Month: May 2017

How Do I Get Out Of Debt Without Losing My Home?

bankruptcy-keep-my-house

For people experiencing debt problems, finding a way to get out of debt and keep their home is usually their top concern.

Ontario introduced exemption laws around home equity in 2015 that mean that you will not lose your home in a bankruptcy if the equity is $10,000 or less.

If the equity in your home is above $10,000 however, how you proceed will depend on how deep in debt you are, what kind of debts you have and whether or not your mortgage is under water.

Is Your House Mortgage Current?

The first step in keeping your home when you file bankruptcy is making sure you are current on your mortgage payments. While you do not necessarily lose your home if you file for bankruptcy, if you are in arrears on your mortgage your lender will eventually take action to repossess your house. Secured loans like your mortgage are not included in either a bankruptcy or consumer proposal. That means you can’t obtain protection from your mortgage lender under Canadian bankruptcy law for mortgage arrears.

So before you do anything else, catch up on your mortgage payments.

Now you have options you can look at that will deal with the remainder of your debt, without the threat of foreclosure on your home.

How Much Can You Afford To Pay to Get Out of Debt?

When choosing the best way to plan your way out of debt, you have to ask yourself what you can afford to pay.  There are options that work if you are able to pay your debts in full.  Then, there are the options for when you cannot repay your debts completely.

  Interest Free Debt Settlement Keep House
Debt Consolidation Mortgage NO NO YES
Debt Management Plan YES NO YES
Consumer Proposal YES YES YES
Personal Bankruptcy YES YES Maybe

Paying Back Your Debts in Full

For some people, the right choice is to utilize the accumulated equity in their house to consolidate other debts into a more manageable monthly payment.  This could take the form of a secured line of credit, a second mortgage, or even a new mortgage with a brand new amortization period.

This is a conversation you have with your bank or mortgage lender.  With the changes to mortgage rules in the recent past, financial institutions are limited to lending you 80% of the assessed value of your house.  For example, you could refinance with a total mortgage balance of up to $240,000 if your home is assessed at a value of $300,000. This option works if you have sufficient equity in your home to take care of all your outstanding unsecured debts. In addition to being able to offer your home as collateral, you will also need a reasonably good credit history. If your mortgage and other debts are in arrears, you may not qualify for this type of debt consolidation loan.

So what if the bank isn’t able to help you because you don’t have enough equity or good credit to refinance your debts?

A credit counselling agency may be able to help you with a Debt Management Plan. Your credit counsellor will work with you and your creditor to develop a debt repayment plan for your debts. The amount of equity in your home does not have a direct impact on the amount to be repaid.  In a DMP, the full principal amount of the debt must be repaid, but you may be able to negotiate a reduced interest rate.

Paying Back A Portion of Your Debts

If you can’t afford to pay back all of your debt, you can look to the solutions provided under the Bankruptcy & Insolvency Act.

When filing personal bankruptcy with a Licensed Insolvency Trustee and want to keep your house, you need to work out a payment plan to pay for that equity within a reasonable time period.  If you fail to make the payments, your trustee is forced to sell your house to realize on the equity for your creditors.

A Consumer Proposal would likely be a better choice to get out of debt if you want to keep your home.  Like a bankruptcy, a proposal is filed with a Licensed Insolvency Trustee.  In a proposal, you offer to repay a portion of your debts. The big advantage of a proposal is that your trustee never has the duty or responsibility to sell your home or other possessions. Instead, you negotiate a repayment amount with your creditors. They will expect to receive as much, or slightly more than, they would in a bankruptcy which means you will have to ‘buy out’ your equity over the term of your proposal.

Why is this different then than a debt management plan? Because you can include more than just credit card debt and, if your debts total more than the equity in your home, you can make an arrangement to pay back less than you owe.

In Short

Keep in mind that any option where you are not repaying your debts in full is going to hurt your credit rating. That’s why most people, before contacting a trustee, first take time to determine if they can pay back their debts on their own first.

If you cannot pay back your debts in full, it is possible to keep your home even if you file bankruptcy or a consumer proposal. Contact us to book a free consultation with a Licensed Insolvency Trustee so we can help you find out how and still get out of debt sooner.

Debt Consultants: Why You Should Avoid the Extra Cost

Man holding jar full of cash to indicate high cost of debt consultants

For the first time ever, the federal government has issued a scathing report, saying that it appears that debt consulting firms are taking advantage of vulnerable consumers.  They charge large up front fees, but in many cases they don’t actually provide a service; they simply refer customers to a Licensed Insolvency Trustee.

Debt consultants charge consumers a fee for their advice. It sounds reasonable as many professions do that, except for the fact that they aren’t experts in the field of insolvency. Only a Licensed Insolvency Trustee can file a bankruptcy or consumer proposal on behalf of consumers in Canada. This means that only Licensed Insolvency Trustees have the thorough knowledge of the process and have a proven track record of helping people through an insolvency.

Debt Consultants: Upfront and Impersonal

Many people seeking advice from debt consultants have been hit with a pretty hefty price tag. If they found the information helpful, then it was worth it. But it’s also worth knowing that many debt consultants charge you for information you can get for free from a Licensed Insolvency Trustee.

In addition to charging upfront fees that are then pocketed by the debt consultant, they also push a one size fits all solution. Instead of impartially weighing your options, debt consultants will push you to the track that they profit off of. For the most part, that’s when they refer you for a consumer proposal. They’ve got a guy for that – in fact, they have 50.

For approximately 50 LITs within these 13 firms, more than 40 % of their Division II filings [consumer proposals] were sourced from these debt consultants.

The OSB is initiating a series of amendments over the next year that will address the risks and issues associated with debt consultants involvement in the insolvency process. Hoyes, Michalos & Associates does not generate business using leads from debt consultants. We also have personalized solutions for each client as each person’s financial situation is different. In many cases, people who come to speak with our team (for free), don’t end up filing a consumer proposal or bankruptcy.

How Can You Protect Yourself?

Our recommendations are simple. Know who you’re dealing with, and make sure to ask the right questions.

  • Do not pay any upfront fees
  • Do not sign a contract to pay anything until you have met with a Licensed Insolvency Trustee
  • Only deal with the Licensed Insolvency Trustee
  • Ask what fees you are being charged, and what you are paying for with those fees
  • When in doubt, seek a second opinion from another Licensed Insolvency Trustee

Always ask whether or not the person you’re dealing with is a Licensed Insolvency Trustee. If you’re uncomfortable being so direct, the OSB has a LIT registry that lists off all LITs in Canada.

Resources mentioned in today’s show:

FULL TRANSCRIPT show #143 with Ted Michalos

debt-consultants-why-you-should-avoid-the-extra-cost

Doug Hoyes: For the first time ever, the federal government just issued a bombshell report saying that it appears that two very large debt consulting firms in Canada are taking advantage of vulnerable consumers. Let me repeat the three most important parts of what I just said, debt consultants taking advantage of vulnerable consumers.

Civil servants don’t like to point fingers. So for the government to actually put this in writing makes this easily the most amazing report ever issued by the OSB.

Today, I’m joined by my Hoyes Michalos co-founder and business partner, Ted Michalos. So, Ted, you ready to say something that you’re going to regret later today?

Ted Michalos: Thanks. Unlike the civil servants, we’re quite happy to point fingers.

Doug Hoyes: [laughs] So, well, let’s get to it then.

Ted Michalos: Let’s see how it goes.

Doug Hoyes: So here’s the background. The Office of the Superintendent of Bankruptcy, the OSB, which is a division of the federal government is responsible for regulating all Licensed Insolvency Trustees in Canada. That’s Ted, and me and all of our Hoyes Michalos trustees. They enforce the rules and if we don’t comply, we could lose our licence and be out of business. So it’s serious business but it’s pretty rare that the OSB actually takes away someone’s licence. It happens maybe once or twice a year, so it’s rare.

Usually, if a Licensed Insolvency Trustee makes a mistake the OSB works with them to correct the issue. We deal with the OSB all the time and, for the most part, they’re quite reasonable, wouldn’t you say, Ted?

Ted Michalos: That’s a safe comment.

Doug Hoyes: So what has these reasonable government employees so riled up? Well, on April 28th, 2017 the Office of the Superintendent of Bankruptcy issued a report saying that some Licensed Insolvency Trustees have questionable relationships with debt consultants and that it’s costing consumers thousands of dollars.

Now, this doesn’t come as a surprise to Ted and I. We’ve been talking about this for years.

Ted Michalos: [laughs]

Doug Hoyes: In fact, I’ll put a link in the show notes to a YouTube video we filmed of a radio interview we did back in 2011, so that’s six years ago, where we talked about this exact issue.

So, Ted, before we review the OSB’s report let’s start with the definition, what is a debt consultant?

Ted Michalos: All right. So there’s no hard and fast definition for this. We all use it in different ways. I think what the government is saying is debt consultants are unlicensed professionals that are charging people fees to get the same sort of information or advice that they could get from a Licensed Insolvency Trustee for free. So they’re people that are specializing in accessing people’s fears. You don’t want to call a Licensed Insolvency Trustee because it’s scary but you will call somebody who says, “I can help you avoid bankruptcy and get rid of your debts.”

Doug Hoyes: Yeah. And you said the key word there which is “fees”. These are people who charge fees and we’re going to throw some numbers around.

Ted Michalos: And they can be really big fees.

Doug Hoyes: Because … yeah.

Ted Michalos: If you want to get me going, we can have some fun with that.

Doug Hoyes: Oh, we’ll get you going. I’ll quote some numbers in a minute.

Ted Michalos: [laughs]

Doug Hoyes: So why does the OSB care about this then? It’s … they licence us, Licensed Insolvency Trustees, obviously they don’t licence unlicensed debt consultants. So why is this an issue for the OSB?

Ted Michalos: Well, a consumer doesn’t recognize that they’re even is a difference here. So if somebody says they’re a debt consultant, they sound they’re some sort of professional and they’re assuming that somebody is regulating them, with some kind of controls, when in fact there are none.

So Licensed Insolvency Trustees, our obligation is to present an honest and objective analysis. So when we talk to somebody we’ll show them all their options, we’ll tell them these are the things that you can do, these are the ramifications of doing them.

Well, if I was just some person being paid a fee for landing new customers I might not be as forthright or honest. In fact, I know that they’re not. So if the only way I make a fee is if I convince you to do a certain procedure, I’m going to sell you to do that certain procedure.

Doug Hoyes: Yeah, whether it’s the right thing for you to do or not.

Ted Michalos: Right.

Doug Hoyes: So how big a problem is this? How prevalent is this association between Licensed Insolvency Trustees and debt consultants? So let me quote a few sections from the report. And this, again, the government report I’m quoting, I’m not giving you my opinion, this is from the government. “In 2016, in 17 percent of all Division II filings” … that’s a fancy word for consumer proposal …

Ted Michalos: Right.

Doug Hoyes: … “the debtor reported having paid for financial advice before being directed to an LIT.”

Ted Michalos: Right. So that means they spoke to somebody else first and they actually paid a fee for it.

Doug Hoyes: “Fifty-seven percent of 2016 consumer proposal filings” … and, again, I’m quoting from the government report here … “for which prior financial advice was reported were received from LITs who had relationships with two large-volume debt consultants.” So this is not some little, tiny conspiracy here where one guy, you know, meets a couple of people.

Ted Michalos: No.

Doug Hoyes: This is a very coordinated, very large, in essence, attack on the insolvency system.

Ted Michalos: Well, and let’s not hide stuff in all the percentages. So 17 percent of people paid a fee, more than half of those people paid it to two specific companies. So you’re talking about five or six thousand people paid one of these two companies an awful lot of money for advice actually that you can obtain for free.

Doug Hoyes: Well, let me quote one more time from the report.

Ted Michalos: Yeah.

Doug Hoyes: “Thirteen LIT firms,” that’s trustee firms, “including one national-level firm were found to have one or more LITs operating in a frequent and sustained relationship with the two large-volume firms.”

Ted Michalos: Yeah.

Doug Hoyes: And, now, the report does not name names, so I do not know for a fact which large national-level firm they’re talking about.

Ted Michalos: Do you think they use initials in their name?

Doug Hoyes: Well, it could be.

Ted Michalos: [laughs]

Doug Hoyes: And, I mean, because frankly there are all only one, or two or three large national level firms, so it wouldn’t be … isn’t too hard to figure out who it is.

Ted Michalos: Right.

Doug Hoyes: But, again, this … it brings the whole system into disrepute when the two big guys are in effect colluding to, you know, not provide great advice for vulnerable consumers.

Ted Michalos: Yeah.

Doug Hoyes: So, again, the takeaways from these findings, only 17 percent of proposals are affected by this. Well, I don’t know, is that a low number or a high number.

Ted Michalos: Yeah, I think … well, that’s … that report being affected by it.

Doug Hoyes: Right, that report being affected by it. Sixty-four percent of those files involved just two large debt consulting agencies, 13 LIT firms. And these are cases where the debtor unnecessarily paid for consumer proposal advice before talking to a trustee.

So let’s bring this home then. Why should someone … why would someone … let’s start with that. I think you, kind of, already addressed this. Why would someone contact a debt consultant before contacting an LIT?

Ted Michalos: Let me give you a story, somebody that came in to see me last week.

Doug Hoyes: Client stories, here we go.

Ted Michalos: So it’s a married couple, they were in their … if I had to guess, they were in their fifties. They went to see … they answered one of those ads that said you can avoid bankruptcy, we can help you deal with your debts, we can reduce them up to twenty percent. Sounded great, they went in and they sat down with a person.

And the approach was very friendly, right? It was … there wasn’t pressure involved, what it was “We can help you deal with your debts. Yeah, we can do all of that stuff. Here’s the first step, you know, give me $500.00 today. I want you to start out with some paperwork and we’re going to set you up a meeting next week with somebody else.”

All right. They went to the second meeting and it was, “All right, we think you need to do this and, in fact, we need another $500.00 payment and then we’ll get you started by referring you to the third guy.” The third guy was going to be a Licensed Insolvency Trustee but they didn’t know that at the time.

So they had two meetings, were supposed to pay a thousand dollars to meet with some guy to solve their debts. The reason they contacted them in the first place was … wasn’t … there wasn’t the intimating I’m meeting with a Licensed Insolvency Trustee, we used to be called bankruptcy trustees which was probably worse. But it was I’m just meeting with a guy who’s a debt consultant, I specialize in helping people solve their problems, as straight forward as that.

When they got in there they realized that, wait a minute, something about this doesn’t quite sound right, “Five hundred bucks and I can do away with my debts?” They owed $50,000.00, by the way. “Now we need another 500 bucks,” “Well, wait a minute, what was the first $500.00 for?” “Well, that was so we could meet with you and get you started,” “Well, what’s the second one for?” “Well, because we’ve got to get all this stuff ready and …” I mean, they just became suspicious because of the way this thing was unfolding.

And, to their credit, they did a little homework on the internet and they discovered, “Well, wait a minute, these guys aren’t Licensed Insolvency Trustees, these guys … they’re nothing, I mean, they’re not regulated by anybody, they’re asking us for a fee and now they’re sending us to this third guy.”

Doug Hoyes: Yeah, and to put it in perspective, so let’s say I’ve got a problem with my car.

Ted Michalos: Okay, you have a problem with your car.

Doug Hoyes: Thank you. So I’ve got a couple of choices, I can go to a, you know, certified class A mechanic … I think that’s what they’re called, right?

Ted Michalos: Yeah, yeah.

Doug Hoyes: And he can … he or she can take a look —

Ted Michalos: Unless they work for Canadian Tire, then they’re something else.

Doug Hoyes: Then it’s a different story. So they can take a look at my vehicle and tell me what’s wrong or I could pay an automotive consultant who isn’t a class A mechanic, who’s just some guy who could say, “Yeah, I think you need this, this and this,” I could pay them a fee and then go to the expert. Well, does that make any sense?

Ted Michalos: Right, just … well, you know, the perfect commercials are those LifeLock guys, right, “Oh, I’m not a dentist, I’m a dental monitor,” you know, you don’t want to talk about —

Doug Hoyes: I have not seen those. I have not seen those commercials.

Ted Michalos: It’s on TV. You go down, you sit down and the fellow, “Yeah, you got a really horrible cavity, I’m going to lunch now,” “Aren’t you going to fix it?” “Oh, I’m not a dentist, I just tell you that you have a cavity.”

Doug Hoyes: Yeah. And so if I’ve got a medical problem wouldn’t I just go right to the doctor, like, doesn’t that kind of make sense?

Ted Michalos: Right.

Doug Hoyes: So what you just described there then is exactly our problem with what debt consultants do, you go to someone who isn’t licensed, doesn’t have the training and the expertise, they charge you a bunch of money and all they’re actually doing is referring them to a Licensed Insolvency Trustee —

Ted Michalos: Right, correct. What they’re doing is they’re identifying that you’ve got more debt than you can deal with and they think you make enough money every month that you can afford to pay some fees to deal with those debts. So they’re not trying to determine if this is the best solution for you or even the right solution, they’re trying to determine do you fit their criteria for somebody that they can sell this product to.

Doug Hoyes: And so how does this differ from what we do?

Ted Michalos: All right. So as a Licensed Insolvency Trustee … more than half the people I speak to don’t end up having to file, so they don’t need to file a proposal to the creditors or file a bankruptcy, what they need is somebody to help them analyze where they’re at. So a Licensed Insolvency Trustee will consider your finances, so what do you own, who do you owe, how much income do you have coming in, what are you spending every month and then is there a way to solve this problem through the various tools that we have.

The first tool is can we just help you with your budget? Well, there aren’t any fees involved with this, this is helping you help yourself or should you be refinancing. In the current real estate market, it’s amazing how many people are just going out and getting second mortgages. And we can do a show on that, I’m sure.

Doug Hoyes: Oh, in fact I’m …

Ted Michalos: We probably have.

Doug Hoyes: … pretty sure last week’s show as on real estate. So the point is we’re not charging any upfront fees.

Ted Michalos: Right. And if we did we would get in trouble. I mean, that’s one of the advantages of dealing with somebody that’s regulated by the government, we’re not allowed to charge you upfront fees. If we do, we’ve got to disclose them to everybody and they come out of any eventual fees that we’re allowed to collect for the work we are licensed to do.

Doug Hoyes: Yeah. So if you were to do a proposal, and you’re going to file it next month and you gave us $500.00 today, we would have to take that $500.00 and put it towards your proposal payments.

Ted Michalos: Correct.

Doug Hoyes: It’s pretty much that simple.

Ted Michalos: And the debt consultant puts it in their pocket.

Doug Hoyes: So there’s a huge difference there. Well, we’re now hitting into the idea of the actual dollars involved. So, again, let me, you know, pull out the government’s report and read you a couple of paragraphs here, because this is kind of amazing. “Costs of insolvency for consumer debtors. Debtors” … and, again, I’m quoting from the government’s report here, these are not my words, not my opinions. “Debtors served by LITs who had ongoing relationships with debt consultants usually ended up paying thousands of dollars more for the administration of their insolvency than debtors who were not sourced through a debt consultant.”

Ted Michalos: Yeah, that makes sense, because you’re paying somebody twice.

Doug Hoyes: Like, that’s not hard to understand there, is it?

Ted Michalos: Right.

Doug Hoyes: They are paying thousands of dollars more. “Typically, debt consultants required a consumer debtor to sign a fee agreement for consulting services prior to being introduced to a selected LIT. Debtors typically understood the role of the LIT as being limited to meeting with the debtor to file the proposal developed by the debt consultant.”

Ted Michalos: Right.

Doug Hoyes: So and, again —

Ted Michalos: And that’s completely backwards the way that the system is supposed to work.

Doug Hoyes: That’s completely backwards. And so, again, we can talk about clients we’ve dealt with. And you, kind of, described it pretty well with the clients you met with recently, they go the debt consultant and the debt consultant says, you know what, the trustee is bad.

Ted Michalos: Well, the trustee doesn’t represent you.

Doug Hoyes: The trustee does not represent you, right.

Ted Michalos: The trustee’s not there to help you, the trustee’s there to make money.

Doug Hoyes: That’s right, the trustee is just there to make money. And, in fact, they’ll often say the trustee represents the creditors.

Ted Michalos: Right.

Doug Hoyes: And the reason they say that is you’re going to pay the trustee money and the trustee is going to give that money to the creditors, obviously, therefore they’re working for the creditors. Whereas me the debt consultant I only work for you, I don’t care about anything other than you, so you’re paying me as this unbiased advocate for you.

Ted Michalos: Yeah.

Doug Hoyes: What’s your response to that?

Ted Michalos: Well, the problem with that is that there’s very little advocacy going on. So the concept behind being an advocate is that you’re in somebody’s corner, you’re going to fight for them. There’s very little fight involved here. They get you to fill out some paperwork, they’ll forward that to the LIT that they have the relationship with and that’s what they’re going to do.

The LIT will tell them this is what needs to be offered for the creditors to agree. There’s no secrets here, there’s no magic, you know, you’re not dealing with a guy who knows something more than anybody else on the street.

Doug Hoyes: Well, but what about the argument that you work for the creditors?

Ted Michalos: Yeah, and we’re officers of the court, so we have a fiduciary responsibility to everyone involved, anyone who’s involved in the insolvency process, the individual that’s in trouble, the creditors that are receiving the payments from the trustee, the Office of the Superintendent and the courts. We have to maintain this middle of the road.

The analogy I always use is we’re referees. So think of us at … as a hockey game, right, we’re the guys who enforce the rules. We don’t write the laws, we tell you if you’re offside, if you’re onside. And it’s the same for either team, we don’t look at one side or the other. If we do, we’re not doing our job, you won’t have us back as a referee.

Doug Hoyes: Right. And that’s a key point. Upfront we tell you here are the rules, here are how they work, so you know what you’re getting yourself into.

Ted Michalos: Right.

Doug Hoyes: And this whole notion that we work for the creditors, well, no. Ultimately, you come to us, you select us to be your LIT and if we do a lousy job you’re going to be telling all your friends that we did a lousy job. If we treat you fairly and get the result that you want, you’re going to be telling all your friends that it worked out great. We’ve been in business since 1999 so that’s, what, eighteen, nineteen years now.

Ted Michalos: Yeah.

Doug Hoyes: And a lot of our work is referral work. People have dealt with us, they send their friends and their family members. So I can, pretty much, guarantee you the debt consultants aren’t getting a lot of referral work.

Now, let me read another paragraph, because this will blow your brains, from the … again, from the government report. “In the cases reviewed, the amount of the consulting fee portion of the agreement between the consumer debtor and the debt consultant averaged approximately $2,400 and reached as high as $4,200.” Like, what more do I need to say about that?

Ted Michalos: Right. So what you need to understand, anyway, listening to this is that what the OSB is doing here is trustees are paid a portion of what you pay to your creditors as an administrative fee. And they’re saying whatever you pay to this debt consultant before you pay any proposal payments is now an additional pure fee and they’re right.

So I’ll give you a numeric example. You’re going to pay back $20,000 on $60,000 worth of debt, about a third and that’s a pretty typical proposal.

Doug Hoyes: Typical proposal, yeah.

Ted Michalos: The fees on that $20,000 are going to run about 4,500 bucks, somewhere in that … does that sound right, 20, 18, 36 … no, about $5,100. There aren’t any upfront fees, that’s what the trustee will get paid over the four or five years while you pay it out.

If you went to a debt consultant first, they would charge you … probably on that size of debt, $1,500, three payments of $500 each. So now instead of paying fees of $5,000 you’ve paid fees of 6,500. So have you got so much money in your pocket that you can afford to pay an extra 1,500 that you didn’t have to pay. That’s really the question.

Doug Hoyes: It’s crazy. Well and let me read you one more sentence from the government’s report, “For lower-value proposals” … so that would be a, you know, proposal where maybe the total payments are 10,000, 15,000 something like that …

Ted Michalos: Right, right.

Doug Hoyes: … “the consulting fee commonly ranged from 20 to nearly 40 percent of the value of the proposal.”

Ted Michalos: Sure, because if you were paying back $10,000 … so let’s say you owed about 30 … the fees for that would be somewhere in the neighbourhood of $3,200. If you paid $1,500 in consulting fees up front, now you’re paying $4,700.

Doug Hoyes: But and to pay 40% more for something and get zero extra value is crazy.

Ted Michalos: Right.

Doug Hoyes: It’s like, well, you can go to this place and get your oil changed for a hundred bucks or you can go over there and pay a hundred and forty. Okay, if it’s the same thing, I think I’ll take the hundred, thank you very much.

Ted Michalos: Yeah. Well, and people have to understand that … this may come across as sour grapes because we have a bias, because we’re the Licensed Insolvency Trustees and we don’t deal with these guys. But the reason we don’t deal with these guys is because, frankly, I think they’re crooks. I mean, if you can get advice … competent advice for free or go to a not-for-profit and maybe they charge you 10 bucks … well, talk about that some more … what’s the point in paying somebody $1,500? Like, I just don’t get it.

Doug Hoyes: Yeah, their argument is we are looking out for you. And so you go to the trustee and the trustee is going to say, “Well, you need to file a proposal where you pay $300 a month for five years. Do you know what, you really only need to pay $150 a month.” The trustee is charging you more money because they make more money.

Ted Michalos: Right.

Doug Hoyes: But, guess what, it’s the creditors who vote on the proposal. So if we recommend that you file a proposal and pay 300 bucks a month, we can offer a proposal of $150 but the creditors are going to say, no, we want more money, we do a couple of hundred of these every month.

Ted Michalos: Right, yeah.

Doug Hoyes: And we’ve been doing them for years and years and years.

Ted Michalos: Right. So we keep track of what creditors vote which ways and what their minimum expectations are.

Doug Hoyes: Yeah. We’ve got a very detailed internal system … and you can’t see it because this is a radio show … but on the other side of these walls here we’ve got a group of six people who do nothing but proposals and they keep track of every single one we do. So if someone comes in to see me and they say, okay, I owe money to the Royal Bank, or to Canadian Tire or CIBC or whatever we can go … look in our system and see all the previous votes that company has done.

Ted Michalos: Right.

Doug Hoyes: And we know that, you know what, they’re going to look for this particular term, they want thirty cents on the dollar, they want fifteen cents on the dollar, whatever. So a debt consultant doesn’t have access to that kind of information.

Ted Michalos: Well, they never actually interrelate with the creditors.

Doug Hoyes: They never talk to them, no.

Ted Michalos: I mean, that’s the other part of this thing that really drives me crazy is they’ll tell you when you come see them, stop making your payments, stop answering the phones, oh, don’t worry about those collection letters. The reason they’re doing that is once you stop dealing with any of these … your debts in the normal course of business you’re pushing yourself down a road.

And so you’ve talked to the debt consultant, they’ve told you to do all these things but you haven’t made your decision yet how you want to solve the problem. Well, they’re forcing you into a decision. Once you stop making those payments it’s not like you can catch them up again.

So now you’re two months down the road you haven’t made a decision and somebody’s threatening you with a lawsuit. Well, it’s too late to just try and negotiate, or budget or do something else, you need a real solution and they’ve got you. They’ve got a hook in you now, they’re going to say, “Well, look, we’ll get you in to see our guy really quickly. You got to pay us that fee and get it done.”

Doug Hoyes: Well, it’s kind of like going to a real estate agent and saying, “I want to buy a house,” and they say, “No problem, we can get you a better deal on a house.” So I’ve got two different real estate agents who I’m thinking of hiring and one of them says, “We can get you that house for $300,000,” and the other one says, “No, that house is worth $450,000” okay, I guess I’ll go with the $300,000 one.

Ted Michalos: Right.

Doug Hoyes: I put in my bid at 300,000, well, guess what, it gets rejected. The buyer has no obligation to take something that’s well below market value.

Ted Michalos: Right.

Doug Hoyes: I mean, again, let me read from the government’s report. “The OSB took a look at proposals and the OSB’s comparison of the data identified a consistent difference in the frequency of files with very low proposed values,” that’s just what I just talked about, underbidding on a proposal.

Ted Michalos: Right.

Doug Hoyes: “LITs working with debt consultants filed five-year consumer proposals with payments under $100 per month about 14 to 19 percent of the time, this compares with only 4% of such proposals filed by the control group of LIT.”

So in your experience, Ted, I mean, okay, would you say that, yeah, it’s probably less than 4% where we’re doing a proposal, that’s four hundred … or a $100 a month or less?

Ted Michalos: Right. Yeah, I mean, the reason that somebody does a proposal that size is that, well, they’ve been … they’re afraid of the whole idea of a bankruptcy. And I don’t want to turn this into a bankruptcy versus proposal thing. But if you are on social assistance or a fixed income, limited means and somebody convinces you to pay $75 a month for five years when you could pay probably less than $100 a month for nine months who are they helping. I mean, they’re putting money in their pocket because they put you into a proposal, they got to charge you a fee. Probably the right answer for that person was a bankruptcy but that’s not what this show is about.

Doug Hoyes: Yeah, a bankruptcy or doing nothing. And, as I said earlier in the show, these debt consultants, overwhelmingly, are recommending consumer proposals.

Ted Michalos: They are because, in most cases, they don’t … they can’t charge any sort of a fee or … yeah, a consulting fee if you’re going to do a bankruptcy. So if the correct answer is that you need to file bankruptcy it’s hard to justify paying them $1,500 when the bankruptcy itself probably only costs $1,800.

Doug Hoyes: Yeah, the typical bankruptcy would do, if you have no surplus income, no assets, you’re probably paying a couple hundred bucks a month for nine months.

Ted Michalos: Right.

Doug Hoyes: The average fee that a debt consultant charges is $2,400, the OSB said that.

Ted Michalos: Yeah.

Doug Hoyes: So why would you pay $2,400 to a debt consultant who is doing nothing and then actually only pay the trustee $1,800, it makes no sense.

Ted Michalos: Right.

Doug Hoyes: They have to justify their fees and the way they do that is by putting you into a proposal, making a low-ball offer. And then of course what happens, the creditors come back and say, “Well, we’re not accepting four cents on the dollar, that’s crazy,” and then who gets blamed for it, oh, it’s the LIT, the debt consultant says, “Oh, sorry, I’m out of the picture now.”

Ted Michalos: Yeah. Well, and a worse example … so let’s say the creditors do agree to it, you get three years into paying $75 a month and you stop paying because it’s … you … it just wasn’t sustainable. Well, your bankruptcy would have been over a year and a half ago, you would have had all that money in your pocket and now you’ve got to file bankruptcy anyway because the proposal … you weren’t able to complete it. I mean, the debt consultant really doesn’t care because they got their fee upfront, they got their first transaction in. Once you’re … once they’re through with you it’s … I mean, they’re on to the next guy.

Doug Hoyes: Yeah. And the way we get paid … and, again, our fees are licensed by the federal government, regulated, every LIT gets the same percentage of the pot in a proposal, we get paid as we send money to the creditors.

Ted Michalos: Right.

Doug Hoyes: So the creditors accept the proposal and then every few months we’re sending them what’s called a dividend, a payment towards the debt, we get our fee at that point. So if the creditors vote no on the proposal we’re not getting paid, if we make the proposal too onerous that you can’t afford it and it fails we’re not getting any further payments after that point.

Ted Michalos: And, of course, the debt consultant was paid in full before they referred you to actually file the proposal.

Doug Hoyes: Yeah. So whether it works or not —

Ted Michalos: So their money has come and gone.

Doug Hoyes: Yeah, they don’t care whether it works or not. So okay. Before we get to the practical advice section of the podcast, I want to discuss what the OSB is actually going to do about this and what you think they should do.

So I’ll tell you what they say they’re going to do. They’ve issued this as a … kind of, a moral suasion, let’s throw it out there. From the OSB’s report they say that, quote, “Over the next year the OSB will initiate a series of amendments to OSB directives, BIA forms and compliance programs to address the risks and issues identifies … identified in this report. Areas of focus will include fulfillment of the LIT’s responsibilities and all aspects of the insolvency process,” et cetera, et cetera. So they’re saying that “we’re going to make some tweaks”.

Ted Michalos: Right.

Doug Hoyes: Okay. I guess making some tweaks is better than doing nothing. I mean, if there’s some murderer running around I don’t know if tweaks is the answer but —

Ted Michalos: But one of the challenges they have is the largest firm in the country is guilty of this, so …

Doug Hoyes: Yeah. As they said, that’s in their report that it’s a large and a —

Ted Michalos: So it would be interesting to see how they tweak the largest firm in the country.

Doug Hoyes: Yeah. It’s kind of like a banking regulator, knowing that the biggest bank in Canada is doing bad stuff, well, what are you going to do, shut down the biggest bank in Canada, that’s kind of hard.

Ted Michalos: Yeah. And that was just an example, we don’t know if the biggest bank in Canada is doing bad stuff. [laughs]

Doug Hoyes: No, no, I’m sure they’re perfectly reasonable people and doing everything fantastically but …

Ted Michalos: [laughs] Certainly.

Doug Hoyes: Okay. So what the OSB is saying is “we’re going to make some minor tweaks”.

Ted Michalos: Right.

Doug Hoyes: What do you think they should do? This is a very serious problem, they’ve identified the fact that consumers on average are paying $2,400 to these debt consultants who do nothing.

Ted Michalos: Well, it’s better than that. They can tell from filing patterns which trustees or which Licensed Insolvency Trustees are doing this. So, for example, if a trustee doesn’t have an office in St. Catharines and they’re doing 25 new files a month in St. Catharines, probably they’re getting work referred to them from somewhere, right?

Doug Hoyes: How is that possible, yeah.

Ted Michalos: They haven’t got an office but they’re doing all that work. So they easily know who it is that’s guilty of this. If a trustee does 95% of their files are consumer proposals and very few bankruptcies, well, probably they’re not seeing the public themselves, they’re getting their work referred to them.

Doug Hoyes: Because, on average, most trustees it’s a relatively even split between proposals and bankruptcy.

Ted Michalos: Yeah, pretty even split. And, intuitively, that’s what it should be. So, if you’re giving people the right advice, either you can help them without filing anything, or half the time they’ll file a proposal to repay part of the debt or half the time, you know what, file the bankruptcy, get on with your life more quickly.

If a debt consultant is not getting the fee for bankruptcies or telling them they don’t need any help, well, you know what they’re going to sell them. What should you do, the biggest single thing, don’t pay any fees up front.

Doug Hoyes: Well, but I’m asking —

Ted Michalos: If anybody … well …

Doug Hoyes: And we’ll get into that.

Ted Michalos: What can the OSB do.

Doug Hoyes: What should the OSB do?

Ted Michalos: Oh, that’s right, yeah.

Doug Hoyes: What should the OSB do. So I’m appointing you the superintendent of bankruptcy now.

Ted Michalos: Well, that’s great. Woohoo.

Doug Hoyes: That’s great, you’re the new guy.

Ted Michalos: Oh, and I want my eight weeks vacation. That’s a different conversation.

Doug Hoyes: Yeah. So what —

Ted Michalos: Do I get a pension?

Doug Hoyes: Yes, you get a pension. So what should they be doing?

Ted Michalos: All right. Well, again, so they can identify easily who they think are the … I’m going to call them the guilty LITs, the people that are acting in a way that’s not —

Doug Hoyes: The guilty parties. Okay, so they’ve got this list, they know who’s doing it.

Ted Michalos: — correct. Yeah, right. So the first thing they should do is moral suasion, okay, we know who you are, we’ve identified you, fly right.

Doug Hoyes: And that’s exactly what this report is.

Ted Michalos: Right, so that’s the first step.

Doug Hoyes: I mean, this is the first shot, the shot across the bow.

Ted Michalos: Yeah. So the second step is, if somebody’s not smart enough to pay attention to that, well … they call it a Chinese customs inspection. So the example is you send a load of produce into China and they’re not going to ban its arrival but it will sit on the docks until it’s rotten and then they’ll release it.

So the trustee, they just … all of our trustees fees have to be approved by the Office of the Superintendent before we can actually complete a file. So they could just slow down the paperwork and … it doesn’t have to be anything … what’s the word I’m looking for …

Doug Hoyes: Yeah, gum up the works is what you’re talking about.

Ted Michalos: Yeah, right.

Doug Hoyes: So what you’re talking about in a bankruptcy there’s a letter of comment that’s issued at the end of the file and that’s when we can draw our final fees. Well, right now for us that happens pretty much automatically, we push a few buttons on the computer, a few minutes later —

Ted Michalos: Comes right back.

Doug Hoyes: — comes right back.

Ted Michalos: Yeah.

Doug Hoyes: But, yes, they could do a manual review and it could take weeks, weeks or months.

Ted Michalos: And with a proposal they could … just they could simply start reviewing proposals.

Doug Hoyes: Well, they could request creditor’s meetings.

Ted Michalos: Yeah.

Doug Hoyes: And, in fact, they have been doing that in … we … you know, the discount clauses issue, which we’re not going to get into because we don’t have the time for that and it’s already been solved. But that’s exactly what they were doing. They identified an anomaly.

Ted Michalos: Right.

Doug Hoyes: And so they said whenever they see that anomaly we’re going to request a creditor’s meeting. And in most cases, in most consumer proposals we do there is no creditors meeting or, if one is required, it’s just a paper thing, you know, here, sign a piece of paper.

Ted Michalos: Right, it’s done by fax and email.

Doug Hoyes: Done by fax, nobody actually shows up. But the OSB could say “we are going to chair all those creditors meetings”.

Ted Michalos: Yeah.

Doug Hoyes: So for that big trustee firm that’s doing this and for those LITs that we know are getting most of their work from these guys, let’s have creditors meetings for every single one of your files.

Ted Michalos: And that dramatically increases the cost of the LIT doing the work, because we don’t get paid by the amount of time we put into a file. We get paid a percentage of the money that’s flowing through. So if suddenly have to do an extra five or six hours worth of work the file isn’t profitable anymore.

Doug Hoyes: Especially on … and it’s a real hassle for the debtor because now you got to take a day off work, you got to show up at this meeting, you got to answer questions —

Ted Michalos: Yeah. And there’s anxiety, why am I having a meeting, my friend did one of these with Hoyes Michalos down the road and there was no meeting.

Doug Hoyes: Hoyes Michalos. Everything was fine. They could also do examinations of the debtor.

Ted Michalos: Yeah, to find out how much did you pay and was it properly disclosed. But here’s the … I mean, if they really want to do something about this, if they find out that a fee was paid to a debt consultant they have the right to have it deducted from the trustee’s fees in the file. And so, suddenly, it’s not the consumer paying the fees up front, it’s the LIT paying the fees. And I think that would dramatically change things too. Because if you … if I was going to get paid $4,000 worth of fees on a proposal and I had to pay $2,400 … or had $2,400 deducted because I paid a consultant first, I don’t know that I would do the file.

Doug Hoyes: It gets to the … well, and if it was a $2,400 fee and the $2,400 deduction, you’re working for free.

Ted Michalos: Well … right.

Doug Hoyes: So at some point it doesn’t make any sense. Well, and I guess the other thing they could do is actually print a list of the offending parties.

Ted Michalos: Sure. I mean, if they published a list saying these are the guys that are performing this practice, without saying good or bad, just saying these are the people that are using debt consultants —

Doug Hoyes: These are the facts.

Ted Michalos: — you can decide for yourself if it’s worth the money.

Doug Hoyes: And you think word would get around pretty quickly, consumers would go, okay, and …

Ted Michalos: Yeah. We’ve been harping on this thing now for over a decade and they’re still in business. In fact, they’re probably busier than they’ve ever been, so …

Doug Hoyes: Right, and so that’s why we’re doing this podcast today in the hopes that we can actually get the word out that this is a serious issue … and, again, this is not just our opinion, the government has finally after … I mean, again, we’ve been on this case for five, six, seven years. They’ve finally done some research and issued a report that says, “We’re going to think about it, we might do something.” So hopefully it’s progress.

Ted Michalos: Yeah, yeah.

Doug Hoyes: Okay. So we’ve given the OSB advice, we know you’re watching, so hopefully you’ve taken these things into account.

Ted Michalos: [laughs] Listening, it’s radio.

Doug Hoyes: Absolutely. Well, this is going to be on YouTube as well if the video recording works, so …

Ted Michalos: So I should look up every once in a while.

Doug Hoyes: Exactly. So and … you know, for the OSB I’m … you know, Ted and I are more than happy to fly to Ottawa, and chat with you in person and give you our thoughts. But what about the person who is listening to us now, the actual individual who’s got some debt issues and they’re trying to figure out, okay, who can I trust, should I go to a debt consultant, what about you guys, how do I know if I’m being treated fairly, what practical advice can you give me?

Ted Michalos: Right. So this is where I was going before. So we jumped the gun a little bit. So let’s start this by saying that, at the end of the day, it’s your decision. If you decide that there’s value in paying these guys a fee before you actually talk to a Licensed Insolvency Trustee, we’re not going to stop you. I mean, it’s … you’re an adult, you got to decide what’s right for you.

But some warning signs for you. You shouldn’t ever have to pay an upfront fee. So if somebody meets with you for free and at the end of the meeting they say, “Well, okay, but now to go any further you got to give me 500 bucks,” wait a minute, trustee is not going to ask you for $500.00. That’s probably money that’s going to a debt consultant.

Doug Hoyes: And that’s real simple advice to understand.

Ted Michalos: Yeah.

Doug Hoyes: We do not charge upfront fees, number one, because we think it’s unethical but, number two, we’re not allowed to, the rules say we can’t do it.

Ted Michalos: Right.

Doug Hoyes: So you do not pay us anything until the paperwork has been filed with the government.

Ted Michalos: So there’s a test for you, right? So you met with somebody because they’ve done that first meeting for free, at the end of the meeting they ask for money, all right. So at this point you shouldn’t be signing anything. Don’t make any sort of commitments, you want to think about this some more.

The follow-up question as soon as somebody asks you for money should be, “Are you a Licensed Insolvency Trustee?” and if that doesn’t make you comfortable, “Are you actually going to do the work for me?” Because if they’re a debt consultant, they can’t. If the guy comes back and says, “Well, I’m going to refer you to my guy down the street. He’s going to actually do the filing,” okay, so why am I paying you money then.

Doug Hoyes: Yeah, when I go in for my surgery consult I would like to talk to the surgeon, not someone who knows the guy who knows the guy who knows the surgeon.

Ted Michalos: Right.

Doug Hoyes: I mean, I want to know who I’m dealing with. So don’t pay upfront fees, don’t sign a contract to pay anything until you’ve met with an LIT. Only deal with an LIT. And I guess, even more basic than that, ask “what fees am I being charged?”.

Ted Michalos: Right, what’s the upfront cost … what are you asking me to pay and why.

Doug Hoyes: And we’re happy for you to ask us that question too because, again, our fees are set by the government, we’re … it’s right in the proposal what we’re getting paid.

Ted Michalos: Right. And, again, if the guy says it’s 1,500 bucks and you think that’s $1,500 well spent, then I respect your decision to do that.

Doug Hoyes: Yeah, I mean, there are lots of people who will go talk to their accountant or their lawyer first and pay their accountant or lawyer money, okay, that’s fine, I’ve got no problem that, particularly if you’re in a business situation maybe it makes a lot of sense because there may be tax implications and whatnot.

Ted Michalos: Right.

Doug Hoyes: But in that case you know what you’re getting, they charge you by the hour, you’ve been dealing with them in the past and they have no incentive to refer you to one person or another.

Ted Michalos: Right.

Doug Hoyes: They’re probably giving you independent advice. But when you’re dealing with a debt consultant … and I guess the other question you could ask them … so, “Okay. You’re going to be referring me to someone. Do you only refer to one different party?”

Ted Michalos: Yeah, “Can I get a list? Who should I be taking to?”

Doug Hoyes: Right. I mean, with the not-for-profit credit counsellors that we deal with in most of the cities we’re in they have a list of three or four different LITs that they’ve met with, preapproved, they know they’re legit. So they don’t send everybody to the same person in most cases, they spread them around.

Ted Michalos: Right.

Doug Hoyes: So … okay, so I think that’s really good advice. What are your final comments then on anything to do with debt consultants, the OSB or people who are listening who may have issues with any of this?

Ted Michalos: Well, so I get the attraction, the debt consultant is allowed to, basically, play on your fears, not only of the debts that you have but of having to talk to a Licensed Insolvency Trustee. It was better for them when we were called bankruptcy trustees, because that’s an even scarier name. So they are playing on your anxiety and your fear, because you don’t want to do that. You want to do something better.

So any time a deal sounds too good to be true, it probably isn’t true. They’re going to meet with you for free up front, because the first time they meet with you it will be, “Yes, come on in for a free consultation.” And more and more these are being done over the internet or by phone now. But the conversation always end with, “Okay, I think we can help you. I need that 500 bucks.” And so they’ll immediately ask you for money and that’s your warning sign, wait a minute, you haven’t done anything yet, why do I need to give you money.

Doug Hoyes: Yeah, it’s pretty much as simple as that, don’t be signing anything, don’t be paying any money before something is filed, deal with a Licensed Insolvency Trustee. Simple as that.

Ted Michalos: Yeah. And you … and, yeah, you can use the second opinion thing on trustees. So you go to see a Licensed Insolvency Trustee and call another one, go see another one. I mean, we call that opinion shopping but, quite frankly, it’s your life, you got the right to look around and make sure you’re comfortable with the people you’re dealing with and you’re getting advice that you can live with.

Doug Hoyes: Well, and I think I met with two people in the last week who had been to see another LIT and they just weren’t comfortable, they didn’t understand the explanations they were getting, well, great, go see someone else then, we get a lot of work from that too, so …

Ted Michalos: Right.

Doug Hoyes: Excellent. Well, I think that’s an excellent way to end it, that’s our show for today, full show notes, including links to the bombshell government report.

Doug Hoyes: And all of the previous videos and articles we’ve written on this topic can be found at hoyes.com, that’s h-o-y-e-s-dot-com.

If you want to have your say, there’s a link on the OSB webpage so that you can send a message directly to the government explaining that you don’t think vulnerable consumers should be scammed by debt consultants who only want to take their money. So feel free to take advantage of that.

Thanks for listening. Until next week, I’m Doug Hoyes. That was Debt Free in 30.

Homeowners Banking On Their Home Equity

Piggy bank and toy house to indicate home equity

Last week we discussed the impact car loans have on our debt levels. This week we’re taking a larger bite out of secured debt and discussing how homeowners cope with their debt, and what they do to hold off insolvency.

First some background on homeowners and debt.

As you may remember, we published our Joe Debtor study at the end of March 2017. This study takes place every two years and analyzes data from insolvent debtors from across Ontario. When it comes to homeowners, we’re seeing a steady decline in the rate they’re filing insolvency. That doesn’t mean they’re without debt, it just means they’re getting creative with how they hold off insolvency.

Although only 17% of all insolvent debtors in our 2017 study were homeowners, roughly 30% of people who call into our offices are homeowners looking for help dealing with their debt. Because home values are so high right now, it may make more sense for the caller to pull from their home equity to help pay off their existing debt, or even sell their home to pay off their debts in full.

How to Avoid Over Leveraging Your Home Equity

Whether you’re a homeowner, or starting to save for your first home, there are a few key factors to consider to avoid debt issues in the future. For new homeowners, you’ve always kept up with your rental payments, which is great, but there are more factors than the mortgage payment to consider. Existing homeowners may not know

  1. Assess the full cost of purchase: In addition to your mortgage payments, make sure to factor in utility costs, property taxes, and any repairs into your budget. Remember that if you’re getting by with paying $1,500 in rent now, that doesn’t necessarily mean you can manage a $1,500 monthly mortgage payment after everything else is factored in. If you’re not sure how to plan for these costs, speak with someone you know with a home that’s similar in size to what you would purchase. See what their costs are and use those as a guideline.
  2. Remember: a bigger house means more space, which also means more furniture. Don’t buy too big and get overwhelmed with wanting to fill every room.
  3. Shorter amortization terms are better: This ties into our podcast from last week with car loans. Don’t tell them what you can afford as your monthly payments, but clearly state how much you would like to spend. Sure, you could afford your dream home if your amortization period is 30-years, but how much of that would you pay in interest? Calculate how much you would save on a 20-year term, or a 25-year term. Make sure to keep tip #1 in mind when calculating these costs.
  4. Have as big a down payment as possible: The larger your down payment is, the less money you’ll have to borrow to purchase your home. This means you’re spending less on interest over the course of your loan, and it may make those shorter amortization term payments that much more manageable.
  5. If you get into trouble, get professional advice: Once you do purchase your home, you’ll find that credit is easy to come by. In addition to the options you had before you were a homeowner, you now also have access to pulling from your home equity. Don’t put your house underwater by over leveraging it to help with your day-to-day expenses.

Resources mentioned in today’s show: 

FULL TRANSCRIPT show #142 on Ask The Experts

homeowners-banking-on-their-home-equity

Doug Hoyes: Last week I played a segment from the Ask the Expert show on 570 New In Kitchener where I was interviewed by Dave Calendar about car loan debt. Today I’ve got the second half of my other interview with Dave where we discuss the other big purchase we finance in our lives, real estate. We talk about what we learn from our Joe Debtor study about home owners and debt and I give lots of practical advice on how to deal with debt if you’re a homeowner. Here’s my Ask the Experts interview on real estate and mortgages.

Dave Callander: Thanks so much on joining us today on Ask the Experts, my guest is Doug Hoyes of Hoyes Michalos Licensed Insolvency Trustees. You’ll find offices in Kitchener, Cambridge and Guelph and quite frankly right across Ontario. If you’d like to get a hold of the office nearest you just pick up the phone and call 310-PLAN or learn more online at hoyes.com, that’s -ho-y-e-s-dot-com.

Today on the show we’ve been focusing on cars, that’s how we spent the first of the show doing but now we’re going to talk about another area where a lot of folks get into debt problems and of course that’s real estate. So, the real estate market in Ontario at the moment is – it’s not booming it’s kind of exploding and I understand from your recent Joe Debtor study that homeowners are still getting into trouble. So, two questions what is your Joe Debtor study and what does it tell you about real estate?

Doug Hoyes: Thanks Dave. Our Joe Debtor study is a study that we do every two years so we released it in the spring of 2017; this was probably our fifth or sixth study. What we do is we take all of the data from all of our clients over the last couple of years, because if you file a bankruptcy or consumer proposal with Hoyes Michalos, obviously it’s a legal process, we’re required to gather a bunch of data, obviously your name and address but a whole bunch of detail on your debts, your assets, your income that sort of thing. And we crunch all the numbers and a look at all the different trends.

And what we found this year was quite interesting actually. The average person on the street would tell you oh well I think bankruptcy is caused by, you know, reckless spending and things like that. And our data proves that no, that’s not the case at all. Our Joe Debtor, we call Joe Debtor, this is the average person that we deal with, our typical client, that’s just the name we made up for him, he’s got money problems and he’s got these problems even before he gets into debt. This is a key point here.

So, the debt is the symptom, it’s not the actual problem. And in a lot of cases his money problems are caused by lower than average or sporadic income. A lot of people today work a number of part-time jobs because they don’t have one full-time job. We see this particularly with millennials. I get up at 5:00am because I do the shift at the coffee shop from 6 till 10, I go home, I get an hour’s sleep and then I get back on the bus for my hour long ride for my second job where I’m working retail from, you know, 6 till 10. And unfortunately if one of those jobs gets interrupted then I’ve now got a problem. We’re seeing that more and more.

So, it’s lower income or sporadic income but then you combine that with the rising cost of living. I mean everyone knows costs keep going up. This like your hydro bill for example, it’s not like it’s going down every month. So, our typical client is struggling to make ends meet. So, what does he do? Well, he uses debt to keep up and eventually he hits the breaking point, can’t do it anymore and ends up having to file insolvency. So, that’s the typical profile of the person we’re dealing with.

Now you asked me a two-part question what did Joe Debtor say and what does it say about homeowners? So, you’re right, at the moment the real estate market is booming and again, I’m talking specifically about the Toronto, Southern Ontario area. There’s other areas like Fort McMurray that’s not doing quite so well at the moment. But it’s booming and so homeownership is not a significant contributor to the current insolvencies in Ontario. In other words if you’ve owned a house for the last five years you’re probably in pretty good shape. If you’ve been paying down your mortgage and your house has been going way up in value, you’re fine, not an issue.

However this does not mean that homeowners are not feeling financial pressure. High home prices, rather than contributing to insolvencies are temporarily masking a future financial risk. So, you know when you’ve got a cold and you got and you get some cold medicine from the drugstore and you feel better for a few hours?

Dave Callander: Uh huh.

Doug Hoyes: Is your cold gone? Well, no you just don’t feel the symptoms of it. And that’s exactly what we’re seeing in the real estate market right now. Here’s the problem, insolvent homeowners have already, in other words the people who are coming to see me for help who own a home, have already overleveraged the equity in their home. So that means they’ve borrowed as much as they can against their home.

So, in the old days you go out and get a mortgage if you had 25% down was all good. If the price of the house went down 5 or 10% it didn’t matter you could still sell it, get all your money out. Well now, we get a mortgage for as much as we can and with CHMC insurance you can, you know, if it’s a new home you’re buying you can have as little as a 5% down payment but we also see people who then go back and get a second mortgage or get a line of credit also secured by the house. And in addition to that we find they end up maxing out their credit cards, their lines of credit, their personal loans so they no longer have enough equity in their home to cover or refinance their other debts.

And again, it’s not hard to understand why. So you’re living in an apartment and you go and you buy a house. Well, now what do you need to do? Well, I got to buy a new couch, I got to buy some more furniture, I got to buy another bed, I’ve got to paint the place. I got to do a bit of landscaping. So, if you don’t have a bunch of cash sitting aside when you buy a house, you end up financing it and that’s how houses lead to things like credit card debt.

And homeowners have very easy access to credit these days. So, even if a homeowner defaults the bank is more than happy to, you know, they figure they’re going to get their money out of the house. So, it’s easier if you’re a homeowner to not only get a mortgage but also to get credit cards and other types of unsecured debt.

Let me throw some numbers at you just to kind of maybe round this out for the listeners. Of our clients, 17% are homeowners. Now that doesn’t sound like a big number and it isn’t. If you go back a couple of years to 2015 it was 24% to 2013 it was 29%. So, think about that. Three or four years ago almost a third of our clients owned a home and still got into trouble and went bankrupt or filed a proposal. Today it’s a much lower number.
The average mortgage that our clients are carrying is just over $191,000, the average home value is $224,000. Of course an average number is a meaningless number. In Toronto there’s no such thing as a $224,000 house. But when we look at the entire province that’s the numbers we’re seeing. 9% of those people have negative equity in their home before, even before considering selling costs. And only 57% have a significantly positive net realizable value. However even the equity in their home isn’t enough to cover their unsecured debts. So, it’s a significant problem. Have we got time for me to throw more numbers at you here?

Dave Callander: We’ve got lots of time.

Doug Hoyes: Let me throw some more numbers at you. In fact when we did our Joe Debtor study our average client had unsecured debt. So, again unsecured debt means there’s no asset attached to it, we’re not talking car loans, bank loans. They had unsecured debts of just over $50,000. However, if you were a homeowner and ended up filing a proposal with us your average unsecured debt was over $72,500.

So, think about that. You own a home and you’ve got a mortgage and in addition to that $72,500 and that’s made up of things like credit cards, you know, credit cards and personal loans account for about 75% of that. A homeowner has 72% more credit card debt than a non-homeowner. And they’ve got 79% more in personal loans than a non-homeowner.

And again, why is that? Well, I got a home so the bank will lend me money.

Dave Callander: Uh huh.

Doug Hoyes: And we think hey, that’s great, the bank is lending me money, I guess I should borrow more. Interest rates are low, this is great. We’ll talk about that in a second segment but it’s only great if you can actually pay it off. 95% of our clients who own a home have credit card debts and on average they have more than four of them. So, it’s not like you’ve just got one that you’re carrying a balance on no, you’re giving me this quizzical look, it’s true Dave. These are actual real numbers I’m giving you over four credit cards.

Dave Callander: Now are we talking about the major ones or are we talking about department stuff as well.

Doug Hoyes: All of the above, all of the above. So, it starts with the major ones but typically if you bank at ABC Bank you’ve got their credit card but it’s very common to also have the gas card and to have the department stores and maybe one of the non-bank credit cards. I’m not going to mention any names here because I don’t want you getting sued here Dave but very common to see that. A homeowner who comes to see us typically has four credit cards that they owe money has, a non-homeowner only has three, which is still a big number. But again, when you own a home it’s that much easier to borrow other money as well and that’s where you get into trouble.

Here’s another stunning statistic. Thirteen percent of homeowners who come and deal with us owe money on a payday loan, which is the highest and most expensive form of borrowing, 13%. Now non-homeowners it’s almost a third, 28% of them have payday loans. But even someone who owns a house, has a significant mortgage, they get into cash flow trouble and what do they do? They resort to a payday loan.

I’ll make one final comment on this and that is that I said back in 2013 about a third of our clients owned a home and today it’s only 17%. However about a third of the phone calls we receive from people are from homeowners. So, homeowners are feeling the pinch, they’re stressed out, they’ve got more debt than they can handle so they’re still calling us but our advice to them is you know what? See what your house is worth, maybe you can refinance it, maybe you can sell it.

And what’s been happening over the last year or two is their house has gone up in value so much that yes they can actually refinance or sell it, and as a result they don’t need to do a consumer proposal or a bankruptcy to deal with their debts. But what’s going to happen when house prices stop going up? Well, you won’t have that ATM machine there to go and continue to borrow. So, that’s the worrisome thing I see. We’ve been reliant on our houses for a long period of time it won’t last forever.

Dave Callander: All of these numbers to me are somewhat surprising. Maybe not so much the fact that 95% have credit card debt, I mean credit cards are everywhere but I can’t get over this 13% of homeowners have payday loans.

Doug Hoyes: Yes because – and the reason you get a payday loan is because you believe you have no other option. So, my mortgage is due on the first of the month but my paycheque doesn’t come in until the Friday which is the fourth of the month. So, what am I going to do? Well, the correct answer is you phone up a mortgage company and say look, really sorry but I’m going to be three days late and they’ll probably yell at you but fine it’s the first time you’ve missed a payment, three days late, not the end of the world. And then from there you can make a plan to not get into that mess again.

But we don’t think of that. It’s like oh, I can’t miss my mortgage, they’re going to kick me out of my house. So you end up going to a payday loan and of course in Ontario they can charge $18 on every $100 you borrow. So, if you have to borrow 500 or 600 bucks to top up your mortgage payment, that’s a massive amount of interest. If you were to do that every two weeks, like borrow $100 and pay back $118 every two weeks for the year, that’s like 468% interest. You’d pay back $468 in interest on top of the 100 bucks. You cannot afford to do that. But even homeowners get into that crunch. So, that’s why I say owning a house is not the solution to all of your problems and in a lot of cases it just causes even more significant cash flow problems for people.

Dave Callander: We’re going to take a short break. When we come back though we’re going to talk with Doug about his advice for homeowners so that we don’t get into these problems or if we are what the solution is. If you’d like to get a head start and get more information, go online to hoyes.com that’s h-o-y-e-s-dot-com or call 310-PLAN to get through to the Hoyes Michalos nearest you.

Doug Hoyes: That was the first half of my interview on the Ask the Experts Show where I walked through some of the scary numbers from our Joe Debtor’s study. One of the key takeaways for me from that study is the massive amount of unsecured debt that homeowners carry. Obviously they have a mortgage, I get that, but they also owe a lot of money on credit cards, bank loans, lines of credit and even payday loans. And the interest rate on that debt is a lot higher than the interest rate on a mortgage. So, it’s a big problem. So, what’s the solution? What practical advice can I give you? Well, that’s the second part of my interview and it starts right now.

Dave Callander: This part of the show we’ve been talking about real estate debt, talking about some of the numbers, the shocking numbers that affect people who are homeowners. But now we’re going to talk about the advice for people who find themselves in trouble. So, what’s your advice Doug?

Doug Hoyes: Well, my advice, and this applies to homeowners, but it also applies to every other area of finances, is you got to start with a plan. So, take a step back and this is very hard to do because when you’re out there with your real estate agent looking at houses and you go oh, wouldn’t that be great, look at that pool, look at that big garage and oh the yard would be great for the kids and the dog and the goldfish and oh, it’s going to be fantastic. You let the emotion of it take over. And that’s fantastic, I mean you should like the place you live. I’ve got no problem with that.

But it’s very important to separate your rational mind from your emotional mind and say to yourself okay before we go out and get all hyped up about all the different houses that are out there, what can I actually afford. And this is a difficult question if you’ve never owned a house because you say to yourself okay so I’m paying $1,500 a month in rent now so I can easily afford $1,500 in mortgage payments. So, there you go, boom, done. Did my analysis, took me 10 seconds.

Yeah, but a house is a lot more than just the mortgage payment. And so I would strongly recommend you go talk to friends or family members who already own a house or who own a house similar to whatever it is that you’re going to be buying and ask them for the numbers. So, what do you pay in hydro, what do you pay in gas, what do you pay in property taxes? If you’re buying a condo, what do you pay in condo fees?

And if it’s a condo that’s been around for a few years, you know, one of these big apartment buildings, what shape is the condo corporation in? Do they have a big shortfall or do they have a surplus of cash? Because if something goes wrong in the condo, if the elevators need to be replaced, if the roof needs to be replaced, if the parking lot needs to be resurfaced, well the number has to come from somewhere. If there isn’t a surplus pot of cash sitting in the condo corporation, guess what? You the individual owner get hit with an additional assessment. So, are you able to kick in an extra five grand if that’s what the condo corporation says they need, you know?

Dave Callander: I hadn’t thought of that, yeah.

Doug Hoyes: So you have to think through all the possible costs that you haven’t thought of and the best way to do that is to talk to somebody who already owns a house or owns a condo or owns something that is similar. You buy a house out in the country, hey that’s great, I don’t have to pay water and sewerage and everything. I’ve got a septic tank, it’s all great. Yeah, okay how often do you have to get the septic tank pumped out? What happens if your well breaks, how much does that cost? You know, when is the roof going to need to be replaced, how much does that cost, how much does a furnace cost, an air conditioner and even just the monthly and regular maintenance costs.

So, how much do all those things cost? And you got to add those into your budget. So, the $1,500 you’re going to be making in mortgage payments might actually be more like $2,500 a month by the time you add in property tax, repairs and maintenance and whatnot. And that’s ignoring any new things you want to do. We’d really like to put in addition on, we’d like to put in a pool, we’d like to do this, we’d like to do that. Again, fantastic, but figure out in advance, can you actually afford it.

Number two would be, and I said this in the car segment earlier, keep your amortization period as short as possible. So, again don’t think in terms of well, I can afford $1,500 a month so let’s get a mortgage that’s $1,500 a month. Okay, well I guess the bank would give you a 30-year term then. Making it a 25-year term or a 20-year term or a 15-year term is going to save you a massive amount of money.

So, what I would suggest you do is go online type in the phrase mortgage calculator or mortgage amortization schedule or whatever, there’s tons of them out there, and punch in the numbers. Boy, if I shorten the term from 25-years to 24-years, how much money do I save, how much money does my monthly payment go up? The more, the shorter you can make it, the better.

And of course the other way to make it shorter is to have as big a down payment as possible. And this is a really sensitive issue these days because everyone is I’ve got to buy a house now because houses are going to go up more tomorrow. I’ve got to jump in, I’ve got to jump in. Well, by waiting an extra year, how much more money can you save up? And I get it, in the overheated market we’re in here in 2017 that’s a very, you know, worrisome thing because house prices might be a lot more in the future. But the bigger a down payment you can have the better.

So, again talk to your financial advisors if you’ve got money in an RRSP maybe it makes sense to use the new homebuyer program if you’ve never owned a home in the last five years to take the money out. But you want to have as big a down payment as possible.

And then finally if you do get into trouble then get professional advice. And so, let me kind of walk through what we do in those cases because as we said in the first segment, 30% of the people who call us are homeowners. Today a lot of them don’t need to file with us because their house has gone up in value. But when someone who is a homeowner calls me, I ask them a bunch of questions. Okay, how much other debt do you have, what are your credit cards, bank loans and whatnot? And we know from our statistics that the average homeowner has over $70,000 worth of unsecured debt, credit cards, bank loans, taxes and so on. So, can you pay that off on your own? What is your house worth?

And in this day and age a lot of people don’t know what their house is worth because values are changing so quickly. So, my advice there is talk to a real estate agent and ask them what your house would sell for if you were to list it and sell it quickly. So, not if we put a new roof on it, repainted it, did a whole bunch of landscaping but as is, what would our house be worth? And get them to give you that in writing, most of them will do it for free. Then you want to call up your bank and say how much would it cost to pay off my mortgage today? What’s the buyout number? Well, now you know, we can calculate if you were to sell the house, pay off the mortgage, pay off the real estate commissions, pay what’s owing on taxes, any other charges or penalties, how much would you actually get for that house?

And if the answer is well, I could get $200,000 for my house and I got $50,000 worth of other debts okay then pretty simple, either sell off the house and pay off the debts or consider getting a second mortgage, refinancing a second mortgage, whatever. And I would suggest that you talk to your bank but perhaps also talk to a mortgage broker to get a couple of different opinions on what it’s worth. So, can you work out the problems on your own? That’s question number one. If you can’t we can help you explore other options. So, the most common solution by far if someone is a homeowner but also has a whole bunch of other debt, is a consumer proposal.

I’ll give you a scenario where the equity in my house is, I don’t know, let’s say $20,000. Okay, we did the math, here’s what it would sell for, here’s what’s owing on it, it’s $20,000. My total debts are $70,000. Okay well, if I sell my house and get $20,000 that won’t be enough to pay off my debts. But what we might be able to do is go to all the people you owe money to, the banks, credit cards, payday loans, income taxes, whatever, and we can say well, look if I go bankrupt and they sell my house you get $20,000, how about we make a deal where I pay $30,000. How about I pay $500 a month for the next five years?

That’s $30,000, that’s more than you guys would get in a bankruptcy but I don’t have to sell my house, I could but I don’t have to so it’s a win-win. I keep my house but I also get my debts under control and in that scenario we can quite often work out a deal. And the beauty in a consumer proposal is you can – you’re in full control. You can keep your house or sell it, you might decide six months into it that you know what? I’d like to sell the house and get my money out, no problem you can do that. So it’s a much more flexible option.

Dave Callander: Finally as we wrap up the show today, we’ve got about a minute left. What is your advice for anyone who’s starting to experience financial troubles?

Doug Hoyes: Debt problems do not go away on their own. So, if you are at all worried that you have debt problems, you probably do. Give our office a call Hoyes Michalos 310-PLAN, that’s 310-7526 or go on the internet hoyes.com h-o-y-e-s-dot-com, we’ve got tons and tons of information. We’ve got over 100 videos on our YouTube channel, I’ve got a podcast that I do every week. There’s well over 100 episodes there. We’ve got tons of information. You can come in and talk to us absolutely for free either on the phone or in person. Don’t wait, your debt problems are not going to go away on their own.

Dave Callander: Alright. Doug, thanks so much for being on the show.

Doug Hoyes: Thanks for having me Dave.

Dave Callander: And again if you’d like to get a hold of the folks at Hoyes Michalos, licensed insolvency go online to hoyes.com or all 310-PLAN.

Doug Hoyes: That was my interview with Dave Callander on the Ask the Experts show on 570 News. That’s our show for today. Full show notes, including a transcript of today’s show can be found at hoyes.com that’s h-o-y-e-s-dot-com. Thanks for listening. Until next week, I’m Doug Hoyes. That was Debt Free in 30.

 

How Car Loans and Car Loan Rollovers Lead to Insolvency

Toy cars on rising coins to indicate high auto loan debt

There are two major purchases we make in our life that we typically use debt to purchase. The first (no surprise here) is our home, and the second is our car. But can car loans lead to insolvency? Believe it or not, yes car loans can lead to insolvency.

As cars are getting more sophisticated and fitted with new gadgets and features, which means they’re also getting more expensive. You’re no longer buying just a car, you’re buying a driving computer. Instead of the days where we could just pay cash up front for our vehicle, we’re presented with loans and leases as a way to stretch the total amount over a number of years. In some cases, car loans extend up to eight years.

This makes cars more affordable for the every day consumer, which is great for car companies as they’re able to continue with the technological evolution of their cars.

How Car Loans Could Lead to Debt Problems

Because there are always newer, more technologically advanced cars coming out, people trade in after a few years to get a newer model. If they were paying for each car in cash, that would be great for the dealer and great for the consumer. But a statistic from DesRosiers Automotive Consultants states that 85% of cars are now bought with debt.

Consumers have started trading in their car, which they paid $30,000 a few years ago and they still owe $15,000 on the car. The car’s trade-in value is only $10,000 now so you’re rolling $5,000 over into your new car loan. So the shiny new $30,000 car is actually costing you $35,000 when you factor in the money you still owe on your previous vehicle.

That’s fine if it’s a one-time transaction, but if you’re getting a new car every two or three years, those rollover costs add up.

Car Loans and Insolvency

Our Joe Debtor study shows that more than one-third of our clients trade in a car with negative equity. Negative equity means that they owed more to their creditor than what their car was worth in resale value.

If you are considering a bankruptcy or consumer proposal it’s important to know that you can keep your car after filing insolvency. Your car is a secured asset so, if you can maintain your car payments, you can keep your car. Something you may want to think of is “is it worth it?”

If your car is only worth $10,000 for a trade-in or resale, does it make sense to pay off your remaining $15,000 that you owe to your creditor? Depending on your situation, it may make more sense to return the car to the dealership, and include the shortfall into your bankruptcy or consumer proposal.

How Can You Avoid Car Loan Debt?

If you’re looking for ways to avoid car loan debt altogether, we have some tips for you. One of the most important pieces of information is to ask how much the total value of the car is.

If I were to pay cash for this car, how much would it cost me?

Many people get blindsided by the affordable monthly payments and don’t necessarily calculate the amount they’re spending over the life of their loan. If you’re paying off a car with a six year loan, the interest may add up to you spending an additional $5,000 or even $10,000 on your car. Here are practical tips to keep in mind:

  • keep your loan period as short as possible,
  • save as big of a down payment as possible,
  • if you get into trouble, get professional advice.

Resources mentioned in this show:

FULL TRANSCRIPT show #141 Doug Hoyes on Ask The Experts

how-can-car-loans-lead-to-insolvency

Doug Hoyes: Today’s show and next week’s show will be a bit different. wiNormally I’m the host of this show and I interview a guest, but today I’m the guest. I’m going to play you the first half of an interview I did with Dave Callander on the Ask the Experts show, broadcast on May 6th on 570 News in Kitchener.

Dave asked me about how people get into debt problems with cars. I tell him some stories about how people end up owing a lot more on their car than it’s worth, and we talk about practical solutions to the problem of debt in cars.

But before Dave asked me about cars, it’s been a year or two since I was on Dave’s show, and in that time our profession changed its name. So Dave started the interview by asking me about that name change. So let’s pick up the show with Dave’s first question about why we changed our name.

Dave Callander: Before we get into the meat of today’s discussion, it’s been a while, as you say, since you’ve been on the show. Last time you were here I think I referred to you as a Bankruptcy Trustee, but now I hear you’ve gone and changed your name to Licensed Insolvency Trustee. What’s up with that change?

Doug Hoyes: Well so it wasn’t actually me who changed it. It was the federal government of Canada who implemented the change, as the government is want to do, on April 1st of 2017, April Fool’s Day. They decided that what we do is help people with their debt issues. And we don’t just do bankruptcy. And in fact, at Hoyes Michalos we do fewer bankruptcies than we do consumer proposals.

And so calling ourselves Bankruptcy Trustees kind of cuts out a big portion of what we do. So all trustees are now known as Licensed Insolvency Trustees, and there are two components to that, licensed meaning we are actually licensed by the federal government of Canada. There’s lots of people out there who say “Oh I can help you with your debts no problem. Give us a call, pay us some money, we’ll take care of it.” Well, they actually can’t.

We are the only ones who are able to use the force of law to help you deal with your debts. And insolvency of course is what we do. If you’ve got more debts than you can handle, then it’s a Licensed Insolvency Trustee that you need to deal with.

Dave Callander: Maybe you could tell us a little bit more about Hoyes Michalos, for folks who haven’t heard you on the show before.

Doug Hoyes: Well as I said, we help people with debt. So the typical person we deal with would have had a good job at some point in the past, they were able to get some credit and then something happened. Perhaps they lost their job, they got sick, they got downsized, maybe they’ve gone through a divorce; they used credit to survive, and now they’ve got a bunch of debt that they can’t handle. And it’s a worry, because if you get behind on your credit cards and your bank loans and your income taxes, you’re likely to have your wages garnisheed, you’re getting phone calls at work, bank accounts can get frozen, a whole lot of nasty stuff can happen.

So people come to us, and we work out either a consumer proposal or a bankruptcy. And a consumer proposal is quite simple; we make a deal with the people you owe money to. So a typical person we deal with might have 40, 50, $60 thousand dollars of what we call unsecured debts, so not car loans and mortgages – we’ll talk about those on today’s show – but things like credit cards, bank loans, payday loans, income taxes, and you’re way behind on them. We talk to the people you owe money to and work out a plan where perhaps you pay 20 cents, 30 cents, 40 cents on the dollar back, no more interest.

So it’s a win-win for everybody. The people you owe money to get more money than they’d get in a bankruptcy, and you don’t have to go bankrupt. And again, we’re Licensed Insolvency Trustees, which means this is all governed by federal law. No one else can do this unless they have a license from the federal government.

And all of our consultations are free. So there are no up-front fees. And the reason there are no up-front fees is it’s illegal for us to charge up-front fees. That’s one of the conditions of my government license. You come in, you talk to us for free and we explain your options, and then you decide from there what’s going to work for you.

Dave Callander: All right. Now as you mentioned on the show, we’ve often talked about things like credit card debt, unsecured debts; I don’t know if we’ve ever focused directly on vehicles. So let’s start with cars. Why do people get into debt problems with their cars?

Doug Hoyes: Well because we like driving new cars and we like driving new trucks, and unfortunately they’re getting more and more expensive. I mean I’m an old guy Dave, I won’t say how old I am but I remember when I started driving there was no such thing as, you know, CD players in the car let alone GPS’s and rear-view cameras and backup this and backup that. They’re getting much more expensive, and as a result very few people today pay cash when they go buy a car.

And again, if you’re listening to the show today, ask yourself that question; the car you’re driving now, did you pay cash for it? Well if it’s a thousand-dollar car perhaps you did, but it’s very rare to see someone driving a brand new car that they went in and paid cash for. They get a loan to buy the car, or they lease it. And you know, again, we used to pay cash for everything but then we started getting car loans, and now cars are getting more expensive.

And so it’s not uncommon for a car loan to last for as long as eight years now. And these long loans are great for car sales, but unfortunately it’s very expensive for consumers. I mean you probably don’t know this, but in Canada automakers are selling about 41% of the vehicles they sell now with loans of at least six years or leases of at least five years. So that means you get a car, you get a loan to buy a car, and you will probably be paying for it for five, six, seven, even as much as eight years. And that’s great for car sales. I mean they hit a record for the third straight year in 2016. But about 85% of cars are bought with debt, according to DesRosiers Automotive Consultants. So you think it through.

Vehicles depreciate over time, and you know, I mean you drive a car off the lot, it’s worth a chunk less the very first day you drive it off the lot. And longer-dated loans, so five years, six years, seven years significantly increase the chance that you’re going to end up owing more than your car is worth.

And we know from reports that the share of Canadians – here’s another fact – the share of Canadians trading in vehicles with negative equity rose to 30% in 2015. And on average they were underwater by about, oh just under $7,000 Canadian according to J.D. Power. So underwater means my car is worth $10,000, but there’s more than $10,000 owing on it. And you know these are serious problems that we’re seeing.

Dave Callander: Tell me a little bit more about the kind of people you meet who have problems with cars and debt.

Doug Hoyes: Well the typical person I see would be someone who, they went to the car dealer – and again, I’ll ask the listeners to think this through. So when you went and bought your last car, did you say to the car salesman ‘How much does this car cost?’ Or did you say ‘What’s my monthly payment going to be?’ We tend to buy cars based on the monthly payment not the total cost.

And it’s also very common, as I said, a big chunk of cars end up with a shortfall at the end of the loan or the lease, so you’re buying a car but you’re bringing in the debt from the previous vehicle. So my old car, it’s now three, four years old, I want to trade it in, but I’m short by $5,000 or $6,000 on the loan. No problem.

So we give you the new car and we take the $5,000 you owed from the old one and put it on the new one. So I’m buying a $30,000 car, but I end up with a $35,000 loan. And of course, the moment I drive the car off the lot it’s only worth $25,000, or whatever. So there’s a shortfall built into it right away.

When people come to see me because they end up having to file a consumer proposal or go bankrupt, it’s quite common to see a shortfall of $10,000 bucks. In fact, I almost don’t have to ask someone ‘Oh you’ve got a car? You’ve had it for a couple years? Well you’re probably short $10,000.’ And by the time we do all the math, it’s very common to see that number.

And so then you get someone who loses their job or gets sick or get divorced, they’ve got this car, they’re underwater on it, and so what do they do? Well they’ve got no choice at that point but to file a proposal or a bankruptcy.

That was the first part of my discussion with Dave Callander about car loan debt. You can keep your car and keep paying your car loan if you file a consumer proposal or go bankrupt, but if you have a significant shortfall it’s often better to just surrender the car and include the shortfall in your consumer proposal or your bankruptcy.

This is a bit of a confusing topic, so Dave and I got into more detail in the second part of the show, after the commercial break. Here’s the rest of our conversation.

Dave Callander: To start things off, we’re focusing on debt surrounding cars. We all have to have one for the most part. Everyone drives here and there. And most of us, as Doug pointed out, love the shiny brand new cars, and that’s kind of where we get into problems. So, just a recap for folks who may have joined the show, what is the main problem surrounding purchasing cars and debt?

Doug Hoyes: Well the main problem is the cost. So you’re buying a car, and obviously when you buy the car there’s taxes, a whole bunch of other charges included in it. So the moment you drive a new car off the lot it’s worth less than what you just paid for it. So you buy a $30,000 car, whatever the number is, you end up paying $35,000 by the time you get all the taxes and this and that in it.

If you wanted to sell that car the very next day, you can’t get $35,000 for it. You can’t even get $30,000 for it, because anybody else can go and buy that brand new car for that price. Maybe you’re lucky to get $25,000 for it. And of course I’m making up numbers; these are rough numbers, but the math is pretty daunting on it.

Now if you keep the car right to the end of the loan term then you’re fine. The loan’s paid off, it’s all good. But it’s very common for the car place to phone you up and say ‘Hey’… And in fact this happens to me all the time. I get a letter from the place I bought my car, and I drive a 2011 vehicle. So I’m not driving a brand new car. It’s many years old. But I still get a letter from them every, you know twice a year, saying ‘Hey, we’ve got this special trade-in deal’, you know ‘trade in your car, we’ll get you a new one.’

Now I don’t have a loan on my car. It’s old enough there’s nothing on it. But if you’ve got a car that’s two years old and it’s like ‘Oh, I can get the newest thing, the shiniest thing’, I trade it in and what happens? I’ve got a shortfall on it. So there’s $20,000 left on the loan but the car is only worth $15,000. No problem.

The dealer says ‘We’ll take that $5,000 shortfall and we will roll it into your new loan. Now we’re going to sell you a $40,000 car.’ That’s great; well your loan is $45,000. And if you do that once or twice; in other words if you do that every couple of years, you’ve always got a shortfall.

So you’re never in a position where you can say ‘You know what? I’d like to reduce my costs by turning in the car’. You can’t do it because there’s always this big shortfall. And if that’s your only debt that’s fine, but of course the people we deal with at Hoyes Michalos end up having a lot of other debts as well, and it just compounds the problem.

Dave Callander: So what is your advice then if we’re thinking about getting a car loan?

Doug Hoyes: Well number one, it’s more than just the monthly payment. So a common sales technique for a car loan company, the car dealer, would be to say ‘Well what can you afford?’ And if the answer is ‘Well I can afford $400 a month’, ‘No problem, we’re going to find something that is $400 a month. Now it might end up being an eight-year loan in order for you to be able to pay for it, but ‘No problem, we can find something that will get you into that’.

I’m much more interested in what is the total cost I’m paying. So why don’t you start with that question. When you’re buying a car, ask the dealer ‘If I was to pay cash right now, cash, cash on the barrel head, how much would it cost me?’ And that’s a much more relevant number than ‘How much am I going to be paying every month?’, because of course the monthly payment can be adjusted up or down based on how long it runs.

You also want to figure out how much you can actually afford. So can you actually afford $400 a month? Is that realistic? So it might not be a bad idea to spend a few minutes before trotting off to the car dealership to actually crunch the numbers. Do a budget, figure out what you can realistically afford.

And again, people get caught on this all the time. It’s not just a payment on a car. You’ve got to pay insurance. And if you’re a 22-year-old male then your insurance is going to be a massive number. You’ve also got to put gas in the car. You’ve got to do repairs and maintenance. If it’s a brand new car with a full warranty, okay your maintenance costs aren’t going to be that great. But if it’s a used car, well guess what, cars need tires, cars need oil changes. So factor in all those costs as well.

So I’m a big believer in keeping your loan payment as short as possible. If you can pay cash fantastic, but at the very least keep the loan payment as short as possible. And one way to do that is to have as big a down payment as possible.

If you get into trouble, then talk to a professional about it. So as you said at the top of the show Dave, we are, at Hoyes Michalos, Licensed Insolvency Trustees. We can help make deals with your creditors to deal with these kind of issues.

Now I want to be very specific here. A consumer proposal or a bankruptcy deals with your unsecured debt. So it deals with credit cards, bank loans, Payday loans, even income taxes are included in a consumer proposal. A secured debt like a car loan is not dealt with directly in a consumer proposal. And a secured debt is a debt that is attached to something. So there is a car attached to the debt, that’s a secured debt.

So if you were to file a consumer proposal you can keep your car. A lot of people don’t understand this. As long as you continue making the payments on the car you can keep the car, no problem. The decision you’ve got to make is, does that make sense.

So go back to the whole thought process about the shortfall. I’ve got a shortfall on the car of five or $10,000, does it make sense to keep the car, keep making the loan payments, knowing full well that I’m going to be paying $5,000 or $10,000 more than the car is worth over the life of the loan.

Your choice if you’re filing a proposal or a bankruptcy is to say either ‘I’m keeping the car and I’m going to keep making all the loan payments’, or right at the start of the proposal ‘I’m going to surrender the car. I’m going to say to the car dealer or the bank ‘Here you go, here are the keys, it’s your car now.’’ And if they take the car and sell it before the proposal is up and running, any shortfall is included in the proposal.

So you can actually eliminate that date in the proposal or the bankruptcy if you are willing to give up the car. And this is a very difficult decision for people because I need my car to get to work. I mean in the Kitchener-Waterloo, Cambridge, Guelph area here there is no subway. You can’t take a subway to work, so a lot of people drive. And I guess, you know, the LRT will eventually be built and we’ll all be taking that, but at the moment cars are the way most people travel.

And so it’s a very difficult decision to decide do I give up the car or not. You’ve got to really crunch the numbers, but you’ve also got to look at what your options are. And so if your friend, family member has an old couple of thousand dollar car that they can sell you, in a lot of cases you’re better off doing that than trying to hang on to a vehicle that’s just going to put you deeper and deeper into debt.

Dave Callander: I’m glad you pointed this out because again, I don’t think we’ve ever really dealt with this directly on the show before. I had no idea that you could return the vehicle and make that shortfall part of the consumer proposal.

Doug Hoyes: And this is why you want to talk to a Licensed Insolvency Trustee up front, because we understand the rules. And these rules have evolved over the years. If you go back you know 10, 15, 20 years, it was not the way I’m describing it today. It used to be – and there was one bank in particular that always did this – if you filed a bankruptcy they took your car, no questions asked, that was it.

The government changed the law a few years ago to say that a secured creditor cannot cancel a secured contract – in other words a car loan – if your payments are up to date. So if your payments are up to date on your car loan when you go bankrupt or when you file a consumer proposal you can keep the car, as long as you keep making the payments.

But, is that the correct answer for you? And in a lot of cases no it is not the correct answer to keep an older vehicle with a big shortfall, particularly if you’ve got a lease that has a mileage clause in it. ‘Well I know I’m already 20,000 clicks over the limit.’ Okay, so when you return that vehicle in a year you’re going to get hit with a big charge. So in a lot of cases it’s better to say ‘You know what? Give the vehicle back now, find something cheaper.’

And yes, if you’re going to finance another vehicle right at the start of a bankruptcy or proposal – it’s possible. There are certainly car dealers in town who will do it, and you call our office at 310-plan, we can tell you who will do that. But often the deal is the first year you end up paying a pretty high interest, you know, could be 25, 30%. So you don’t want to be getting much more than a $5 thousand car loan. It’s huge. It’s huge.

But in a lot of cases, after the first year, you’ve made all your payments, well now it becomes a, you know, 10 or 15% loan. And by the third year you can often get back down to a much more reasonable rate. So in a lot of cases the better answer is to make the tough decision, get the fresh start and surrender the vehicle. But it is up to you; that’s the point.

Dave Callander: But the folks at Hoyes Michalos can help you crunch the numbers and figure out what makes sense for you.

Doug Hoyes: Absolutely. And I always recommend bring your lease documents in with you. Bring your loan documents in. We can go through it and figure out if there’s some kind of weird accelerator clause, a mileage clause, a penalty for breaking a lease, whatever. So we can tell you.

And we also have access to the Black Book, so we can punch it into our computer and tell you how much your vehicle is likely worth today. You could also go back to your dealership and get an appraisal from them; ‘Hey, how much cash would you give me for it today?’ And then you know for sure what you’re dealing with.

I don’t like making decisions without proper information. I like to know exactly what I’m dealing with. And that’s what we emphasis at Hoyes Michalos; let’s help you get the proper information, educate you so that you can make the right decision for you and your family.

Dave Callander: My guest today on Ask the Experts. We’re speaking with Doug Hoyes of Hoyes Michalos, Licensed Insolvency Trustees, online at hoyes.com. That’s h-o-y-e-s-dot-com, or call 310-PLAN.

Doug Hoyes: That was my interview with Dave Callander on the Ask the Experts show on 570 News, where I gave my advice on how to deal with car loan debt. My advice, well it’s more than just about the monthly payment. Figure out what you can actually afford. Keep your loan payment as short as possible. Have as big a down payment as possible. And if you get into trouble, get professional advice. That’s what we’re here for.

There are two big things in life we borrow to purchase, cars and houses. We talked about cars today, and next week I’m going to play the second half of my interview with Dave where I talk about houses. Real estate is a big topic at the moment, so you won’t want to miss that discussion.

That’s our show for today. Full show notes and a complete transcript of today’s show are available at hoyes.com; that’s h-o-t-e-s-dot-com. That was our discussion about car debt, so until next week when we’ll discuss mortgages and real estate I’m Doug Hoyes. Thanks for listening. That was Debt Free in 30.

Debt Consultants or Licensed Insolvency Trustees? Who to Trust?

Trustees vs debt consultants video play thumbnail

As I blogged about last week, the Office of the Superintendent of Bankruptcy has released a review of consumer proposals involving debt consultants.

Trustees vs debt consultants video play thumbnail

Read Transcript

Doug: A lot of people hear the ads on TV for people who can ‘settle your debts for 30 cents on the dollar, 20 cents on the dollar’ and they wonder is that what you guys do? Is that different? There are a number of different people out there who say that they can help you deal with your debts. You got credit counsellors, some of them who are not-for-profit agencies, they can do what’s called a debt management plan. Where they take your debts, and you pay them off in full over a period of up to 5 years. And most cases they can negotiate reduced or 0 interest. So, if you’re able to pay all your debts in full, but you just need a bit of a break, credit counselling through a not-for-profit credit counsellor is a good way to go. People who are advertising on TV are for-profit companies, and they are either debt consultants or people offering deb settlements. They’re not necessarily regulated by anyone in particular. They don’t necessarily have any particular education background or qualification. What they’re going to do is attempt to negotiate something with your creditors. Whether they can do it or not, who knows. Problem is you’re going to end up paying them a bunch of fees before you really find out what’s going to happen.

Ted: Bankruptcy trustees are licensed by the federal government, we’re officers of the court, So, right from the get-go we’re different from just about any other professional you’re ever going to meet. Lawyers are officers of the court, but they can’t serve in this kind of capacity. The analogy I usually give people is think of a bankruptcy trustee as a referee. So, the bankruptcy laws set out a specific way that things are to be administered, the trustees are the ones that make sure everyone follows the rules

Doug: That’s what makes us different, we’ve actually got legal authority to do this. We are using federal law to bring about the settlement. So, when a consumer proposal is filed, all unsecured creditors, people like credit cards, income tax, bank loans, payday loans, are all treated exactly the same.

Ted: Chartered accountants were originally the only ones that were trustees, and you had to train the next generation. So chartered accountants trained the next generation of chartered accountants. It’s only been in the last 10 years when non-accountants have become trustees. And in fact, in our firm, 1/3 of our trustees are not accountants. And the reason we did that is it gives us a broader spectrum, a better appreciation of individuals backgrounds and their experiences. We’ve got someone who’s got a health background, someone with an insurance background, one that used to be a teacher. The idea being that we could better relate to people because we’ve got this breadth of experience, as oppose to all being boring accountants.

Doug: We’ve got the hammer. I don’t need to get every single person to agree, I just need the majority to agree because that’s how the federal law works. So, if you’re not licensed by the federal government under federal law, you can’t do that. And that is the ultimate difference between a Licensed Consumer Proposal Administrator, a Licensed Bankruptcy Trustee, and everyone else.

Close Transcript

I’ll start with an important reminder: a consumer proposal is a legal debt settlement process available through the Bankruptcy and Insolvency Act. This process can only be administered by a Licensed Insolvency Trustee.

Unfortunately it’s often difficult for a consumer, already under stress as a result of their financial situation, to decipher who they are dealing with when looking for debt relief. I recently came across a typical website someone looking for debt solutions may stumble across – credit720.ca. If you will notice from this screenshot, under their services tab they advertise consumer proposals and bankruptcies.

debt-consultant-credit720

Telltale Signs

This website advertises consumer proposals and bankruptcies, yet no where on their site does credit720.ca identify itself as a Licensed Insolvency Trustee. All Licensed Insolvency Trustees and firms are required to identify themselves as an LIT under directive 33 governing advertising for Licensed Insolvency Trustees.

If you use their debt calculator you are provided with a cost comparison of different debt relief options. Theirs includes a consumer proposal, which is not unlike our own debt relief calculator on hoyes.com.

What We Found

To understand who the company was, and who potential debtors would be dealing with, we decided to inquire about their services through their online chat. Below is a reproduction of our live chat dialogue, which took place on March 22, 2017 (You in this conversation is Hoyes Michalos).

You — Please update your info

Who are you

Credit 720 joined the chat

Credit 720

Hi, how can we help you today? =)

You — Please update your info
what type of services do you offer?

Credit 720
we offer credit counseling, debt management, consumer proposal and bankruptcy.

You — Please update your info
oh – are you a bankruptcy trustee then?

Credit 720
we are a credit counseling firm.
we have trustees working with us.

You — Please update your info
will I see a credit counsellor or trustee?

Credit 720
initially you’ll be seeing a credit counselor and if required you may see a trustee later on in the process

You — Please update your info
how will you know if I have to see a trustee?

Credit 720
Depending on your situation and your file the counselor you in meet in our office will decide
would you like to book an appointment in any of our nearest office?

You — Please update your info
I’m not sure, I’m still not sure who will help me. Do the trustees work for you or are they another company. I’ve already run into this before

Credit 720
trustees are independent license holders. They work with us

You — Please update your info
OK I understand. What do you charge?

Credit 720
we don’t charge for the consultation.
after we go through the complexity of your file the counselor will decide on the fees.

You — Please update your info
What would he be charging me for?

Credit 720
The work required to get your file go through and to administer you file.

You — Please update your info
Go through who – the trustee? What if I don’t need a trustee?

Credit 720
There are other options available other then trustee
i would suggest that you come and our counselor so they can respond to your queries in an appropriate & satisfactory manner

You — Please update your info
Still uncertain – if the counselor is not a trustee what they will do for me. What kind of education do they have?

Credit 720
credit counselor are BIA licensed holders and trustee are CAIRP & LIT.

You — Please update your info
??? – the person I will meet with is a BIA licensed holder? What is that?

Credit 720
yes they are BIA License holder. BIA stands for Bankruptcy and Insolvency Act
you can ask your questions when you see them in person

You — Please update your info
OH so bankruptcy again. They BIA person works for you? And that’s who I would meet with?

Credit 720
All licensed credit counselors working in any credit counseling company or trustee firms are BIA accredited.
yes they work for Credit 720

You — Please update your info
OK I still am not sure as I want to file bankruptcy and that seems like all you are going to do is refer me to a trustee. So I’ll think about it

Credit 720
BIA license is not just limited to bankruptcy. As said earlier in the chat it includes debt management, consumer proposal and orderly payment of debts programme
once you decide you’re more than welcome to book your appointment with us.
Is there anything else i can help you with?

End chat.

As you can see, these companies advertise the services of a Licensed Insolvency Trustee, but are somewhat unclear when it comes to stating who will be working on your case, and how fees will be charged for the services. They advertise services that can only be administered by a Licensed Insolvency Trustee, and they are not Licensed Insolvency Trustees. This is very confusing to the public and can prove costly for consumers. Without the right knowledge, the debtor ends up paying unnecessary, and often very high, consulting fees.

We strongly recommend that anyone looking for debt help investigate the company, and individual they are dealing with before entering into any payment agreement. Confirm that you are working with, and only making payments to, a Licensed Insolvency Trustee, and not an unlicensed debt consultant.

Use of Debt Consultants Questioned by OSB

Long nose indicating lying to show that debt consultants deceive their clients

It’s no secret that Hoyes Michalos is not a fan of debt consultants. We’ve written about our concern with debt consultants many times. It’s for this reason that I was quite pleased to see the Office of the Superintendent of Bankruptcy (OSB) issue a report on their review of the involvement of debt consultants in the administration of consumer proposals in Canada.

A History on Debt Consultants in Canada

Before addressing the issues raised by the OSB, I’d like to share a short history about the evolution of large scale debt consulting in Canada.

A few years ago American style debt settlement companies ran numerous advertisements offering to help consumers settle their debts for pennies on the dollar. Competing with consumer proposals, their debt settlement program came under fire because of the high upfront fees charged by these debt consultants, often for little or no work. Many of their clients were left worse off, and often came in to speak with us after having paid a significant amount of money to their debt consultant.

Eventually the Ontario government cracked down on these types of debt consultants – introducing debt settlement legislation in 2015. This legislation effectively stopped these companies from charging large upfront fees.

Rather than going away, debt consultant companies changed their business model.

One of their new approaches has been to become a referral source to specific Licensed Insolvency Trustees for consumer proposals. This is the practice being investigated by the Office of the Superintendent of Bankruptcy.

Understanding Consumer Proposals in Canada

In Canada only a Licensed Insolvency Trustee can administer a consumer proposal, which is a procedure available under the Bankruptcy and Insolvency Act. Today consumer proposals make up almost half of all insolvency filings in Canada.

Debt consultants know a consumer proposal is a better product for someone who is looking to make a debt settlement plan with their creditors. This is because a consumer proposal offers legal protection from creditor actions, like collection calls, and wage garnishments. This protection begins as soon as a proposal is filed. In addition to that benefit, fees charged by a Licensed Insolvency Trustee are set by the federal government. This allows for full transparency, consistency, and fairness for consumers in what they pay to file a proposal.

Debt Consultants Adding to Proposal Costs for Debtors

The report prepared by the OSB highlights several concerns with debt consultants offering consumer proposal advice to consumers for a fee.

debt-consultant-credit720

Debt consultants increasing proposal costs for debtors.

Consulting fees charged by debt consultants “averaged approximately $2,400 and reached as high as $4,200”. I have spoken to debt consultants who tell me they can get a better deal for the debtor because of their knowledge of the system. That’s ridiculous and that’s why these fees are completely unnecessary. I do not believe that a proposal arranged through a debt consultant will result in a proposal costing less than one arranged directly through a Licensed Insolvency Trustee. Certainly not sufficient to warrant a $2,400 consulting fee.

At my firm, Hoyes Michalos, we have successfully negotiated thousands of consumer proposals, giving us far more knowledge of the process than a debt consultant who has never filed a consumer proposal. As noted by the OSB report “for lower value proposals the consulting fee commonly ranged from 20 to nearly 40% of the value of the proposal”. That cost should not be born by the debtor for a useless service, and those funds could otherwise be directed towards the creditors if the debtor can afford that amount of debt repayment.

Ancillary and confusing supplemental services increasing costs.

The OSB found that many debtors were sold extra services including credit rebuilding loans, proposal insurance, and loans to prepay a consumer proposal – all at a significant cost to the debtor. In many cases, the debtor was unaware of what services were part of the consumer proposal process, and which services were provided by the debt consultant.

Understand Who You’re Dealing With

There are roughly 1,000 active Licensed Insolvency Trustees in Canada. As noted in the report, only 13 LIT firms were found with a “frequent and sustained relationship” with two large-volume debt consulting agencies.

To be clear: Hoyes, Michalos & Associates Inc. does not have a referral arrangement with any debt consultant agency. 

Unfortunately these debt consulting agencies use confusing advertising, often advertising a consumer proposal, and the debtor does not know or understand who is providing the service.

Our recommendations

  • Ask whether or not the person or agency you’re meeting with is a Licensed Insolvency Trustee. If you are not sure, research them on the OSB list of Licensed Insolvency Trustees.
  • Do not sign a contract that requires you to make any payments prior to meeting with a Licensed Insolvency Trustee, signing your proposal documents and having them filed with the government.
  • Ask the person you are meeting with what they will be charging you for. You should never have to pay someone to help you through the process or help you prepare paperwork to file a consumer proposal.
  • If in doubt, seek a second opinion from another Licensed Insolvency Trustee. All reputable firms offer a free consultation and should not require a payment until your proposal has been filed. At Hoyes Michalos, we do not charge any fee until your proposal has been filed with the government.

The OSB has indicated it will continue to pursue this matter, including making changes to OSB directives that govern how Licensed Insolvency Trustees operate and amend consumer proposal documents and forms. I assume this measure is to increase disclosure for the debtor, creditors, and the OSB compliance review. I look forward to these changes, which will hopefully end the practice of these types of debt consultants and save unsuspecting consumers from unnecessary costs as they work towards debt relief.