It’s easy to get dejected if your credit score isn’t where you want it to be. But just because you have a low score today, it certainly doesn’t mean that you’re stuck with it for life. Even if you have faced a bankruptcy or consumer proposal, or have accounts in collections, there are measures you can take to improve your score. In this guide, I explain what you need to know about rebuilding your credit after you have filed bankruptcy or a consumer proposal or if you have bad credit due to past mistakes in handling your credit history.
How much credit do you need?
I don’t advise that anyone, after completing a consumer proposal or bankruptcy, jump right in and start borrowing again. If you can live without debt, that’s great. However, in today’s modern economy you might need or want access to credit.
The first thing you should do is figure out why you want to improve your credit score. Begin by writing down your expected credit and financial goals.
Credit goals to consider:
Qualifying for a car loan
Getting a mortgage
Getting a credit card
Qualifying for a line of credit
Getting a student loan to go back to school
In addition to determining your future credit needs, it’s important to consider what financial or savings goals will help you qualify for new credit.
Savings goals relating to access to credit might include:
Setting aside money for a secured credit card
Saving a deposit for a car loan
Saving for a down payment to purchase a home
These savings goals need to be balanced with other financial goals like saving money for your child’s education or your retirement, so you don’t need to rely on credit in the future.
A credit score is simply a three-digit number between 300 and 900. The higher your score, the more credit options you will have and at lower interest rates. With Equifax:
729 to 759 is very good
660 to 724 is good
560 to 659 is fair
Anything below 560 is poor
If all you need is a credit card for bill payments or emergencies, you can generally qualify for a secured credit card with a credit score around 650. Even someone in an active consumer proposal or bankruptcy can get an unsecured credit card from certain credit card issuers as long as they don’t have a history of bankruptcy with that provider.
However, if your goal is to take out an auto loan or apply for a mortgage, you will need better credit.
But you need more than just a good score if you are thinking of getting a mortgage or low-interest car loan. To qualify for a larger loan from a regular lender, like a mortgage, your credit will be considered re-established when:
Two years have passed since you finished your bankruptcy or proposal
You have two accounts active or established after your completion date, and
Each account has a credit limit of $3,000 or higher.
One final word on credit scores. Your credit score is for the bank’s benefit, not for your benefit. Credit scores are designed to help the bank decide if they should lend to you. They are there for the bank’s benefit, not yours. Your credit score is only important if you want to borrow in the future. Never chase a credit score for vanity’s sake.
DIY Credit Repair
Repairing credit on your own is possible; it’s not complicated and it is often the fastest and cheapest way to rebuilding your credit. To rebuild credit you need to create a reputation as someone who can handle credit wisely.
Try our Free Online Video Course on Rebuilding Credit. Get a step-by-step plan on how to manage your credit score, how to review your credit report and fix errors and discover what types of credit you need to rebuild credit.
Here are the five steps to take to repair credit on your own.
Step 1 – Get a copy of your credit report
Your credit score is only as good as the information that is on your credit report. Credit bureaus get their information from your creditors, and mistakes happen. It’s up to you to ensure that the information on your report is accurate and presents a good image of how you manage credit.
The first step in rebuilding credit is to get a copy of your credit report. The best source is directly from TransUnion, Equifax or your bank if they offer you that service for free in their app or online banking platform. You can request a free copy of your credit report online, by mail or by phone. We’ve provided links and instructions in our article on how to get a copy of your credit report for free.
If you are rebuilding credit after filing a bankruptcy or proposal, we recommend waiting at least two weeks after your discharge or completion before requesting a copy of your report. You want to wait long enough for the government to report your completion date to the credit bureaus, and this is done weekly.
Step 2 – Fix all errors on your report
Now that you are armed with a copy of your credit report, the next step is to look at all the information and see what needs fixing.
There are several areas on your credit report to review.
Personal information
Be sure that your name, mailing address, social insurance number, birth date, and employment information are correct.
List of accounts
Review the accounts or creditors listed on your report. Regularly checking that these are companies you owe money to is a good way to monitor for fraud and identity theft.
Balances and credit limits
This information is used to calculate your utilization rate, which has a big impact on your credit score, so you want to be sure it’s correct. Accounts included in your bankruptcy or proposal should show a zero balance upon completion of your program.
Narrative
Next to each account will be a comment or narrative. If you filed a proposal, any debts included should be marked as ‘included in proposal’. Debts included in your bankruptcy will be marked ‘included in bankruptcy”. If this description is wrong, highlight it as something to be fixed.
Each account will also have a two-part code next to it – a letter and a number.
The letter shows the type of account – R for revolving like a credit card or line of credit, I for installment loan like a car loan, O for open accounts such as an internet or cell phone bill, and M for mortgage are the most common.
After the letter is a payment code.
0 means the account is new or approved, but you haven’t used it yet.
1 means it was paid on time. That’s what you are aiming for.
2 to 5 means there was a late payment on the account. The higher the number, the longer you were late. 2 means you were a month late, 3 means two months late, and so on.
A repossessed vehicle is coded as an 8.
An account included in a consumer proposal should appear as a 7. If your account is in collection or you filed bankruptcy, you will see the code 9. It is not uncommon for creditors to report an account included in a consumer proposal as a 9 until it is completed. Credit bureaus may not update this to a 7 until your proposal is finished. What you do want to be sure though, is that the narrative is correct, as this is what lenders look at.
If you decided to keep a financed vehicle when you filed and are maintaining your payments, make sure there is no narrative beside this debt. Secured debts are not included in your bankruptcy or proposal unless you gave the vehicle back. And as I mentioned before, make sure to make payments on time on accounts that remain after you filed, as this will help you improve your credit score.
Payment activity
Check the date of last payment or activity and the number of late payments reported. If you have filed a bankruptcy or consumer proposal, the date of last payment should be frozen at the date you filed insolvency. Creditors, in particular Canada Student Loans, may continue to report late payments during your bankruptcy or proposal. Again, make a note of this but know that credit bureaus likely won’t correct this until after you have been discharged or your proposal is finished. When they do, they should backdate the correction and remove any late payments to the date you filed.
Public records section
If you have filed a bankruptcy or consumer proposal, review the Public Records Section of your credit report. This is where information about the type of proceeding, the date you filed, and the date of discharge or completion will appear.
Other items
Check for any closed accounts still marked as open.
Look for duplicate records – the same debt reported twice under different names, or a bankruptcy or proposal reported twice.
Watch for old accounts being re-reported by collection agencies with updated payment dates or the reinsertion of information you previously had corrected.
Once you have identified everything that needs correcting, visit our article on how to correct errors on your credit report to get the necessary links to the dispute resolution form and information on how to dispute errors with both Equifax and TransUnion.
Step 3 – Pay your bills on time
Your payment history has the largest impact and makes up about 35% of your credit score. Late payments are the worst thing you can do for your credit score. If you have a credit score over 800, one late payment could make your credit score fall 30 points. To rebuild your credit, you must always pay your bills on time.
During your bankruptcy or proposal, make sure you keep up with your internet, cell phone bill, car loan payment, or any other active account that remains after you file. Missed payments will affect your chances to rebuild.
Most major cell phone providers report to the credit bureaus today. Paying your cell phone bill on time during your bankruptcy or proposal is very important. While it does not help your score increase because the payment is small, paying late will hurt your score a lot.
Step 4 – Establish new trade lines
The most important type of credit for credit rebuilding is credit cards. Mortgages and car loans and other forms of credit help, but credit cards have the most dramatic impact on your credit score. A credit card is revolving credit, meaning you control how much you use and repay each month. That makes a credit card the best tool to show you know how to manage credit wisely. And that is the goal of building a good credit history. Credit cards do not have a defined term like a car loan and as we know, the longer you have credit the better your score. Closing an old credit card account can lower your score drastically.
The downside is that high credit card limits can tempt you into borrowing. Only charge what you can pay in full each month.
If you really need a credit card during your bankruptcy or proposal, you can try getting a secured credit card. A secured credit card is backed by a deposit you leave with the credit card company. They will use this deposit if you stop making payments which is why they are willing to lend to more risky borrowers, like someone in a consumer proposal. Getting a secured credit card can help you jump-start your credit rebuilding enough to help you qualify for a regular card after your bankruptcy or proposal is finished. Be prepared though, not everyone who filed a bankruptcy will be approved while still in an active bankruptcy. Talk to your trustee or credit counsellor to see if applying for a secured card while bankrupt is a good idea in your situation.
Start by requesting a small credit limit, say $300 to $1000, depending on how much you can save for the deposit. Our experience shows that Capital One is best for active bankrupts, while Capital One or Home Trust Visa may approve your application during a proposal. The Capital One card comes with an annual fee. Both charge high interest rates, so be sure to pay your balance in full each month.
After your bankruptcy or proposal is complete, and you have corrected items on your credit report, apply for a regular credit card. Certain lenders are more willing to lend to someone with low credit, like Capital One or Canadian Tire (or what’s called Triangle now). If you don’t have good enough credit to qualify for an unsecured card, try a secured card if you haven’t already done so.
After six months of making payments on time on your first new card, you have an increased likelihood of being approved for a second credit card. Credit card providers like MBNA, TD, CIBC, and PC Financial, in that order, are good options assuming these creditors were not included in your bankruptcy or proposal.
If you already have a car loan, you may already have a decent credit score, so you may not need a second regular credit card. As long as you are making your car payments on time, this loan already shows you can manage a healthy mix of credit.
Increase your limits slowly. Asking for a higher limit is asking for more credit, which may mean a hit on your credit report. If your credit card provider offers you a limit increase without you asking, then take it if it brings your unsecured limit up to $3,000 or higher.
Always wait a few weeks, or a few months, between credit applications. New credit may temporarily lower your credit score, so you don’t want to apply for a second credit card right after you got your first.
As a reminder, the goal if you want good credit so you can qualify for a low-interest car loan or mortgage is to have two active established accounts, with authorized credit limits of $3,000 on each card, and maintain a good payment history for two years after your bankruptcy or proposal is complete. You might get credit faster, but it may not be prime credit. It will likely carry a high interest rate and may not look good on your credit report to future lenders.
Step 5 – Keep your utilization rate low
Managing your credit score is more than just paying your bills on time. You must also manage your balances.
Filing your consumer proposal or bankruptcy allowed you to start your credit repair process with no more debt. That’s good.
However, as you rebuild your credit, you will need to carefully manage your future credit balances. Carrying high balances on your new credit cards will hurt your credit score.
Wait, so I can charge one thousand dollars on my new secured or unsecured credit card, but if I wait to pay off that balance until it’s due, my credit score could drop?
Yes, it’s called credit utilization, and it accounts for 30% of your credit score. Credit utilization is simply the amount of money you borrow divided by your total credit limit. Credit bureaus assume that if you need to use most of your credit limit, you aren’t managing your credit well and so lending you more money might be risky for the next lender.
To have a good credit score, you want a low utilization rate on revolving credit like credit cards or a line of credit.
And here’s the key point: you want to keep this balance low throughout the month. You don’t know when your balance will be reported to the credit bureau. Your creditor might report your balance two days before your payment is due. If you have a high balance, it looks like you are carrying a lot of debt, even though you make all of your payments on time.
You want to prove to the credit bureau that you are responsibly using your credit card, and that you don’t need it, which is why you keep your utilization rate low.
So, what’s the right utilization rate?
If you are rebuilding, our experience shows that zero is better than 30%, and you should never go over 50%.
So, if you have a limit of $500, how are you supposed to keep your utilization rate at or close to zero?
Simple, pay your credit cards early. You don’t have to wait until the bill is due to make a payment. I recommend you choose a fixed cost bill, like your cell phone or internet. Set this account to be paid off automatically each month with your new credit card. Next, pay off this balance the same day. After you set this up, hide your card so you won’t be tempted to spend more than you should. Check your credit card statements every month to make sure this is working and that your balance is zero on the due date.
This will do two good things for your credit. You will have a history of payments, and your balances will be low. You are proving that you don’t need the money.
It’s possible to lower your utilization rate by getting another credit card or raising your limit. However, having a lot of credit is risky. You might be tempted to run up your balances, leaving you in trouble with debt again.
Also, if you have a lot of credit cards with high limits, even if your score is good, future lenders may not be willing to loan you more money because they think you have too much credit already.
You only need to worry about managing your credit utilization on revolving credit like credit cards and lines of credit. You can’t manage your utilization rate on your mortgage or car loan. These types of loans start with a 100% utilization when new, and you make fixed monthly payments. Over time the balance you owe falls until it reaches zero.
Build good financial habits, not your credit score
After your bankruptcy or proposal, while you may want to rebuild your credit, my last word of advice is don’t obsess over your credit score.
If all you need is a credit card for everyday use, a credit score in the mid- 600s is likely good enough.
If you take the steps I outlined to re-establish your credit, including two active trade lines with authorized limits of $3,000 each, you should be able to get a mortgage or car loan at a reasonable rate two years after your bankruptcy or proposal is finished.
But getting a loan, and affording a loan, are two different things. The larger your down payment, the better chance of approval since the amount of loan you are asking for will be lower.
Also, remember that more debt benefits the bank. The more you owe, the more interest you pay.
What you don’t want to do is go back to using credit to make ends meet.
That’s why I recommend you focus on building some savings while in your bankruptcy or proposal as you prepare to rebuild your credit.
Remember, credit is not your money. The trick while taking on new credit to rebuild is to find the right balance. You need to show you can use credit but do so responsibly and not get overextended. You want to take on the right amount of credit at the right time for the right reasons.
My normal advice is not to use credit cards to pay for everyday living expenses like groceries or gas. Yes, you can earn some points, but the balances can quickly grow past what you can pay. If you do use your card more often, make multiple payments throughout the month – for example, with each paycheque. It will reduce the risk that you will end up with a balance you can’t pay off at the end of the month.
And if you do apply for a larger loan, apply for only as much credit as you need, whether it’s a car or a house or anything else you might finance. Don’t take on more credit than you can afford to repay. Focus on building savings, not debt.
Your end goal is to be better off financially, not to have a better credit score and lots of credit.
Today I ask a question that generates a lot of debate on our Facebook page: what happens if you stop paying your debts? More specifically, what happens if you stop paying your debts and you are not in a consumer proposal or bankruptcy?
To help me delve deeper into this topic, Ted Michalos, my partner and co-founder of Hoyes, Michalos & Associates, joins me to discuss the various outcomes of not paying your debts.
What happens if you stop paying your credit cards?
Defaulting on payments or being in arrears has consequences. The severity depends on just how far you are behind on your payments:
If you miss one payment, the bank or credit granter will send you a friendly reminder. Generally, it will say ‘we noticed you didn’t pay last month. If you’ve paid by now, ignore this message”.
If you do not pay for two months, you may receive a phone call or a letter saying ‘you are two months in arrears, please contact us’.
If you do not pay for three months, this is when the bank has to decide whether or not they are going to send your debt to a collection agency.
If they do send it to collection agency, you’re supposed to receive a letter or notification from the credit card company saying that they have done so. However, more often than not, most people do not receive a notice, or they receive it after the collection agency has called. If you receive a call but you have not received a written notification, you have the right when dealing with a collection agency to ask for a letter outlining what you owe and to who you owe the money.
If you’re getting a call from a collection agency that you’ve never gotten a call from before, the first question should be, who are you collecting for? Send me a letter explaining who you’re collecting for, what I owe, what the story is. Because … that’s the law here in Ontario. They have to send you written notice before they do that.
If you have not paid the collection agency, they will try to pursue you for a couple months before threatening legal action. If you still haven’t paid, the collection agency will have to decide whether they will sue you or send your debt back to the credit card lender.
If they choose to sue you and it’s under $2,500 in Ontario, they can file a statement of claim in Small Claims Court. The courthouse will then send you a notice, and you will have 21 days to respond. If you do not respond, the people who are suing get a default judgement, which allows them to apply for a writ of seizure or execution, giving them the right to garnish your wages, seize your bank account, or employ other intense measures.
If you can’t afford to repay your credit card debt, then you may need to look at other options to get out of credit card debt.
What happens if you stop paying your payday loan?
When you take out a payday loan, we strongly recommend against giving a void cheque or access to your bank account. If you can’t pay, they just take the money out anyway. If you don’t have enough money to cover the payment, they’ll try again tomorrow. And every time they try to take a payment, you get hit for a service fee.
You could put a stop to the payment on the account or close the account or if you have a lot of payday loans, you may need to consider options to eliminate payday loan debt.
What happens if you stop paying your income taxes?
The federal government doesn’t have to take you to court to garnish your wages or seize your bank account. They can even send a demand to pay or a notice to pay without telling you. It will go straight to your employer or bank, and you won’t find out until the money is gone or seized. Or, they can put a lien on your house, which serves like a mortgage, meaning they can take your house if you do not pay them.
CRA has many collection tools at its fingertips to ensure they receive their money. There are also no limitations on money owed to the Canada Revenue Agency. Walking away from income tax is never a good idea. You need a formal plan to deal with tax debt.
What happens if you stop paying for your car or mortgage?
Car loans, leases and mortgages are secured debts, meaning that you’ve made a pledge with your lender that if you stop making your mortgage payments, they have the right to take your car or house.
For cars, the financing company will repossess your car if you default on your payments. For houses, banks will initiate a power of sale, which is a legal procedure where they give you 35 days to bring your mortgage current. If you do not bring your payments current in that time, they can show up with a sheriff and ask you to leave in 24 hours. If banks have gone to a power of sale, you should be looking at the likelihood you will have to move.
A consumer proposal provides meaningful debt relief.
If you live on very modest means and own very little, its unlikely your creditors will take action against you. However, if you have a good income, savings, or assets, your creditors are likely to purse some form of legal action to collect on your unpaid debt. Therefore, if you do have assets or a good income, it makes more sense to speak with a licensed insolvency trustee about your options than it is does to stop paying your debts and hope for the best.
One option for dealing with debt is a consumer proposal. It is a legal arrangement where you repay a portion of what you owe to your creditors. Every dollar you owe is a vote and you need 50% of the votes to be in favour of your proposal. So if you owe six creditors but one has more than half the debt, it only matters what that one creditor decides. In addition, there are other factors that could have affect the likelihood of your proposal being accepted:
How much the creditors are getting in comparison to what they would get if you were to file bankruptcy. This takes into account any assets you own and if you would have to make surplus payments.
Some creditors have a standard amount on the dollar they would like to receive. Generally it’s 30% of the debt.
They will look at your activity prior to filing a consumer proposal. If you ran up the debts 3-4 months before filing, it might suggest to them that you were planning on filing a consumer proposal versus if the debt slowly accumulated through normal use.
They will also look at your expenses to see if nothing is out of the ordinary or if you could cut back to pay a little more. Special allowances are made for certain circumstances. For example, special dietary needs may require an unusually high grocery budget.
The last thing they consider is the overall viability of the proposal. Or in other words, do you have a steady job that you can make the payments? Are the payments reasonable and affordable while satisfying the creditors?
If you can satisfy the above requirements, there is a strong chance that your creditors will accept your proposal, providing debt relief that will give you a fresh financial start. It’s a better solution for dealing with debt problems than not paying and just hoping that they go away.
It’s the last show of the month, and as we do at the end of most months it’s time for our frequently asked questions show here on Debt Free in 30. On most frequently asked questions shows we’ve got a list of five or 10 questions. Today the list is much shorter. We’ll probably only get to two questions but they are two important questions.
The first question is one that’s been the subject of lots of discussion over on the Hoyes Michalos Facebook page. And as a reminder if you’re on Facebook you can find our page at faceboook.com/310PLAN, which also happens to be our phone number. Or you can go to Facebook and search for Hoyes Michalos or 310PLAN. So, the first question we’re going to answer today is can I just walk away from my debts? What would happen if you owned money on a credit card or bank loan and you just stopped paying it? In many cases if you are deep in debt, a consumer proposal or a bankruptcy is the necessary solution, but what would happen if you just stopped paying? You didn’t file a bankruptcy or consumer proposal, you just stopped paying.
That’s today’s first question so to answer it I’m joined by my Hoyes Michalos partner and co-founder Ted Michalos. So, Ted can I just stop paying? What would happen if I just walked away from my debts? What’s the process?
Ted Michalos: Well, let’s break this down and talk about different types of debt. So, one of the things you mentioned was credit cards. That’s a pretty common problem for people to have, so can you walk away from your credit card debt? Maybe. The bank has got to decide is it worth pursuing you so what do they know about you? Have you got employment, have you got money on deposit with them? Are you a good candidate for them to sue? So, if they decide that they really want their money back and you’re not co-operating, they could take you to court. Well, the bank could decide that you know what, you’re a bad candidate for a lawsuit, you haven’t got enough that it’s worth pursuing you and I’ll just let you get away with it. The problem is you just don’t know which one of those you’re going to be.
Doug Hoyes: So if I’m a bank, I got three choices then. I can just say forget it, which of course banks don’t like to do ’cause they don’t make a lot of money if they just stop collecting debts. They could continue pursuing you through a collection agency or they could take you to court. So, tell me about the whole collection agency process. If I have always paid my credit card and now I miss one payment, they’re not taking me to court, what’s the process when I miss that first payment?
Ted Michalos: Well, so when you miss one payment or you’re late with a payment, you’re probably still dealing with the bank or whatever the credit granter is themselves. And you’ll get a polite reminder next month saying, you know, we noticed you didn’t pay last month, if you’ve paid by now ignore this notice otherwise you owe double this month. That’s not too pushy, it’s just their way of saying you got to catch up what you owe us. If you’ve made a habit of this, then instead of getting that polite reminder you might get a phone call or a letter that specifically says, you know what, you’re behind. American credit cards are much more aggressive about that than Canadian ones by the way.
So, let’s say you missed a month’s payment, you got this friendly reminder and the second month comes around and you still don’t pay them. So, the bank will probably still deal with you themselves for that second month. So, again now it’s as if you didn’t get a phone call before you’ll probably get one now, you get a less friendly reminder or you get a letter that says you’re two months in arrears and we need you to deal with this, contact our offices.
It’s the third month when things get interesting. The third month is when the bank has to decide are we going to send this out to a collection agency? And this all about psychology, it’s bad for business for the bank to be yelling at you themselves, they want their money but they don’t want to have a bad public impression. A big bad bank is beating up on Jane Doe, the single mom who can’t pay their credit card bill. So, they send it out to a third party, the third party’s job is to collect and they get paid a commission.
Now the law says you’re supposed to receive a letter or notification from the credit card company telling you they’ve assigned it before you have any obligation to talk to a collection agency. So, in nine times out of 10 nobody ever receives that notice or they receive it after the collection agency called. So, if it were me, I tend to ignore those. If you haven’t gotten a notice telling you who it is that’s calling you, why would you talk to somebody on the phone, particularly about your debts.
Doug Hoyes: So and then that’s a practical tip then obviously. If you’re getting a call from a collection agency that you’ve never gotten a call from before. The first question should be who are you collecting for? Send me a letter explaining who you’re collecting for, what I owe, what the story is. Because you’re right, that’s the law certainly here in Ontario. They have to send you written notice before they do that.
Ted Michalos: Particularly in this day and age with identity theft. I live in Guelph and lately we’ve had a scam on our phone systems. Once or twice a day there’s a message on my machine saying you owe the federal government agent money, your taxes are in arrears, we’re going to initiate legal action, you got to call this number now. Well, the federal government doesn’t leave messages like that.
Doug Hoyes: No and you’re right. They’re getting very creative because with all the fancy phone systems now, they can mask their phone number, they can make it look like it’s coming from a 613 exchange, which is Ottawa and that’s where the federal government is. And so, it looks legit, so, as a starting point yes, get them to send you a letter so that you know.
Ted Michalos: So, now we’re back to the collection agency.
Doug Hoyes: So, we’re back to the collection agency then.
Ted Michalos: Alright. So, the collection agency is going to try and pursue you for a couple of months. Then they have to decide do they threaten legal action? And if they threaten do they actually go through with it or do they just send the credit card debt back to whoever your lender is and let them try to deal with you again?
Let’s say that they’ve decided that you’re a good candidate for a lawsuit. And we can talk about what makes you a good candidate to be sued. And they decide they’re going to do something. If the debt’s under $2,500 in Ontario, they can take you to Small Claims Court. Small Claims Court is a pretty simple system. The person wanting to sue you, goes to the courthouse, fills out a statement of claim, the courthouse mails you the notice and you’ve got 21 days to respond to it by saying whether or not you want to argue or dispute the fact, the amount that’s being claimed.
If you don’t respond, the person suing you gets what’s known as a default judgment. A judge basically says okay the debt must be real ’cause you didn’t argue about it. Then the next thing they’re going to do is apply for a writ of seizure or execution. This lets them garnish your wages, freeze your bank account. In some cases I supposed they can register something with the sheriff, which effectively puts a lien on your house and your other possessions, and it’s complicated stuff and it’s pretty intense.
Doug Hoyes: And it doesn’t happen a whole lot in the overall grand scheme of things. And there are relatively few people who actually get sued out of the total number of people who owe money. And the vast majority of those lawsuits would result in like you said a default judgment. I don’t show up in court ’cause what am I going to say? The purpose of court is not to figure out how much you should pay, it’s to figure out do you owe the money or not. It’s really that simple isn’t it?
Ted Michalos: That’s right. I mean the first responsibility of the court is that the person who’s trying to sue you has to establish that you actually owe the money. Now what you said it correct, most people don’t respond to these notices and so a default judgment kicks in. But if you were to ask a lawyer or anyone associated with the court just how many cases they actually see relative to how much credit card debt is out there, it’s an infinitesimally small number. It’s one of those things that it’s used as a threat to scare the bejeezus out of you but it isn’t often followed through on.
Doug Hoyes: And that’s a key point. It’s very rare, comparatively speaking, that someone actually gets sued. So, we’re answering the question can I just walk away from my debts? And you’re saying well, you know what? It’s relatively rare that someone is actually going to sue you for those debts. So, under what circumstances is a bank not going to bother suing you? That’s obviously the common response, when does that happen?
Ted Michalos: Well, so the most obvious instance is when they can’t find you. So, if you’ve got a relatively small debt on a credit card, and you’re difficult to get a hold of, so, you’ve moved once or twice because your circumstances aren’t great, so you’re not getting these notices anyway. The bank, you don’t bank with the bank anymore so your paycheque doesn’t go there. They don’t know if you’ve got any money. They know in the past that your income wasn’t great. I mean these are all things that it’s not worth spending money on a lawyer to try and sue you. It’s just good money after bad.
Doug Hoyes: And as a result they won’t do it. So, obviously not having wages is going to make a big difference. What’s the point in suing someone if you can’t garnishee their wages?
Ted Michalos: Right.
Doug Hoyes: So, let’s go through the different types of debt. So, you addressed credit cards right off the bat. That’s a fairly simple one to understand. And the process you described is one as going to happen with credit cards. What about payday loans?
Ted Michalos: I knew you were going to bring this up.
Doug Hoyes: I’ve always got to needle you there with the whole payday loan thing.
Ted Michalos: You push my buttons. Okay, so payday loans are a funny animal onto themselves because usually when you go and take a payday loan out, you give them a void cheque or access to your bank account. So, if you don’t go in and make your payday loan payment, they just take it. Now of course you could stop that by putting a stop payment on the account or closing the account. And quite frankly once you start dealing with a payday loan company, if you’re able to break the cycle that’s great, but don’t ever give them one of your void cheques. Don’t ever give them access to a bank account where your pay actually goes into. These guys are notorious for trying to take your payment today, well if it doesn’t go they’ll try again tomorrow. And every time they try to take a payment, you get hit for a service fee.
Doug Hoyes: Well and we’ve talked a lot about payday loans this month. I’ve had a couple of different guests to talk about them. So, you can go to our website at hoyes.com and search for payday loans and you can see entire episodes. And we’ve got more coming up in the future. So, that’s certainly a big topic. But the point is you can’t just say to your payday – when you get the payday loan, if you give them a void cheque or access to your bank account and they say well if you don’t come in Friday to pay it off we’re taking the money out of your account, you can’t just walk away from it if you haven’t already put a stop payment on it or –
Ted Michalos: You have to do something or you’re going to lose your money.
Doug Hoyes: You’ve got to do something, some action is required. So, what about income taxes that I owe? Can I just forget about that?
Ted Michalos: So a lot of people think they can forget about income taxes but you’ve got to remember that the federal government has a very long reach. They’re not required to take you to court in order to seize a bank account or garnishee your wages, they simply send out something called a demand to pay or notice to pay. And they won’t tell you that they’re doing it, it’ll go straight to your employer or straight to your bank. And after the money’s taken you’ll find out who did it.
So, if you’ve got a debt with the federal government, I wouldn’t play around with that one. It’s not the same as a credit card where they got to decide whether or not they’re going to sue you. It’s not the same as a payday loan. The federal government has the tools to take their money. And you know what I found in the past, they’re more likely to be aggressive with small debts, people that owe them a few thousand dollars than the people that owe them hundreds of thousands of dollars. Makes no sense to me but I guess it’s cause it’s easier to pick on somebody getting a paycheque than it is somebody running their own business and hiding money from them.
Doug Hoyes: Yeah and I guess the guy who’s the average working guy doesn’t have access to the fancy lawyers and accountants, and whatever to protect themselves.
Ted Michalos: That’s true too.
Doug Hoyes: Now the other element we haven’t touched on is The Limitations Act of Ontario, which says in laymen’s terms, what does it say?
Ted Michalos: So, the limitation’s act says if you haven’t affirmed, confirmed the existence of a debt in two years and legal action hasn’t been commenced in that two years, you now have a defence in court to say that effectively you don’t believe the debt is real anymore.
Doug Hoyes: And in real simple terms. If I haven’t made a payment in two years on that debt, then if they were to take me to court and sue me, and try to garnishee my wages, I could go to court and say hey judge, it’s been more than two years and they wouldn’t be able to get their judgment all else being equal. Now does that apply to income taxes?
Ted Michalos: It does not apply to income taxes.
Doug Hoyes: It does not. So, you can walk away from some debts. And if it’s been more than two years, it’s highly unlikely that they’re going to be able to take you to court and sue you. But income taxes are not subject to those rules. So even if you owe taxes from 10 years ago and you start working and you start generating tax refunds, they’re going to keep them and obviously Revenue Canada, Canada Revenue Agency has the power to freeze bank accounts and do other nasty things, so, walking away from taxes generally not a good idea.
Ted Michalos: Right.
Doug Hoyes: We’ve been talking up to this point about unsecured debt, tell me about secured debt. So, first of all what does secured debt mean?
Ted Michalos: Okay, so secured loan or secured debt is one that you’ve pledged, you said that if I don’t pay you, you have the right to come and take something from me, the most common examples, car loan, car lease or a mortgage on your house. So, with a car loan you basically say if I don’t make my loan payments, they’ve got the right to come and take your car.
Doug Hoyes: So, that’s pretty cut and dry.
Ted Michalos: It is and they’re more likely to do that than they are – than so the credit card where you don’t pay it. ‘Cause the credit card, their only choice is hound you or take you to court. With a car loan, okay well I can come take your car. And for most people the car has enough value that I mean you need it to get to work, you need it to get the kids to soccer, you’ve got to have a car. So, you find a way to make the payments, so it’s a much bigger threat they’ve got over you.
Doug Hoyes: And so walking away from a car loan debt means your car is going to be gone. It’s pretty much that simple. Unless of course it’s a car with no value and it’s not worth it for them to repossess. But in most cases that’s an obvious answer. So, a secured debt is a debt that is attached to something. A credit card isn’t secured, it’s not attached to anything. Income taxes in most cases aren’t attached to anything. Payday loans I guess are attached to your wages.
Ted Michalos: We should be careful with the tax ’cause it’s a little – they’ve got some special rights ’cause again we’re talking about the federal government. So, when a credit card sues you, they get a writ of seizure, write of execution and lets them garnishee your wages. The court’s given them some rights. They still can’t come and take your stuff from you. The tax department, if you owe income tax and the tax department puts a lien on your house, it serves like a mortgage on your house. So, it’s not like a judgment that there are ways to get around. That’s a secured debt just like your mortgage to the bank. It’s got to be paid or the government has the right to take your house.
Doug Hoyes: And they don’t have to go to court to do that.
Ted Michalos: Well, they go to internal tax court. But as far as the average person is concerned, they don’t have to, they just send a demand.
Doug Hoyes: They push some buttons on the computer. So, the final category then is mortgages. And again, I think the answer on this one’s pretty obvious. So, can I just stop paying my mortgage and everything will be great?
Ted Michalos: Only if you want to leave your house. Effectively what they’re going to do is decide do they initiate power of sale, which is just a legal procedure where they give you 35 days to bring your mortgage current. If you don’t bring it current in that time, they’ve got the right to show up with a sheriff, knock on your door and say you’ve got to be out in 24 hours. And as unpleasant as all this sounds, they don’t actually want to throw you out of your house, ’cause that’s not how they make any money. But if they go to a point of power of sale, you should be looking at moving.
Doug Hoyes: Yeah because the bank, the mortgage company isn’t going to just walk away from hundreds of thousands of dollars. They obviously want their money. So, let’s wrap this up then with an overall comment, then. So, what’s your advice? How do you know if you should just walk away from your debts or try to pay them or should you take some more tangible action like filing a consumer proposal or a bankruptcy?
Ted Michalos: Well, so as coarse as this may sound, the less you have, the less likely you are to be subject to some sort of legal action. So, if you’re a person that’s living on very modest means, maybe you’re on government assistance or a pension now, you’re not a good candidate to be sued, there’s not a lot of practical reason to do so. If you’ve got a good paying job, regular income, money in a savings account or assets that are worth a fair bit, then you are a much better candidate and more likely that someone’s going to take action against you. So, the more you have, the less likely you can just walk away from something.
Doug Hoyes: Excellent. We’ll expand on that in the Let’s Get Started segment but I said I wanted to get to two questions, so we’re kind of burning through the clock here on the first one but I think that was good stuff. So, the second question I want to answer today in the last sort of four or five minutes of this segment is what are the chances my consumer proposal will be accepted?
So, we just talked about one of the solutions when you are being pursued, your wages are about to be garnisheed, you can file a consumer proposal. So, give us the 20 second overview, what is a consumer proposal?
Ted Michalos: Alright so, a consumer proposal is an arrangement to repay a portion of what you owe. So, as an example let’s say you owe $30,000 to all your unsecured creditors, you can’t afford to pay that back. But maybe you can afford to pay back $10,000. And so you make a payment plan to pay that amount of money over a period of time, one, two, three, four, maybe five years. You’re automatically thinking well, why would anybody agree to accept less money? Well, a proposal is designed to be an alternative to bankruptcy. So, often in a bankruptcy the creditors get very little money, in a proposal you’re voluntarily saying I`m going to pay you some of what I owe, something is always better than nothing, which is why they make sense.
Doug Hoyes: And so, the creditors, which is the people I owe money to, have to vote on this. How does the voting work?
Ted Michalos: So, it`s a pretty simple. Every dollar you owe is a vote and we need half the dollars to actually accept the deal. So again let’s use that $30,000 example. If $15,001 or $15,000 and one cent were to agree to terms of the deal would be approved.
Doug Hoyes: So more than half have to say yes.
Ted Michalos: That’s right, a simple majority of dollars, not creditors. And that’s important because if you owe to six different people but one company has more than half the debt, then it really only matters what the one company says.
Doug Hoyes: In that case one person out of six is going to decide. So, okay you go through the analysis and decide yes, I should file a consumer proposal. So, the person is sitting in front of you and says okay Ted so what do you recommend and you say well I think, you know, $300 a month for five years is a good thing. And what are the chances then that the creditors are going to accept my proposal? So, you already hit on the first thing that they look at, which is comparing it to bankruptcy.
Ted Michalos: Yeah, it’s got to be a better deal than a bankruptcy. Why would anyone agree to take less money than they’re going to get if you were bankrupt, which is a very rules oriented project. You know exactly what you got to pay in a bankruptcy.
Doug Hoyes: But aren’t they going to get nothing in a bankruptcy?
Ted Michalos: It depends on your situation. So, there are cases where you actually have to pay money into a bankruptcy. If you have equity in your home, if you have savings, if you make more than the government guidelines for families of your size. It gets complicated and I don’t think we can get into it here. But bankruptcy does cost you something.
Doug Hoyes: Yeah, it’s based on your income and the assets you have. And I’ll put some links in the show notes to the concept of surplus income, which is what you’re talking about. Based on your income you have to pay more so if in a bankruptcy it’s likely I’m going to have to pay $3,000 because of my assets, my income whatever, the proposal is going to have to be more than $3,000 or else why would the creditors accept it?
Ted Michalos: That’s right. And there’s a second complicating factor. Most of the Canadian credit granters, so the banks, the credit card companies, the loan companies have all said that they want a minimum return to accept a proposal. So, they won’t just – it doesn’t just have to be better than a bankruptcy, it needs to be about a third of what you owe. It’s possible to get deals accepted for less than that but the standard response or the standard request that all of these lenders have told us they want, is about a third of the debt. So again, you owe $30,000 then probably they’re going to ask you to pay back 10.
Doug Hoyes: Yeah and when you come into see us obviously we can look at the specific creditors you’ve got. There are some that are more likely to accept 20 cents on the dollar, so each case is different. But you’re right, if a bankruptcy is going to generate one cent on the dollar for them, it’s unlikely that they’re going to accept two cents a dollar in the proposal. Even though it’s twice as much it’s just administratively –
Ted Michalos: It’s not worth the trouble.
Doug Hoyes: It’s not worth the trouble. So, one of the other things they look at is prior activity. What does that mean?
Ted Michalos: Yeah so what they want to know is how have you been using your credit? So, did you deliberately run the balances up in the three of four months before you came in to file? That suggests that maybe this was a planned activity and they might ask for more money to be returned. Or were you using it in an unusual way? So, traditionally you use it to buy gas and groceries and small expenses, but two months ago you took a trip overseas and you put $10,000 on your credit card that you wouldn’t normally do. Or you repaired the engine in your car, something unusual or out of the way. Anything like that causes them to take a look and say well was there something deliberate done here? Do we need to ask for a little bit more?
Doug Hoyes: And again, that’s something that we could advise you on. They also look at your expenses every month.
Ted Michalos: Yeah, this is – it’s kind of a grey area. So, the government has established guidelines for how much they think a family of different sizes they think need to live on. And so, within that number this is what they expect you to pay on rent. This is what they expect you to pay on groceries. This is what they expect you to pay on gas and insurance. And they see enough of these things that if something in unusually high, they’ll notice it.
So, for instance a family of three might spend anywhere between $700 or $1,000 a month on groceries. Well, if your family of three is spending $2,000 a month on groceries, they might wonder why. And there could be very valid reasons for it. Nobody’s saying you can’t spend your money the way you want to, but they’re going to look to see are you doing something out of the norm or something that perhaps they could say well if you cut back on that, you could afford to pay us a little more?
Doug Hoyes: Yeah, if you’ve got special diet requirements or something that maybe a reason and which case that would be explained to the creditors. I guess the final criteria they look at is the overall viability of the proposal. Do you have a job that’s going to allow you to continue making the payments, that sort of thing?
So, there’s a number of different factors that go into it. I guess the closing comment is well when you come in and see us we’ll look at your situation and figure out what it’s going to take to make it work in your situation. That’s really the key. We’re going to get into a little bit more detail in the Let’s Get Started segment and all of that. But for now we’re going to take a quick break and we’ll be back with the next segment. You’re listening to Debt Free in 30.
It’s time for the Let’s Get Started segment here on Debt Free in 30 where we emphasize practical advice for dealing with debt problems. Before the break Ted Michalos answered the question how do I know if my consumer proposal will be accepted?
So, Ted let’s get practical with this, what advice would you give someone to increase the chances of their proposal being accepted. When someone comes in to see you and you review their situation and it looks like a consumer proposal is the best option, what practical things can that person do to increase the chances of their proposal being accepted?
Ted Michalos: Well, we touched a little bit on this before. So, when you’re looking at your household budget, which is money coming in and going out every month, we have to disclose that to the creditors, they get to consider your proposal. You want it to appear reasonable. So, you don’t want to have $500 a month for red licorice, which would seem like a luxury to most people. You want to be in line with what the average Canadian household spends on their groceries and their living expenses, and all the other places that their money goes. You don’t want to have unusual transactions, particularly large dollar amounts, going through your credit cards, lines of credit loans, in the two or three months before you file a proposal.
So, they’re looking for how you continue to act in your normal manner, so this really is a solution that you’ve come upon? Or did you plan the solution so you ran your debts up a little higher? Most importantly it’s are you making an offer that makes sense? Are you going to be able to afford the payments? Are you offering them as much of a payment as you can afford? So, you’re looking at your budget and it turns out that, you know, you should be offering $250 a month. Well, if your budget only supports a payment of $150, then the proposal’s not likely to get approved. If your budget shows that you can afford $350, well then $250 might get bumped up. So, all of this is deal with someone who’s got enough experience in the industry that files enough of these that they can guide you properly through this minefield.
Doug Hoyes: Yeah and the first thing we’re going to do when we sit down with you is look at your budget. And a lot of people don’t have a budget so that’s not problem, let’s piece it together. How much do you spend on rent? What’s an average grocery bill and so on? And it may be that there are some things that you’ve got to cut out before the proposal gets filed. So, your example of $500 a month on red licorice, I mean I guess black licorice should be okay.
Ted Michalos: Somebody had that on their budget once; I’m not making this stuff up.
Doug Hoyes: There you go. And well, we’ve seen it. I’ve seen people who have, you know, I spend $300 a month buying magazines. Okay, well maybe what you need to do then is go to the library and buy them because the creditors aren’t going to accept a proposal where you pay $200 a month if you spend $300 a month on magazines. Unless I guess that’s part of your job that you have to read them. So, what’s reasonable? It’s actually modifying the budget, modifying your actual expenses, it’s not the budget, it’s what you’re really spending that needs to get reduced. Now I would assume that the more you offer the better because the creditors are more likely to say yes to it.
Ted Michalos: And that’s a reasonable assumption. Keep in mind here that the creditors understand that you’re offering a proposal because you cannot afford to pay them in full. If they ask you to pay the debt in full, so they turn down your proposal for anything less than that, you might just file bankruptcy where again they’re going to receive less money. This has got to be a win/win for everybody. So, the proposal’s going to be structured so that you give them more than a bankruptcy, at least a third of it is that you owe. But they’re not going to force you to pay so much that the bankruptcy becomes a more attractive option.
Doug Hoyes: Well, and it has to be something you can afford obviously. If you can only afford $300 a month, then them asking you for 500 doesn’t make a whole lot of sense. Now one of the criticisms I hear all the time is you license insolvency trustees, we know how this thing works. You get paid a percentage of the money that gets distributed to the creditors.
Ted Michalos: That’s true.
Doug Hoyes: So, we don’t get upfront fees, we don’t charge you money to come and talk to us. But once the proposal is up and running and it’s been accepted and we’re distributing money to the creditors, we get a percentage of the money that goes out. So, it would therefore seem that the higher the proposal the better for us ’cause we’re making more money. So, how do I as a debtor who comes into see Ted Michalos at Hoyes Michalos, know that you’re not recommending $400 a month in my proposal just so you can make more money, when really $300 would have worked.
Ted Michalos: Yeah, I mean a couple of common sense things. People in the community, word gets out pretty quickly if there’s someone asking you to pay more than you should have to pay, I mean I don’t expect you to go to the hairdressers or down to the pub tonight, and talk about you’re filing a consumer proposal, but word gets around. So, if a trustee is suddenly forcing people to pay more than they should on a regular basis, they won’t be doing many proposals. So, I guess one of the questions you could ask is: how many proposals do you file every month. If a trustee tells you one or two, as opposed to 10 or 20 or 30 or in our case a couple of hundred, that’s a pretty good indication that maybe they’re not experienced at it and maybe they’re asking for too much money.
The flip side of course is, if we ask for more than you can afford to pay then you won’t make the payments and we won’t make any money at all and the creditors won’t make any money. So, the creditors won’t be happy with us. So, there are checks and balances in the system.
But at the end of the day, you’ve got to be comfortable that the payment that’s being suggested is one that you can afford. And then the creditor’s got to decide is it enough money? And frankly, very few trustees would let you file a proposal that they don’t think would be accepted. It doesn’t serve any use or purpose to offer 10 cents on the dollar if we know the creditors want 20 or 25 cents on the dollar. So, if you find somebody that’s letting you do something that sounds too good to be true, it probably is too good to be true.
Doug Hoyes: You’re right, it has to work for both parties, that’s the name of the game. Excellent, thanks very much Ted for answering those two questions for us. That was the Let’s Get Started segment. I’ll be back to wrap it up in a minute right here on Debt Free in 30.
Announcer You’re listening to Debt Free in 30. Here’s your host Doug Hoyes.
Doug Hoyes: Welcome back. That’s our show for today. So, to find out more about walking away from your debts or how you can evaluate whether or not your consumer proposal will be accepted, please go to our website at hoyes.com, that’s h-o-y-e-s-dot-com for full show notes and links to everything we discussed today. Thanks for listening. Until next week, I’m Doug Hoyes. That was Debt Free in 30.
In a previous article, we compared the cost of 4 different debt relief programs and determined that in most cases a consumer proposal offers the lowest possible monthly payment, significantly better even than a debt management plan. Inevitably when we do this comparison the question comes up – but what about the impact on my credit score? A bankruptcy or consumer proposal will affect my credit so isn’t that bad?
There is a misconception that credit counselling, or a debt management plan, will not affect your credit score. In fact, it will.
Even though you are agreeing to repay your creditors in full through a debt management plan, it is still considered a repayment program that is reported to the credit bureaus.
A debt management plan will appear as an R7 on your credit report. This note will remain for the lesser of 6 years from the date of filing or 3 years after completion.
A DMP through credit counselling has the same impact on your credit as a consumer proposal yet it is much more costly.
To help clarify the confusion, below is a summary of how the various debt relief programs will appear on your credit report.
How does a debt management plan appear on your credit report?
This rating will remain for a maximum of 6 years after default which is usually when filed.
It is removed the earlier of six years from filing or 3 years after completion.
Each debt included in your proposal will be marked as part of a consumer proposal.
The individual debt will be cleared 6-7 years after the date of default
In other words, both a consumer proposal and debt management plan have the same impact on your credit report. There is no difference in how these debt programs are reported and when the notice is removed.
The sooner you pay off your program, the sooner it is removed from your credit report.
The main benefit of a consumer proposal over a debt management plan is that you pay less than you owe. This makes your monthly payments much lower.
Let’s look at an example. If you owe $35,000 in credit cards, payday loans and other unsecured debt your payments under each program could be as follows:
5-year debt management plan: $642 a month (full payment plus 10% fees)
5-year consumer proposal: $204 (assuming your creditors settle for 35cents on the dollar)
If you have room in your budget, you can increase your proposal payments and pay off your proposal faster. Given the smaller monthly payments, this is more likely than being able to increase your debt management plan payments above $642.
Here is why this is important.
There is a direct relationship between how long it takes to pay off your consumer proposal, and how long this will impact your credit.
This holds true for both programs, but again since a proposal costs less than a debt management plan, being able to repay your proposal faster is more likely.
How does bankruptcy appear on your credit report?
A bankruptcy is listed as an R9 credit rating.
First time bankruptcy, no surplus income: 9 months + 7 years = just under 8 years
First time bankruptcy with surplus income: 21 months + 7 years = just under 9 years
Individual debts are purges after 6 – 7 years
The above addresses how long the notice of any debt relief program will appear in the legal section of your credit report. In addition, each debt is purged from your credit report after a period of 7 years for TransUnion and 6 years for Equifax.
Choosing a debt relief program is about getting out of debt in the best possible way. While the impact on your credit history may worry you, the determining factor should be which program makes the most sense for you financially.
If you need debt help, contact us today to book a free no-obligation consultation. We’ll explain the cost and impact of all options so you have the information you need to make an informed decision about what solution is best for you.
A consumer proposal is a safe and reliable way to get out of debt but it can also be the cheapest in terms of monthly payments. This is because a consumer debt proposal combines two substantial benefits over other debt repayment options:
Debt forgiveness; and an
Interest free repayment period.
To illustrate we will look at a typical debt situation and compare the financial cost of 4 different approaches to eliminate debt including a consumer proposal. A consumer proposal deals with unsecured debts and reduces your overall monthly payments substantially.
The Scenario:
Mark owes $60,000 in consumer debt, a fairly typical amount for the average insolvent debtor.
His monthly minimum payments average $1,200 a month.
Mark is single and earns $3,200 a month after tax.
Mark owns no other assets that would have to be surrendered to his creditors.
In all repayment plans, we assume Mark would like to be out of debt in a minimum of 5 years.
Repayment Options
Repay on his own – cost $1,600 a month for 5 years.
If Mark want to pay off his credit card debt within 5 years he will have to increase his monthly payment to almost $1,600. That is the equivalent of half of his paycheque. He will have to make this payment amount every month for 5 years and during that time cannot incur any other debts as this will increase his interest costs further.
Debt Management Plan – cost $1,000 a month for 5 years.
A debt management plan, filed through a credit counsellor requires that you repay your debts in full. You can achieve interest savings, which is why Mark’s monthly payments in our example decline by $600 a month however there is no reduction in the total principal payments you must make.
Personal Bankruptcy – cost $570 a month for 21 months.
Bankruptcy costs are not based on the amount of debt you owe but rather how much you make and what assets you own plus a base contribution to cover the value of non-exempt small personal belongings and administrative costs. Based on his higher income, Mark would be required to make surplus income payments of approximately $570 per month, assuming his income does not change. As a first time bankrupt with surplus income his bankruptcy would last 21 months after which he would be discharged and his debts would be eliminated.
So in the case of Mark’s bankruptcy, he would be out of debt sooner than his expected timeline, and for significantly less than the cost of a debt management plan.
Consumer Proposal – cost $245 – $350 a month for 5 years.
In Mark’s case he wanted to be out of debt within 5 years. He has to option to file bankruptcy to meet this timeline but if he wants to lower the monthly cost of getting out of debt he can consider a consumer proposal.
A consumer proposal is a legal way to negotiate an arrangement with your creditors to repay a portion of your debt and spread those payments over time. The cost is based on what you can afford and what you can negotiate with your creditors. Creditors typically expect to receive slightly more than they would in a bankruptcy because you are spreading payments over a longer period of time. In addition, certain creditors expect to receive a minimum recovery on their debts. Some big banks (like RBC and CIBC) often expect recoveries in the 30 cents on the dollar range. While every situation is unique, since everyone’s cash flow needs and creditors differ, in our scenario Mark would likely be able to negotiate a repayment plan costing between $245 and $350 a month for 5 years.
As you can see this is substantially lower than the costs of any other debt relief program. It is for this reason that debt management programs only have a 43% successful completion rate.
In choosing a consumer proposal over bankruptcy, Mark would be making a tradeoff between getting out of debt sooner and lower monthly payments. In doing so his total costs over time are higher compared to bankruptcy yet are still much lower than those in a debt management plan filed through a credit counselling agency.
What this shows is that in most cases where debtors are dealing with substantial debts the debt forgiveness, combined with an interest free repayment period, make a consumer proposal the lowest cost option when comparing debt recovery programs.
It is true that a consumer proposal is not for everyone however if you are severely in debt it is worth exploring. We’re here to explain all your debt relief options and help you choose the right one for you.
It’s no secret that payday loans charge an outrageously high interest rate. In Ontario, as of 2018, payday lenders can charge $15 for $100. If you take out a new $100 loan every two weeks, you would pay $390 a year, that’s an interest rate is 390% on an annual basis. And therein lies the problem with these types of loans. But what is the solution?
On today’s podcast, I speak with Jonathan Bishop, a Research and Parliamentary Analyst at the Public Interest Advocacy Centre (PIAC) about Bill 156 and pay day loan regulation. The PIAC is a non-profit organization that conducts research into public service issues that affect consumers. The payday loan industry is something they have been investigating for well over a decade.
History of Payday Loan Legislation In Ontario
Before 2007 interest rates were limited to a maximum of 60% under the Criminal Code of Canada. The Criminal Code was amended in 2006 to allow payday lenders under provincial regulation rather than under the usury laws of the Criminal Code. Payday loans would be allowed to charge more than 60% as long as provincial legislation existed to provide set limits around the cost of borrowing even if this exceeded the criminal code rate. In reality Ontario payday loans were already operating at that time so the amendment to the law prior to 2007 permitted what was already occurring with payday loans in Ontario.
Ontario itself enacted the Payday Loans Act in 2008, limiting fees to $15 per $100 borrowed for two weeks as of January 1, 2018.
explore opportunities to increase protection for vulnerable and vetted consumers such as modernizing payday loan legislation.
PIAC responded to the initial call for comments with a 50-page policy analysis and a recent research report on debt collection practices. Bill 156 was the result of the consultation process.
One of the changes proposed in the bill will affect repayment time. If you get a third payday loan, the loan becomes an installment loan that has to be paid back over a period of 62 days instead of two weeks. This is to help break the payday loan cycle of someone trying to repay a payday loan with a payday loan from another payday loan lender.
As Jonathan says:
One of the other outstanding issues with a payday loan product is that onetime balloon payment in terms of the borrower has to pay it back all at once. There’s no kind of steps to doing it or planning. It’s just ‘here’s my paycheque. Oh here you go, you’re the first in line ’cause you have my paycheque, so I don’t have any choice’… rather than if you say two paycheques or three paycheques to pay it off.
Jonathan also mentioned that part of the challenge with payday loans is access:
Traditional financial institutions move out of a neighbourhood in a process called ‘redlining’ to focus on geographic areas and products offering a higher return.
Additionally, small ‘mom and pop’ businesses historically provided some of the basic services of a bank for a nominal fee, such as cashing a cheque. The proliferation of big box stores has squeezed small businesses out of the market, further reducing a community’s access to affordable financial services.
Payday lenders and alternative cheque cashing services move in to fill the void but at a high cost.
Possible Solutions to Payday Loans
A possible solution that Jonathan offered, was that a trusted authority such as the Ministry of Consumer Services could provide the community with the locations and business hours of alternatives that are within walking distance or within their neighbourhood.
In addition, another solution the PIAC put into its submission to the Ontario Government, was that the government should support legitimate micro-credited initiatives by partnering with local financial institutions to make this financial product available. The goal being that these micro-loans would be a competitive product that satisfies the need for immediate cash without trapping a person on in a payday debt cycle.
Other structural changes Jonathan would like to see in Bill 156:
some lengthening of the repayment period,
a limit on the number of payday loans a person can borrow in a given year
a reduction in the allowable cost of borrowing, and
lenders should be required to consider the borrower’s ability to repay the payday loan before granting credit.
He notes that in Manitoba, a payday loan cannot be more than 30% of the borrower’s net income. In British Columbia and Saskatchewan, the limit is 50% of the borrower’s next paycheck. The PIAC, recommends that the limit should be no more than 5% of the borrower’s monthly income to give the borrower enough money for other living expenses.
Doug acknowledges that some of the changes proposed in Bill 156 may help, but he is concerned that the bill isn’t addressing the underlying problem with payday loans – debt:
[Borrowers] are maxed out on their credit cards and they can’t borrow from a bank so they turn to payday loans. If we could address the underlying problems, one of which is excessive of debt, perhaps the need for payday loans would be greatly diminished.
Today we’re going to talk about a topic we’ve discussed here before on Debt Free in 30, payday loans. You’ve heard me give my thoughts on payday loans and I’ve other licensed insolvency trustees and credit counsellors on the show to discuss the evils of payday loans. We all know the problem, they charge very high interest rates. In Ontario, they can charge $21 on $100 loan so if you get a new $100 loan every two weeks you end up paying $546 a year, which on $100 loan is a 546% interest rate on an annual basis.
That’s the problem with payday loans but what’s the solution? Should the government have a greater role in regulating payday loans and short-term loans? Is that the solution? Would it work? If so, what should the government actually do? We already have laws regulating payday loans in Ontario, and most other provinces, and that hasn’t solved the problem so is the government the answer? That’s the question I want to ask my guest, who isn’t a licensed insolvency trustee or credit counsellor and he doesn’t work for a bank or payday lender.
So, let’s get started. Who are you? Where do you work and what do you do?
Jonathan Bishop: Good morning Doug. Thank you for having me. My name is Jonathan Bishop, I’m a Research and Parliamentary Analyst at Public Interest Advocacy Centre here in Ottawa. I do policy research on a variety of subjects, and including payday loans and financial service issues.
Doug Hoyes: Can you tell me what the Public Interest Advocacy Centre is? So, you – do you go by the initials, how do you refer to it?
Jonathan Bishop: Well, around the office we go by PIAC. Anybody that deals with us on a regular basis, that’s kind of what we’re known by. But the Public Interest Advocacy Centre is a non-profit organization and charity that provides legal and research services on behalf of consumer interests and particularly vulnerable interests concerning the provision of public services.
Doug Hoyes: So, you’re looking at people who – you’re doing research into issues that help real people. You’re not trying to figure out a way to make banks more profitable, you’re dealing with the actual real person is what you’re doing.
Jonathan Bishop: Yes.
Doug Hoyes: So, what kind of projects have you worked on in the past?
Jonathan Bishop: The past two or three years myself, I’ve worked on issues relating to wireless data roaming, the commissioner for complaints of telecommunication services, payday loans obviously, loyalty programs, online group buying, the amount of money you pay to receive a paper bill for communications or a financial institution bill on a month basis, things of that nature.
Doug Hoyes: So, a wide variety of things, so let’s talk then about payday loans. So, you’ve done some research into this area why don’t you start me off with a short history lesson then. So, what is the state of payday loan legislation, you know, in Canada and in Ontario whatever, wherever you want to start.
Jonathan Bishop: Sure, the Public Interest Advocacy Centre has been investigating payday loans for well over a decade. Prior to 2007 the maximum for all rates for all loans in Canada, according to the criminal code was 60%. However at that time an exemption to the criminal interest rate was passed to allow payday loans, which were operating in Ontario at that time, in provinces that opted to permit it. So, Ontario had them but they didn’t have any regulations around it. So, the amendment to the criminal code in 2007 kind of permitted what was already there. To my knowledge on Newfoundland and New Brunswick are the provinces remaining that don’t have active payday loan legislation.
Quebec for example has gone a different route than many of the provinces by limiting the criminal rate of interest to 35%. This has in effect curtailed the operation of payday lenders there.
Doug Hoyes: Just a question on that then, so in Quebec the maximum interest rate that can be charged I guess by any lender is 35% is that correct?
Jonathan Bishop: That’s my understanding, yes.
Doug Hoyes: And that’s curtailed payday lending just because it’s not profitable to do it.
Jonathan Bishop: That’s my understanding. I know there are still storefronts there but they’re not offering products on a similar basis as they do in other provinces.
Doug Hoyes: Got you. Whereas, where I said in the introduction at a place like Ontario here, the maximum interest rate, which is governed by federal law, as you said, which are governed by the usury laws I guess, is 60% but the payday loans get around that. Is it because of this specific provision that you talked about going back to 2007?
Jonathan Bishop: That’s right.
Doug Hoyes: That’s what it is, okay. So, they’re charging on an annual basis a higher rate of interest but there’s a special rule that allows them to do it is essentially what happened, okay.
Jonathan Bishop: When the amendment was introduced in 2007, the provinces were told that you could regulate the interest on, you know, the maximum rate of borrowing a payday loan if legislative measures that protect recipients of payday loans and that provide for limits on the total cost of borrowing under the agreements were put in place. So, what’s happened is that’s occurred in many of the provinces. New Brunswick’s established payday regulation, but they haven’t put it in place yet. They haven’t finalized it.
Doug Hoyes: Got you. So, these laws have been in place in Ontario for a number of years. And yet I understand that, and I think you were probably the one that made me aware of this, that Ontario is now considering revisions to the existing rules. So, this is Bill 156, am I correct?
Jonathan Bishop: Yes, you are correct.
Doug Hoyes: So, tell me about Bill 156. What’s the point of Bill 156?
Jonathan Bishop: Sure. Bill 156 was introduced in Queen’s Park in December. It began its political life as basically a sentence in the mandate letter in 2014 from the Premier to the Minister of Government and Consumer Services, committing the ministry to quote explore opportunities to increase protection for vulnerable and vetted consumers such as modernizing payday loan legislation, unquote.
So, in to order effectively check that box, the ministry began a consultation process last summer asking for comments. They issued a paper that had about 22 questions in it. The Public Interest Advocacy Centre answered that call with a 50 page document policy analysis and we also attached a recent research report on debt collection practices because that was part of the questions that were asked by the ministry. And so Bill 156 is the end result of that consultation process.
Doug Hoyes: We’re now in the spring, it’s April of 2016, the bill as I believe has gone through first reading, presumably there’ll be lots of committee work, and so on and so forth. So, would you agree with me that’s it’s unlikely that we’re going to see any new legislation in 2016. Is this more likely that it’s 2017 if anything happens or could it happen quicker than that?
Jonathan Bishop: It could happen quicker than that if there’s a political will to make it happen. However, with Bill 156 a lot of where the rubber’s going to hit the road, so to speak, will be when regulations are established. And that won’t be until 2017 even if the political will is there to pass this bill by the end of 2016.
Doug Hoyes: Got you. And obviously they have the votes because it’s a majority government in Ontario right now. But it’s whether they want to do it. And you’re right, the devil is in the details, the legislation itself will contain a few lines, but then there are regulations which actually spell out how it works. And I think this is exactly what we saw with the legislation that I believe came into being in 2015, in Ontario with respect to debt settlement agencies for example. The legislation itself was reasonably short but then there are regulations that actually spell out how it works. So, it’s the same concept, I guess, that we’re going to have to wait to see the regulations. But, what is specifically included in Bill 156 now that would impact on payday lenders?
Jonathan Bishop: Well, specifically there are rules in here, in 156, to change restrictions applicable to replacement payday loans. So, for instance in the Bill there’s rules saying if you get to a third payday loan in a period of time, then that payday loan becomes essentially, they don’t say so, but essentially an installment loan that has to be paid over 62 days rather than a two week period or a, you know, that kind of thing. They’re going to attempt to lengthen out the repayment time specifically. There’s a couple of other nuances in here as well.
Doug Hoyes: But is that the big change then?
Jonathan Bishop: That is one of the big changes, yes.
Doug Hoyes: So, right now I go get a payday loan, it’s due on payday, which is two weeks from now. So, two weeks from now I’ve got to come up with the money to pay it plus I’ve got to pay the charge that was added on top of it. So, my $100 loan I’ve got to pay back $121 but I don’t have the money so I go to – I can’t go to the same payday loan place and borrow again. I can’t get a loan from company A to pay off the loan from Company A under the existing rules. But I can go to Company B, borrow from Company B, come back to Company A and pay it off. Under the new regulations if I get a certain number of loans from the same company in a predefined period, the third loan can’t be just another two week loan, it’s got to have a longer time period, am I understanding the gist of it correctly?
Jonathan Bishop: That’s right. If you get into a third payday loan agreement within 62 days, then that third agreement has to be repaid in 62 days.
Doug Hoyes: Got you, Okay. So, what they are trying to do is break this cycle. So, let’s get into some solutions here then. So, we understand now conceptually what the rules are today in Ontario and in many provinces there is a cap on how much a payday lender can charge. And under the new rules there will be, perhaps, the requirement to extend the payment terms to give someone a little bit of extra time to pay them off.
I want to hear your thoughts on what possible solutions there are then. So, should the government just adopt Bill C-156 and does that correct all our problems? Well, I’m sure the answer to that question is no. So, why don’t you walk me through some specifics solutions that – I don’t want to say that you are advocating them but things that you think are at least worthy of consideration? Where would you start?
Jonathan Bishop: Well, there are a number of potential solutions to investigate from the mundane. So, when part of the problem with payday loans or the challenge is access. Consumers have lost access in many instances to traditional financial institutions just because they’ve moved out their neighbourhoods.
So, in instances such as that, it may be beneficial to consumers if the Ministry of Consumer Services say, a trusted voice were to – it would provide them with locations and business hours of alternatives that are within walking distance or within the neighbourhood, rather than waiting then having a payday loan institution come into their neighbourhood that replaces the bank, so to speak, geographically. And then, you know, then operates
Doug Hoyes: So, what you’re saying is that banks now, there are fewer branches than there used to be. If we looked at the number of branches 20 years ago and the number of branches today, it’s a lower number. And a lot of that is because we now all do online banking and things like that. And what you’re saying is a lot of the branches that have closed, have closed in perhaps, less affluent neighbourhoods and so those people perhaps don’t have access to cars to go into the next neighbourhood to use the bank. And as a result, perhaps, they’re being more drawn to payday lenders who are on every corner, sort of like a coffee shop. So, you’re saying one possible solution then would be to provide different physical location access then.
Jonathan Bishop: Yes, that’s correct. I mean there is a little more to it than that, but yes. Researchers in this field call this whole process redlining, where banks essentially redline a neighbourhood and move out because they want to focus on products that provide more return on investment. So, rather than say being in one central area of Toronto, they’ll move out to a place like Whitby where they can concentrate on financial products to get a little better return, leaving that inner city neighbourhood without that financial institution.
Another part of this that we found is the evolution of big box stores kind of crowding out local retailers, where those local retailers used to do things like say cash a paycheque for a fee. Now with the removal of that local retailer, some citizens are left with having to go to another organization that might charge an exorbitant fee in order to do something simple like cash a cheque.
Doug Hoyes: So, the local grocery store, hardware store used to fulfill some of the functions of a bank, like cheque cashing for example. Just, I want to make sure I understood then on the first point about the redlining and the banks moving out, so you are suggesting, what as the alternative, that different organizations then come into pick up the slack, so to speak?
Jonathan Bishop: Well, there are a couple of – that’s happened in other jurisdictions. Say for instance credit unions have come into the fray with products and offerings that are somewhat similar to a payday lending product. I can think of the good folks at Vancity have offered I think it’s fast and free loan or something, fast and friendly loan or something of that nature.
In Montreal, going back to the Quebec example you alluded to earlier, there’s an advocacy group that works in conjunction with financial institutions to offer a longer-term loan product at a very low interest rate. I believe in Thunder Bay there’s also a movement to offer a product that’s in competition with a payday lending product. There are small – they’re examples, but they’re kind of few and far between and sprinkled throughout the country in terms of products that could be comparable to a payday lending product.
Doug Hoyes: Got you, so it may be credit unions, it may be other types of organizations that pick up the slack. So, okay, so back to the solutions then, so I’ll let you continue. We talked about access, we’ve talked about how big box stores have crowded out some of the small retailers that were providing some of the functions of banks. What are some of the other things on your list of possible solutions?
Jonathan Bishop: When there’s a little bit more of creative solutions, one of which PIAC had put into its submission to the Ontario government and it’s that the government could consider supporting legitimate micro credited initiatives to replace the high cost of these alternative financial service loans. With micro credit options – so, you’d have to – we suggest the government partner up with say local financial institutions in order to make these offerings. So, it’s not just relying on those folks like say a credit union to kind of enter into this field but provide some incentive to enter into this field in order to help consumers. So, that’s one of those more original options.
Doug Hoyes: So, when you say micro credit, what do you mean by that? You’re talking about loans that are under a certain amount, is that really what micro credit would be defined as, so kind of a loan of under $1,000 or $2,000 or whatever?
Jonathan Bishop: Right, I mean we’ve heard from industry spokespeople in the past that say, look the payday loan product is used to, say – it’s cheaper than say, having my electricity disconnected and then reconnected. Or, you know, going without groceries or going without something for a short period of time and paying a fee, so, for say, like a disconnection.
So, holding these industry folks to their word, put out a competitive product that addresses that need for that immediate cash fix but doesn’t necessarily mean you have to get stuck on debt treadmill.
Doug Hoyes: So, let me play devil’s advocate here. We’ve got the payday loan companies and these other short-term lenders, a lot of them are now internet based, but they’re all out there. Presumably they’re all making a profit. So, I just want to play devil’s advocate here. So, we’ve got these payday loan companies, short-term loan companies that are obviously I guess making money or they wouldn’t be there. The banks don’t want to go into that market because presumably they don’t think they can make money. And so, what you’re saying is well maybe we need to give a little bit of help to either the traditional financial institutions who already make a billion dollars three months, each one of them, or we need to help, perhaps, credit unions or small local initiatives to do this. Well, if the payday loan companies can make money at this why would there be any need to support other people to also do this?
Jonathan Bishop: Well, I would counter that by saying if the payday loan industry was a purely competitive industry that wasn’t just a creation of a regulation or regulator, then these payday loan providers would compete on the basis of price and they don’t compete on the basis of price. They all hover around the maximum of borrowing allowed by regulation. They don’t seem to offer that kind of – I mean other markets don’t lower the price to entice competition, they all just seem to hover above the top.
So, if it’s a structural issue maybe there needs to be some injection of competition through something of a nature like helping out another institution provide a competitive product. Not that they need to subsidize a large corporation like a bank or credit union, but for the benefit of the fairness to the consumer.
Doug Hoyes: So, if I was to say to you okay Jonathan I have a hundred million dollars in my pocket, and you and I are going to start a financial institution and we are going to focus on micro credit, we’re only going to give loans of $1,000 or less, and we are only to charge a maximum of 10% interest. So, we are going to put the payday loan guys out of business by offering the exact same product at a much lower cost. Would that work or would you and I lose money because we weren’t charging enough?
Jonathan Bishop: I’m not sure if we’d make any money Doug. However, I know that that particular model does exist and it is operating in Montreal. The good folks at Option Consommateurs offer a product in conjunction with a financial institution that charges in interest rate somewhere in the neighbourhood of 5% for a loan that is somewhere in the realm of, I think the limit is $1,000 or $1,500. And it’s payable over a couple of years. It’s not in an effort for it to make Option Consommateurs or the group that’s doing this rich or anything of that nature, it’s just a matter of offering a service to assist consumers. That’s my understanding.
Doug Hoyes: Got you, so it may require then an organization that is doing it not for profit, maybe on break even basis to be able to shoulder the costs of making these types of loans without making or needing to make a huge amount of profit on.
So, okay I’d like to hear some more potential solutions. We’re going to take a quick break though and come back and talk more and maybe you can give me some of your far out ideas on how we can address the payday loan situation.
So, we’ll take a quick break and I’ll be back with Jonathan Bishop. You’re listening to Debt Free in 30.
It’s time for the Let’s Get Started segment here on Debt Free in 30. My guest is Jonathan Bishop from The Public Interest Advocacy Centre. So, Jonathan what do you hope is accomplished with Bill 156 in Ontario.
Jonathan Bishop: What I hope happens as a result of Bill 156 in Ontario, for instance, is that the government introduces some kind of limit to the number of payday loans that borrows can take out in any given year. In addition, one thing at the time to repay those loans would be nice. Reducing the allowable cost of borrowing would be terrific. If that were done so through say a public hearing where organizations in the industry can put forward cases to regulate the maximum cost of borrowing at a certain rate instead of just having it dictated by cabinet, that would be terrific.
And also, the consideration of a borrower’s ability to repay a payday loan product when they applied for a payday loan product would be some very good first steps, PIAC thinks, in terms of addressing some of the outstanding concerns in regard to the offering of payday loans. Because we think there’s a balance there but we don’t think necessarily that balance is found in Ontario at the moment and I don’t think the Ministry of Government Consumer Services thinks so either ’cause otherwise we wouldn’t be having a conversation about a Bill 156.
Doug Hoyes: Right, they wouldn’t be introducing a bill if everything was perfect. So, limiting the number of payday loans you could borrow, would there need to be central database of all payday loan borrowers? Is that how it would work?
Jonathan Bishop: That’s our understanding. That would be our proposal in terms of how that would work practically. Yes, there would be some kind of repository information that a payday lender would have to consult before agreeing to provide a payday loan product to a borrower and hopefully that repository would be administered by The Government of Consumer Services.
Doug Hoyes: And I guess there’d have to be some discussion about what goes into that repository, presumably every loan that is covered by that usury law in the criminal code exemption we talked about would be included.
So, you also talked about lengthening the time a borrower has to repay their payday loan. So, right now I assume the average payday loan is paid in full on your next payday and that’s a hardship because if I needed to borrow $100 two weeks ago, what are the chances that I have $600 to pay off the loan today and I have enough money to survive until my next paycheque. So, by lengthening the time to repay I assume it would make it easier on borrowers. How long do you need to give borrowers to repay? What’s the magic number?
Jonathan Bishop: I don’t know what the magic number is. However the longer you can provide a customer in order to make that repayment the better off they’re going to be in the long run financially rather than get trapped on the, as I refer to it, become a debt hamster or be put on the debt treadmill. Even if it say went from 14 days to 28 days, at least it would give a little bit more time for that repayment process to kind of kick in.
One of the other outstanding issues with a payday loan product is that onetime balloon payment in terms of the borrower has to pay it back all at once. There’s no kind of steps to doing it or planning. It’s just here’s my paycheque. Oh here you go, you’re the first in line ’cause you have my paycheque, so I don’t have any choice, so here you go, you’re all paid at once, rather than if you had say two paycheques or three paycheques to pay it off, you might be able to do it kind of in installments.
Doug Hoyes: Right, because I pretty much have to take out another payday loan to pay off the first one ’cause I have to pay the whole thing off whereas if I was allowed to pay it back in four equal payments, so I’ve got $1,000 loan it’s only $250 of my next four paycheques, that would make it a little simpler, perhaps.
So, final point Jonathan, you had said considering the borrower’s ability to repay before the payday loan company would be able to grant the loan, explain to me what you mean by that and how that would work.
Jonathan Bishop: Okay. In Manitoba, for instance, part of the consideration for a borrower to go in for a payday loan product is that the payday lender has to take into consideration what percentage of net income this encompasses. I think in Manitoba they introduced a limit of 30% of a borrower’s net income in 2010 and then it was reviewed in 2013, so, also in B.C and Saskatchewan, also, borrowing limits of 50% of the net amount of an individual’s next paycheque as a barrier, kind of as a limit, a ceiling for this.
There’s also another theory out there considering the borrower’s ability to repay in order that’s based on a selected basket of expenses. So, something like say the consumer price index that sounds to us like something that’s found in the consumer financial protection bureau’s notes in regard to payday loan regulation in the U.S that says quote, make a reasonable determination that’s sufficient income remains to cover loan costs and estimated living expenses.
Because like I say in the U.S. the CFBP has been looking at payday loan for two or three years now. I would imagine the good folks in The Ministry of Government Consumer Services are looking to that organization for a little bit of guidance as they go through this process as Bill 156.
PIAC takes an extreme view on this particular point. Through our policy research and through a variety of sources throughout North America in terms of payday loan regulation, we’ve determined and we’ve said this to the government of Ontario, that the average limit of borrowing should be about 5% of monthly income and no higher. Otherwise you get into situations where consumers are putting off saying paying for food or other bills or other needed expenses in order to pay off these financial products.
Doug Hoyes: Great. Thanks Jonathan. I’ll be right back to wrap it up. This is Debt Free in 30.
Doug Hoyes: Welcome back, it’s time for the 30 second recap of what we discussed today. My guest today was Jonathan Bishop, the research and parliament affairs analyst for the Public Interest Advocacy Centre. And he discussed with us the results of the research into the payday loan problem in Canada and he shared with us many possible solutions to help consumers get out of the cycle of payday loan debt. That’s the 30 second recap of what we discussed today.
As frequent listeners to this show know, payday loans are a problem because they charge very high interest rates and they require the borrower to pay the loan in full on their next payday. That’s often not possible so a second payday loan is often taken out to pay off the first one and the cycle continues.
Jonathan made some good suggestions to help alleviate this problem. He suggested if a payday loan lender allowed a borrower to pay off the loan over a few pay periods that may alleviate some of the problem. The math makes sense. Paying $800 on my next payday may leave me with no cash for rent or other living expenses. If I could pay $200 on each of my next four paydays that might leave me with enough cash to cover my other debts, and therefore, not make it necessary for me to keep borrowing to stay afloat.
The proposed Bill 156 in Ontario does include a provision for longer repayment terms so that may help. My worry with all of these tweaks is that they may help a little bit, but they aren’t addressing the underlying problem. A lot of payday loan borrowers have a lot of other debt. They’re maxed out on their credit cards and they can’t borrow from a bank so they turn to payday loans. If we could address the underlying problems, one of which is excessive of debt, perhaps the need for payday loans would be greatly diminished.
I’ve got a lot more to say on this topic but we’re out of time on today’s show so stay tuned for future episodes where we’ll discuss payday loan solutions in more detail.
A consumer proposal is just one option for dealing with debt. As a debt relief approach it has it’s own advantages and disadvantages over other programs that help you get out of debt. For example:
it can be better than bankruptcy if you have enough income to trigger surplus income payments or have assets that you would like to keep like RESPs or some equity in your home;
it can be better than a debt management plan because you can offer to repay less than you owe, often up to 85% less, which results in a significantly lower monthly payment;
it is better than an informal debt settlement program because it provides legal protection from creditor actions (like wage garnishments and collection calls) right from the beginning.
Having said all that, a consumer proposal is not the right option for everyone. The best way to tell if a consumer proposal is a good idea for you is to get a debt assessment with a licensed insolvency trustee. It is important to know that this initial assessment is free and you are not committed to anything by talking with a trustee about your situation.
Conducting A Consumer Proposal Assessment
Assessing Your Financial Situation
Initially you will meet with a consumer proposal administrator to evaluate your situation and determine if a consumer proposal is the right option for you. Your trustee will look at your assets, your income and your family situation to see how a consumer proposal would compare to other options for you. The purpose of this first step is to see if you have the ability to make a proposal to your creditors and to see if the benefits of a consumer proposal, like the ability to keep certain assets or avoid surplus income, apply in your particular situation.
It is very important that both you and your trustee are confident that you can afford your proposal terms.
You want to be sure you can complete your proposal successfully so it eliminates your debts.
Your trustee is required by law to submit a report to the Office of the Superintendent of Bankruptcy stating that they think the proposal is fair to all parties and that you, as the debtor, will be able to meet the agreed upon terms.
Determining The Proposal Payment Amount
When determining the cost of a consumer proposal and how much you will need to pay back to your creditors, your trustee will look at who you owe money to and how much, what type of assets you have, as well as your budget. These factors will be used to determine an affordable monthly payment for you that will also be agreeable to your creditors.
Your trustee will begin by calculating what a bankruptcy would cost. This is because your creditors would expect to receive at least that amount in total. Your trustee will then look at who you owe money to. Certain creditors have a minimum expected recovery and that must be taken into consideration.
Most proposals can be made for between 30 and 35 cents on the dollar. Sometimes less is possible, and occasionally a higher payout is required if you have very high income or assets, but that is the norm.
Deciding on the Number of Payments
In a consumer proposal, you pay off your proposal by making payments for up to 5 years or 60 months. To achieve the lowest monthly payments, you would spread your total proposal amount over the full 60 months.
Proposals are also interest free so the calculation for your monthly payments would simply be the total amount you are offering your creditor divided by the number of months you will be making payments.
However, if you can afford more each month, you can shorten your proposal term or offer a lump sum payment.
Debt Reduction At a Lower Cost
The reason to file a consumer proposal is to eliminate debts you cannot repay on your own. A proposal allows you to repay a portion of what you owe. In most cases people find that their proposal payments are much lower than even the minimum payments they are making today.
If you decide to proceed with a consumer proposal, documents will be prepared and signed by you. These documents include the proposal terms determined during the assessment stage, along with information about your creditors, your debts and your assets.
If you cannot afford to make a proposal, then filing bankruptcy is an option your trustee will explain as a last resort.
It can be hard to know who to turn to when you are dealing with Canada Revenue Agency and you need tax debt help. Some situations are relatively simple and can be resolved on your own, while other situations may require more expertise. Choosing the wrong professional for your situation, may end up costing more than it should.
On today’s show, I speak with Janette Martin, a Certified Credit Counsellor, and Ian Martin (no relation), a Licensed Insolvency Trustee with extensive experience with the CRA, about how to get the right tax debt help.
Janette shared two stories about clients with fairly simple tax situations, who sought the advice and services of a tax lawyer to resolve their issues. While the tax lawyer was able to help one client with a clerical error, the client paid thousands of dollars for what they could have resolved on their own with a T1 Adjustment Request or through a tax accountant for a nominal fee, or could have avoided by getting help from tax preparer in the first place.
Another client forgot to record his foreign pension in his tax return. Eventually, he was reassessed and owed CRA $12,000 in income tax and lost his eligibility for the guaranteed income supplement that he claimed for years. With a fixed income, the client couldn’t afford to enter into an agreement to repay CRA, and they began garnisheeing his pension by $385 a month. In the hopes of getting out of the debt, the client took a cash advance of $5,000 on his credit card to pay for a tax lawyer. The tax lawyer was not able to get him out of a tax debt he legitimately owed. As a result, the client now owed both the CRA and had credit card debt. He eventually contacted us to resolve his tax debt and credit card debt by way of a consumer proposal or a bankruptcy. In this case, talking directly to a licensed insolvency trustee about tax debts that he did owe, but could not pay, would have saved him money in terms of lawyers fees and unnecessary credit card debt.
What do you do in these situations? How do you get tax debt help?
Unfiled tax returns – The solution to this problem is simple: file your taxes. Nothing upsets the Canada Revenue Agency more than unfiled tax returns because they have no idea how much you owe them. You can file the tax returns yourself, or with a competent tax preparer, bookkeeper, or accountant. If you work in a specific industry where certain tax exemptions may apply, be sure to ask friends, family, and coworkers who they would recommend. It is extremely important to file your tax return as the CRA will discover the omission, will estimate your taxes owing and has the authority to seize your bank account or garnish your wages.
CRA accuses you of a crime – CRA can say you have committed fraud if you are deliberately under reporting income or making up a bunch of the deductions. Fraud is a serious crime, and you will need to speak with a tax lawyer. If convicted, you could have to pay severe fines, restitution orders, or serve jail time. A lawyer has solicitor-client privilege, meaning you can tell your lawyer anything and it will remain confidential. Also, a lawyer can represent you in court and work with the CRA and its lawyers to deal with the legal issues.
CRA has made a mistake – It happens, and it can be resolved without the assistance of a lawyer. Visit an accountant to review the assessment to see if CRA has correctly assessed your tax situation. If the CRA has made a mistake, an accountant can help you deal with Canada Revenue Agency to correct the error. You or your accountant can fill out a T1 Adjustment slip. An accountant can be helpful if you are not sure what line the expense was supposed to be on in the original tax return.
You owe money to CRA – Making a mistake is not a crime. Forgetting one of your T4 slips or accidentally claiming the wrong expense on the wrong line are not criminal acts. Generally, fix the error and move on. There may be a penalty for the error, you may owe some tax, and some interest. There are three ways to deal with tax debt if you owe the CRA money:
You can make payment arrangements – CRA will work with you to pay them back within 12 months, plus interest.
File a bankruptcy – If you owe more to the CRA than you can hope to repay, or you are concerned that the CRA will seize your bank account or garnish your wages, you can file either bankruptcy or a consumer proposal. Both are governed by federal law, and as the income tax act is federal legislation, the Canada Revenue Agency must follow federal law, so income taxes can be included in a consumer proposal or personal bankruptcy. If you go bankrupt, all taxes owing up to the date of the bankruptcy are included.
File a consumer proposal – In a consumer proposal, all taxes are included up to the end of the previous year. There are special rules concerning taxes owed in the current year, so be sure to consult with your Hoyes Michalos professional. Also, in a consumer proposal, each creditor has the opportunity to vote to accept your proposal. If CRA is the majority creditor, they are the controlling vote. They can decide if your consumer proposal is accepted or not.
How do you get the CRA to accept your consumer proposal?
Whether you have filed a prior insolvency – if you have, were taxes the issue?
If you have tried making payments
If they will be receiving more in money in the proposal than they would get if you were to file for bankruptcy
You’re ability to make the payments in the consumer proposal
If you can convince the CRA that you are honest but unfortunate, you’ve got a much greater chance of success that they will agree to your proposal.
It’s important to know that only a licensed insolvency trustee can file a consumer proposal or a bankruptcy, which are the only ways to reduce tax debt for less than the amount owing.
Things you can do to determine if you need a lawyer, an accountant, or a tax preparer?
Do your research
Ask a lot of questions
Make sure that the advice you’re getting is for your specific situation
If you are unsure about something, get a second opinion
Be sure that the advisor you are speaking to has your best interests at heart
If you owe money to the CRA and would like to look at your options to deal with tax debts, contact a Licensed Insolvency Trustee for a free consultation.
FULL TRANSCRIPT show #84 with Who To Call For Tax Debt Help
It’s the month of April and in Canada that means it’s tax time, our favourite time of the year. Today on Debt Free in 30 we’re going to talk about tax problems but not tax problems in the conventional sense. Lots of people owe money on their taxes and we’ve talked before on this show how to deal with tax debt. If you can afford it, your best option is to work out a payment plan directly with Canada Revenue Agency. As a general rule, they’ll almost always accept a plan if you can pay off the tax debt over a period of up to one year. So, if you owe over $12,000 and you can afford to pay them $1,000 a month, they’ll probably accept $1,000 a month deal.
If you owe more tax than you can hope to repay, a consumer proposal or a bankruptcy may be your best option because taxes can be eliminated in a bankruptcy or a consumer proposal. So, if you have more tax debt than you can pay, talk to a licensed insolvency trustee to find out if a consumer proposal or bankruptcy is the best solution for you.
But what if your tax problem is more basic than that, what if you don’t know how much you owe? What if you haven’t filed your taxes? What if CRA is pursuing you? What do you do? Who do you turn to? Should you talk to a tax preparer, a bookkeeper, an accountant or do you need a lawyer or a licensed insolvency trustee?
At this time of year there are lots of commercials on the radio for tax accountants and tax lawyers, well what’s the difference? How do you know who to turn to? How do you know if you’re getting bad tax advice? To answer these questions I’m joined today by Janette Martin who helps people get out of debt in the North York and Scarborough offices of Hoyes and Michalos. Janette, thanks for being here today, how are you doing?
Janette Martin: I’m good Doug, how are you doing?
Doug Hoyes: I’m good thanks. So, you and I were talking a few weeks ago and you told me the story of Tom and Janice, now that’s not their real names and obviously I don’t want you to reveal any person information but I want you to give me the gist of their situation. So, they had debt issues so they came into talk to you, so, tell me about your meeting with Tom and Janice.
Janette Martin: Oh sure. So, Tom and Janice are currently in a proposal with us. But prior to meeting with us, Janice, although she’s still in – she’s in her late 70s, she still works part-time and is considered self employed. She had years where she did not pay her income tax or HST and that accumulated and accumulated. So, prior to meeting with us they went to a tax lawyer hoping to reduce that tax or not have to pay it. That did not work out, so, when I met with them, they had other debts, we put together a proposal and that dealt with that debt and that’s fine.
So, after their proposal’s in place they’re still preparing their taxes by hand, her husband is. And on one of his most recent tax returns they claimed a business expense but they put it on the wrong line of the tax return but they wrote a note on the tax return explaining why it was there. The expense was disallowed by Revenue Canada pending the supporting documents. They panicked, they again went back to a tax lawyer and the tax lawyer charged them some money and wrote to Revenue Canada explaining that it was simply an error, the expense was claimed on the wrong line. It was eventually worked out. I’ve suggested to them that maybe they consider going to tax preparist to avoid these type of issues in the future. I’m not sure if they will but I’m not sure that going to a tax lawyer really was great.
Doug Hoyes: Yeah, it’s not what they needed to do. What they had was in effect a clerical error. They put the expense on the wrong line. And so, the solution is to send in the T1 adjustment request to Revenue Canada saying oh, sorry I put it on this line, it should have been on that line, you know, here’s why, here’s the receipts, here’s the support, whatever. That’s something that you can actually do yourself, but certainly having an accountant or a bookkeeper or tax preparer do that as well is a lot cheaper than having a lawyer write a letter. ‘Cause I’m assuming the lawyer didn’t do that for $50. I assume writing that letter cost $1,000, $2,000, $3,000, something like that or do you know?
Janette Martin: I agree. I believe it was thousands of dollars.
Doug Hoyes: Thousands of dollars, so okay so in their case they made a mistake and ended up going to a lawyer to fix it when there were certainly cheaper solutions. And this is kind of one of the things that bugs me that the lawyer should have said to them look, this is a simple matter, you can either do it yourself, let me send you to a bookkeeper to fill out the form or let me just fill out the form for you. I’ll charge you a few bucks ’cause obviously nobody works for free but charging the full lawyer cost was probably a little bit excessive.
Janette Martin: Taking advantage, yes.
Doug Hoyes: Yeah, they were taking advantage. And obviously they ended up paying a bunch of money to a lawyer for something they could have got a lot cheaper. There was another person you were telling about and again we’re going to change names here because I don’t want to be using anybody’s names on the radio here. And maybe we won’t reveal every single fact we know about this person. But let’s call this guy Joe. Tell me about Joe’s story.
Janette Martin: Oh sure. So, recently I took a call from an elderly gentleman who was in his 80s. So, Joe receives OAS and CPP and as well he also has a pension coming from another country. He did use a tax preparer, the same tax preparer for several years and that tax preparer did not include his out of country pension in his tax return. He did not think it had to be claimed.
CRA eventually caught up with this and reassessed Joe for several years. When they reassessed him, not only did he have to pay income tax, he was also, he also became ineligible for the guaranteed income supplement that he claimed for several years.
So, now he has a tax debt with Revenue Canada of about $12,000 and on a fixed income he cannot possibly pay that back. He could not enter into a payment arrangement because he really cannot afford it. So, OAS or CPP they’re now garnishing his pension by I think $385 a month, which is really going to leave him cash strapped.
When I was speaking to him about his debt he also mentioned he does have some credit card debts and part of that credit card debt that he is now incurred is because he also hired or went to speak to a tax lawyer about this problem to see if they could help him. So, they charged him I believe about $5,000 to help him.
Doug Hoyes: $5,000?
Janette Martin: Yes.
Doug Hoyes: Wow. And this guy doesn’t have any money, where did he get the $5,000 from?
Janette Martin: Credit card.
Doug Hoyes: So, he took a cash advance on his credit card to pay $5,000 to a lawyer to try to get him out of this debt, which they couldn’t. And I guess this kind of raises a pretty important point here that lawyers are great when there’s some kind of criminal activity and you need defending or it’s a very complicated legal issue.
In this particular case, in Joe’s case, this was a very simple issue. He forgot to put some of his income on his tax return. There’s no grey area of law here. And I understand why the mistake was made; I mean obviously he gets the T slip from CPP and OAS every year so he remembers to put it on. His pension from another country doesn’t send him a Canadian T slip and it’s probably not massive dollars, so he just okay, I didn’t realize I was supposed to put it on. If you don’t tell your tax preparer about all your sources of income, they’re not going to know to put them on either. So, it was a pretty simple matter. He didn’t report his income so he owes the taxes on it.
That’s not something a lawyer can get you out of. So, in this particular case the solution for Joe was either a bankruptcy or a proposal depending on what his income was to deal with the debt.
Janette Martin: That’s right, that’s right. He’s not sure which way he’s going to handle it. I mean he is in his 80s so he has to take that into consideration.
Doug Hoyes: And often for somebody in their 80s we say well, you know, they’re not going to be able to garnishee your wages ’cause you don’t have any but in this case CRA is garnisheeing his CPP. So, he is actually losing money every month because of this debt. So, if he was to go bankrupt or file a proposal, that tax debt would be eliminated, the garnishment on his CPP would stop right away.
So, I guess he’s really got to decide is the cost of the bankruptcy or the proposal worth it to save that garnishment and it probably will be in his case. So, have you run into other people who have had their CPP garnisheed in the past?
Janette Martin: Occasionally I have, yes. Yes, actually I met with somebody yesterday who’s losing all of their CPP to the government but he has not filed his taxes in 10 years.
Doug Hoyes: Wow and in my experience that’s about the only time CRA is going to garnishee a pension is if there is something pretty egregious wrong. If you haven’t filed your taxes in 10 years, well they don’t know how much you owe, so in order to get your attention it’s not uncommon for them to take some or all of your CPP. A normal creditor can’t do that. If you owe money to VISA or MasterCard, they can’t take your CPP but CRA can.
So, I guess them message here Janette is number one, file your taxes, ’cause you’re going to get into trouble if you can’t and number two, if you have a tax issue, well you can consult a lawyer if you want but remember lawyers deal with specific things. They aren’t able to make a proposal to eliminate the debt, that’s not something lawyers do.
Janette Martin: That’s right, that’s not a negotiable amount, the tax that you owe is the tax that you owe. Also, CRA does usually send out some warning signs, they sent out letters, they don’t usually just garnishee your pay out of the blue.
Doug Hoyes: Yeah and in the case you just cited where the person hadn’t filed their taxes for 10 years, well that certainly wasn’t out of the blue that was something that had accumulated over an extended period of time.
Janette Martin: That’s right.
Doug Hoyes: Excellent, well I appreciate those real life stories, thanks for being here Janette.
Janette Martin: You’re welcome.
Doug Hoyes: Thanks Janette, we’re going to take a quick break and we’ll be right back right here on Debt Free in 30.
Welcome back, today on Debt Free in 30, we’re talking about how do to identify whether or not you’re getting bad tax advice. On the first segment, Janette Martin told us two examples of people she has helped relatively straightforward tax problems but they went overboard and hired a tax lawyer to help them. They ended up paying thousands of dollars to the tax lawyer for nothing.
So, let’s answer today’s question. How do you know if you’re getting bad tax advice? How do you know if you need a tax lawyer, a tax accountant or someone else? Well, the first step is to indentify your problem, and as I see it there are four possible problems. First, you’ve got unfiled tax returns. Second, Canada Revenue Agency has audited or assessed you and they say you’ve committed a crime. Third, CRA has made a mistake, perhaps they disallowed a reduction and now they say you owe more money than you actually do. And fourth, you actually owe CRA money. You filed your tax returns and there are not mistakes, you simply owe money for taxes.
So, let’s go through each of those four problem areas and figure out whether you need a tax lawyer, or tax accountant or someone else to help you solve the problem. So, problem number one, unfiled tax returns, if you haven’t filed your taxes for last year or a few years, that’s a problem. As I said in the first segment with Janette, in my experience the one thing that will upset CRA more than anything else is unfiled taxes. They get upset if you owe them money but they get even more upset if you haven’t filed your taxes. Why? Because they don’t know how much you owe them. They don’t know how serious the problem is and they don’t like uncertainty.
If you have unfiled tax returns, the solution is simple, you need to file your tax returns. You need to either do them yourself or find a competent tax preparer, bookkeeper or accountant to get them filed. So, how do you find a good tax preparer? Well, ask around. Ask your friends and family, if you work in a specific industry, ask other people in your industry who they use. For example, if you’re a truck driver, ask other truck drivers who they use to prepare their taxes. Truck drivers can claim specific deductions for meals when they’re on the road. So, using a tax preparer who is familiar with the trucking industry, makes sense. If you don’t know anyone, call your local Hoyes Michalos office at 310-PLAN and we’ll tell you who we would recommend.
Now let me address one more issue here. A lot of people come to me and say wait a minute, I haven’t filed my taxes for two or three years and Revenue Canada is leaving me alone, if I file the taxes and it turns out I owe money, isn’t that going to be a serious problem? Well, yes, yes it is but it’s going to be an even more serious problem, if and when Canada Revenue Agency figures out wait a minute, you haven’t filed your taxes.
And they’re going to know if you have any income that gets reported directly to them. Employment income for example it goes on a T4 slip, that goes to CRA. If they get a T4 slip and there’s no tax return, eventually they’re going to say wait a minute, why isn’t there a tax return and that’s going to set off the alarm bells for them. It may not be income, you may be self employed and so there are no T4s going to CRA but if you have any money in a bank account that earns interest, an RSP contribution you make, anything else that gets reported to CRA if there isn’t a tax return filed that’s going to raise the alarm bells for them.
So, in my experience, it’s better to file your taxes so you don’t have them rushing to judgment and starting to seize bank accounts and garnishee wages. And then once the tax is filed, then you’ve got deal with the taxes that are owing.
We’re going to talk about that, but let’s go back to the four different problems you could have that may require expert help. So, the first one is not filing your taxes, we talked about that, get them filed. Problem number two, Canada Revenue Agency says you’ve committed a crime. So, if CRA says you’ve committed fraud, well that’s a criminal act so you probably want to talk to a lawyer. For example, if CRA says you deliberately under reported your income, they may say that’s fraud. If they say you made up a bunch of fake deductions, well that’s fraud. Fraud’s serious, it’s a criminal act. And if you are convicted you could be subject to severe fines, restitution orders or even jail time.
So, if you’ve been charged with a criminal offence, you should consult a lawyer. Now a lawyer can do two things, first there’s what’s called solicitor, client privilege, meaning that you can tell your lawyer anything and it’s confidential. So, if you know you’ve committed fraud or some other illegal act, you want to tell your lawyer the full story and you want it to be confidential. Second, of course a lawyer can defend you. They can negotiate with CRA or CRA’s lawyers, which are from The Department of Justice, and if your case gets to court, they can represent you in court. So, when you’re charged with a crime, yes I agree you should talk to a lawyer.
Now problem number three, what if CRA has made a mistake? So, what if you haven’t committed a crime? And let’s face it, it’s pretty rare for somebody to be committing deliberate tax evasion, that’s a very rare circumstance. It’s much more common that a simple mistake is made.
Making a mistake on a tax return is not a crime. Forgetting to put one of your T4s on your tax return is not a crime. Putting an expense on the wrong line of a tax form is not a mistake, that’s a clerical error. You fix the error and off you go. Yes, there’s probably going to be a penalty for the error, you owe some taxes, maybe some penalties and interest and that’s it. It’s not a criminal event, so you don’t need a lawyer. And in my experience, that’s the most common scenario, you made a mistake, you fix it and you move on. And in the examples we talked about with Janette in the first segment, that’s what happened, it was an error, it needed to be fixed.
Now where else could you need a lawyer? Well, tax lawyers are valuable for very complicated tax situations. If you have a corporation or a trust or an offshore company, then a tax lawyer may be necessary to make sure all of the tax forms are filed correctly. If you’re setting up a new corporation, a lawyer is very helpful. You could fill out the paperwork yourself but in most cases it’s prudent to spend the extra money and have a lawyer do the work.
So, if you haven’t committed a crime but you disagree with what CRA is saying, what do you do? In other words if you’ve received a notice of assessment from Canada Revenue Agency, and they’ve disallowed a reduction, what do you do? Do you need a lawyer? Generally the answer is no, you don’t need a lawyer. You need an accountant to do two things. First, review the notice of assessment to see if Revenue Canada is correct. Perhaps, you tried to deduct something that you can’t deduct. Maybe, you did forget to include one of your T4s or forget to report some other income. If that’s the case, CRA is correct so you don’t need to fight it, you owe the tax.
However, if there is an error an accountant can help you deal with CRA to correct the mistake. In most cases, it’s a simple procedure, you or your accountant fills out what is called a T1 adjustment request. And, you can go to the show notes for this episode at hoyes.com, that’s h-o-y-e-s-dot-com, I’ve got a link to the CRA website where you can get a copy of a T1 adjustment request. Or you can go to Canada Revenue’s website and do a search for T1 adjustment request. It’s a simple form, you can download it right from CRA’s website and you simply put the line number for your tax return that requires adjustment. You put the original number and then the adjusted number with an explanation of the difference. That’s it.
An accountant is helpful if you don’t know what line it was on the original tax return or if you don’t know how to describe the change. Otherwise, you may be able to do it yourself. In most cases, there’s no point in paying a lawyer to do it.
Problem number four: you owe money. Well, if you’re taxes are file and they were filed correctly and CRA assessed them correctly, you now owe money. So, what do you do? Well, we’re going to discuss that in the next segment, but before we finish talking about whether or not you need a lawyer or a tax accountant here are some things you can do.
First of all, do some research. When you’re talking to the professional, the tax lawyer, the tax accountant, ask a lot of questions. Make sure that the advice you’re getting is specific to your situation. I said earlier if you’re a self employed truck driver dealing with an accountant who understands that industry is great because they can give you very specific advice. You don’t want general advice if your situation is more specific. And if you’re at all unsure, get a second opinion and then compare the advice. And finally, be sure that the advisor is acting in your best interest. Don’t be talking to mutual fund’s salesman about how you should be handling the tax consequences of an investment, they’re there to sell you an investment. You want someone who is just working for you, giving you unbiased advice, which is generally the case with someone like a tax accountant. Those are four things you should look out for when you’re dealing with tax issues. And that hopefully will give you some practical advice on how to deal, how to recognize bad tax advice. We’re going to take a quick break and then I’ll come back to wrap it up with some final thoughts and some suggestions on what to do if you actually do owe taxes. We’ll be right back, you’re listening to Debt Free in 30.
It’s time for the Let’s Get Started segment here on Debt Free in 30. In the last segment, I discussed four problems you can have with The Canada Revenue Agency. And the last problem I discussed was owing money to CRA and in most cases, in my experience, that’s the most common problem.
So, what can you do if you owe money on your taxes? Well, you’ve got three choices. First, you can make an arrangement with CRA to pay them, which is what you should do if you have the money to pay them. In my experience, CRA will accept a deal if you can pay them back over a period of no longer than a year. So, if you own $24,000 and you can afford to pay $2,000 a month, plus interest, they’ll generally agree to that deal.
If you don’t have the money to make a deal with CRA and you owe more money than you can ever hope to repay and if you’re worried about them garnishing your wages or freezing your bank account, there are two more options: filing a consumer proposal or personal bankruptcy. A lot of people don’t realize but income taxes are included in a bankruptcy or consumer proposal. Why? Because bankruptcy and consumer proposals are governed by federal law and the income tax act is federal legislation, so CRA is required to follow federal law. It’s as simple as that. If you go bankrupt, all taxes owing up to the date of bankruptcy are included.
In a consumer proposal, all taxes are included up to the end of the previous year. There are some special rules so if you got taxes owing for the current year, talk to your Hoyes Michalos professional. In a consumer proposal, each creditor has the opportunity to vote, to accept or accept the proposal. If CRA is the majority creditor, meaning half of your debt is with CRA, they control the vote. They alone can decide whether or not your consumer proposal is accepted or rejected.
So, what are the chances that CRA would accept a proposal, back on show number 30, I asked Ian Martin that question. Ian, who’s no relation to Janette Martin who was on the first segment, is currently a licensed insolvency trustee and consumer proposal administrator with Hoyes Michalos. And before joining Hoyes Michalos, he spent many years working for CRA, so he understands the process from both sides of the desk.
So, my question to Ian was, have you ever had CRA accept a consumer department that you filed.
Ian Martin: Yes, I have. I mean it’s gone the other way as well but I don’t want people to think it’s an impossibility.
Doug Hoyes: So, it is possible, you know, you worked at CRA for many years. You’re now on the other side of the desk. You’ve had many creditor’s meetings with them. What are they looking for? What’s going to make them say yes to it?
Ian Martin: I guess, the way I see it, the CRA, Canada Revenue, they take it more on a case by case basis compared to some of the more big banks when they receive proposals. So, what they’re looking for if they’re sitting down with you and asking questions is a lot about your past, quite honestly, if you’re up to date with the returns, if you co-operated with them in the past, if there had been a prior insolvency, meaning a prior bankruptcy or proposal where taxes were one of the large issues. So, they want to see have you been a problem in the past, basically. But then also how are you going to be in the future?
Doug Hoyes: So, they’re actually looking at your character.
Ian Martin: That’s a good way of putting it.
Doug Hoyes: And I agree with you, a big bank is looking at it and going hey you know what, if a proposal gets us more money than a bankruptcy, we’re going to take it. Whereas CRA has a different view: we are here to guard the taxpayers’ money. So, your character then becomes an issue.
Ian Martin: There’s definitely different considerations and definitely a higher level of scrutiny that the government exercises in saying yes to it. ‘Cause you’ve indicated this, basically a proposal is an offer to settle the debts for less than the full amount. The banks usually if you, you know, their more formulaic in terms of what they look at. The CRA has –
Doug Hoyes: Yeah, it’s a math question for them.
Ian Martin: Correct. Whereas The Revenue Canada is more – there’s some softer considerations that will also weigh on whether they say yes or no.
Doug Hoyes: So, if you’re filing a proposal and you haven’t done your taxes for the last three years, it’s going to be a no.
Ian Martin: That’s going to be pretty difficult. Before they will be even willing to say yes or no they’re going to be wanting to see what the returns are, what is the dollar amount because they want to know what they’re considering.
Doug Hoyes: Because unlike a bank, a credit card company can look at your statement and see how much you owe. CRA can’t do that because you haven’t filed your taxes yet. So, at a bare minimum your taxes have to be filed and up to date. And your chances of success are increased if you have made a significant effort in the past too. You’ve been trying to make monthly payments, you’ve been filing your taxes on time. If you’re way behind on taxes and you haven’t given them any money in five years your chances of success are significantly less.
Ian Martin: I agree. And I think kind of the common sense explanation of that is that why would they say yes if they’re looking at your situation and think that agreeing to some kind compromise through their proposal is basically going to be a waste of their time.
Doug Hoyes: Yeah and really they are the honest but unfortunate debtor kind of guy. If you can convince them that you are honest but unfortunate, you’ve got a much greater chance of success. They obviously also look at the math as well and they want to be receiving more in a proposal than they would get in a bankruptcy.
Ian Martin: Right. And that would be for anybody, whether it’s the government or a bank. What I find is that there is, as I have said, a higher level scrutiny and sometimes the government will seem to push for a higher rate or return but I don’t think it’s formulaic, I think it ties back into some of these other considerations. But, really they want to know where the money’s going to come from as well. Where they want to know the self- employed guy, how is business going to be so much better than it was in the past?
Doug Hoyes: And so, if you can prove to them that not only can, that there’s a legitimate reason for the past but you can stay up to date in the future, then you got a good chance of success with them.
Ian Martin: Correct.
Doug Hoyes: Great, thanks very much Ian. That was some good tips on taxes and debt. You’re listening to Let’s Get Started here on Debt Free in 30.
Announcer: You’re listening to Debt Free in 30. Here’s your host Doug Hoyes.
Doug Hoyes: Welcome back, it’s time for the 30 second recap of what we discussed today. On today’s show we discussed bad tax advice. And Janette Martin told us the story of two people who paid a lot of money to tax lawyers for no reason. Ian Martin explained that if you have tax debt, consumer proposal may be a good option. That’s the 30 second recap of what we discussed today.
Tax lawyers serve an important function, if you’re charged with tax evasion or setting up a complicated tax structure, you should see a tax lawyer. But if your problem is that you put an expense on the wrong line of a tax return, you don’t need a lawyer, you need to correct the problem either yourself or with a tax accountant who can generally do it more cheaply than a high priced lawyer. If your problem is that you owe a lot of money in taxes and you can’t pay it, a lawyer can’t help you.
CRA does have the power to reduce interest and penalties in exceptional circumstances but the law says that CRA cannot reduce the principle you owe on your taxes, unless you go bankrupt or file a consumer proposal. A lawyer can’t file a bankruptcy or consumer proposal, only a licensed insolvency trustee can, so, if you owe taxes and want a no charge initial consultation to find out your options, give Hoyes Michalos a call at 310PLAN and we’ll walk you through the process.
That’s our show for today. Full show notes are available on our website including links to CRA’s website and the T1 adjustment form we talked about and information on how a consumer proposal or bankruptcy can eliminate taxes. So, please go to our website at hoyes.com, that’s h-o-y-e-s-dot-com for more information.
Thanks for listening, until next week I’m Doug Hoyes and that was Debt Free in 30
The payday loan industry in Canada loans an estimated $2.5 billion each year to over 2 million borrowers. Like it or not, payday loans often meet the need for urgent cash for individuals who can’t, or won’t, borrow from more traditional sources. If your hydro is about to be disconnected, the cost of a payday loan may be less than the hydro re-connection fee, so it may be a prudent financial decision in some cases.
As a “one time” source of cash a payday loan may not be an issue. The real problem is payday loans are structured to keep customers dependent on their services. Like opening a box of chocolates, you can’t get just one. Since a payday loan is due in full on payday, unless your situation has improved, you may have no choice but to get another loan from another payday lender to pay off the first loan, and a vicious debt cycle begins.
Rhys talks about how the objective should be to build a better small dollar credit market, not just look for ways to eliminate or regulate what a perceived as a bad product:
a big part of creating a better market for consumers is finding a way to maintain that access to credit, to reach people with a credit product but structure it in a way that is affordable, that is safe and that enables them to achieve financial stability and really improve their financial situation.
Their report provides a three-pronged approach, or as Brian says on the show the “three legs on a stool” approach to aligning the interests of consumers and lenders in the small-dollar loan market.
there is no magic bullet solution is really what we’re getting at in this paper. It’s a complex issue and there’s a lot of deeper issues that are driving this problem. But what we think … is there’s actions that government, that financial institutions, that community organizations can take to shape a better market for consumers.
The Role of Government Regulation
Government should play a role, but both Brian and Rhys acknowledge that government cannot solve everything about payday loans. They believe that the focus of new legislation should be on mandating longer loan terms which would allow the lenders to earn a profit while making loans easier to repay for consumers.
If a borrower is required to repay the entire payday loan, with interest, on their next payday, they are likely left with no funds to survive, so they require another short term loan. If they could repay the payday loan over their next few paycheques the authors believe the borrower would be more likely to be able to repay the loan without creating a cycle of borrowing.
The math makes sense. Instead of making a “balloon payment” of $800 on payday, the borrower could perhaps repay $200 on each of their next four paydays, thereby spreading out the cost of the loan.
While this may be a more affordable solution, it also presents the risk that short term loans take a longer time to repay, so the borrower remains in debt for a longer period of time.
Existing Financial Institutions Can Create A Better Small Dollar Loan Market
Brian and Rhys point out that it is the lack of small dollar credit options that create much of the problem. Credit unions and other financial institutions can help by making small dollar loans more available to a broader array of customers. They need to consider that making these loans, even though they may not be as profitable, create healthy communities in which they operate.
If payday loan companies charge too much, why not have community organizations (churches, charities) make loans directly? Making small-dollar loans requires infrastructure. In addition to a physical location, you require computer systems to loan money and collect it. Banks and credit unions already have that infrastructure, so they are well positioned to provide small-dollar loans.
Partnerships With Civil Society Organizations
If one group cannot solve this problem on their own, the solution may be with a partnership between government, charities, and financial institutions. As Brian says, a solution may be:
partnership with civil society organizations. People who want to invest in their communities to see their communities thrive, and who want to be able to provide some capital or resources for the financial institutions who want to do this but don’t have the resources to do this.
This “partnership” approach is an interesting conclusion in this study. Perhaps a church, or the YMCA, could make space available for a small-loan lender, with the “back office” infrastructure provided by a credit union or bank. Perhaps the government or other entities could provide some form of loan guarantees.
Is this a realistic solution? As the authors say, more study is needed, but a good starting point is getting the conversation going to explore alternatives.
Responsible Lending and Responsible Borrowing
As I said at the end of the show, another piece in this puzzle is the existence of other debt that small-loan borrowers already have.
In our Joe Debtor study, borrowers facing financial problems often turn to payday loans as a final source of credit. In fact 18% of all insolvent debtors owed money to at least one payday lender.
Over-extended borrowers also borrow more than the average payday loan user. Ontario data says that the average payday loan is around $450. Our Joe Debtor study found the average payday loan for an insolvent borrower was $794.
Insolvent borrowers are more likely to be chronic or multiple payday loan users carrying on average 3.5 payday loans in our study.
They have more than likely turned to payday loans after all their other credit options have been exhausted. On average 82% of insolvent payday loan borrowers had at least one credit card compared to only 60% for all payday loan borrowers.
When payday loans are piled on top of other unsecured debt, borrowers need much more help getting out of payday loan debt. They would be better off dealing with their other debt, perhaps through a bankruptcy or consumer proposal, so that a short-term or payday loan may be less necessary.
So while restructuring payday loans to make occasional use better for consumers is a positive goal, we are still concerned about the chronic user who builds up more debt than they can repay. Increasing access to additional short term loan options may just create another avenue to accumulating unsustainable debt.
For more information, read the full transcript below.
FULL TRANSCRIPT show #83 with Brian Dijkema and Rhys McKendry
We’ve discuss payday loans here on Debt Free in 30 many times and every time we do I make the same point – payday loans are expensive. In Ontario the maximum a payday lender can charge is $21 on a $100. So, if you get a new payday loan every two weeks, you end up paying $546% in annual interest. That’s the problem with payday loans.
So, why do people get payday and short-term loans if they’re that expensive and what can we do about it? Well, I’m a big believer in education, that’s one of the reasons I do this show every week, to give my listeners different strategies to become debt free.
But is education enough or do we need more? Do we need stricter government regulations or are there other solutions? So, how can we solve the payday lender problem?
That’s the topic today and I’ve got two guests who recently co-authored a very detailed research study on this very topic. So, let’s get started, author number one, who are you, where do you work and what’s the name of your study?
Brian Dijkema: My name is Brian Dijkema, I’m the program director for work and economics and Cardus. And I am co-author of the report called Banking on the Margins.
Doug Hoyes: And let’s have your co-author say hello. Tell us who you are and what you do here at Cardus.
Rhys McKendry: My name is Rhys McKendry, I’m the other co-author of this report and I am the lead researcher here on this project at Cardus.
Doug Hoyes: Excellent, you’re the math guy as we already established here before we started.
So, I know from our Joe Debtor study of people in Ontario who go bankrupt and file a consumer proposal that 63% of all payday loan borrowers who become insolvent have income of $2,000 a month or higher. And this is net income we’re talking about and more than a quarter of them, 27%, have income over $3,000 per month. So, these aren’t low income people. 30% of them are 50 years and older so they’re not young people either in a lot of cases. On average, our clients who have a payday loan have 3.5 payday loans when they file with us. So why do people use payday loans.
So, why don’t I start with you Rhys on that or Brian, whoever wants to chime in first. Let’s start with the why question. Why do people use payday loans?
Rhys McKendry: The reason people use payday loans is generally because they’re in urgent need of cash. The research we’ve done suggests that those that don’t have a lot of money in the bank, so those with less than $500 in savings are almost three times as likely to use a payday loan. Income, lower income people generally are more likely to use payday loans because they don’t have as much savings in the bank, it’s harder for them to save. But really when you account for savings and the predictors for what drives payday loan use, the relevance of income actually drops out of what predicts payday loan use.
Doug Hoyes: So, it’s an urgency thing. And I guess that makes sense because in our study we’re seeing people at every different income level who are using payday loans. So, again I’ll leave it with you Rhys, give me the solution then. Tell me the one thing we can do right now based on your study that can solve this payday loan problem
Rhys McKendry: Yeah, well I think there is no magic bullet solution is really what we’re getting at in this paper. It’s a complex issue and there’s a lot of deeper issues that are driving this problem. But what we think we can do is there’s actions that government, that financial institutions that community organizations can take to shape a better market for consumers.
Doug Hoyes: Well, so let’s flip it over to Brian then and maybe explore those in some kind of detail then. So, there is no one single thing you can do to solve the payday loan problem. In your report you kind of go through I guess three different areas that we should start exploring. So, walk me through, you know, what would be the first thing you would be exploring right now if I give you the magic wand and you get to start solving this problem?
Brian Dijkema: Right, I think there’s – really it’s a problem that because it’s so complex requires a complex and multifaceted response. And our paper recommends and I think there’s good reason to pursue this is that the response needs to be lead by three groups. One of them is the primary group is financial institutions. One of the real reasons why payday loans are so prevalent is that there’s a lack of small dollar credit options out there for people who need it. And that’s really an issue with financial institutions, credit unions, banks not offering those services. So, that’s number one.
There’s also a role for government. Our paper says that if you’re looking to government to solve the problem you’re looking in the wrong spot. But at the same time there is a role for government to play, particularly if you look at the way the loans are structured right now.
The main problem, and you would know this from talking to your clients, one of the real challenges with payday loans is that you take them for a 10 day term, which is the average term, or 14 days. And you have to pay the whole thing back, the principle plus the interest back in one lump sum, that’s the balloon payment. And for people who have cash flow problems, which is why people are using it in the first place, that big lump sum, that big balloon payment is what really kills you.
So, we think that’s – if the government wants to make a real difference on this issue, they could actually look at and change some of the structures of the loans to allow people to pay back in instalments. And that’s been done in Colorado to some effect. But again, we have to be careful, that’s not a silver bullet. Just changing those loan structures is not going to change the market. It’s still going to leave people without alternatives. So, we need to have financial institutions partnering with others to do that.
We think the third leg of the stool, and I think this is a very important one; the third leg of the stool is partnership with civil society organizations. People who want to invest in their communities to see their communities thrive. And who want to be able to provide some capital or some resources for the financial institutions who want to do this but don’t have the resources to do that. So, we think that if we’re going to address the problem you need to have a partnership between financial institutions, community organizations, charities, community foundations, churches, others that are interested in investing in the community inside a strong and I think fair regulatory environment.
Doug Hoyes: So, you hit on a lot of areas there so I get to play devil’s advocate here and just disagree with everything you said or question everything you said so let’s kind of go through it one by one then.
So, the first pillar in your stool, leg in your stool, I got to keep your analogies straight here. The first leg in the stool is financial institutions, right, okay? So, the reason that banks don’t give these kind of loans is because presumably they can’t make money off of it. If a bank could make money, they’d be doing it. Do you agree or disagree with that statement?
Brian Dijkema: Yeah, I think the way that banks are structured is that they have to pursue the highest amount of money that they can make. So, it may be that a product will make them a small amount of money but because banks, their nature and the fact that they’re publicly traded and they have to pursue, try to maximize value for their shareholders, that there is not enough money in it for them.
Doug Hoyes: So, they’d rather go after credit cards and mortgages and car loans and things like that, which are higher dollar value amounts. So, if my average credit card starts at $5,000 and my average small loan, payday loan, starts at $500, well it’s pretty easy to see, even if the interest rate is three times as high on a payday loan, they’re going to make more on a credit card loan. So, that’s why presumably the banks are not in that business, which is why payday loan companies have come into existence. They can actually make money at that ’cause I guess they got a different cost structure, that’s all they do and they’re able to do it.
So, do you have any hope then that you can turn this monolith around? I mean the big banks in Canada make, you know, each of them on average a billion dollars every three months. So, can we actually convince them to look at this market or is that not really realistic?
Brian Dijkema: So, two responses to that. One is that I think when we’re talking about financial institutions we have to realize that there’s more to it than the Canadian market than just the big banks. Obviously they’re the biggest players but you also have a fairly robust array of credit unions, other organizations, the co-operative banking and that type of stuff that’s around. That, while they do want to make a profit, and many of them do and do well by their members, they’re also interested in ensuring that the communities in which they work are thriving.
So, I think there certainly is, and I’ll say a bit more about the big banks later, but we have to realize more than just the big banks that play here. Credit unions are across the country and have a role to play, in fact maybe even better suited for it.
On the question of the big banks though I do think that one of the things that we’ve talked about is that if you’re a bank, what you want, you will do well in a market economy that’s thriving as a whole. And it does not do well and does not bode well for your future and the sort of long-term prospects for your organization if increasingly more and more people are getting into debt. It means that you’re in an unhealthy situation. It’s not a robust and vital economy. And I know that banks have a lot of corporate social responsibility programs and so on. And they’re often aimed at sort of market initiatives or community initiatives and so on. We think there’s actually an opportunity for them to dedicate some of those funds towards ensuring that the ground from which their future profits are going to be drawn is healthy.
Doug Hoyes: Yeah and again to play devil’s advocate here I’m of the view that credit unions for the most part are just banks. Okay, they’re smaller – in the past a credit union was a community organization. The people at the local, you know, auto parts plant got together, created a credit union, their own money got lend to members. But now we have credit unions that are huge. They’ve got millions and millions in revenue. Aren’t they really just banks under a different name?
Brian Dijkema: I’d say there is actually a real difference between the banks and the credit unions. I know that the charters of all of them are often and their purpose and their very mission they do talk about investing in their communities. And many of them, I’d say even most of them I think I’d be willing to say that, put their money where their mouth is.
So, absolutely there’s no disputing the fact they need to be responsible and they need to understand that way markets work and they need to get a profit for their members. But credit unions I think as a whole, as a body, as a community, are much more interested in ensuring the communities in which they, from which they take deposits, and in which they invest are healthy. And that’s why I think in Canada, especially in this past year and in recent times, there’s been an increased interest in addressing this and providing alternatives from the credit union, the credit union world.
Doug Hoyes: So, the second pillar was government and maybe Rhys you can chime in on this one then. So, again I’ve kind of been of the view that well we want the government to solve our problems? I mean aren’t these the guys who run up massive deficits and aren’t these the guys that run the post office? I mean is this really where we want to look to? Now, I know in Ontario right now as we record this in the spring of 2016, there is a bill before the legislature, I believe it’s Bill 156, that will adjust some of the regulatory environment for payday loans, I guess kind of addressing like you said allowing for longer term loans. Are there other things that you think government should be doing now or other roles that government should have in this process?
Rhys McKendry: Yeah and I think as Brian has said we don’t believe that government alone can fix this problem. But aside from regulation, we think that government can play a role in supporting financial institutions, community organizations and helping develop these alternatives. So, because there are public costs to debt dependency, whether it’s increased costs to healthcare, policing services, there’s a number of studies that have been don’t to show that the effects of payday loans on communities, on families create costs for the state.
So, the government has a reason to get involved and helping support these alternatives. Whether that’s through providing funds for loan loss reserves or providing space and free advertising for these types of programs, just helping to create incentives for these institutions to develop these alternatives and helping to shift the economics of that market because it is as you said such a difficult market to operate in profitably, helping to create ways to enable them to sustain these types of alternatives.
Doug Hoyes: Well, so let me jump on one of the things you said there. Your phrase was something like helping to guarantee loan losses or something. So, what in my mind you’re describing is CMHC, which is a government organization funded by the fee on your mortgage but also backstopped by the tax payers so that I can get a mortgage with less than a 20% down payment. I believe the law in Canada now or certainly the standard practice is any mortgage I get where I have less than a 20% down payment has to be guaranteed. CMHC is the biggest guarantor.
And so what we’ve seen certainly in Ontario and British Columbia over the last five or 10 years is massive increases in house prices because we now have the ability to borrow more. Of course CMHC doesn’t guarantee me, if I lose my job they don’t pay my mortgage. What they’re doing is they’re guaranteeing the banks. So, these banks who make billions of dollars in profits don’t have as much risk on their mortgages because the government was trying to backstop it. Is that what you’re suggesting some similar organization for small loans and payday loans?
Brian Dijkema: I think what you’re pointing out is the fact what they would call a moral hazard. That if we don’t actually pay attention to the fact that there are risks associated with this that we will end up funding a program that is actually just going to increase loans and so on. We don’t want that.
I do think though that as Rhys mentioned there are real public costs to debt. And there are real public costs associated with the debt that comes from payday lending. So, I think the government does have an interest in finding some ways to assist firms that for whatever reason are not able to provide that given their own risk portfolios and so on with a way to do that.
One thing that we note in our paper and I think that’s unique about our approach is we think that it’s not just – there are ways to do that that mitigates that moral hazard but that also involves non-government players in this field. And I know that there’s a lot of charities, a lot of community associations that recognize, they recognize the problems with payday loans, they see the problems in their community and they want to do that as well. So, we’re not saying that the government should set up a CMHC for payday loans or anything like that. But that there’s room for them to perhaps partner with community associations that will have their own accountability structures and will also be putting some skin in the game so to speak.
Doug Hoyes: Well, so let’s talk about that then, because that’s the third chair on your stool. Again, I butchered your analogy sorry, leg on the stool, there we go. So, the third leg on the stool was what you called civil society and so you defined that as organizations like charities, community organizations, church groups, things like that who are not governments, who are not banks but who could play a role in this. So, explain your vision for that then? How would the local church group, the local charity potentially be able to help in this area?
Brian Dijkema: Well, I think one way they could do that, there are a number of ways but one of – the probably the primary way, is that they would be able to actually allocate some of the capital that would mitigate some of the risks or at least provide a bit of a space for credit unions, basically looking at market based community focused financial institutions to experiment. And this is one of the real challenges, the real problems with this is that there are not a lot of small dollar credit alternatives for people.
So, if you’re looking for a $450 loan, which is I think the average size of a payday loan, there are not a lot of places where you can get that, especially if you have some challenges with credit history or if you’re a newcomer of if you’re not familiar with that.
So, there’s a role to play for institutions like churches that have often a lot of capital tied up in investments or what have you, community foundations, many of which have again capital resources that they’re there to invest in their communities. And I think if you do that, if you provide sort of a partnership there’s a local accountability structure, there’s a sense in which that money is there. That’s one way for these groups to do it.
There are also, we could go on for a little bit but there’s also physical resources. One of the real contributors to the cost of payday loans is capital cost, buildings, rent, turning on the lights. And if you look throughout communities, there’s a whole host of places that are run, there’s actually physical space that could be provided by civil society organizations, by charities.
Doug Hoyes: Like the church basement kind of thing.
Brian Dijkema: That’s one example, YMCA is another one. There’s a whole host of those. And you also look at for instance, you know, I’m a good public transit user in Hamilton I take the bus every day. You look and there’s all kinds of empty advertising space. That’s again a huge cost for payday lenders. They invest heavily into advertising. And there’s a way there I think for creative responses to helping innovate in this market.
Doug Hoyes: What role do you think debt plays in all of this? So, in my study of course the people who go bankrupt have a whole bunch of other debts and they end up having a payday loan as kind of the last resort and that’s what tips them over the edge. So, my answer, one of my answers to the problem is take a look at your debt profile, maybe what you have to do is clean up the $50,000 you have in credit cards and lines of credit and all the lines of credit first, which would lessen the need for this high interest, high urgency lender. Is that a factor at all? Is that something that you noticed in your study at all?
Rhys McKendry: Yeah, certainly we, through our research it revealed that those that had trouble managing debt in the past, those that have poor credit history, have been refused credit cards, have maxed out their available credit card, their line of credit, are much more likely to use a payday loan because that credit is no longer available. And that’s the only place they can turn. So, helping people to manage that credit, to manage their money better, to improve their credit rating and build their credit rating so they can access higher quality credit is important.
Doug Hoyes: As a starting point. So, well I think that’s a good way to end it. Now just so that everybody can read this study, your organization’s name is Cardus and is there – what’s your website?
Brian Dijkema: The best way to find the study is go to www.cardus.ca and if you want to do that as cardus.ca/paydayloans that will bring you right to the site. There’s a short video there that sort of describes our work and you can download the paper as well.
Doug Hoyes: Yeah and you’ve got a search function on there. There’s a whole bunch of other studies that you’ve done over the years. So, I guess one question I should ask you then, you guys are funded by the big banks then I guess. Is that where all your money comes from to do all this stuff? Who’s paying for this?
Brian Dijkema: If any of the CEOs of the big banks are listening I would love to have a conversation and take a cheque from you but we’re not actually funded by the big banks.
This was funded by a private foundation and private donor, this work. And both of those folks who helped support this project have no interest in the payday lending environment nor in some of the alternatives. This was philanthropists who were quite concerned with our community and wanted to see some of this work done. And that’s where all of our funding comes from, it comes from private donors and community foundations and what have you.
Doug Hoyes: It’s not the big banks then, there you go.
Brian Dijkema: Certainly not.
Doug Hoyes: Well, excellent. That’s a great way to end this segment. We’re going to have more in a minute, Brian Dijkema, Rhys McKendry, thanks for being with me today.
Doug Hoyes: Thank you.
Doug Hoyes: It’s time for the Let’s Get Started segment here on Debt Free in 30. I’m joined today by Brian Dijkema and Rhys McKendry who are the authors of study called Banking on the Margins, finding ways to build an enabling small dollar credit market. And obviously we’ve been talking a lot about payday loans today.
The question I’d like to address in this segment is are payday loans a net benefit to society. People use them, they’ve got short-term cash need so I guess that helps them out so they can get their rent paid. But then you’ve got this counter balancing huge cost. And that’s the thing that tips people into big troubles.
I addressed out Joe Debtor study earlier. When you look at the average payday loan borrower in Ontario, they’re borrowing somewhere between $300 and $500 depending on what stats you’re looking at. The person who is dealing with us is averaging more like $794 in terms of their payday loan debt. They’re multiple users, they’ve got three and a half of these loans at the time they go bankrupt. 60% of payday loan borrowers in the general population have at least a credit card. In our study it’s 82% so obviously the accumulated debt that they’ve got is one of the things that is driving them to this. So, are payday loans helping the situation, not helping the situation? Brian why don’t you address that? Is there a net benefit to society to payday loans or not?
Brian Dijkema: Yeah, I think to some extent that’s the wrong question to be asking. One of the reasons why we wrote this paper was that we were looking at and studying this issue and we saw that this was often the way the debate worked. Some people would say that payday loans are good, they’re a market response to real demand for cash.
And there’s a point to that. If you look at it and think about what some of the costs of not having access to that cash would be they’re pretty extreme. So, for instance NSFs if you get a bounced cheque or something like that, often those charges, they’re around $42 from the banks themselves, there’s often additional charges on that. So, all of a sudden for a $200 loan it starts to look, at $21 per $100, it starts to look actually like not a bad choice, right? And you think about if I make the rent or not do I get groceries or not? It seems like a decent choice at that point. So, there is – and there’s something to that, there’s something good about that.
The trouble is the folks on the other side who say they’re actually not a net benefit also have a point. They create dependency. You can look at, as we’ve done in our paper, we’ve looked at the loan structures, the business structures of those that provided them. They start a cycle, a whirlpool of debt that drags people down. It actually ends up acting like a ball and chain when you’re trying to swim out of the water, right? So, we have this debate between are they good, are they bad? Both sides have a point. Our paper tries to ask the next question which is how do we build a better market? How do we make that credit, that small dollar credit market a better place for people who need it?
Doug Hoyes: So, Rhys what are your thoughts on that then? How do we build a better credit market for people who need it?
Rhys McKendry: Well as Brian got at it, there’s significant structural issues with the way these payday loans are designed. So, a big part of creating a better market for consumers is finding a way to maintain that access to credit, to reach people with a credit product but structure it in a way that is affordable, that is safe and that enables them to achieve financial stability and really improve their financial situation.
So, one of the big things that we identify is that the short-term nature of payday loans are a real problem that because payday loans are often less than a two week term and are due with a large balloon payment at the end of the period, people have a lot of trouble paying off that debt and staying out of debt because they’re already working on a tight budget.
Doug Hoyes: Yeah, I borrowed $500 and I got to pay back $600 or $700 or whatever the number is. How am I going to do that? If I don’t have the money today how am I going to have it in 10 days?
Rhys McKendry: Exactly, so what payday lenders do is they structure that payment to be due on your next payday. So, when your cash flow is at its highest, they’re going to get paid back most likely ’cause it’s due when you have that cash inflow. But the fact is that two weeks later or a month later when you come to the end of your cash flow cycle, you’re likely going to be a few hundred dollars short again because of that large deficit in that cash flow. And so, what happens is people have to go back to these payday lenders and borrow again.
So, what we’ve identified is we need to find ways to structure this debt that allows people to spread it out over multiple pay periods. Although the overall dollar amount that they may be paying maybe the same over the long-term or even a little bit higher, allowing them to spread that over pay periods creates a more affordable structure for them to pay off that debt and then stay out of it once they’re done paying it off.
Doug Hoyes: So, I borrow $500. Instead of paying it in 10 days maybe I pay back $100 every payday every two weeks.
Rhys McKendry: Exactly.
Doug Hoyes: So, I’ve got two months or three months to pay it off. So, does that actually help the situation though or am I just dragging out the inevitable? Instead of getting hit with it in 10 days, while I spread it out over two months would it make a difference do you think?
Rhys McKendry: Well, I mean it certainly depends on the person’s financial context and that’s another part of structuring credit in a way that’s safe for the consumer. The lender needs to understand what the consumer’s capacity is for repayment. For some consumers it may be that they can afford $50 out of their budget every two weeks. Some consumers it could be $100, some it could be $200. Every situation is a little bit different, so, finding ways to structure debt over a term and a period that enables consumers to fit it within their budget and their ability to repay.
Doug Hoyes: Is what it takes. Well, great that’s excellent information guys. More information is available on your website cardus.ca just do a search for payday loans and they’ve got all the information there. Brian Dijkema and Rhys McKendry thanks for being here on the Let’s Get Started segment of Debt Free in 30.
Doug Hoyes: Welcome back. It’s time for the 30 second recap of what we discussed today. On today’s show Brian Dijkema and Rhys McKendry discussed the need for financial institutions, government and civil society to work together to address the payday loan problem. That’s the 30 second recap of what we discussed today.
I agree that new approaches are necessarily but I think the starting point is to deal with the other debt consumers have before they take out a payday loan. Of my clients that have a payday loan, 82% of them also owe money on at least one credit card. So, if they could deal with their other debts that may significantly reduce the need for a short-term payday loan.
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