continued to fall, down 4.3%.

I’m often asked why insolvencies are not skyrocketing amid a pandemic?

During the pandemic three important changes to personal finances impacted many highly indebted households:

1. an increase in disposable cash flow for those who remained working as their expenses dropped,
2. a shift in income to non-garnishable government supports for those who lost their job,
3. a severe lack of collections and lawsuit activity for those behind on their debt payments.

In the beginning stages of the pandemic, working households found themselves spending much less. This increase in cashflow was redirected towards debt repayment with the result that credit card debt fell to a 10-year low in February 2021 and remains below pre-pandemic levels still. This effectively broke the typical debt spiral towards insolvency for some Canadians.

However, it is the second two factors that had the most impact on insolvency filings. The main tipping points for indebted individuals to contact a Licensed Insolvency Trustee are repeated collection calls, a wage garnishment or a court judgment.

Debt collectors remained quiet most of the year while courts were either closed or slowly working on a backlog of files. Up until now, there has been little incentive for heavily indebted individuals to ‘act’ on their debt obligations. Individuals who were not working and on CERB or its successor program, CRB, were creditor proof with income that cannot be garnisheed.

Even Canada Revenue Agency has delayed collection action during much of the past 18 months. With most CRA agents working at home, collection calls and notices were slow to non-existent.  The Canadian government also allowed taxpayers with income below $75,000 who earned COVID-19 benefits to defer payments interest-free until April 30, 2022, reducing the incentive to deal with outstanding tax debts, at least for now.

So that explains why consumer insolvencies have remained so low. And while we expect consumer filings to continue to lag for the next few months, there are some indicators that there will be a resurgence in insolvencies.

Total household credit says, ‘what pandemic?’

Despite a nationwide economic lockdown, Canadian households didn’t curb their appetite for debt. We are now sitting at more than $2.6 trillion in total outstanding credit. Total average outstanding household credit increased 6.0% year-to-date and is trending upwards, with growth at 7.2% in October 2021.

Most of the growth was led by residential mortgages, which now make up a staggering 73% of total household credit (as of October 2021), compared to 69% in 2019. Year-to-date, residential mortgages are up 9.2%, increasing every month over the past year and up 10.2% in October 2021 over growing volumes.

Low-interest rates, FOMO and investor frenzy created an insatiable demand for housing, leading to escalating house prices. According to the Canadian Real Estate Association, home values in Ontario are up nearly 23% year-over-year in October 2021 and 18.2% in Canada.

Homeowner insolvencies are almost non-existent

Unsurprisingly, indebted homeowners have been able tap into this rising household equity and avoid insolvency by consolidating their unsecured debts into their home mortgage.

The result was that our Homeowners Bankruptcy Index was at record lows all year and currently sits at 1.5% in November 2021. It hit its lowest point ever recorded in September 2021 at just 0.4%.

Consumer appetite for non-mortgage credit returning

Mortgage debt was, without question, the biggest contributor to mounting debt loads in 2021. Throughout most of this pandemic, Canadians repaid a record $20 billion in non-mortgage debt, but this downward trend has slowed.

This return to old habits of funding spending with credit is cause for concern.

Credit card debt rebounding

There was a lot of media surrounding our impressive ability to pay off credit card debt during the pandemic – a whopping $16.6 billion decline until its low in January 2021. While still not at pre-pandemic levels, credit card balances have increased throughout 2021.

Looming on the horizon: income tax debt

While we are concerned about debt balances slowly creeping back up after months of decline, we are more worried that many Canadians will need to brace for an impending tax liability due to CERB and CRB receipts in 2020 and 2021. This is an outstanding obligation which has been kicked down the road by both Canadians and the federal government but will inevitably add to consumer debt loads in 2022.

According to Statistics Canada, 35.2% of Canadian workers who earned at least $5,000 in 2019 received CERB payments in 2020. In addition, there have been almost 2.3 million unique applicants for CRB. Many Canadians who received one or both benefits will be facing a potential tax obligation. CERB was paid without withholding taxes and CRB was paid with a nominal 10% tax withheld. While an interest-free period is available to recipients earning less than $75,000, this interest relief comes to an end on April 30, 2022.

Based on calls to our office, many Canadians took advantage of this interest relief and put off paying their 2020 tax debts. Next year, these individuals will have both their 2020 tax obligations, as well as any taxes owing for 2021. I expect there may be a lot more borrowing to make these tax payments next year.

Collection limitation period is fast approaching

While collection calls were slow at the beginning of 2021, this too is changing. Loans that went into arrears just before the pandemic are nearing the end of the statute of limitation period during which creditors can commence legal action. While there is some legal question as to whether that period is extended by six months in Ontario because of provincial emergency orders during the pandemic, creditors are not taking any chances. We have seen an increase in calls from individuals receiving notification of possible court action from major banks in recent months.

Debt to disposable income rising again, albeit slowly

Canadians owe an average of $1.77 for every dollar of disposable income, still below pre-pandemic levels but rising again.

The issue as we see it is that there are competing, and growing, demands on the average household’s disposable income and this may not bode well for many households moving forward.

It’s costing way more to live, and this will go on credit for some

As of November 2021, inflation is up 4.7%, the largest gain since February 2003.

With pandemic-related supply chain issues and overall increased costs of production, Canadians can expect to pay a lot more for their day-to-day needs for months to come.

Prior to the pandemic, our annual insolvency study found that most debtors did not have an income problem, they had an expense problem. The basic costs of living consumed such a high proportion of their paycheque that any small extra expense was put on credit. In 2020, the average insolvent debtor spent 42% of their income on housing and 30% on food and other living costs.  With both these costs rising, these percentages are likely to increase, leaving very little remaining to cover debt repayment.

And any rise in the costs of basic needs like food and shelter will likely mean more credit card debt. Food costs alone are up 4.4% in November 2021, after rising steadily at less than 2% all year. This sudden and likely continued rise in the cost of living will be a burden for already indebted households.

At least our interest costs are low, for now

A final cause for concern is increased interest rates and its impact on the cost of debt repayment.

Low rates and declining balances early in the pandemic have lowered debt servicing costs for the average Canadian to levels not seen since 2005.  The good news is more of these payments are going towards principal repayment. As of the third quarter of 2021, more than 56% of debt payments were going to pay down debt.

What’s unknown is how long the boon of low rates will last. The Bank of Canada has expressed a desire to raise interest rates as early as next year. While I know rates are not likely to jump astronomically, even a small increase will be felt immediately on the servicing costs of callable debts like lines of credit and variable rate mortgages.

While there will be a lag effect on fixed-rate mortgage debt, Canadians are rolling the dice on low rates to continue. According to the Canadian Mortgage and Housing Corporation, 40% of new mortgage balances issued in the second quarter of 2021 were variable rate mortgages. Given the sheer size of today’s mortgages, any interest rate increase will mean a much bigger struggle to meet monthly mortgage payments. The average new mortgage in Canada was $371,584 in the third quarter of 2021, up 22.5%. In Ontario, it was $464,712, up 24.5% over the prior year. A half-percentage increase on an average Ontario mortgage from say 1.45% to 1.95% could cost the mortgage holder an extra $110 a month or an increase of almost 5% in their monthly mortgage payment. For someone living paycheque to paycheque, this extra payment typically goes on consumer debt as homeowners will do anything to avoid defaulting on a mortgage payment.

And if home values also drop, it will be that much more difficult to refinance or deal with any accumulated unsecured debt.

Conclusion

In short, I am concerned about the loss of financial cushions from structural changes during COVID that have actually protected indebted households for the last two years.

CRB has already wound down. Unless the Canadian government implements yet another income supplement, more and more people will return to regular work, where their income could be at risk of a wage garnishment if they fall behind on their debts. The CRA is likely to resume more aggressive collection activity next year, while at the same time eliminating interest relief on tax debt. The cost of living is not going down anytime soon either. All I’m saying is that pressures are starting to mount. An absence of cushions doesn’t mean an immediate return to record insolvencies, but it will be the beginning of some serious financial stress for Canadian households.

However, if you want to find out how much I, and my co-founder Ted Michalos, believe insolvencies will rise, and when, tune in for our year-end review on the Debt Free in 30 Podcast on January 1, 2022.

Every year we choose 10 key statistics that most accurately tell the story of what’s happening with consumer debt in Canada and Ontario.

Here are our top 10 debt statistics for 2021

1. Consumer insolvency decline: 11.9% in Ontario, 7.4% in Canada (to October 2021)
2. Total household debt: $2.6 trillion
3. Growth household credit: 0% and trending upwards, with growth at 7.2% in October 2021
4. Mortgage debt as % of total household credit: 72% (73% in October 2021)
5. Homeowner insolvencies at record lows: 1.5% in November 2021
6. Percentage of Canadian workers received at least $5000 CERB: 35.2% – tax debt risk
7. Debt to income ratio: 177.15 – slowly rising again
8. Inflation up 4.7% in October 2021 – puts pressure on household budgets
9. Growth in average new mortgage: Canada 22.5%, Ontario 24.5%
10. Interest portion of debt service ratio: 43.5% – very low but at risk to rise

Sources

1. https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=3610063901
2. https://www150.statcan.gc.ca/n1/pub/11-621-m/11-621-m2021004-eng.htm
3. http://strategis.ic.gc.ca/eic/site/bsf-osb.nsf/eng/h_br01011.html
4. https://www150.statcan.gc.ca/n1/pub/45-28-0001/2021001/article/00021-eng.htm
5. https://www150.statcan.gc.ca/n1/daily-quotidien/210823/dq210823c-eng.htm
6. https://www150.statcan.gc.ca/n1/daily-quotidien/210602/dq210602b-eng.htm
7. https://www.canada.ca/en/revenue-agency/services/benefits/recovery-benefit/crb-statistics.html
8. https://www150.statcan.gc.ca/n1/daily-quotidien/211117/dq211117a-eng.htm
9. https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=3810023801
10. https://www.cmhc-schl.gc.ca/en/blog/2021/new-report-residential-mortgages-shows-30-year-low-arrears
11. https://www.cmhc-schl.gc.ca/en/professionals/housing-markets-data-and-research/housing-data/data-tables/mortgage-and-debt/average-value-new-mortgage-loans-canada-provinces-cmas

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Who is GEM Debt Law?

According to their website, GEM Debt Law is an established debt settlement firm. They purport to be Licensed Professionals but not Bankruptcy Trustees. GEM indicates that they operate as a law firm.

Why is this important to know? Because in Ontario, debt settlement companies must be registered under the Collection and Debt Settlement Services Act (CDSS Act). This Act legislates fees and services of debt settlement companies. However, lawyers, not-for-profit credit counselling agencies and Licensed Insolvency Trustees are exempt from the requirement to be registered and thus are not bound by the CDSS Act. While LITs are federally legislated and bound by the Bankruptcy & Insolvency Act (BIA), lawyers and credit counsellors are not.

At the time we published this post we were unable to confirm where GEM Debt Law’s lawyers are licensed as their website did not list the full names of their lawyers.

UPDATE January 2022:

Since the publication of our initial blog post, GEM Debt Law has modified their website to include the lawyer’s full name.

What does GEM Law do?

As has become a common theme with these contract reviews, GEM Debt Law charges a fee to help individuals with insolvency filings. Specifically, their contract states that they act as a Legal Representative for filing a consumer proposal, Division I proposal or bankruptcy and help select a Trustee (Licensed Insolvency Trustee).

As you can see, GEM Debt Law under this agreement does not actively settle debts for clients as they cannot negotiate binding agreements with creditors through consumer proposals. Remember, only Licensed Insolvency Trustees are legally able to file a bankruptcy or consumer proposal. Only an LIT can approve claims, count votes and get a binding agreement with creditors in a consumer proposal.

The question then becomes, do individuals need legal representation to help them file a consumer proposal, select a trustee or attend any meeting of creditors? In my opinion, in almost all cases, no. Filing a consumer proposal is a legal process, and LITs are licensed and trained in law and the regulations provided by the Office of the Superintendent (OSB) required under that process. LITs are Officers of the Court versed in the legal requirements of filing a consumer proposal. Interestingly, in Canada, lawyers are prohibited from being Licensed Insolvency Trustees.

So, what about any meeting of creditors? Should a debtor have a legal representative at that meeting? Again, in most cases, it’s not necessary. Firstly, not all proposals have a creditors’ meeting.  A meeting is only required if directed by the Official Receiver (seldom) or if creditors who hold a minimum of 25% of the debts request a meeting (again rare). If a meeting is requested, the purpose is two-fold:

• To allow the creditors, or the government, to ask questions of the debtor;
• To count votes.

Even if a meeting is requested, in my experience, anyone rarely attends. In most cases, the creditors simply don’t like the offer and wish for a higher payment. A new offer can be discussed and arranged before the meeting. If the debtor agrees, the new deal can be papered and sent, enabling a yes vote and eliminating the need for anyone to attend.

So, if you don’t need legal assistance in filing a consumer proposal, selecting a trustee or attending a meeting, what about the services where GEM Debt Law states they collect and review financial information, advise about debt relief options and anticipate the response of creditors? This is what is known as a financial assessment. Again, Licensed Insolvency Trustees are required by law to conduct this assessment and explain all options for dealing with debt to any debtor. The OSB has set out specific guidelines in Directive 6R3 stating what is required. Yes, a trustee can delegate the collection of information. However, most reputable trustees, including Hoyes Michalos, conduct this assessment in-house, for free, as part of the consumer proposal or bankruptcy process. There is no need to pay an outside third-party company to perform this assessment.

The last argument put forth by most debt settlement companies is that they can get a better deal because they work for the debtor.  In fact, on their website, GEM Debt Law states that “GEM’s fiduciary duty obliges us to serve the clients’ best interests, not the creditors or collectors”.

That brings us to cost. Let’s look at that.

What does this cost?

In this case, the client was requested to make 60 monthly payments of $334.67 for a total cost of $20,080.20.  These costs were broken down as $7080 in fees, taxes and bank fees to GEM and what appears to be $13,000 in suggested consumer proposal payments. 

The $13,000 is marked as ‘Savings’ in the Pre-Authorized Payment Agreement sent to the client. However, Schedule A of the agreement notes that the Retainer Fee payment consists of GEM  fee plus taxes and bank/eft fees and a ‘Creditor Fee’ to be calculated based on the client’s total debt and projected savings on debt reduction.

These payments were to be paid as 60 equal monthly installments of $334.67, with the first two payments entirely going to pay upfront GEM fees, tax and bank fees.  The remainder was split between ongoing GEM fees and creditor payments for an additional 58 months, which we assume to be the proposed proposal term.

Again, the total cost to the client with GEM would have been a minimum of $20,080. This is assuming the deal as recommended by GEM was accepted by the creditors. While GEM states in their contract that they “shall strive to achieve the best results for the Client, such as the lowest monthly payment and significantly reduce debts owing to creditors,” they acknowledge that “results may vary and no guarantees whatsoever shall be implied within this Retainer”.

In other words, if the creditors do not like a lowball offer, the cost to the client will increase.  This is true with all consumer proposals. However, if the creditors ask for more after being referred to the Trustee, it appears GEM Debt Law fees will also rise. GEM also has what appears to be a clause allowing them to collect their fees in advance if the consumer proposal start date is delayed.

If the client does not file a consumer proposal and files a bankruptcy instead, either because the creditors do not accept any offer or because the LIT recommends that a bankruptcy makes more sense, GEM can continue to charge the same retainer fee as assumed with a consumer proposal filing.

A first bankruptcy, for someone with no surplus income, can last as little as nine months and cost roughly $1,800 or $200 a month. If this were the situation, a client would still be required to pay $7,080 in fees to GEM versus $1,800 to file bankruptcy (including the trustee fees) unless GEM agreed to lower their fee.

Also in the agreement are several potential additional charges or fees, not included in the retainer agreement. One example is a $50 per credit report request, while we help clients obtain their free credit report as part of our process at no additional cost. I’ve attached an image of their fee schedules at the end of this post.

Consumer Proposal outcome with Hoyes Michalos

In this case, the individual was sufficiently concerned with the $7,080 in costs to be paid to GEM that they contacted our office for a second opinion.

After a full debt assessment, we recommended a consumer proposal of $250 a month for 60 months.

• Their monthly payments would be substantially less than the $334.67 proposed by GEM, making them more affordable.
• The monthly proposal payments with Hoyes Michalos would be the full $250 versus $224.24 in the GEM contract. As a result, the creditors would receive more, making the proposal more viable, all while the client paid less.
• Fees earned by Hoyes Michalos as LIT for administering the consumer proposal would amount to $4,634.95, significantly less than the $7,080 in the GEM contract. Trustee fees are legislated and are included as part of the consumer proposal payment, while GEM fees are unregulated and added on top.

In this case, our client’s total amount payable over five years amounted to $15,000, significantly less than the $20,080 proposed by GEM Debt Law. With total unsecured debts of roughly $47,000, this amounted to a settlement offer of 32 cents on the dollar. I am happy to report the proposal was accepted by the creditors.

Recommendations

To date, we have reviewed several third-party ‘consumer proposal advisory’ contracts. You can see two recent posts here and here, along with a client testimonial here.

We continue to advise consumers facing debt problems to talk directly with a Licensed Insolvency Trustee, especially if the agency mentions bankruptcy, consumer proposal or debt settlement. It is vital to get advice about insolvency proceedings, for free, from a professional licensed to provide those services.

We continue to ask that the Office of the Superintendent of Bankruptcy:

1. Place under administrative review any Licensed Insolvency Trustee consistently obtaining file referrals from, or in a related business with, any debt settlement companies or unlicensed debt consultant.
2. More strictly regulate the advertising and provision of consulting services around consumer proposals.
3. Amend Directive No. 6R3 to limit who a trustee may delegate the collection of information required to conduct an assessment under the Bankruptcy & Insolvency Act and that the cost of this assessment be borne by the Licensed Insolvency Trustee, not the debtor.

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As we have done in the past with other debt consultants, we will review the contract details as provided through our client (with their permission) to help others avoid unnecessary costs.  To protect our client, personal information has been removed from images taken from the York Credit Services contracts provided to us.

Services Provided

According to their contract, York Credit provides debt relief consultations, helps clients choose a ‘Third Party Professional’ and represents the client while implementing the chosen program.

In other words, they collect information, and when they suggest a consumer proposal, they refer you to a Licensed Insolvency Trustee.

For this review and referral, they charge a hefty fee.

How Much Does This Cost?

In this case, the consultation fees charged amounted to $4,920, payable as two installments of $400 each BEFORE the consumer proposal was filed, and 24 ongoing installments of $172.

On top of this, the client would pay proposal fees to the Licensed Insolvency Trustee bringing his total recommended payments to $13,920 on unsecured debts (as listed in his proposal filing) of $31,010.

• $4,920 payable to York Credit Services
• $9,000 for the proposal to his creditors

As many who read our blog know, a consumer proposal allows you to settle debts for less than you owe, and settlements as low as 20 cents on the dollar are possible. In this case, York Credit Services recommended monthly proposal payments of $150 a month payable over five years, or 29 cents on the dollar.

However, when you factor in their consulting fees, the total settlement cost increased to 45 cents on the dollar! That means going through a debt consultant increased the cost by 55%.

Whether the proposal payments of $150 a month were reasonable, I cannot determine as I did not conduct a debt assessment at that time. However, I can say that it was completely unnecessary for this client to pay an additional $4,920 for a referral to a Licensed Insolvency Trustee.

To be clear, Licensed Insolvency Trustees are required by law to conduct a complete financial assessment (more robust than the cursory services which appear to have been provided for by York Credit Services), and an LIT does so for free.  All reputable LITs provide free consultations. If you are not happy with the recommendation of one trustee, seek a free second opinion from another Licensed Insolvency Trustee.

As you can see from this scenario, debt consultants cannot get you a deal that is better than the one you can achieve going directly to a trustee, especially after factoring in their consulting fees.  Consultation fees by debt consultants can increase the overall cost by 50% or more.

Additionally, LITs do not require clients to make payments prior to filing a consumer proposal with the federal government. And when you work directly with an LIT, the ONLY payments required are those under the proposal, in this case, $150 a month.

This client continued to pay an additional $171.67 a month to York Credit because they thought these payments were required as part of the proposal process. They were not.

And yes, Licensed Insolvency Trustees do get paid to administer consumer proposals. That administration including filing the proposal with the government, collecting credit claims and counting votes, communicating with creditors, holding meetings if necessary, and making distributions to the creditors.

A $150 a month proposal for 60 months would result in total fees of $3,279 to the trustee plus costs (government filing fees and counselling fees) of $296.34.  I should also point out that Licensed Insolvency Trustees are regulated, and our fees are included in the monthly proposal payment. The creditors bear the cost since they receive a smaller distribution after the trustee has been paid.  Debtors do not pay extra.

That means, in this scenario, the Licensed Insolvency Trustee would be paid $3,279 over five years to administer the proposal while the ‘consultant’ was paid $4,920 to recommend a proposal!

Other Clauses

Also of note is a clause in the agreement prohibiting the client from retaining the services of anyone else conducting similar services, including consultations regarding their debt relief options. In other words, this contract tells a client they cannot engage another Licensed Insolvency Trustee since these are the services they provide.

While this clause may or may not be enforceable, it certainly capitalizes on the confusion, fear, and stress a client is feeling to prevent them from seeking a second opinion.

Another pressure clause we found was 8 (c) which indicates that failure to make payments will result in cancellation of the program.  Many clients may believe this means that if they stop paying York Credit, their consumer proposal will be cancelled. This is not the case. A consumer proposal is annulled according to law, and only when someone is behind three consumer proposal payments. The payments to York Credit are not part of the proposal and stopping payment to York Credit cannot impact an ongoing proposal. However, the fear of cancellation is enough to keep many people from questioning the extra payments to York Credit even after having filed their consumer proposal.

What happened in this case?

In this situation, the client filed a consumer proposal with another Licensed Insolvency Trustee in March 2021.  This was, of course, after paying $800 to the debt consultant prior to filing. They then continued to make payments to both the Trustee and York Credit for several months.

Unfortunately, the burden of paying an extra $172 a month was unaffordable, so this person turned to payday loans to keep up. To be clear, this person thought that these additional payments were part of the proposal. They did not know the charges by York Credit were not legislated payments.

After they contacted us a few months later, we advised that they stop all payments to York Credit while we conducted a new debt assessment. This individual then proceeded to file bankruptcy, which was a more affordable option for them.

Could this individual have afforded the $150 a month proposal? Perhaps, however, they could not afford those payments plus $800 upfront and another $171 a month on top of their proposal fees.

Recommendations

If you have contacted or signed an agreement with any debt consultant, we recommend the following to protect your interest:

1. Confirm their credentials. When seeking debt advice, be sure you know who you are dealing with. If the advisor recommends a proposal, ask: “Are you a Licensed Insolvency Trustee?” If you are uncertain, search the government website.
2. Never sign an agreement that requires fees in addition to your proposal payments which are payable to the Licensed Insolvency Trustee.
3. Never make payments before your consumer proposal is filed with the government and you receive your official insolvency filing documents, including estate number.
4. Stop paying the debt consultant if you have entered into such an agreement prior to filing a consumer proposal. Our position is that this is an agreement for services rendered prior to the signing of a consumer proposal and that the ongoing payments are money owing in the future for past services and hence should be included as an unsecured debt in the consumer proposal.
5. If you were paying these types of fees and were under the impression they were part of your consumer proposal, contact the Office of the Superintendent and file a complaint.

We also recommend that the Office of the Superintendent of Bankruptcy:

1. Place under administrative review any Licensed Insolvency Trustee consistently obtaining file referrals from debt consultants.
2. More strictly regulate the provision of debt assessment and consulting services for consumer proposals. Licensed Insolvency Trustees are tightly regulated, however, the advertising and provision of consulting services around consumer proposals are not. Like medical services, the service, not just the provider, should be regulated.

Licensed Insolvency Trustees have many years of training and practical experience, are required to take many courses and pass many exams and are regulated by the federal government.  LITs are the only professionals that can file a consumer proposal or bankruptcy in Canada.  We are the professionals.  Our fees are set by the federal government.  We are not allowed to charge up front fees.

Don’t be scammed.  If you have debt, get a free consultation from a Licensed Insolvency Trustee, not an unlicensed debt consultant.

And I’d really like for the government to protect consumers by taking action to fix this problem.

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