Last week I was interviewed along with Laurie Campbell of Credit Canada on CHCH TV. Click on the picture to be taken to the CHCH TV website to view the interview:

Laurie Campbell provided her comments in a great blog post entitled The fat is in the fire for debt settlement services (the comments at the end of her blog are interesting as well).

Global TV also did a story on one particular company, Cambridge Life Solutions; you can watch the full interview on the Global TV website. I posted my comments on the news story (and I answered my critics) in a post on Cambridge Life Solutions on Global TV.

These TV broadcasts generated lots of calls to our 310-PLAN helpline, which is great.  Residents of Ontario are starting to realize that just because a company can spend a lot of money on advertising does not necessarily mean they are looking out for consumers.

Both interviewers asked me if I think the Ontario government should do something to stop deceptive practices in the debt settlement industry.  Here’s my position:

First, I believe that consumers have the ultimate responsibility to look out for themselves.  Before you sign a contract with anyone, research them on the internet, and then meet with them face to face before you decide if they are reputable.

Second, the Ontario government could put a stop to these American debt settlement companies by simply enforcing laws that we already have on the books.  The law says that debt negotiators must be resident in Ontario, and licensed in Ontario; since some of them operate from call centres in the United States, it should be simple to shut them down.

Third, the Ontario government could pass laws like they have in Alberta and Manitoba to prevent up front fees before a settlement is reached.  That would help, but it takes governments a long time to act, so I’m not holding my breath.  (And it the Premier is reading this, I’m still waiting for a reply to my letter…..).

At least the Ontario government has posted a Consumer Alert about debt settlement companies on their website; that’s a good start.

If you have more debt than you can handle, contact us, and we will walk you through all of your options and help you make an informed decision.  And yes, we can help you even if you have already signed a contract with a debt settlement company.

However, I understand the confusion now that there are lots of debt consultants advertising on the radio and television.  The problem for you is that you have no idea what these people actually do, so here’s a quick summary:

A not for profit credit counsellor can provide you will advice on budgeting, and they can negotiate a debt management plan, where you repay your debts in full, but over an extended period of time, and often at reduced or zero interest.  If you can afford to pay in full but need a break on the interest, this may be a good options for you; give our office a call and we can give you the name of a not for profit credit counsellor in your area.  We work with credit counsellors every day, and we will only refer you to a credit counsellor that is a member of the Ontario Association of Credit Counselling Services.

A debt consultant is not regulated by a not for profit agency, and while some of them may be reputable, many of them simply act as a referral service for trustees.  You go see the debt consultant, pay them some money, and then they refer you to a trustee.

Here’s a tip: you don’t need to pay anyone a fee to refer you to Hoyes Michalos.  Pick up the phone and call us, or e-mail us, or fill out our on-line evaluation form, and we will meet with you and review your options at no charge.  There are no up front fees.  You don’t pay us a penny until you understand all of your options and you have chosen the one that’s right for you, and we have filed your proposal or bankruptcy with the federal government.

A debt settlement company is a company that offers to negotiate a settlement on your debts with your creditors.  Debt settlement may be a good option if you have a lump sum of money, and relatively old debts.  If you owe $20,000 on a bank loan from three years ago, and you now have saved up $5,000, a debt settlement company may be able to negotiate a settlement to eliminate the rest of the debt.  Of course you may be able to phone up the bank and make the same deal yourself.

In most cases you won’t have a lump sum of money, so most debt settlement companies put you on a savings program where you save up the money for your settlement, often over a period of one to three years.  Unfortunately, there are two problems with this approach:

First, most debt settlement companies charge up front fees, often equal to your first three or four month’s payments.  If the plan requires you to save $500 per month, they may take the first four month’s payments, or $2,000, as their fee, and that’s before they even contact your creditors.  That’s risky for you (and remember, at Hoyes Michalos there are no up front fees).

Second, until you have the money saved up for the settlement, your creditors can still phone you, and even take you to court, sue you, and garnishee your wages.  It’s unlikely that your bank or credit card company will just sit there doing nothing for three years waiting for you to save money.  In my experience, bank’s want their money, sooner rather than later.

It’s these up front fees and no guarantee of a settlement that is causing the controversy.  The heat got turned up a bit more last week with a press release from The Canadian Association of Credit Counselling Services (CACCS), a Canada-wide network of accredited, not-for-profit credit counselling agencies that offer preventative education and confidential services to clients experiencing financial difficulties.  In their press release, An urgent matter of consumer protection: Canadian lawmakers must address the growing controversy surrounding “debt settlement services.”, they are asking the government of Ontario to act to curb abuses by debt settlement companies.

My guess is that the government of Ontario won’t do anything.  You can read my letter to Premier McGunity that only got a semi-automated response, so I’m not optimistic that anything will happen.  In fact, we already have laws that require debt negotiators to be licensed and regulated, so I’m of the view that the quickest solution would be to simply enforce the laws that are already on the books.  (You can read more about this in my series on one of the biggest American debt settlement companies, that is now operating in Ontario).

My advice: do your own research, explore your options, and don’t sign anything unless you fully understand the plan.  Protect yourself; don’t wait for the government to do it for you.

For example, if in a bankruptcy in Canada your surplus income payments (based on your income) would be $10,000, and you have assets that would be seized of $5,000 (like RESPs, contributions to your RRSP in the last year, or tax refunds), the creditors would expect to receive their share of $15,000 in a bankruptcy.

So, logically, if you offer more than $15,000 in a proposal, most creditors would accept that proposal. They might not accept $15,001, since a bankruptcy may still be completed faster, but a proposal of $20,000 should be sufficiently more than the expected realizations in a bankruptcy, so most creditors would accept.

Most, but not all.

Douglas Hoyes, CA, Consumer Proposal Administrator

The Royal Bank, in my experience, requires you to pay more in a proposal than any other creditor. Let me explain, and please read on to find out how we can assist you if you have significant Royal Bank debt. Let me illustrate with an example:

I filed a proposal for a single woman (I’ll call her “Jane Doe”). Her monthly income is $1,900 per month, she has no assets, no unusual expenses, and she has never before been bankrupt. Under government surplus income rules a single person is allowed to earn $1,980 per month; if they earn over that amount they pay a surplus income penalty of half of the amount they are over. Obviously in this case Jane Doe is under the limit, so it’s likely she would make a base payment of $200 per month for 9 months in her bankruptcy, and she would be discharged in 9 months. She normally gets a tax refund of $200, so she would also lose that, so for her the total “cost” of a bankruptcy would be about $2,000.

Her only creditor is the Royal Bank. She owes them just under $13,000. She knows she owes the money, and wants to pay what she can, but on an income of $1,900, after paying rent and living expenses, she can only afford to pay them $200 per month. So she offered the Royal Bank a proposal of $200 per month for 35 months, or $7,000 in total.

The math is simple: in a bankruptcy the Royal Bank gets their share of $2,000. In a consumer proposal they get their share of $7,000.

If it was up to you, would you rather have $2,000, or $7,000?

The Royal Bank rejected her proposal, and counter-offered by asking for $200 per month for 60 months, or $12,000 in total, very close to the full amount owed.

Jane Doe was faced with a decision:

• agree to pay $200 per month for five years, and then have a note on her credit report for three years after that saying she filed a consumer proposal (for a total of eight years), or
• file bankruptcy, pay $200 for 9 months, lose her $200 tax refund, be discharged in 9 months so she can start rebuilding her credit, and have a note on her credit report for 9 months plus six years, or just under 7 years.

For most people it’s a simple decision: assuming she doesn’t qualify for a consolidation loan, can’t afford credit counselling, and doesn’t have a lump sum for a debt settlement, and has no family or friends that can help her, given a choice between a consumer proposal and a bankruptcy, the bankruptcy is the most logical method for Jane Doe to eliminate her debt and begin to rebuild her credit.

Let me be clear: At Hoyes, Michalos & Associates, wherever possible we strongly encourage people to file consumer proposals as an alternative to bankruptcy. Most people prefer to have us negotiate a settlement and avoid bankruptcy.

In most cases a proposal of $7,000 to discharge less than $13,000 in debt, when a bankruptcy would yield less than third of that amount with no extenuating circumstances, should be accepted.

But, in my experience with the Royal Bank, that’s not the case.

At Hoyes, Michalos we maintain a database of all proposals we file, and we calculate the realizations creditors expect. The vast majority of creditors accept proposals that are somewhat larger than the expected payments in a bankruptcy, and that are reasonable based on the debtor’s monthly income and expenses. But not, in our experience, the Royal Bank.

In fact, I just completed an analysis of all of the consumer proposals Hoyes Michalos has filed over the last eight months (almost 1,500 files) and here are the results:

• 92% of all proposals we file are accepted as filed by the creditors; that’s a fantastic success rate!
• In  7% of all proposals the creditors requested more money, and the debtors’ agreed, so that means that 99% of all proposals we file are accepted by the creditors;
• 1% of proposals are rejected or withdrawn, and in many of those cases the debtor ends up filing bankruptcy.

So what does this have to do with the Royal Bank?

The Royal Bank votes against 6% of all of the proposals we file. In total, all other creditors (all other banks, credit card companies, and the government combined) vote against 5% of our proposals.  (If they have a small vote their “no” vote may not be enough to reject the proposal).

That’s a staggering statistic. The Royal Bank votes “no” more than all other creditors combined!

The Royal Bank is the largest bank in Canada, so it’s only logical that they will appear as a creditor in more proposals than a smaller bank or credit card company. However, even adjusting for that difference, in our experience the Royal Bank remains, by far, the biggest “no” voter in consumer proposal filings.

What does this mean?

For the Royal Bank, it means they lose a lot of money when people file bankruptcy instead of filing a consumer proposal. In fact, there are many people I meet with each month who want to do a consumer proposal, but I’m forced to tell them that because the Royal Bank is their largest creditor they will most likely be required to offer more than what other creditors would require, which may not make a proposal affordable for them.

For you, it means you will need to meet with a Hoyes Michalos representative to crunch the numbers and decide what you will likely need to offer to have the Royal Bank accept your proposal.  Fortunately, we maintain the most extensive and current database in the industry of what creditors want, so we will use this “insider” knowledge to do everything we can to work with you to negotiate a settlement so that you don’t have to file a bankruptcy.

So why am I writing this blog post instead of just picking up the phone and calling Royal Bank?

Simple: I’m not allowed to talk to the Royal Bank. The Royal Bank has outsourced all consumer proposal filing processing to a separate company. My staff and I are required to communicate with that company, who then passes on our messages to the Royal Bank. That’s just the way it is.

Hopefully the Royal Bank reads this post and gives me a call at 310-PLAN; I’d be happy to explain to them how much money they have lost over the years with their “we want more money than everyone else” consumer proposal policy.  I’ll also explain that a consumer proposal is a great way for creditors and debtors to reach a solution that’s a “win-win” for everyone.

What does this mean to you?

It means if you earn more than the limit allowed by the government, you pay a penalty of half of the amount you are over the limit, and your bankruptcy will be extended by twelve months.

The surplus income rules are much more complicated than that previous sentence may imply, so to find out more, we suggest you:

• read our detailed explanation of surplus income and bankruptcy; and
• use our free surplus income and bankruptcy calculator.

If you find the math confusing, don’t worry.  We’ve developed some very sophisticated computer programs to crunch the numbers, so give us a call at 310-PLAN (310-7526, no area code required) or complete our free bankruptcy evaluation form, and we’ll meet with you and crunch the numbers to help you determine the cost of bankruptcy for you.

What happens if the math says you will need to pay a lot of money while bankrupt?

No problem, we have a solution for that; it’s called a consumer proposal, and when you call us we’ll explain why you can file a consumer proposal and not worry about working overtime or earning extra income.  Give us a call and we’ll give you the details.

There are a number of debt consultants that are operating in Ontario, and, in my opinion, they are breaking the law.  For example, there are American companies that do all of their debt negotiation work in the United States, which is illegal.  The Collection Agencies Act of Ontario requires all debt negotiators to be residents of Ontario.  There are also some Canadian companies that charge huge up front fees, and then do nothing.  So, I would like the government of Ontario to either prevent companies from charging huge up front fees and doing nothing (similar to what they have now done in Alberta and Manitoba) or at the very least enforce the existing laws requiring debt negotiators to be residents of Ontario.  I don’t actually expect the government to pass any new laws, but I thought I would send an e-mail to see if at least the Premier would think about enforcing the existing rules.

Today, exactly three weeks after my e-mail, I got this response:

Thanks for your online message about credit counselling, debt settlement and consumer protection. Your views and concerns are important to me, and I appreciate your taking the time to share them.

Helping Ontario consumers make informed choices is part of our government’s commitments to educate, protect and serve Ontarians by ensuring a fair and safe marketplace.

As the issues you have raised fall within the area of responsibility of my colleague the Honourable Margarett Best, Minister of Consumer Services, I’ve passed along a copy of your message to her for her information. I trust that the minister will also give your views her careful consideration.

Thanks again for contacting me. Please accept my best wishes.

Dalton McGuinty
Premier of Ontario

c: The Honourable Margarett Best

So there you go.  Apparently my views are important to the Premier, so he has passed on my concerns to the Minister responsible for these matters.

I look forward to discussing this with Ms. Best, and if we correspond or speak, I will report back, so stay tuned.

Doug Hoyes on CBC Radio

Today I was interviewed on CBC Radio’s The Current, on a segment about Doubting Personal Debt.  But first, here’s an interesting fact: CBC radio prefers to use Skype for radio interviews. Skype, as you probably know, is a free service that allows you to send text messages, talk, and do video calls over the internet.  I’ve done lots of radio interviews over the years, and all of them were done via telephone.  CBC prefers the better sound quality of the internet, so here’s a picture of me this morning with my microphone plugged into my computer to do the interview.

With that inside view, here’s what we discussed about debt:

Debt is a “ticking time bomb”.  It may not be a big problem today for many people because interest rates are low, but I made the comment that we could be in trouble if interest rates rise.  Here’s the math:

If you have a mortgage and the interest rate goes from 3% to 4%, that may not seem like a big increase; it’s only 1%, right?

Wrong.

If the price of a loaf of bread goes from $3 to $4, that’s a $1 increase, but that’s a 33% increase in the cost.  That’s huge, and it’s the same with mortgages, car loans, and all other forms of debt.  If your mortgage interest rate goes from 3% to 4% that’s actually a 33% increase in your interest costs.  That’s huge.

Here’s an even simpler way to look at it: An increase of 1% in the interest rate on your $200,000 mortgage is an increase in payments of $200 per month.  Do you have an extra $200 per month?  If you are living paycheue to paycheque you probably don’t, and that’s the problem with debt: if anything changes, like the interest rate, you’ve got a problem.

So what’s the solution?  As I said on the radio today, the solution is to reduce your debt, so that if interest rates go up, or if you lose your job, or get sick and can’t work, you don’t get stuck with interest payments you can’t afford.

You can hear my four minute interview with Anna Maria Tremonti on the CBC Radio website (my comments start at the 8 minute mark).

If you already have more debt than you can handle, take 30 seconds and try our free, on-line debt options calculator so that you can learn how to eliminate debt, and defuse the ticking time bomb.

My point: I’m interested in how you got into debt, but I’m more interested in how we can work together to eliminate your debt, and help you manage your money in the future.

At Hoyes Michalos we focus on tomorrow, not yesterday.

Douglas Hoyes, CA

Yesterday I sent the following message to Dalton McGunity, the Premier of Ontario.  (You can send a message to him as well from the government website).  Here is a copy of that letter; I’ll report back if I get a response.

Dear Mr. Premier:

As you are no doubt aware, residents of Ontario have record levels of personal debt. Unfortunately some unscrupulous companies, many based in the United States, are taking advantage of this situation and advertising debt negotiation and debt settlement services to Ontarians. I say “unfortunately” because many of these companies do not provide a real service. They charge an upfront fee, and then tell the debtor to stop paying their debts and save money in a separate account to use in a future debt settlement. Most banks and credit card companies are not willing to wait two or three years while the consumer accumulates sufficient money for a settlement, and the debtor then discovers that they are facing legal actions and wage garnishments from their creditors.

By paying up front fees with no guarantee of service, many debtors are worse off than before they entered the debt settlement program.

On February 2 the government of Manitoba amended their Consumer Protection Act regulations by banning upfront charges, setting maximum fees, and requiring debt-settlement agencies to become licensed. Under Manitoba’s new laws, debt settlement companies can only charge a fee if the creditor and debtor reach an agreement on a reduced payment, and their fees are limited to a maximum of 10 per cent of the debt owed.

I applaud Manitoba’s actions to protect consumers, and with that background I ask the following question:

Premier McGuinty, when will the government of Ontario take steps to protect Ontarians from unethical debt settlement companies?

I am a chartered accountant and licensed consumer proposal administrator and bankruptcy trustee, and I acknowledge that I am biased. I met with debtors every day that have paid a lot of money to debt settlement companies and have received no service, and by the time I meet with them it is often to late to negotiate a settlement. In many cases bankruptcy becomes the only option.

I believe consumers should be aware of all of their debt management options, and therefore I believe that debt settlement companies, credit counsellors, bankers, lawyers, accountants, consumer proposal administrators and bankruptcy trustees all have a role to play in helping residents of Ontario deal with their debt problems. However I believe that debt advisors should solve problems, not make them worse, and for that reason I respectfully request that the government of Ontario consider legislation to prevent predatory debt settlement practices.

Thank you in advance for your consideration of this matter.

Yours truly,

J. Douglas Hoyes, BA, CA, CIRP, CBV
Trustee

That was my letter.  Other members of the Hoyes Michalos team have also commented on the Manitoba debt settlement rules, and you can read them here:

• Ontario Lags in Protecting Consumers with Debt
• Debt Settlement Agencies – Manitoba’s New Policy
• Manitoba Cracking Down on Debt Consultants – Will Ontario Follow?

I explain these five debt busting options in the video:

1. Personal budgeting: Make a budget, and pay off your debts on your own.  (I’m not a big fan of budgeting, since it’s hard, so you can read my post on why budgeting is a bad idea, and what you can do to manage your money without budgeting).
2. Debt Consolidation Loan: A debt consolidation loan is a loan used to pay off multiple smaller debts. It allows you to combine multiple payments into one smaller monthly payment, generally at a lower interest rate and spread over a longer period of time. Of course debt consolidation doesn’t reduce your debt, unless you can pay more towards the principal each month.
3. Credit Counselling: A credit counsellor can negotiate repayment plan where you pay your debts in full, but at a reduced interest rate. This is called a “Debt Management Plan” and works well if you can repay your debts in full.
4. Debt Settlement: A debt settlement is an arrangement negotiated with a creditor where you pay a portion of the amount owing. If you owe $20,000, you could offer to pay $8,000 as a lump sum to settle the debt, or you could offer to make payments over time. If the debt is old, and if you have a lump sum of money, this may be a viable solution. However, if you have many debts, you must reach an agreement with each creditor, which may not be possible.
5. Consumer Proposal: A consumer proposal is a legally binding settlement between a debtor and a creditor. It typical involves the debtor making one monthly payment, on an agreed upon settlement amount, over a period of no more then 5 years. At the end of the proposal period the debtor is then released of any remaining balances, which may be left from their original amount of debt.
6. Bankruptcy: In an Ontario bankruptcy an individual surrenders certain assets to a trustee, in order to be absolved of their debts. They are then legally declared bankrupt and required to adhere to the duties of a bankrupt, in order to obtain an absolute discharge, at the end of their bankruptcy term.

Douglas Hoyes, Co-Founder, Hoyes, Michalos & Associates Inc.

The Office of the Superintendent of Bankruptcy just released bankruptcy statistics for the months of September and October, 2011, and the results showed that bankruptcies are down considerably from last year. For the year ended October 31, 2011, personal bankruptcy filings in Ontario dropped by almost 24%. Consumer proposal filings increased by 7.3%. Combining bankruptcies and proposals, consumer insolvencies are down over 11% from last year. Across Canada the rate dropped by 8%, so Ontario’s performance is better than the national average.

(For information on local results, you can read our commentaries on the results in Brantford, Mississauga, Cambridge, St. Catharines, Toronto bankruptcy, Toronto consumer proposals, Vaughan, and Windsor).

A drop in bankruptcy filings in Canada is good news, right?

Yes, in general, fewer bankruptcies is good news for the economy. Fewer insolvencies implies that more people are working and are able to service their debts, and that’s good news for everyone.

Next question: will bankruptcy levels continue to drop in 2012?

Probably not, for four reasons:

First, when the unemployment rate decreases, bankruptcy rates tend to decrease. That makes sense; if more people are working, more people are making money, so fewer people have debt problems. However, according to Statistics Canada, the unemployment rate dropped to a multi-year low of 7.1% in October, and has been increasing every month since, and in January hit 7.5%. It’s therefore quite possible that the increase in the unemployment rate at the end of 2011 will lead to more bankruptcy filings in 2012.

Second, the average debt level of all Canadians continues to increase. According to Statistics Canada, in the third quarter of 2011 Canadians were carrying debt equal to 153% of their annual disposable income. That’s the highest level in history, and it means if you earn $1, you probably have debt of $1.53. That a huge number, and it doesn’t take a lot of thinking to realize that the more debt we have, the more likely we are to get into financial trouble.

In other words, we now consider high debt levels to be normal. Twenty years ago you were very worried if you couldn’t pay your credit card bill in full each month. Today we think it’s normal to just pay our minimum monthly balance.

Third, we are used to high levels of debt, but the lenders are also getting used to it. TD Bank Chief Executive Ed Clark said at a banking conference on Tuesday that the lender would be reluctant to push someone out of their house if they can no longer afford payments if it was still comfortable with the mortgage. Think about that statement: banks don’t want to foreclose on your house. Great news, right?

Yes, but are banks not pressuring borrowers as much out of the goodness of their hearts? Not exactly. The banks realize that if they were to foreclose on everyone’s mortgage that is one or more payments in arrears, they might own many of the houses in Canada! So, instead, they are willing to work with you, at least up to a point. That’s good, because if they are working with you, you are less likely to need to go bankrupt.

But what happens when your mortgage gets so far behind that the bank can’t work with you anymore? They may waive a payment if you are a month behind on your credit card, but will they do nothing if you are three months behind? At some point the bank must take action, and if they do that in 2012, we could see an increase in consumer insolvencies.

There is a final reason why it is possible that bankruptcy filings will increase in 2012: “debt consultants”.

At Hoyes Michalos we believe you should understand that the debt consultants you hear making wild promises on the radio are not always telling the whole truth, which is why we have written many articles like The Problem with Debt Consultants, Debt Consultants: Why Doesn’t The Government Stop Them?, and Debt Consultants: Some Horror Stories.

The fact is that in Ontario many thousands of people are paying money, right now, to debt consultants to solve their financial problems. These debt consultants have a simple sales pitch:

We can settle your debts for 30 cents on the dollar. Pay us $500 (or whatever) per month, and after three years we will have accumulated the money we need to make a settlement with your creditors.

That sounds great. Unfortunately, most credit card companies won’t wait for three years to get paid. I can guarantee you that Revenue Canada won’t wait for three years to get paid. After a few months of non-payment they are likely to start garnisheeing your wages, at which point the debt settlement plan collapses.

My prediction for 2012: we will do hundreds of bankruptcies and consumer proposals for people who paid thousands of dollars to debt consultants only to realize they got scammed. Why are bankruptcy numbers down? One reason is because instead of filing bankruptcy, many people are paying debt consultants. Those people may well need to go bankrupt in 2012, so when those people enter the system, bankruptcy filings will jump.

(This is an easy prediction for me to make, because in the last two months the professionals at Hoyes Michalos, myself included, have met with over 100 people who are currently in plans with debt consultants, but now they realize they need to file a consumer proposal or go bankrupt).

So what does this mean to you: Don’t be a statistic.

If you realize that your debt consultant isn’t helping you, give us a call. If you have a lot of debt, try to deal with it on your own. Here’s my advice on the easy way to budget:

Or, to find out all of your options, give us a call at 310-PLAN, and we’ll arrange a no charge initial consultation to help you deal with your debts, so let’s get started.