Listen to the podcast - Managing Debt In A Boom & Bust Economy
Doug H: Welcome to Debt Free in 30, the show where every week we take 30 minutes and talk to industry experts about debt, money and personal finance. I'm Doug Hoyes. I've got a good guest today so I want to get started and get right into it. So, let's get started. Who are you? Where do you work and what do you do?
Doug H: Newfoundland and Labrador. And what I wanted to get you on today to talk about, Ian, was the whole boom-bust economy. One of the first shows I did back in the fall of 2014 was with Barton Goth. He is a trustee who you know and I know. He's based in Alberta which is a boom and bust economy if ever there was one.
When I had him on the show oil prices were still very high, things were still going really good. And as we record this now in late of May of 2015, things have dramatically changed in Alberta. The oil price has gone considerably down; they now have a NDP government, which has never happened in that province. It's totally different. I mean that's certainly the definition of boom and bust. Are you seeing the same sort of things out on the east coast? Is it a boom and bust economy there as well?
Ian P: Absolutely. Our economy is very dependent on oil as well, but we're a lot smaller than Alberta and a percentage of our GDP oil is actually a much larger percentage over here. So, as time goes on we're probably going to feel it even more, directly in terms of the royalty revenues from oil from our provincial government. But indirectly cause there's still a lot of Newfoundlanders, and a lot of Canadians for that matter, that work in Alberta and we're starting to see those folks come home now because they're getting laid off. Alberta's clearly slowing down and we're sort of starting to see a bit of a perfect storm over here. We're also dependent on other resources such as iron ore for example and in Labrador, that industry is struggling as well. So, we're definitely seeing a bust cycle of a small resource based economy over here definitely taking shape.
Doug H: So, explain to me how I can work in Alberta when I live in Newfoundland? What's the typical work schedule? How does that work? Do I just move there for five years? Am I coming back and forth? What's the typical process?
Ian P: I think in sort of the better times a lot of the companies in Alberta were willing to fly people back. So, you might go for 10 days or two weeks or three weeks and then fly home for two weeks or whatever. And have the flights paid for. You'd be set up in a camp or a hotel in Alberta and it was pretty easy and pretty lucrative, particularly before Newfoundland's economy took off six or eight or ten years ago. But those arrangements are changing now, they're harder to find, they're less likely to pay for accommodations while you're there, they're becoming unlikely to pay for your air fare back and forth. So, more and more people are being (if they're fortunate enough to still have jobs in Alberta) are being forced to move to Alberta.
Doug H: And are you seeing a lot of that or is it really the exact opposite that more people are coming back then as opposed to going out there?
Ian P: Well, there's still a lot of people that are commuting. I mean there's still a direct flight; Air Canada puts off to Fort McMurray so I mean, that speaks volumes right there. But more and more of these people are coming back. We're seeing a lot of people that have been laid off or longer layoffs now. Or, you know, the 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, kind of thing.
Doug H: Wow, okay so let's kind of get into the specific people then, that you're dealing with. So, paint a picture for me then of a typical client that you're dealing with. So, you mentioned the concept of a consumer proposal. So, we've talked about that on the show before but why don’t you give us the quick overview of what is a consumer proposal and then we can talk about some of the specifics in your area. So, what is a consumer proposal?
Ian P: Sure. Well, a consumer proposal is an alternative to bankruptcy and typically it's a more flexible option. You'd likely have a lower monthly payment, but over a longer period of time. The flexibility the proposal offers you allows you to deal with house equity and other assets that you may wish to keep that would be possible but perhaps more challenging under a bankruptcy scenario. And a lot of these people have challenging cash flows cause they are not going back and forth to Alberta.
Like I said some are fortunate enough to have their plane fares and their accommodations paid for but others aren't. So, even if you're going down to Alberta for two weeks, three weeks whatever, the cycle is you've got to have money for a plane fare. Some people are paying room and board up there while they still have their mortgage back in Newfoundland and sort of sending the money back to their spouse and their kids. So, the cash flow becomes a real challenge for those people. And a consumer proposal I find works a little bit better, a little more flexibility, a little bit lower monthly payment. And for people living in Alberta that's typically where we lean, as long as their job is relatively stable.
Doug H: Now you said it's an alternative to bankruptcy, but you also said their making monthly payments. So, why not just go bankrupt and be done with it?
Ian P: Well, the bankruptcy, like I said, you typically pay a larger amount, it's based on your income. So, if your income goes up, you work more, your bankruptcy payment goes higher and higher and higher. So, you're sort of chasing a snowball down a hill kind of thing, sometimes. And so the lower payment and the flexibility to deal with equity and things like that over a longer period of time, we just find the consumer proposal works much better for the Alberta people, generally.
Doug H: And so you also talked about things like house equity. So, explain to me what the rules are in your part of the country. So in Alberta, when we had Barton Garth on he was explaining that when you have equity in your house in Alberta there's a chunk of it that you get to keep. In Ontario the rule is, if you have equity in your house when you go bankrupt you don’t get to keep it. And we define equity as the amount of money you would get if you sold your house. So, after you sell your house and pay off the mortgage, pay the real estate commissions, pay the penalties to break the mortgage and legal fees, whatever you're actually left over with real money, is equity. So, there's a difference between how it works in Alberta and how it works in Ontario. How does it work in Newfoundland?
Ian P: We're somewhere in between Doug. We also view equity the same way you do. So, in Newfoundland there's a $10,000 exemption that follows the property. So, whether it's held by one person or jointly, there's a $10,000 exemption that comes off the top. You deduct your selling costs, similar to what you described, deduct the mortgage and that's the equity number. So yeah, if there's a big equity number - and in Newfoundland just to give you some perspective in the last 10 to 12 years, real estate values in the larger centres certainly in Saint Johns have tripled.
Doug H: Tripled.
Ian P: Yeah, double digit increases year over year over year. So, a house that cost $200,000 in 2003, might be worth something $560,000 or maybe a little bit more today. And maybe today is not a great yardstick cause real estate has dropped off the last six months.
Just to give you a flavour for the kind of increases we've been seeing so equity has been an issue in more recent years. I started doing this kind of work 20 years ago and equity in houses was rarely an issue back then. But with the growth now, it clearly is. We do a calculation, take the $10,000 exemption off and that's the number you have to pay in a bankruptcy or a proposal.
So in a bankruptcy, in addition to your surplus income payment, you'd also have a house equity payment and when you spread that over likely the 21 months if you're talking about a first time bankrupt with surplus income; if the equity number is large the payment can become very prohibitive. So, what we then might look at is maybe doing a proposal over four or five years and cutting that monthly payment possibly down almost in half. And even though you're paying over a long period of time and maybe a little bit more money, it's more manageable on a monthly basis for cash flow.
Doug H: So, there's two elements you talked about there. The first one was the asset side of things, so if I have equity in my house, then if I go bankrupt, I'm potentially going to lose that. So, in Newfoundland I'm going to keep the first $10,000 worth of equity, anything over and above that I'm going to lose it, if I'm in Ontario I'm going to lose the whole thing. So, if I have equity I don’t want to go bankrupt, and what you're saying is with a consumer proposal I can - the creditors are still going to get that money but I'm going to be in effect pay it off over a longer period of time.
So, let's take the example then of somebody who only has house equity - let's say they've got $20,000 of house equity. So, what you would do then is a proposal, a consumer proposal where they pay slightly larger than that amount then, maybe $22,000, maybe $25,000 something like that, but they could spread it out over four of five years is what you're saying.
Ian P: Yeah, absolutely. So, a first time debtor without surplus income, I mean firstly, they don’t have surplus income, so they're living on a modest income to start with. And to try and pay out that $20,000 over a nine month bankruptcy it just becomes prohibitive. And of course you have to pay your mortgage, too. And most of these people would have a regular mortgage payment on top of that. So, it's impossible.
So, you know if you want to keep your house and sometimes people will say I would really like to get out from under the house, we sell the house, we cut them a $10,000 cheque and they've got a fresh start with $10,000 in their jeans pocket sort of thing. So, it's not all always a terrible thing. But usually, they do want to keep their home and we can build a proposal that would see them pay and your numbers are good whether it's $22,000 or $25,000 over four or five years. They keep their house, they've got a manageable payment, the creditors, the phone calls stop and then at the end of the proposal the debts are legally forgiven. So, it can be a pretty effective tool.
Doug H: Got you. Now you also talked about surplus income which obviously in a boom and bust economy is a big thing. So, I want to delve a bit into that. But we're going to take a quick break first and come back and talk about that.
I'm talking to Ian Penny a trustee from Newfoundland. My name is Doug Hoyes. You're listening to Debt Free in 30. We'll be right back.
Doug H: Welcome back, I'm Doug Hoyes, my guest today is Ian Penny who is a trustee and consumer proposal from Newfoundland. Am I pronouncing Newfoundland right there Ian?
Ian P: If you're Canadian you are, but not if you're from Newfoundland -
Doug H: So, how are you supposed to say it?
Ian P: Newfound-land and Labrador. So, understand and Newfoundland.
Doug H: Understand Newfoundland and Labrador. And we always forget Labrador, but that's part of the province. So, we got to get it right.
Okay, so before the break we were talking about the people who work in your part of the country, or sorry, who live in your part of the country but have been working in Alberta. Often they'll go there, they'll spend 10 days, two weeks, fly back and back and forth because the economy was so good with the oil patch in Alberta. Those people who had debts when they got into that situation would have to decide well do I go bankrupt or do I file a proposal?
Before the break you said one of the disadvantages of a bankruptcy is that if you have assets, you potentially lose them. And one of the assets you could have is a house. And you told us that in some of the big centres, you've actually seen prices go up like 300% over the last 10 years because of the booming economy. You don’t want to do a bankruptcy and have to lose that. The other thing you mentioned is surplus income. So, give us the quick overview of what you're talking about there. Why is surplus income a problem if you're contemplating bankruptcy?
Ian P: Well, basically we sit down with a debtor. We look at the money that comes in through the door and the money that goes out. Now the government sets every year standards for a family of two, a family of three, a family of four and so on. So, depending on what your expenses are and obviously we're talking about the Alberta worker commuting back and forth to Newfoundland, but it could easily be a Newfoundland worker who works in Newfoundland as well. If your expenses are relatively high, you know, houses are expensive in Newfoundland and you need a good car cause you travel back and forth to work, sometimes over great distances.
So, your expenses are relatively high. We go through the calculation with the government standard and low and behold there's not enough money left at the end of the month to pay the full bankruptcy payment. So, that's where we sort of talk about then, you know, how stable is your job?
Doug H: Well, let's take a real quick example, then. And the surplus limits that you're talking about are the same in Newfoundland, they're the same in Ontario, they're the same in British Columbia. They're federal standards, right?
Ian P: That's a very good point Doug, yes.
Doug H: Which doesn’t make sense because I think the cost of living on Bell Island - is there such a place as Bell Island?
Ian P: There is such a place.
Doug H: There you go, look at that eh? So, the only reason I know that is there's lots of people that come from Bell Island and come and live in the Cambridge area in Ontario where I am. So, I've met a number of them.
But the surplus level is the same no matter where you are. So, it doesn't really make sense but nothing we can do about it. You and I don’t set the rules.
So, for a single guy, let's take the simplest scenario here in 2015, the limit is around $2,000, it`s actually slightly higher than that but let's keep the math simple here. So, if I'm making $3,000 and we're talking about take home pay here, after taxes, whatever comes off your pay cheque that you have no choice about. If I'm making $3,000 a month, I'm a $1,000 over the limit so I've got to pay roughly $500 a month. And because I'm over the limit if it's my first bankruptcy I'm going to be bankrupt, not for nine months which is the minimum period, but for an extra year, 21 months, that's what you're talking about, right?
Ian P: That's what I'm talking about.
Doug H: Okay, so if in that scenario I've got to pay $500 a month for 21 months (at a minimum), I can't afford that. That's what you're talking about. I've got all these other expenses; I've got perhaps significant transportation costs. So, in that scenario, how does a proposal work for me, then? So, instead of paying $500 a month for 21 months, give me a rough idea. And I realize every case is different and it depends on your debts and other factors, but give me a rough idea of what a proposal might look like.
Ian P: It might look like $250 a month for five years. It might be $300 a month for four years. You really have to run the math. But, that's the kind of number we're talking about. And if your same single person there, had some house equity or some vehicle equity or a cottage, everybody in Newfoundland has a cabin or a cottage, that they wanted to keep. Well obviously it's just impossible to do that on that $3,000 income, pay $500 to the trustee, pay out the equity and whatever the asset was, so we'd look at the proposal; stretch it out, a much better option.
Doug H: So, it becomes a win-win for everybody is what you're saying.
Ian P: Absolutely.
Doug H: So, if I'm the guy who owes the money, I can't afford $500 a month, but if I could afford $250 or $300 a month I end up paying for longer which means the people I owe money to get just as much or more, so they're happy. But I'm happy because I can handle the cash flow. That's really what you're talking about.
Ian P: That's exactly what we're talking about. I started to say, one of the things that we look at when we speak to a person you really need a stable job because what we don’t want to have happen is you get two or three years into this proposal and you get laid off for an extended period or you lose your job, can't find another quickly, you start missing payments. Well, then you're faced with defaulting on your proposal and potentially having to go right back to square one and start over with a bankruptcy.
So, we really like to make sure that A, the person is committed to making the payments for this extended period, but probably more importantly, does their job have the stability that's required to be able to commit to this?
Doug H: Well, and that seems like a pretty difficult question. So, I walk in to see you today and let's say that I've been working, still living out east, but working in the Alberta and the oil patch. I'm taking that direct flight you mentioned from Air Canada to Fort McMurray every 10 days. I've been there for a couple of years, but I have no idea if I'm going to continue to be there or not. I assume so, but I don’t know. I've got all these debts and for all the reasons we talked about a bankruptcy doesn't make sense to me. I've got some equity in my house. I've got significant surplus income so a proposal is the logical option. But I don’t know if I can commit to a five year proposal. What kind of advice are you going to give me? What do I do?
Ian P: Well, that's a tough one, and it really comes down in many ways to the individual. I'll support them to the extent I can, but once you miss three payments you're off side sort of thing with the proposal. So, I do have that conversation with them.
One of the strategies we do like to use is to try and keep the person ahead in their payments. So, if you get a bonus or if you work extra overtime and you've got a few extra dollars, make an extra half payment that month. I'll actually structure my proposal so that payments don’t start for a couple of months from when it's filed. But I'll suggest to the debtor, you know why don’t you just start making that payment now? You're not paying your creditors now. We've got a two month window here, if you could get a couple of payments made in advance of when you're proposal says you're going to start paying, well you know what? If something happens down the road you've got that two month window there where the payments are prepaid.
And if you're able over the next year or so to pay an extra couple of hundred dollars here or there maybe you can have three or four payments, you`re ahead of the game. And then if something happens, Christmas comes, the car breaks down, whatever, life has a way of getting in the way of what you want to do sometimes. You do have that little cushion built up so you're not faced with buying groceries or paying or proposal payment.
Doug H: Well and I guess you could also - if you set up a proposal to be $300 a month, if times are going good and you can pay $400 a month, that's another strategy to get ahead.
Ian P: Absolutely, and some people do that and some people sort of put the extra $100 in their sock drawer. I had a guy there before Christmas came in with gee it was almost $10,000 cash. He paid off the last year and a half of this 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.
Doug H: Wow, which is great. I don’t know that I necessarily encourage people to put money in their sock drawer cause when your house burns down you've lost your money. But I see what you're saying. You've got to be proactive; you've got to look ahead.
And that's really what we're talking about today. In a boom and bust economy where things go up and things go down, you've got to, as they say here, make hay when the sun shines, right? So, if you're working the overtime don’t be spending all that extra money, live like you're not making overtime and bank the rest, get ahead in your proposal payment, build up your emergency fund, so that when things do slow down you're ahead of the game.
So, you mentioned that if you get three months behind in your proposal payments your proposal's automatically dead. If I get three months ahead, and then I miss a payment, I'm still two months ahead. So, I'm still good, right?
Ian P: Absolutely.
Doug H: So, that's the whole key to it. Okay, well that's a pretty good summary of some of the different strategies to employ in a boom and bust economy. I appreciate you joining me today, Ian. We're going to take a quick break and come back to wrap it up. We're listening to Debt Free in 30.
Let`s Get Started Segment
Doug H: Welcome back. It's time for the Let's Get Started segment here on Debt Free in 30. My name is Doug Hoyes and I'm joined today by Ian Penny. And Ian, we've been talking about a boom and busy economy. We've been talking about bankruptcies and proposals.
I'd like you to kind of start at the beginning for me and walk me through what's going to happen when someone walks into your office. So, let's take the example of one of your typical clients these days, who perhaps is working in the oil patch in Alberta, perhaps they're working in the oil industry in your province. Perhaps they're working in an industry that's related to it. They've had good income over the years, perhaps their house prices have also gone up. But now they're feeling this squeeze, perhaps their income has eased off a bit and for whatever reason they've got a bunch of debt. They`ve got some credit cards, maybe they owe a little bit of taxes, they've got some debt out there and they realize they can't make it with their income coming down a bit. There's just no way to keep up with the debt payments. So, what's the thought process you go through with somebody in that situation? And what are the kinds of questions you're asking them? What are the kinds of options that you are presenting to them?
Ian P: Sure. Well Doug, every debtor, every individual has a unique story. In the first few minutes of our meeting I really try and get to the heart of what's the cause of their financial difficulty. Some people just overspend and mismanage, others have had a life event: a divorce, a sick child, a sick spouse. Maybe it was two spouses working and getting by and baby comes into the picture and maternity leave and so on. Then you got substance abuse problems, gambling, that type of thing. So, I think it's important to really understand what the root cause is and some people have many of those route causes, unfortunately.
Doug H: And why is it important for you to understand that?
Ian P: Well, I think someone who's going through a divorce, someone who's had two incomes and now they're on one, you know, they probably haven't got a fundamental budget problem, they haven’t got an issue with drugs. It's really a life changing thing that they now need to adapt to. So, someone who needs to change the way they spend and shop might have more options than someone who`s had a life changing event and they just don’t have the income to work with anymore.
Doug H: And ultimately you have to get to the point where you're expenses are slightly less than your income, not the other way around.
Ian P: I think that's absolutely critical. You know, a lot of these people have used credit cards and credit to prop up income, sometimes for many years. And I think the challenge is, and 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. And sometimes more than one thing has to go because you really have to get that budget fixed. 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.
Doug H: And that's a very key point. You can deal with the debt, but what you can't deal with is a negative cash flow next month.
Ian P: Right.
Doug H: So, that's step one. Okay, so you sit down with the person, you figure out what's got you into this situation, let's figure out some strategies so that you're not continuing to bleed cash every month. Once you've got the budget balanced and a lot of that's going to have to be dealing with the debt obviously. We've got to get rid of this debt so you're not paying $2,000 a month in minimum payments on all your credit cards every month. What's the next stage of your thought process then once you've got to that point?
Ian P: So then we look at sort of the balance sheet of the individual, what they're assets are, is there equity? You know, are there any things here that are really luxuries that this person probably shouldn’t afford or can't afford, maybe shouldn’t have?
So, a modest house with a little bit of equity, that probably makes a lot of sensed to keep that. Transportation particularly in a province like ours where there's not a lot of public transit, it's very difficult to live without a car here. But is it a Honda Civic or is it a F350 pick-up that costs $1,500 a month to keep on the road? Those are two very different modes of transportation. Newfoundlanders love their cottages, their ski-doos, their ATVs. A lot of those things come at high interest rates, high payments. And sometimes I got to have very difficult conversations with people about what's your priority here is it your house or your skidoo? You can't afford both.
Doug H: And those are the difficult conversations then. So, in the final minute or so that we've got left then the end point of the conversation then is to present them with the options and they then have to make a decision.
Ian P: Right. So typically then, I'd look at the superintendent standard for income, we'd calculate a payment in a bankruptcy. Are you nine months, are you 21 months? Do you have any equity that you would have to repay over that period? And then we'd come up with a bankruptcy payment see how that fits into the budget, and then talk about a proposal, but again subject to, are they prepared to make that commitment? Is their employment stable enough to commit to a four or five year proposal? And really put forward both those options and ultimately the debtor will have to decide what their prepared to commit to.
Doug H: Yeah and it's obviously a difficult decision. But I like the way you're thought process works. Let's identify what got us into this mess in the first place and let's deal with the underlying causes so we can deal with that. Then let's make sure we got the budget balanced, then we go to the point of dealing with the debt, let's look at all the options, let's crunch the numbers, get them all explained. Then you come up with a viable solution. I think that's a great way to think about it. And I appreciate you joining me today Ian, thanks very much.
Ian P: Thanks Doug, I enjoyed our time.
Doug H: Thanks very much. You're listening to the Let's Get Started segment here on 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. My guest today was Ian Penny, a Bankruptcy Trustee from Newfoundland and Labrador who explained that in a boom and bust economy it's important to be proactive and get ahead on your debt payments while times are good so that you're ahead of the game during the down times. That's the 30 second reap of what we discussed today.
I agree with Ian's message and I agree that if you start a consumer proposal when times are good, it's essential that you get ahead on your payments, so you can handle any unexpected future downturn.
That's our show for today. Please go to hoyes.com, that`s h-o-y-e-s.com for more information and full show notes. Thanks for listening. Until next week, I'm Doug Hoyes and that was Debt Free in 30.