Listen to the podcast - Joe Debtor: Marginalized By Debt
Doug H: Welcome to Debt Free in 30, the show where every week we take 30 minutes and talk to industry experts and debt, money and personal finance. I'm Doug Hoyes.
So, what does someone who goes bankrupt look like? That's a question we asked ourselves at Hoyes Michalos eight years ago. And every two years since then we have gone into the data we gather from everyone who ends up filing bankruptcy or a consumer proposal with us, and we have created a profile of what we call Joe Debtor, our typical client. There are some very interesting results this year and so I've asked Ted Michalos to join me and talk about it. Ted, how are you doing today?
Doug H: So, what was the genesis that prompted us to start gathering this data? Why do we do the Joe Debtor study every two years?
Ted M: Well, the first few years that we were open we were always getting questions and in fact we still do; what's a typical bankrupt individual look like? And we went searching on the internet, government agencies and we went to banking sites and it turns out nobody produced any kind of data or profile for public consumption. In other words, they weren’t willing to share with the general public what they thought or what the average bankrupt person looked like. And so we dug into the data that we had and it's pretty detailed data.
Doug H: We have a large number of people who contact us and that's where we have gathered this data from. And you're right, the amount of media coverage surrounding the ongoing consumer debt crisis has been relentless; it's in the news all the time. And yet despite all those warnings, many Canadians still find themselves facing crippling debt.
So, I mean how is this possible? Is it too simple to say, well you know you should only spend as much as you earn? What we've discovered is that for many at-risk groups, they're just not participating in the economic recovery, and it's due to many reasons. Let's talk about that to start. So, how would you define at-risk groups? Who are the people are most at risk here in our current financial climate?
Ted M: Well, let's back up to the comments you just made. So, Canadians no longer think there's a debt problem because we've got historically low interest rates. Well, unfortunately not everyone can tap into these low interest rates. If your credit is bad, if your debt ratios are out of line with what the lenders think they should be, if you've got no collateral, if you've got unstable employment, you're not qualifying for historically low interest rates. You're qualifying for subprime or very high interest rates. And so anyone that doesn’t qualify for the deal is at-risk because they're paying more for the money they're borrowing.
Doug H: And you're right. For many Canadians day-to-day living expenses are growing faster than their incomes. So, many people consider credit to be their only saving grace, that's how they're surviving. Individuals facing huge financial problems and you see this right? They will do anything to maintain their credit. That's a big issue for them.
Ted M: Well, that's right. If you get to the point where you rely on your credit to make your basic living needs every month, if you've got to take a cash advance to pay the rent or to buy groceries or just to put gas in the car, then you'll do anything to make sure you have access to that credit. One of the telling things is, is lately they're turning to payday loans and what are they called instant cash loans?
Doug H: Well, we call them fast cash loans. I don’t know if there even is a real word for it. But we call them fast cash instalment loans and these are the loans, a lot of them are online, you can go online and apply and it's bigger than a payday loan.
Ted M: That's right and there's no credit checks. I mean they're borrowing more and they're paying them back over an extended period of time.
Doug H: Yeah and people in financial trouble are making every effort, like you said to maintain their minimum monthly payments because they want to be able to ensure they can continue to use their credit. And we found in fact that nationally about 70% of consumer accounts are paid as agreed, meaning they're not behind, they're not delinquent when the person ends up going bankrupt.
That's amazing. But as their balance and required payments continue to increase, they borrow more in order to make the payment on their credit card, their car loan, their mortgage payments. And, you know, for most people we deal with, much of their debt is incurred not to fund spending, but to service other debt and to cover ongoing interest rate payments. Is that what you see?
Ted M: I don’t know if it's a pride issue or if it's just you can't see the forest through the trees. But yes, what happens is you get a critical amount of debt, debt that you can't typically service or handle, but you feel you need access to that credit and so you incur more debt to make the minimum payments on the old debt. And it just becomes a cycle that gets ever worse. Now they call that the debt spiral, where it's just a hole where you just keep digging deeper and deeper and deeper.
Doug H: And we're going to talk specifically about payday loans when it comes to that cycle. But let's start then with what does the average person, the typical person that we deal with look like? So, this is somebody who has already filed for bankruptcy or a consumer proposal. Give me the profile, what does Joe Debtor look like?
Ted M: Okay, it's not what people think. So, the stereotype is that it's some young person unemployed, maybe homeless. You're thinking about the hobo from the old movies.
Doug H: Yeah, that would be the typical stereotype. They've got no money, no job and so therefore I had to go bankrupt.
Ted M: And the truth is, our average client's a 44 year old male. They are probably married with a dependent, they've got a decent job, they're making $2,400, $2,500 a month net. The problem is, they owe $56,000 or more in unsecured debt. So that means credit cards, income taxes, payday loans, personal loans. The average Canadian owes about $18,000. So, our average person has three times as much debt on the same basic income. Now the minimum interest payments on $56,000, it's a $1,000 a month. If you only have $2,500 coming in, how can you afford to have $1,000 going to service your debt?
Doug H: And that's what tips you over the edge, obviously. It's just too much debt. So, we said at the start that people aren't worried at the moment because interest rates are low, insolvency rates have been falling, so the number of people that go bankrupt in Ontario and in Canada has fallen every year for the last five years.
Ted M: That's right.
Doug H: Things are great, so do we have to worry? Is this really a problem? Is this something we need to be concerned about?
Ted M: Well, there's two sides to the answer. One is they're not great for everyone. When we've identified three specific groups where things are getting worse, we're concerned with seniors because more and more of them are filing; the number of seniors filing is increasing as opposed to decreasing. We're concerned about lone parents, the single mom whether she's divorced or never been married whose got dependents, and folks with student debt. And there's a tie in here between that single mom and student debt that makes things even worse. So, these at-risk groups aren't benefiting from the historic low interest rates. They don’t qualify for any of these great deals that are available to people, they're carrying expensive debt and they're doing anything they can to make the payments.
Doug H: So, we've really got two groups in Canada, then. We've got the people who are benefiting from the fact that interest rates are low. They're able to borrow mortgage rates I guess would be the classic example.
Ted M: TD last week it's 2.2%.
Doug H: Yeah, they're very low rates. But then we've got another segment of society that does not qualify for those great rates and as a result they end up going with the higher interest rate options. That's what we're seeing.
Ted M: That's right. And I may be considered a doom and gloom guy, but I'm quite worried about the side that's benefiting from the low interest rates. Cause if you got a mortgage of 2.2% and the rate jumps to 3.2% or 4.2%, you're going to find yourself in a lot of trouble, but we're not talking about them today.
Doug H: You're right. And the difference between two and three, it's not only 1%, it's -
Ted M: $100 a month on every $100,000 of your mortgage.
Doug H: They are huge numbers. So, you identified three specific groups that you're most worried about, seniors, the single parents and people who have student debt. So, I'd like to talk about each one of those individually.
We're going to start with seniors, but we're going to take a quick break and come back and specifically talk about why seniors are so at risk and some of the scary numbers that we've seen. I think the scariest number I saw that was that payday loans are highest among seniors, which absolutely blows me away, because if you're over 60 years old, why are you getting payday loans? So, that's the first question I'm going to ask you when we come back from the break. That's what we're going to do right here on Debt Free in 30. We'll be right back.
Doug H: We're back here on Debt Free in 30. My name's Doug Hoyes and I'm joined today by Ted Michalos. We have just released what we call our Joe Debtor study. Before the break we said that there are three specific groups that we are most worried about: seniors, single parents and people with student debt.
So, Ted I would like to start with the seniors and this is counter intuitive to me cause I would think that if you're over 60 years old, and that's how we're defining a senior for the purposes of this study, I would think everything's great. You've lived through the greatest economic boom in history, you've got a house that's completely paid for, you've got a huge pension, everything's fine. And yet the study does not show that for a certain segment of the population. 10% of all the bankruptcies and proposals we do are for people over the age of 60. So, what can you tell me about why seniors are one of these high risk groups for financial problems?
Ted M: So, the first thing you need to address is that there's this misconception. We're all thinking that seniors are like our grandparents. And maybe I'm dating myself here, but they probably didn’t borrow a dime over the course of their life. They made sure they paid cash for everything, they saved money like crazy, they left something for their children and grandchildren.
Doug H: And let's think about some numbers here, so if somebody is 60 years old today, then they were born in, what's that, in the 50's?
Ted M: Yeah.
Doug H: And that means that their parents were born around the depression era.
Ted M: That's right.
Doug H: Before the war, during the war, after the war, something in that time frame. So, they learned from their parents. Their parents didn’t have credit cards, their parents didn’t have car loans.
Ted M: Well in fact some of the people listening to this won't realize that credit cards only started to appear in the 70's. Diner's Club was the first one. It was the 80's before they were commonly available.
Doug H: So, if I'm 60 years old today, when I started working I mostly likely did not have a credit card cause they didn’t really exist.
Ted M: You saved money, you paid cash for your house so you put a huge down payment down and your house only cost you $25,000.
Doug H: So, going back to what you were talking about these misconceptions then. So, what are the misconceptions we have about seniors?
Ted M: So, we've all got this picture in our mind and maybe that's - the picture's just not real. What we're finding now is that seniors are entering retirement with debt. So, as opposed to being debt free and having savings, they're carrying debt into retirement. And then the first thing you discover when you retire is that your pension income is not as high as your employment income. And so you're carrying this debt, your living expense are the same as they used to be, but you're income's gone down. So, the first way you bridge that is by accessing credit.
Another aspect of this is that pride kicks in. You never stop being a parent. We've got seniors that their adult children or their grandchildren are coming to them looking for help. And of course they want to help. And so, if you've got access to credit, they'll take out the loan, they'll take out the money to help their children, their grandchildren along. It's an increasing snowball. So, the seniors started with debt that they retired with, the borrowed more to make up their monthly living expenses. They borrowed more to help family, friends over their own financial difficulties and then suddenly they realize I've got more debt than I can handle.
Doug H: So, talk to me about numbers then. So, the average person, let's ignore the seniors for a minute. The average person who we deal with, you said was carrying how much unsecured debt?
Ted M: About $56,000 and let's throw that other number I threw out out there, the average Canadian adult carries about $18,000. So, our average client has got 56, three times as much. The average senior, when they come to see us is carrying almost $70,000 in unsecured debt.
Doug H: So, even more than the average person who's getting into trouble and considerably more than the average Canadian who's out there.
Ted M: That's exactly right.
Doug H: And so, what other things do we know about their debt? Do they tend to have a lot of credit card debt? No credit card debt? Where do they stand on the scale?
Ted M: Well, there's more ugly comparisons to make. So, the average person that comes to see us has about $21,000 in credit card debt, the senior has $33,000 in credit card debt. They've got the highest level of tax debt. So, our average client has about $9,000 of tax debt, the average senior is closer to $13,000.
Doug H: Let me stop you there. How is that even possible? If I'm on a pension, I'm not earning that much income, how can I have a massive amount of tax debt?
Ted M: The most common problems we see with seniors are, they've got more than one pension so they're not being taxed appropriately or worse they're cashing our RRSPs or other investments and they're getting a double tax whammy. Because they've got pension income that's being taxed, they take out the RRSP money as a lump sum to help somebody and it puts them into an even higher bracket.
Doug H: And that tends to be a real big problem the first year you're retired. If you retire part way through the year, I've still got my employment income and my boss was taking off taxes so it wasn’t a big deal. But then I retire and now I'm getting perhaps a company pension, maybe I'm getting CPP, maybe I'm getting OAS. And each one of those things individually doesn’t know about the other guy. And so the CPP figures, okay well we're sending you ten grand a year, that's how much tax you need to pay based on that. But when you add in the other factors, boom you're in trouble. So, not being aware of the total tax implication of being retired is a big one. How do you see - things like debt-to-income ratio, this is kind of a metric that we use. What kind of numbers do we see when we're talking about seniors?
Ted M: Yeah, this confuses people a lot. The average Canadian, for every dollar of take home pay they have, owes $1.63 in debt. The average person that we see owes $1.94 in debt. The average senior owes $2.60. So, for every dollar they've got coming in every month, they owe $2.60 of debt to somebody. And it's an unsustainable model. The thing that I find scariest for the senior population now, is the number of them that are using payday loans. And this was a phenomenon we hadn't seen before; it's fairly recent.
Doug H: And again I want to but in here cause how is this possible? So, I'm retired, I don’t have a pay cheque, how can I get a payday loan which traditionally is lending against my pay cheque? How is this even possible?
Ted M: But you have a regular pension cheque coming from the government or coming from your past employer. And what a payday loan company is looking for is, have you got stable income that they know they're going to get paid in a week and a half? And pension income is the stablest income there is. So they know they're going to get their money back.
The horrible aspect of this is that once you repay that payday loan, you've got to borrow another one because you haven’t got enough money till the end of the next month when your pensions come in again. Seniors on average had $3,700 worth of payday loans, the ones that had payday loans that saw us. Now the average client is about $2,700, and it's a crazy number.
Doug H: And $3,700, so if your typical payday loan's $1,000.
Ted M: Yeah, it's like $800. So, they've got four or five of these things.
Doug H: So, it’s well, and 3.7 is the average number of payday loans we see in the people who are senior, who have payday loans. So, only 9% of them, of the seniors who file bankruptcy, have a payday loans, but it's a very significant number. And people might be sitting there thinking, well $3,700, that's not a big number, yeah but when you figure out the math on it, if you're borrowing you know $600 or $700 and you got to pay back $800 in two weeks, your interest rate can be 400, 500, 600% over the course of a year.
Ted M: There's easier math to understand than that. The average senior's pension that comes to see us is about $2,300. If you owe $3,700 in pay day loans you're behind the eight ball before you even get started.
Doug H: Yeah, there's no way you can possibly pay it off with your pension cheque cause you owe more than that.
Ted M: Right. There is no way out of it.
Doug H: You're dug right in. And so, are most of the people we deal with retired? Are they still working at the age of 60? How does the breakdown work there?
Ted M: Well, that's a funny trend too. It used to be that the vast majority are retired. And I guess they still are, but there's a greater percentage now that are working as well. And so we're seeing folks that are supposed to be living out their golden years, have now got part time jobs or continue with employment, as well as their pension income, because they're trying to make ends meet.
Doug H: Yeah, we're seeing of the over 60 crowd, 58% are either retired or on disability. Well, that means a significant number of them obviously are still working. So, it's a very, very serious issue.
So, what kind of practical advice then would you give to seniors? And I'm not talking about the guy who's got the million dollar pension and the house and the cottage all paid for and he's doing fine. I'm talking more about these at-risk people that we're seeing who are carrying high levels of debt, perhaps even dipping into payday loans and other things like that. What's the advice you would give them?
Ted M: It's pretty typical for most pre-retirees to have a meeting with somebody either at work or with a financial planner at least five years out from their retirement. Just to see what's the picture look like for their retirement. And one of the things that's often overlooked is how much debt are you carrying? And how much are you likely to be carrying five years from now? And so, you need to assess what are your monthly needs? And the simple question you have to ask is, can I get by with less? Because once you start earning a pension, you're going to have less. They're very few people that get a raise when they retire.
Doug H: And your pension is a fixed number.
Ted M: That's right; you've got to learn to live on that number.
Doug H: Sure, it'll go up by the rate of inflation, you know, 1% next year of whatever the number is, your expenses are quite likely going to be increasing faster than that. And you're even more and more squeezed. So, I guess the number one piece of advice for somebody who's contemplating retirement is, you want to make sure you're retiring without debt.
Ted M: That's right or as low a debt as possible given the life, the world that we live in now.
Doug H: If you don’t have debt then even though your income goes down, that's one less expense you're trying to carry. So, it's clearly a serious problem. What about seniors who help their adult children? Do you see that as an issue?
Ted M: Yeah this one, this is frustrating. I mean you never stop being a parent, so if your child or grandchild comes to you and says I need help; I need the down payment on my first house, I need a down payment for my car, I can't make the rent this month, Grandma, can you give me $1,000 and help me out? Just about everyone, if there's anyway they can do it, will try and find a way to help that family member.
And all it does is make things worse. The family member probably isn’t going to be there to help you when you disclose to them that you've to excessive levels of debt. Of course you probably aren't going to disclose that to them, there's a pride aspect of being a senior as well. You were always the head of the family that other people come to for help, now you need help yourself, well that's not something you're going to discuss with anybody else.
Doug H: So, we have no objections to people helping other people but do it with cash, don’t be borrowing to do it because now you're digging yourself into a hole. I think if your adult children are having cash flow problems because they've got a lot of debt, the better answer would be to have them talk to someone like us, let's see if we can solve their problems independent of having to dip into your retirement pension.
Ted M: Well and the truth is if the seniors had to come for us to help, within six months we often see the family members, too. Because now the head of the household as found a solution to their problems and they pass that knowledge on. It's a backwards way to kind of fix things.
Doug H: But we want to break that cycle of debt. That's what it's all about.
Ted M: Correct.
Doug H: Great, well thanks very much Ted. That's a great summary of the issues with seniors and our Joe Debtor study. I'll be right back to wrap it up right after this. You're listening to Debt Free in 30.
Announcer: You're listening to Debt Free in 30. Here's your host, Doug Hoyes.
Doug H: Welcome back, it's time for the 30 second recap of what we discussed today. On today's show Ted Michalos and I discussed our new Joe Debtor study that shows that some seniors, single parents and people with student loan debt are at high risk for financial problems. That's the 30 second recap of what we discussed today.
Many Canadians are not worried about their high debt levels. Interest rates are at record lows and bankruptcy rates have declined for the last five years. All looks good. Unfortunately, those at risk groups may not quality for traditional low-cost borrowing options so they turn to payday loans, quick cash instalment loans and other high interest crippling forms of debt. That leads to a debt cycle you can't escape from, and for many people bankruptcy or a consumer proposal is the only solution.
That's our show for today. If you're at risk and have more debt than you can handle, we explain all the solutions in the show notes on our website at hoyes.com, that's h-o-y-e-s.com. Thanks for listening, until next week I'm Doug Hoyes. That was Debt Free in 30.
Announcer: Thanks for listening. This was Debt Free in 30.
Doug H: It's time for the Let's Get Started segment here on Debt Free in 30. I'm Doug Hoyes and I'm joined today by Ted Michalos and we're talking about our Joe Debtor survey where we take all the data from the people who have filed bankruptcy and consumer proposals over the last couple of years and come up with a typical profile of what that person looks like.
We talked earlier about seniors and we had some pretty scary statistics there. Let's look at the other end of the spectrum, some younger people and specifically I would like you to tell me, Ted, about lone parents or single parents and what the profile of them looks like. And then we can also perhaps get into talking about student debt which kind of crosses over. So, of the people who file for bankruptcy or consumer proposal with us, how many of them are single parents?
Ted M: So, it's roughly one out of five, 18%. And that's up from the last time we did the study by the way. It used to be one out of six. Three quarters of those people are women. The average family size is 2.7, which means they've got two dependents. Now most of them are working; 86% of them are working, but their household income is a little bit lower than our average clients. So, they've got two dependents, they're a single mom and they are working for a little bit less than the average person. They've also got less debt, but not enough less debt to make a difference. And one of the most significant elements of that debt or the student loans, which is the next segment that you wanted to kind of talk about.
Doug H: So, let's think about this then, so you said that they have slightly less income than the average person in our study, but it's not a big difference. I mean it's 4% difference so it's significant, but it's not like it's half or anything. They are carrying a bit less debt. So, you know, $53,000 compared to 56,000, so again not a huge number and yet obviously they are seriously struggling. What are we missing here? Why is it that single parents have such a tough time of it when it comes to debt problems?
Ted M: One of the biggest challenges for single parents is just living expenses. I mean 40% of these people have got a car loan payment that they're trying to make. [Roughly] 20% of them have student debts that they're trying to deal with. So, they've got all of the regular living expense of a household but they've only got a single income to deal with it. And that's the telling part of it.
Doug H: So, the debt isn’t caused by taking a whole lot of vacations.
Ted M: No, it's not vacations, it's not jewellery. They haven't got all the latest Chanel suit or whatever those women collect these days.
Doug H: So, they're simply borrowing to live.
Ted M: That's right.
Doug H: That's what it comes down to, the typical living expenses. And you're right if you're a single parent you don’t have the other parent there kicking in for a chunk of the costs, but the costs are still the same, that kid costs the same whether there's one of you or two of you, right?
Ted M: That's exactly right.
Doug H: And that's what gets into it. Now you said that 18% of them, 18% of single parents have student debt. And I think in our entire survey, 13% of people had student debt. So, they are more likely to have student debt. What do we know about student debt? Why is it an issue?
Ted M: Well, so the average person who has student debt owes about $14,000. 60% of them are women. So, this ties right back to the single women stat where three quarters of them are women.
Doug H: And so, I think women, I think to myself I guess they must be earning less than the men who have student debt. Is that true?
Ted M: Yeah and that's not true. The women actually make about the same, maybe a little bit more than the men. The problem is their income isn’t as stable. So, 91% of the male students, or the male debtors that have student debt are employed (it's about 83% of the women), but again their employment is sporadic. They're off because of maternity leave or family sick leave or they've got different jobs as opposed to getting started on one career.
Doug H: Yeah, it's just, you know.
Ted M: Well, they've got the challenges of raising the two kids. So, if the kid is sick they're not going to work and so they've got different positions.
Doug H: And they're more likely to be looking after their parents who might be elderly or sick or something and so they've got the challenge. So, when they're working they're making just as much if not a little bit more than the male in that situation, but the issue is they're not working all the time.
Ted M: Yeah, they're not working as regularly.
Doug H: They're not working as regularly. They take time off for maternity leave, to care for sick relatives, whatever. So, it's the stability issue that becomes the problem. And so, that's why student loans are such a big issue, then.
Ted M: Well and in addition the women that have student loans actually have slightly higher debt levels than the men that have student loans. So, the average student loan is $13,800, the average female student loan is $14,700. That means the average male student loan is obviously something like $12,000.
Doug H: Yeah. So, I mean that's 19% more, so that is a significant number. So, it's really kind of like the perfect storm. You've got all these different things that are factoring into it. So, before we close then what is some advice you would give people that are either lone parents or who have student debt as they're looking forward to try and rectify their financial situation?
Ted M: Well, one of the most telling signs that we've seen is an increased use of payday loans. So, if you're finding yourself in the financial situation where you're considering payday borrowing or the instant -
Doug H: Fast cash instalment loans.
Ted M: Instalment loans off the internet. If you haven’t started down that path yet, instead of doing that, seek some professional advice. Come and speak to a bankruptcy trustee, a non-profit credit counsellor, someone who can help you analyse your situation and develop a plan to get you out of the debt.
Once you get on that payday loan treadmill, it's almost impossible to break. And again what we find is with the single moms is they'll rely on their credit to make their monthly payments and then they got to rely on more credit to make the payments on the credit. I mean, it's just a cycle.
Doug H: Yeah and it's a cycle of debt that you want to break. That's a great way to end it. Thanks very much for being here, Ted. You're listening to the Let's Get Started segment here on Debt Free in 30.