Managing Debt In A Boom & Bust Economy

Posted in Debt Free In 30
Posted by J. Douglas Hoyes, CA, CPA, LIT, CIRP, CBV

managing debt

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On today's show, I talk with Ian Penney, a Trustee in Bankruptcy, Chartered Accountant and President of Janes and Noseworthy in Newfoundland and Labrador. Recently, oil prices have declined, affecting the finances of those who work and/or live in a boom-bust economy.  Alberta is a prime example of this type of economy, but the sting is also being felt in Newfoundland and Labrador.  As lay-offs continue and people are forced to find alternatives, Ian has noticed that personal finances are taking a hard hit, and that as a result, people are turning to bankruptcies and consumer proposals to eliminate debt.

How does a boom-bust economy affect workers from the east coast?

When oil prices were lucrative and the industry was booming, many Canadians joined the ranks to cash in; including a high volume of workers from the east coast. Oil companies would often fly workers home on their off days and set them up in a hotel or a camp while in Alberta - life was good.

Although the oil industry in Alberta hasn't completely gone bust, workers are noticing changes including layoffs, higher expenses that used to be covered by their employer and reduced work hours leading to less pay. Ian explains that,

...people that are insolvent with me that have been flying back and forth, are now having to come up with money for their own plane fare, which they haven't had to do in years.  So, they're calling me saying how can I make my proposal payment and still buy a plane ticket so I can go back to work on Monday morning.

As a result, many workers who have been laid off or just can't afford the expenses are moving back to the east coast.

A Consumer Proposal Offers Boom-Bust Workers A Solution For Debt

Consumer Proposal: A flexible alternative to bankruptcy having typically lower monthly payments, spread out for up to five years. This option allows debtors to deal with their debts, while keeping assets (such as a house with equity) that might otherwise be included in a bankruptcy.

Ian explains that his client's typically lean toward consumer proposals because it offers flexibility for those facing cash flow reductions and higher than normal expenses. His suggestion is that people take advantage of bonuses at work, over-time pay and any extra money that comes their way. Instead of spending that money, he recommends that you "make an extra half payment [on your proposal] that month." Since a consumer proposal allows for additional payments to complete the process early, it's important to take advantage of the opportunity when possible. Ian gives an extreme example stating,

I had a guy there before Christmas, came in with almost $10,000 cash. He paid off the last year and a half of his proposal in one payment.  That was his goal and he put the money aside and he came in with the money all in one lump sum payment and he was done a year and a half early.

Although a $10,000  lump sum payment may not be feasible for everyone, Ian's point is that it's important to be pro-active and to take advantage of your cash flow when times are good.

 Finding The Right Debt Solution

I ask Ian how he helps people facing financial issues, especially as a result of a boom-bust economy and he identified three main steps that he takes to help someone deal with their debt.

1. Identify the root cause of financial difficulty.  Was it overspending and mismanagement of money that brought on their debt, or was it a life altering event (i.e. divorce, sick child or spouse).

2. Balance the budget. Next Ian crunches the numbers to find out whether his client's expenses are necessary ones or luxuries that they can't afford to keep. He explains that

sometimes it's a difficult conversation with the person to say, you know what, you really can't afford the house, the truck and the cabin. You know, at least one of those things has to go...Cause it's no good for me to erase the debt and you don't change your habits and low and behold the spending continues in excess of the income and we really haven't solved the problem.

3. Review all debt options to come up with the one that's right for that person.

What Can We Learn?

All Canadians, working in a boom-bust economy or not, can learn from these kinds of economic shifts. Whether you're living in an oil town in Alberta or in a city like Toronto, Ontario, we all need to be pro-active when it comes to our finances.  Preparing for financial difficulty and life events is necessary if we want to decrease the amount of debt that we take on.  For example, in our recently published Joe Debtor study we found that the average insolvent individual is carrying upwards of $56,000 in unsecured debt.

To figure out what someone should do about that volume of debt, we need to adopt Ian's three steps for assessing a their situation but anyone can use this same approach to improve their own finances. Identify the problem, crunch the numbers and then make a plan to deal with debt; whether it's on your own or with the help of a professional.

Read the full transcript Debt in A Boom and Bust Economy.

Resources Mentioned in the Show

About J. Douglas Hoyes

Doug is our co-founder and is a Licensed Insolvency Trustee, Consumer Proposal Administrator, certified Insolvency Counsellor and Chartered Professional Accountant.

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