How fast do you pay off your monthly credit card charges?
People frequently do not know the full terms and conditions of their credit cards, bank loan or line of credit. Do you know what types of fees you have to pay if you are late? Do you know when interest starts if you take a cash advance? Not knowing the answer to these questions can mean you pay more fees than you should.
Based on your payment pattern, what type of borrower are you?
Paying your balances in full, each and every month means you pay no interest or payment fees on your account. You purchase something for $125 and the cost to you is $125, no more.
Pay in full borrowers use their credit card as a payment convenience so they don’t have to carry cash but are not using credit cards as a source of borrowing. They don’t risk driving up their credit card debt because they know they are spending well within their means. They only borrow what they can pay off completely at the end of every month.
We recommend that everyone treat their credit cards and similar spending credit this way. If you pay your balance off in full each and every month you save money on interest charges and will never find yourself deep in debt.
Borrower / Saver
The same Abacus Data study found that for credit card users who typically do carry a balance beyond month end, 16% pay it off most months and 40% pay off more than the minimum payment required. Borrower/savers tend to carry credit card balances most months pushing to pay down those balances, only to see them increase again.
The disadvantage of this approach is that you will incur interest costs and fees which lower your ability to save money.
While sometimes the cause is an unexpected expense, like a car repair, it can also be a sign that you have a tendency towards impulse shopping.
Our advice is to keep track of your balances regularly and make it a goal not to charge more than you can safely repay at the end of the month. Having an emergency fund can help reduce the need to turn to credit periodically.
Fee Payer
If you make only the minimum payments on your credit card bills, regularly incur late charges and over-the-limit fees or take cash advances, your borrowing and debt payment habits make you a fee payer.
The fee payer is using credit card debt as a substitute for a cash shortfall. Balances typically grow over time because you are not able to catch up.
It’s time to create a budget to help you balance your cash inflows and outflows. Include a debt repayment plan as part of this budget to reduce your overall balances.
The high fees and costs of alternative lending products making getting off this debt cycle very difficult.
Seldom do our clients start out as a payday loan user. The typical scenario is that of a credit card user who, for one reason or another began to use credit cards as a borrowing tool, rather than a payment tool. Having done so they became a borrower / saver. As debt increases, paying down balances becomes increasingly difficult – and soon these same individuals find themselves becoming a fee payer, with many turning to payday loans to continue to make ends meet.
Ask yourself where you sit on this scale? If you are a heavy borrower and see no way out, take action. Contact us today to reverse the cycle so you too can become a wise, pay in full borrower.
Words matter. Have you ever wondered why a credit card isn’t called a debt card like it should be? Think about it. That’s what a credit card really does – it gives you debt. Well, I’ll tell you why. Because it’s not good marketing. And credit card companies know this.
For example, have you ever wondered why you are a customer of a bank, but you are a member of a credit union? It’s because words matter, and it’s better to be a member of an organization than a customer of some company.
And yes, I realize that to become a member of a credit union you have to buy shares, so technically you are an owner, but if there are a few thousand other members of your credit union you don’t have a lot of power as an owner, but you get a good feeling being a member; it’s good marketing.
Here’s another example: You are a customer of a grocery store, but to buy anything at Costco you have to be a member.
Same word, same idea; it’s great marketing to call you a member at Costco, even though, obviously, you are a customer. Words matter, and the word “member” probably makes you feel better about shopping at Costco than you feel about being just another customer at another store.
There are two words that I want to talk about today: Credit, and debt.
Let’s start with some definitions:
Credit has two meanings:
Credit is the ability to obtain goods, money or services in return for the promise to pay at some later date. That’s the financial definition, but credit can also be used to describe a source of pride or honour, like “you are a credit to your family”.
Credit is positive. Credit is good. When we say “give credit where credit is due” we are making a positive statement. Used as a noun, credit means trustworthiness and credibility.
Used as a verb, it means to believe, or put confidence or trust in, or have faith in. Again, it’s a positive word.
The word credit dates back to around the 1520s, where in French crédit meant belief or trust. The Italian word credito, from the Latin creditum, meant to trust or believe. Credit has always indicated something positive, something good.
Contrast that with the word debt.
Debt is something that is owed; it is a liability or obligation to pay something.
The first usage of the word debt dates back over 800 years, to the Middle English, Old French and Latin word dēbita meaning to owe, which is the opposite of to have, or to possess.
Obviously debt is a negative word. It’s not good. So why am I telling you this? Because words matter.
You know that plastic thing you have in your wallet? That thing that allows you to go to a store and instantly borrow money to purchase an item? What’s it called? You would assume that a plastic card that allows you to incur debt would be called a debt card, but it isn’t.
It’s called a credit card. Why is it not called a debt card? You know why. Debt is bad. Debt is something to avoid, so you don’t want to be reminded that you are incurring debt every time you use your plastic card.
Calling it a credit card does not change the fact that it is really a debt card.
Those of you who have read my book, Straight Talk on Your Money, will know that a central theme of that book is that we humans make many of our decisions based on emotion. That’s understandable; we don’t always have the time or the facts to do a thorough analysis of the decision, so we go by “gut feel”.
What would your gut tell you about using your debt card?
I think we can all agree that pulling out your debt card at the store would trigger a negative emotional response. We wouldn’t like it. We would think twice before using our debt card. That’s why it’s called a credit card.
The credit card companies understand psychology.
They understand that you would not feel comfortable thinking of your debt card every time you make a purchase, so they came up with a brilliant solution:
Don’t call it a debt card: call it a credit card!
Brilliant.
Credit is good, so we are happy to use our credit card; it triggers a positive emotional response when we use it. We are giving ourselves “credit where credit is due”, and that’s good, or so we think.
So tell me this: would you use your credit card differently if it was called a debt card?
Try it. Starting now, refer to your credit card only as a debt card. When you go to the store or gas station or wherever, say out loud, “I will complete this transaction by borrowing money on my debt card.” Yes, the cashier will probably look at you funny, but even if you’re a slow learner it will only take a dozen or two transactions before your mind will create a new association between your plastic card and debt.
Words matter, and by using different words you can change your perceptions, and your behavior.
Once you start consciously thinking about the meaning of words, it changes your view of the world.
Here’s another example: How do the banks decide if they should give you debt? They use a debt evaluation system, that records all of your debt, and creates a rating based on your projected ability to service your debt.
What is this debt rating called? You guessed it, it’s called your credit rating.
What is the debt scoring system called, that allows the bank to determine how much debt to give you?
It’s not called a debt score, which would make sense. It’s called a credit score.
If Equifax and TransUnion called it your debt score, would be you willing to pay $20 per month to monitor your debt score? Probably not. In fact, you would probably do everything you can to avoid hearing about it.
Instead, they call it a credit score, and we do everything in our power to increase our credit score, because obviously a higher credit score is good.
You already know my thoughts on credit scores; we discussed them in detail back on show #167 with Ross Taylor. Yes, I understand that if you want a good mortgage rate you need a good credit score, but pursuing a high credit score should not be your sole financial objective. Saving money is also important, even though that won’t be reflected in your credit score.
My point today is simple. Words matter.
Calling you a member does not change the fact that you are really a customer.
Calling it a credit card does not change the fact that it is really a debt card.
Your credit score is really your debt score, and it’s for the lender’s benefit, not yours.
So here’s my challenge for you this week. Think about the words we use to describe money, and try changing the words to be more accurate, and see if that helps you make better financial decisions.
I know you can do it. I give you credit for trying.
This is such a common fear or concern among people who call us that it became Myth #2 in my book Straight Talk on Your Money.
Some of our clients tell us that the feelings of guilt are one of the main reasons why it took them so long to reach out to us for help. I’m here today to say that you shouldn’t blame yourself.
The answer is that our high debt levels are everyone’s fault. The banks and credit card companies earn a huge profit from lending money, so they may lend more than they should lend in some cases. Companies that sell products (like electronics, cars and houses) also encourage you to borrow; it’s not their job to determine whether or not you can afford to pay it back.
Part of the problem is just the massive opportunity and pressure there is today to obtain credit. There are so many more options to borrow money today than in the past. Alternative and online lenders make it easy to rely on debt as a way, not so much to live the high life, but to live day to day. With low interest rates, mortgage brokers and car loan lenders have enticed us with low monthly payments, encouraging too many people to buy a bigger home or a better car because hey, why not, it’s cheap.
Of course none of us are forced to borrow; we can choose to borrow, or not. However, the underlying truth is that, for many people, debt creeps up over time. You could manage the debt payments for a while, until something unexpected happened. A job loss, illness or divorce can have a severe impact on your finances. Next thing you know you are using credit to make ends meet. Pile this new debt on top of old debt, and eventually you find yourself in a situation where you can no longer keep up with your debt payments.
This is the situation faced by the majority of people who file a bankruptcy or consumer proposal with us.
In these circumstances, filing insolvency is not an easy way out but often, it’s the only viable solution. It doesn’t make sense to continue to struggle, continue to accumulate more debt just to avoid dealing with the real issue: you can no longer afford the debt you are carrying.
My point: I’m not interested in how you got into debt. I’m more interested in how we can work together to eliminate your debt, and help you manage your money in the future.
At Hoyes Michalos we focus on tomorrow, not yesterday. We can help you eliminate your debt. Contact us today to talk with a local Licensed Insolvency Trustee.
It is not uncommon for someone to call us worried because a creditor may be threatening a wage garnishment. When facing a garnishment they have three common questions:
What kind of income can my creditors garnish?
How much of my income can they garnish?
What can be done to stop the garnishment.
Today’s podcast is all about what types of income are subject to seizure through a garnishment order and how much can be garnisheed.
In general, wages in all forms can be garnisheed, but most other forms of income cannot be withheld under a creditors garnishment order, except for certain exceptions for child and spousal support orders, or by the CRA for tax arrears and benefit overpayments.
For garnishment purposes, wages can include any payment you receive from an employer for working, and includes hourly wages, salary, or piecework compensation.
Can severance pay be garnished?
Yes, severance pay or termination pay can be garnisheed as it is considered wages, because it arises as a result of your employment.
Can Ontario Works be garnished?
Under the Ontario Works Act basic financial assistance is not subject to garnishment, attachment, execution, or seizure. The only exception is support orders under section 20 of the Family Responsibility and Support Arrears Enforcement Act that can be garnisheed.
Can a disability pension be garnished?
The answer depends on whether your disability income is from a company disability plan or government benefit programs like ODSP.
Long term disability payments provided through a company disability pension are a replacement for lost wages, and are therefore deemed to be wages, and can be garnished.
Under the Ontario Disability Support Program (ODSP) Act, income support is not subject to garnishment, attachment, execution, or seizure, except for support orders.
Can retirement income be garnished?
Neither the Ontario Pension Benefits Act or the Canada Pension Plan Act make any reference to garnishments.
That means that a typical creditor cannot garnishee your retirement pension or Old Age Security (OAS) including the Guaranteed Income Supplement, the Allowance, and the Allowance for the Survivor.
However, there are five exceptions or cases where you could lose some or all of your government pension:
Pension funds you deposit into a bank account where you owe money. Banks can seize money in your account if you owe them money. This is called the right of ‘set off’. They can take any amount out of your account, up to the balance owing.
Child or Spousal support arrears. The Family Responsibility Office can be granted a garnishment of pension income to recover arrears for child or spouse support and can garnish up to 50% of your pension.
Canada Revenue Agency (CRA) has broad garnishment powers. No court order is required for them to garnish your pension. They can simply send a letter to your bank or the Income Security Program office (the government office responsible for CPP and OAS).
Income Security Overpayments. If you were overpaid (perhaps on OAS where your income increased), the government can deduct overpayments from future benefits until the entire amount is repaid.
Social Assistance Repayments. If you are eligible for OAS you are generally not eligible for Ontario Works or ODSP, but if you are over paid, the overpayment can be clawed back from your pension.
Can my tax refund be garnished?
If you file your tax returns and are owed a refund, the only creditor that can garnish the refund directly is a government agency like the CRA, Family Responsibility Office, Student Loans etc. This is a common occurrence if you have government debts in collections such as student debts, government over-payments, tax debts or support payment arrears.
Non-government or private lenders do not have the legal ability to garnish your tax refund. They can however apply to the court to freeze your bank account which means if your income tax refund is deposited in your bank account, your creditors may seize those funds once they obtain a judgement order.
Under the Ontario Wages Act, a judgement creditor (like a bank or credit card company) can garnishee up to 20% of your net wages (after statutory deductions for taxes, CPP, and Employment Insurance). A support order for child support or spousal support can garnishee up to 50% of your wages.
Canada Revenue Agency is not bound by the provincial Wages Act, and therefore can theoretically seize up to 100% of your wages, although they typically take 20%, or 50% of your wages in extreme cases.
A judge may increase or decrease the amount of the garnishment.
In 2017 the Ontario government started a pilot project to test basic income. The pilot project is currently operating in Hamilton, Brantford and Thunder Bay. In the pilot project, participants receive a set amount of money each month. Can this income be garnisheed? We don’t know.
Other income support programs, like Ontario Works and ODSP, have specific legislation that specifically prohibits income garnishment. There is no such specific provision in legislation for Basic Income, so it is possible that it could be garnisheed. We don’t know, and we probably won’t know until either specific legislation is enacted, or there is a court case where the court makes a ruling. We will continue to monitor this new source of income.
Doug H: One of the most common reasons that people call the Hoyes Michalos 310-PLAN helpline is because either their wages are being garnisheed or a creditor is threatening to garnishee their wages. We’ve done a podcast about what steps to take if you have a wage garnishment, today we’ll give a quick reminder of what you can do if you are faced with a wage garnishment, but we’ll start by talking about what types of income can be garnisheed and how much of your wages can be garnisheed if you receive a garnishment order.
We’ll discuss different forms of income, so if you’re listening today and you’re only interested in one type of income, like wages, and aren’t interested in the other forms of income that can be garnisheed, like pensions, well no problem I’ve got you covered. You can go to the show notes over at hoyes.com/podcast and find the show notes for this show. I’ve created a list of the time stamps for each topic we cover so you can fast forward to the exact topic you want to hear about.
So, to help us talk about all things wash garnishment returning to the show once again, but for the first time this season, is Ted Michalos, my Hoyes Michalos co-founder and business partner and Ted of course like me is a charter accountant and a licensed insolvency trustee. Ted, welcome back.
Ted M: Thanks Doug.
Doug H: So, before we begin, let’s address a question that bothers everyone. Is the correct term garnish or garnishee or garnishment?
Ted M: It’s okay. So, let’s look at some definitions and maybe have a little bit of fun. What’s a garnish? So, a garnish is some sort of decoration or embellishment. You usually think of it when you’ve got a food out as a presentation. You know, that fancy turkey dinner you see on the TV with some parsley on the outside, maybe some lettuce, that sort of thing.
Doug H: Exactly, parsley, parsley is a garnish.
Ted M: Now, on the same token though, garnish is also a legal term which means to serve with a garnishment. So, I guess we’ll have to talk about what a garnishment is. So, you can actually be garnished. How’s that for confusing things?
Doug H: So the answer is all the terms are correct then.
Ted M: Sure. Well, we didn’t talk about garnishee, which is a funny term. It’s generally the one that most legal professionals think of when you’re talking about taking a deduction from somebody’s wages, you are garnishing them. But it’s correct to say garnishment, garnishee or to garnish. You’re right, it’s all right.
Doug H: It’s all right. So, that’s good so that’s one of the few terms where it doesn’t really matter how you use it because I get corrected on that all the time. People say oh well, garnish, that’s something you put on your food which is why I typically use the term garnishee but they’re all correct.
So, okay so now for the real question, what sources of income can be subject to a garnishment order? So, obviously we help people with many different sources of income, the most common sources of income would be wages, Ontario Works, disability payments, pensions and there’s even this new basic income that’s being piloted in Ontario we can talk about.
So, let’s start with the most obvious source of income, which is wages. And can wages be garnisheed? So, in Ontario we have something called The Wages Act, it’s really short, it’s only three pages long so we’re going to quote from it now. So, obviously if you’re listening to this podcast outside of Ontario Canada the laws will be different in your area but the basic concepts in most provinces and states are very similar. So, this should still be a good guide for you but again we’re talking only about laws that apply in Ontario. So, Ted let’s start with the obvious question, quote me from the act, what is the definition of wages?
Ted M: Alright, so wages mean wages or salary whether the employment or with respect to which is the same payable either by time or by job or by piece or otherwise. So what that means is it’s money you’re getting paid for working. It doesn’t matter if you’re getting paid by the hour or piecework or my salary, it’s all considered wages, you earned the money.
Doug H: Okay and that’s pretty simple something I get paid for working, that’s what wages are. Now you and I both have jobs.
Ted M: So far.
Doug H: So far, depends what we say on this podcast I guess. We both get a paycheque. I mean we happen to own the company that pays us but we do get a paycheque. And as every employee knows money is deducted from that paycheque. So, if I make $15 an hour, I don’t get paid the entire $15 because my employer is required to take off money for employment insurance and CPP and income taxes. So, when we’re talking about wages subject to a garnishment – how do those deductions factor into it?
Ted M: Okay. So the act very clearly says that your wages do not include an amount that the employer’s required to deduct by law from wages, so that would be your CPP, your EI premiums, any other legally required or statutory deduction from your pay. So if someone is getting a garnishment order against you, your wage – it’s on your net pay or rather your pay net of government deductions.
Doug H: Your net pay, okay.
Ted M: That’s easy to understand.
Doug H: That’s easy to understand, so, if I get paid $15 and a $1 is coming off, I’m only really getting $14 an hour, I can be garnisheed on the $14, not the $15.
Ted M: That’s right.
Doug H: Okay, so the real question, the big question is, what percentage, how much of my wages can be garnisheed?
Ted M: Alright, so this is where the government gets cute. So in the Wages Act it says subject to subsection 3, which we’ll talk about in a second, 80% of a person’s wages are exempt for seizure or garnishment. So, instead of saying that they can take 20% of your net pay, they say 80% of your net pay is protected.
Doug H: Yeah, this is why the government just drives us crazy. But okay, yeah so you’re right, why not just say 20%, they can take 20%?
Ted M: Well, it’s easier to understand now. Subsection 3 says that 50% of a person’s wages are exempt from seizure or garnishment in the enforcement of a support order. So that means that if you’ve got a spousal support or child support order they can take up to 50% of your next pay.
Doug H: Okay so let’s do some math here then. So my gross salary is $1,000 and my employer’s required to deduct $200 for E.I, CPP and taxes so normally my net paycheque is $800, what’s the maximum that can be garnisheed?
Ted M: Alright, so for what we’re going to call a regular creditor, a normal creditor, an execution creditor, those are all terms that people use, they can take 20% of your net. So, if your net is $800, 20% of that is $160, your pay would be $640. Now if it’s a support order, it can be 50% of your net. So, if your net is $800, 50% of that is $400, you’d receive $400 in pay. There’s another twist though.
Doug H: So tell me the other twist then.
Ted M: So, the other twist is that the court has the right to adjust those exemptions up or down. Effectively any time something’s in court, judges have the discretion that they can say well, the 20% isn’t fair, you can afford more or that’s too much. And so you’ve got to keep in mind that the vast majority of the times 20% is the limit for an execution creditor, somebody that sued you, 50% is the limit for a support order.
Doug H: But it someone goes to court and convinces the judge to make it different then it could be different.
Ted M: Right.
Doug H: So we’ll talk about CRA shortly but as a general rule, federal law trumps provincial law so Revenue Canada is typically not bound by that 20% limit either. So, we’ll get back to that.
So, okay let’s knock through then the different kinds of income that people can receive and ask the question whether or not that could be subject to a garnishment order. And the reason we’re doing this show is because one of the main reasons people end up going bankrupt or filing a consumer proposal is, I don’t want my wages to be garnisheed.
Ted M: Right. They’re afraid of what’s going to happen. They’re having a hard enough time living paycheque to paycheque and suddenly now part of their paycheque’s disappearing.
Doug H: And so if you have a job and are getting paid wages then it is very likely, well not very likely, but it is possible that your wages could be garnisheed. But other sources of income may or may not be able to be garnisheed. So, if they can’t be garnisheed maybe you don’t need to do a bankruptcy to prevent a garnishment order. Maybe there’s other reasons but maybe you do. So, okay let’s start with Ontario Works also knows as social assistance, can social assistance, can Ontario Works be garnisheed?
Ted M: So by law it cannot be. Section 23 of the Ontario Works Act says –
Doug H: That is a special act that covers this particular thing.
Ted M: We’re going to throw more laws at you today than anybody wants to hear about. But it basically says that basic financial assistance, which is what Ontario Works, social assistance, welfare cheques are, is not subject to alienation, transfer and is not subject to a garnishment attachment or execution seizure or receivership order under any other act. So, it basically says that they can’t garnishee your Ontario Works money.
Doug H: What if I owe child support and I’m on Ontario Works.
Ted M: This is where it always gets great. So child support can be taken from any sort of income.
Doug H: And that’s specifically mentioned in the act too.
Ted M: That’s right. And it’s basically because if somebody’s been ordered to pay spousal or child support, then presumably that order is based on whatever type of income they had at the time and the recipient needs that income to maintain a standard of living for the child or the ex-spouse so it’s just got to be done.
Doug H: Okay, so that makes sense then. So, Ontario Works cannot be garnisheed except if there is a support order outstanding then possibly that it could be.
Ted M: Right.
Doug H: So then let’s go into the next category which is disability payments. So, can a disability pension be garnisheed? Now there are two common categories, company plans and government plans. So, a company plan would be where you have a disability coverage through work so if you become disabled the disability insurance plan pays you. So, I mean in effect it’s a replacement for lost wages because you can’t work. So Ted the question is garnishee or no?
Ted M: So it can be garnisheed. And so the real critical element here is that it’s an insurance plan that you’ve purchased to replace your wages. It’s not a social benefit. So the act says for the purpose of this section, payments from an insurance or indemnity scheme that are intended to replace income shall be deemed to be wages. So it’s very clear, if you’re off work and you’re receiving insurance benefits from work, they can be garnisheed.
Doug H: And that’s from the Ontario Wages Act. So, that’s the way you’ve got to think about it, disability payments from work are just like wages, really no different. So, okay that’s if I have a company disability plan, what if I’m getting my disability payments through a government organization like for example ODSP? So ODSP stands for Ontario Disability Support Program and of course there is an act called the Ontario Disability Support Program Act, what does it say?
Ted M: Alright so it specifically says in section 18, income support under this act, subsection B, is not subject to garnishment attachment execution seizure or receiver under any other act. So, it cannot be garnisheed.
Doug H: And same clauses though with respect to support orders.
Ted M: Yes and no, and that’s going to apply in every case. So, I guess we need to make sure that people clearly understand there are execution creditors, people that have sued you that have the right to try and garnish your wages. And then there’s orders under the family law act for support. The Family Law Act orders are always going to be able to pursue whatever form of income you have if the court has ordered that you’re required to pay support.
Doug H: So there you go. So to summarize this then, wages can be garnisheed, disability payments from your employer for lost wages can be garnisheed ’cause they’re really just a replacement for wages. Ontario Works and Ontario Disability Support Payments, ODSP cannot be garnisheed or attached because as you said the execution creditors cannot get them with the exception of support orders for child support or spousal support. And we know all this because we’ve reviewed the Wages Act, the Ontario Works Act and the Ontario Disability Support Payments Act. So that’s more lawyer stuff than we’ve ever done on this show.
Ted M: And there’s more to come.
Doug H: More to come because the final common category that people get is pensions. And yes of course there is an Ontario Pension Benefits Act; it’s by far the longest of acts that we’ve looked at so far. The Wages Act had eight sections; the Pension Benefits Act has 116 sections. So, Ted you’ve read them all I know. You’ve always wanted to be a lawyer when you grew up. How many of those 116 sections in the Ontario Pension Benefits Act deal with garnishments?
Ted M: Let me think about this, none.
Doug H: None. So, if you get a retirement pension from where you used to work, there is nothing in the legislation that specifically permits a creditor to garnishee. That’s good.
Ted M: That’s good.
Doug H: Now there’s also federal legislation, called the Canada Pension Plan Act, it has 118 sections ’cause of course the feds have to have a couple of extra sections. How many of those sections deal with wage garnishments?
Ted M: None.
Doug H: Good. So, the final category of government pensions is the old age security program, which is the Government of Canada’s largest pension program, a lot of people don’t know that. So, can retirement income be garnisheed? So, let’s start with OAS, so the Old Age Security Pension, that’s a monthly payment. It’s available if you’re age 65 or older and you meet, you know, Canadian legal status, meet the resident’s requirements. You probably have to apply to receive it.
Back in 2016 the income threshold was $73,756. So, if you earn more than that you don’t get the full OAS pension. And in addition to the OAS pension there are three types of OAS benefits. I mean I don’t know how the government could have made this more confusing but there’s the guaranteed income supplement and so what’s the guaranteed income supplement?
Ted M: So you live in Canada and you’ve got a low income, this monthly non-taxable benefit can be added to your OAS pension. Basically it’s topping you up.
Doug H: It’s a top up. And then there’s also an allowance, what’s the deal on that one?
Ted M: So if you’re 60 to 64 years old and your spouse is already receiving OAS pension, you may be eligible for the guaranteed income supplement. So, it’s a top up if you’re the spouse of somebody receiving the pension already.
Doug H: And you’re obviously slightly younger than them. And there’s also something called the Allowance for the Survivor.
Ted M: Right. So, if you’re 60 to 64 years old and you’re widowed or a widower, you may be eligible to receive this benefit. The idea is that it’ll bridge you until you’re eligible to receive the benefit yourself at 65.
Doug H: Right. So, those last two, the allowance or the allowance for the survivor obviously disappear when you’re 65 because then you’re getting the full OAS. So, there is of course an Old Age Security Act. Fortunately it’s only got 46 sections. So, Ted is there anything in the Old Age Security Act about garnishments?
Ted M: Nothing.
Doug H: Nothing. So OAS can’t be garnisheed by a normal creditor. But your payments can be suspended by the government if you cease to reside in Canada or if you’re in jail or if your income is too high. But those are not garnishments.
Ted M: Right.
Doug H: So, okay let’s talk about some exceptions to all of this then. So there’s nothing in the legislation that allows a creditor to garnishee my CPP or OAS so that sounds great.
Ted M: Yep.
Doug H: But there are five cases, at least that I can think of, where you could lose some or all of your government pension. So, Ted I’m going to say the list and you just fire in your comments on each one. So, number one exception to the pension rules is pension funds deposited into a bank account where you owe money.
Ted M: So, once the money is deposited into your bank account it is co-mingled. So it’s no longer pension money and now it’s just your money and the banks have the right to seize it if you owe them money on one of your other accounts. It’s called The Right of Set off. So basically if you owe $500 on your Visa Card you’ve got $500 in your bank account, wherever that $500 came from, they’ve got the right to take it if you don’t make your payment.
Doug H: So pretty simple. And that’s why we always recommend if you’re going through financial trouble it might not be a bad idea to open a new bank account at a bank where you don’t owe money.
Ted M: That’s an excellent way to protect yourself because the banks will do this without telling you.
Doug H: Because they have the power to do it. Okay so the second exception to this rule that says pensions can’t be garnisheed, what if I owe child or spousal support arrears?
Ted M: Okay, so remember we said all along here that if you – sorry, support orders from the Family Law Act can take up to 50% of your pay. It’s usually done by the Family Responsibility Office, which is another government agency. So if you owe support they can come after your pension too.
Doug H: And we’ve certainly seen that happen.
Ted M: Yes.
Doug H: Now I kind of glossed over Revenue Canada in one of the previous segments. So, if I get a pension and if I owe money to Canada Revenue Agency, obviously for taxes, what power do they have?
Ted M: Well, at Canada Revenue Agency, I mean they’re a power onto themselves. So they can do all sorts of things without getting any oversight from anyone else. So no court orders required, they simply send a letter to your bank or to whatever program is offering you the benefit and start garnishing or seize the money.
Doug H: So they can send a letter to CPP or OAS or whatever and start taking money.
Ted M: And when you think about it, it’s just the same right of setoff that the other creditors have, it’s just that the government is more powerful. So, if you owe them money for taxes why would they keep paying you your pension?
Doug H: And we’ve actually seen that happen.
Ted M: Yeah and it’s frustrating for seniors because obviously the folks receiving that pension, it’s usually the only form of income that they’ve got. Something horrible has happened and now they’ve got the added problem of the government wanting the rest of their money.
Doug H: Yeah because if they had other sources of income, the government would be going after that presumably. So, okay so category number four, exceptions to the pension rules, income security overpayments. What are we talking about here?
Ted M: So if you get a government benefit think of it like the Old Age supplement. Another one is the Child Tax Benefit, things like that. If they overpay you, or have overpaid you in the past, then they will claw back a portion of your benefit in the future. They don’t consider it a garnishee per se; they consider it a claw back and an offset.
Doug H: But the effect is the same. Instead of me getting 800 bucks a month, now I’m getting 400 bucks a month.
Ted M: Correct.
Doug H: If it walks like a garnishment and quacks like a garnishment, it’s a garnishment, right?
Ted M: Yep.
Doug H: So, and I guess kind of a very similar line, number five in the exceptions is social assistance repayments.
Ted M: Right, so same thing. If you’re on Ontario Works or ODSP or any form of social assistance or welfare, if they believe they have overpaid you in the past then they will claw back a portion of your future benefits to recover that money.
Doug H: Cool. Okay now everything we’ve talked about up to this point we’ve been quoting the act. Ted has spent the last five weeks in detailed study reading every single act. And we’ll summarize all this at the end but there is one more source of income that we haven’t talked about and it’s a source that Ted and I have never encountered in real life and it’s not covered by any legislation so we don’t really know what the answer is. But hey, that’s never stopped us before, we’ll discuss it anyway and that’s basic income.
So, back on show number 114 in November 2016 my guest was David McDonald, a senior economist with the Canadian Centre for Policy Alternatives. On that show David described the concept of basic income and if you’re interested in a full explanation I’ll put a link to that show over in the show notes over at hoyes.com/podcast. In simple terms if basic income became widely available, everyone would get a payment each month whether they are working or not.
Now in 2017 the Ontario government started a pilot project to test basic income. A pilot project is currently operating in Hamilton, Brantford and Thunder Bay, participants must have lived in these communities for a least a year and still live there. They must be between 18 and 64 years old. So this isn’t for seniors, obviously there’s other programs for them, and they must have a low income, which is defined as being under $34,000 if you’re single or under $48,000 for couples.
Participants in this test will receive around $17,000 per year for a single person or $24,000 per year for couple less half of any income they earn. People with a disability will receive an extra $500 per month. And I’m not going to get into the mechanics of this and whether it actually makes sense or not. I mean my comment off the top of my head would be this doesn’t sound like basic income if you’re going to have these deductions and so on and so forth. But okay, fine, that’s the way the policy is right now.
So, here’s the question, if you are a member of this pilot project and you’re receiving a basic income payment and you have debts, can your basic income payment be garnisheed by a creditor? And this is a very relevant question because as we know from our Joe Debtor study, people who file a bankruptcy or a consumer proposal in Ontario have incomes that are around 40% less than the median income in Ontario.
So since the participants in the basic income study are people with lower incomes, it is likely that at least some of the participants have debts. So, if they owe money on their credit card and don’t pay, could the credit card company go to court, get a judgment, and then enforce that judgment by garnishing their money basic income cheque?
Ted M: And the answer is we just don’t at this point. It hasn’t been tested in court yet that we’re aware of. It doesn’t seem to meet the definition of wages because you haven’t earned this income for doing something, unless you consider being alive a way of doing something.
Doug H: Well wages are defined as an employer paying you something and obviously there is no employer here.
Ted M: It doesn’t appear to be a pension, right? I mean it’s, if anything it’s like government assistance. But unlike Ontario Works or ODSP, there’s no specific protection in the legislation so at this point we just don’t know.
Doug H: Yeah. And we just don’t know. And I’ve talked to a number of people who are involved in this on many sides of the issue and this is a very serious concern. The pilot project is something that people sign up for and so a number of organizations, I can think of one in Hamilton in particular, have said, you know, we’re kind of reluctant to be encouraging people to sign up for this if what we’re really doing is giving them income that potentially can be garnisheed.
Ted M: Right.
Doug H: So it’s a bit of a worry. So at this point in time, our opinion is there is no specific law that says it cannot be garnisheed.
Ted M: Right. So, it’s really going to come down to the first few test cases in court and the judge’s perception of what this law’s supposed to do.
Doug H: And then presumably the government will then pass laws to codify how it should work, exactly what they’ve done with OW and ODSP.
Ted M: One of the reasons this is so important is because people are saying that the basic income is a benefit that will replace a lot of other government programs. So right now it’s in the test phase but if the government likes the results, they believe that it’s beneficial to the public and can save them some money somehow, you know they’re going to roll this out in a bigger way and this is going to become a very important aspect of it.
Doug H: Yeah because if everyone had a basic income you wouldn’t need Ontario Works.
Ted M: Right or pensions.
Doug H: Yeah I mean I guess pensions –
Ted M: Not the old age supplement or the CPP.
Doug H: Yeah maybe those go away too depending on where at age 65 basic income disappears because there are other programs there. So you’re right they’re going to have to figure out what they’re going to do if this becomes a thing. And I would assume the government would just put those same clauses that you read from the Ontario Works legislation, the ODSP legislation and so on.
Ted M: Can you imagine on how annoyed the public would be if suddenly they found out that these supplements were being garnisheed by creditors. There’d be a revolt.
Doug H: Yeah we come up with basic income to support the banks.
Ted M: That’s what it sounds like.
Doug H: Which is what it sounds like.
Ted M: So we’ll see.
Doug H: So stay tuned, we’ll continue to monitor this very closely and as we know more we’ll report back. Obviously this pilot project will run for awhile at which point the results will be assessed and we’ll see what happens from there. So, okay let’s get to the meat of it then and that is what can you do if your wages are being garnisheed or about to be garnisheed? So, people now understand what can be garnisheed, what can’t be, let’s take the very simple case of okay, I’ve got wages and they’re saying they’re going to take me to court, they’re going to garnishee my wages or it has already started. So, Ted what’s the advice you give people in that situation?
Ted M: Well, so unless you’re a lawyer and knowledgeable about this stuff, you need to get some help. The best advice I can give you is to call a licensed insolvency trustee because this is what we do for a living. You’re going to see ads from debt consultants, financial consultants, credit counsellors. All these people are trying to sell you something, they’re not necessarily going to give you the answer that you’re looking for. A licensed insolvency trustee is required by law to describe to you your options, what you can do to stop the garnishee to deal with all of your debts.
Doug H: So if I am being garnisheed right now, what can I do to stop it?
Ted M: Alright, so the easiest way to stop it is to pay off the debt in full. If you could have done that then obviously –
Doug H: You would have done that already.
Ted M: You probably would have done that already. So you can try to negotiate with the creditor, whoever has got the execution against you for the garnishee and say look, this is what I’m going to do to help you. If they’ve gone to the trouble of garnisheeing your wages, I think they’re not going to be very receptive to any kind of deal you’re going to offer them at this point.
Doug H: ‘Cause they’ve already spent the money on the court and everything.
Ted M: Well and they only took you to court because you weren’t very faithful about paying them for whatever reason in the first place. So, you have legal options though, you have the right to file a consumer proposal or you could file for personal bankruptcy. And we could talk a little bit more about both of those things, it probably makes sense.
Doug H: Okay, so let’s start with personal bankruptcy then. Personal bankruptcy stops a garnishment, is that correct?
Ted M: That’s right. The only type of garnishment that it will not stop is for support orders, so child support, spousal support. Just like all those other exemptions we came across when we were reviewing the six or seven laws in this program, you cannot stop an order for support for somebody else through bankruptcy law. And the idea is that you’re diving your income to support your children, your spouse, from a previous relationship and that’s protected under the law.
Doug H: So that doesn’t go away. But otherwise the garnishment will stop. So, the process would then be, they come in, they see you, you do up the paperwork, how long does it take to stop a garnishment?
Ted M: So, someone that’s got all the information required to put these documents together, you can stop a garnishment in a couple of hours. It can literally be done that quickly. The reality is that we need to contact your employer after you’ve filed the bankruptcy. Give them a notice that’s called a stay of proceedings, we also send the same notice through to the court telling everyone you filed bankruptcy now, you’re protected under the law, the garnishee has to stop.
Doug H: And so part of it depends on your employer. And I know a lot of people say oh, I don’t want you contacting my employer, I don’t want everyone to know. Yeah, well unfortunately –
Ted M: It’s already too late because somebody’s contacted your employer to garnishee your wages. The only way we can stop them is to contact your employer to say no, no, no you’re not allowed to do this anymore, this person’s protected under the law.
Doug H: And so the speed at which we can stop the garnishment is really dependent on the information you can give us. If you work for a big, huge company that has 15 people working in the payroll department, it would be really helpful to know here is the person who is dealing with my situation, here’s their fax number, their email address, their phone number, they’re going to be at work this afternoon.
Ted M: Well and you know what I found, the bigger the employer actually the longer it can take. ‘Cause you need to know in advance that if you’re working for a huge company, they probably do their payroll a week and a half ahead of time. And so we’ll send the notice to stop the garnishee immediately and if they’ve already processed your next paycheque, it’ll come off anyway. Now the good news of that is they’re required by law to send it to us and we’ll help you deal with it as part of the bankruptcy as opposed to it going off to your creditors and you never seeing it again.
Doug H: So we do what we can to do it as quickly as possible, we can start that process once you have filed your bankruptcy and we electronically send your bankruptcy to the Office of the Superintendent of Bankruptcy and we instantly get back, assuming there’s no glitches in the system, a certificate of appointment which is then the piece of paper with the fancy number on it that we need to stop that garnishment.
Ted M: Yeah we don’t apply to the court to get you protection, it’s an automatic provision of the law. As soon as you have filed and we’ve got that number and as Doug said it’s all done electronically, it takes like two minutes, your protection’s in place.
Doug H: So in theory if you come in to see us at 1:00 and sign all the paperwork at 1:30 we’re pushing the buttons. We’ve got, like at 1:31 in the afternoon we’ve got the piece of paper back from the government. If you’ve given us your employer information already then, you know, by in theory at 2:00 we can fax it to them or email it to them and they can then start the process to stop it. But as Ted said well, if payroll’s already been processed for this Friday then it may be the next one before you see it stopping come off your paycheque.
Ted M: It’s one of the first questions we ask someone, when is your next pay date so we can give you an estimate of whether or not can we get this thing stopped before your next payday or is it probably too late?
Doug H: And then you know from a cash flow point of view what’s going to happen.
Ted M: Yep.
Doug H: So everything you’ve said about personal bankruptcy, stopping a garnishment, what are the differences between that and a consumer proposal stopping a garnishment?
Ted M: Well, so the protections under the law are the same. As soon as you file a consumer proposal, the creditor is stayed, which means legally they have to stop any type of garnishee, any type of enforcement action against you. So the same notices that we send under the bankruptcy, we’re going to send to your employer as part of the consumer proposal. And the difference between the two, bankruptcy’s is saying – you’re saying you can’t afford to repay any part of your debt, your proposal, you’re offering to pay part of it. And we’ve done whole programs on both of these things it’s a question of your own situation, which one of these solutions makes more sense.
Doug H: Right. So back to your initial point, come in and see a licensed insolvency trustee.
Ted M: Right because nobody else can do these things for you, you can’t go see a lawyer to get a bankruptcy filed or a proposal filed. You have to speak to a licensed insolvency trustee.
Doug H: That’s just how it works. Kind of if you want heart surgery you have to go to a heart surgeon, that’s just how it is. So, we encourage everyone who thinks there’s a garnishment that’s about to start or is already in that situation even if it’s already started, even if it’s been going on for months, we can stop it, simple as that.
Excellent. So if you need to stop a wage garnishment, today’s broadcast is a good place to start but I also recommend as we’ve just said, talking with a licensed trustee about your options. That’s our show for today. Full show notes including a lot of links to all of the different legislation we talked about today and the time stamps on each different topic we talked about if you want to go back and listen to a specific section, can be found at hoyes.com and we will have a full transcript at hoyes.com as well. Ted, thanks for being here.
Ted M: Always a pleasure.
Doug H: Thank you and thanks for listening. Until next week I’m Doug Hoyes, that was Debt Free in 30.
Hoyes, Michalos & Associates Inc. is not a bankruptcy firm – we are a “fresh start” organization. We know that bankruptcy is not your only option. When you call us for help with overwhelming debt, we explain all the alternatives to bankruptcy in Canada. You might be surprised to know that less than 10% of the people who contact us for help actually file bankruptcy. We help them avoid bankruptcy by looking at other options. In this post we will look at the top 5 bankruptcy alternatives.
Bankruptcy Alternatives in Canada
If you have more debt than you can handle, there are solutions that you can explore. We’ll explain these in more detail below, but generally the top 5 alternatives to bankruptcy in Canada are:
Repayment of debt through personal budgeting,
Refinancing debt with a debt consolation loan,
Repayment under a debt management plan through a credit counselling agency,
Informal debt settlement through direct negotiation with your creditor,
Avoid bankruptcy and eliminate debt with a consumer proposal.
No one solution fits everyone. There are pros and cons for each option, which we detail below. Our professionals are happy to talk to you, either over the phone or at a free 30-minute consultation about your financial situation and which option makes most sense for you.
How to Avoid Bankruptcy
Many of us struggle financially at some point in our lives and may even consider filing for bankruptcy as a way to manage our debt. Most of the time, this extreme decision can be avoided in favour of an alternative that allows you to take charge of your debts without the drastic step of declaring bankruptcy.
Personal Budgeting
Repaying debt isn’t easy, and the first question should be “Can you afford to repay your debts on your own?” To answer this question, you need to create a personal budget to see how much money you have available each month to pay down your debts. Then, make a list of all of your debts and monthly payments and see how long it will take to pay them off.
To help you do this we have created a free and easy to use excel Debt Repayment Worksheet. This spreadsheet will show you how much you need to pay each month to pay off your debt in 1 year, 2 years, 3 years and up to 5 years.
If, through this analysis you cannot repay debts like credit card debt in a reasonable period, say 5 years, move on to the next option.
Debt Consolidation Loan
A debt consolidation loan allows you to combine several outstanding credit cards and bank loans into one single loan. If you qualify for a debt consolidation loan, you use this money to repay your other debts. You will now repay one consolidation loan, which typically has a lower interest rate than your other debts. This doesn’t solve the entire problem – you still have debt. However, it does make the payment much more manageable since you would only be making one payment versus several different payments.
You have two opportunities to consider when consolidating debt through a new debt consolidation loan:
You can lower your interest rate, thereby reducing your monthly interest costs, and
You can lengthen the term of the loan, lowering your monthly payment but potentially increasing the total interest you will pay.
Example of the benefit of a lower interest rate: If you have $20,000 in credit card debt and make payments at a rate of $500 a month at 29% interest it will take you 5 years and 4 months to pay off your credit card debts. If you can only afford $400 a month, that same credit card debt will take 8 years and 4 months to repay. However, if you can get a debt consolidation loan at 8%, paying $400 a month will eliminate your debt in 5 years and 2 months. In effect, getting a lower interest rate saved you 3 years in debt payments and more than $15,000 in interest.
Example of the cost of a longer term: Let’s assume you have $25,000 on a bank loan with a 5-year repayment term at 6%. Your monthly payments are roughly $480 a month. If you refinance this loan with a second mortgage (and for ease of comparison we will assume the same 6% interest rate) but extend the term to 15 years, your monthly payment drops to $210 a month. However, by extending the term you will pay almost $9,000 extra in interest over the length of the new loan.
Clearly these are extreme examples, however when considering a debt consolidation as an alternative to bankruptcy, these are the costs and benefits you need to consider.
You can consolidate debt through an unsecured debt consolidation loan or a secured consolidation loan like a second mortgage. The first option generally comes with a higher interest rate. The second option requires that you have sufficient equity in your home to put up as collateral to qualify for refinancing.
Debt Management Plan
A debt management plan, filed through a reputable, non-profit credit counselling agency, allows you to consolidate your monthly debt payments without having to qualify for a new loan. This type of debt repayment plan is a good option if:
You only want to consolidate a few, small debts;
You have bad credit and so would not qualify for a low-interest consolidation loan through a traditional lender.
Under a debt management plan, you must repay your debts in full. You may be eligible for interest relief, however there is no debt relief with an alternative like a debt management plan.
Example of payments under a debt management plan option: If you have $20,000 in credit card debt and choose a debt management plan over 5 years, your payments would be $333 a month. This is less than the pay it yourself alternative of $500.
Credit counselling can help you if you have a consistent income stream but are struggling to keep up with both interest and principal payments on your debts. A debt management plan, through a credit counsellor will allow you to repay your debts with a low interest rate and sometimes even with no interest.
For this alternative to be a good option it should:
Deal with most of your unsecured debts
Be affordable and sustainable.
The problem is however, that these types of repayment plans aren’t helpful if you are repaying income tax debts or any other type of government debt. In addition, you will still be required to repay your debts in full. While interest might stop, you cannot settle your debts for less than 100% of the outstanding balance you owe now.
We have met with many people who have not been able to keep up with the higher payments in a debt management plan and who eventually chose to file a consumer proposal instead.
Informal Debt Settlement
If you’ve been struggling with your debt for quite some time and your debts are small and fairly old, you may be able to settle your debt on your own with your creditor for a lower amount than the one you’re currently contracted to repay. You can sometimes repay around 50% of your overall debt and in some cases some companies will accept even less.
A word of caution: There are many debt consultant and ‘credit counselling agencies’ who offer to help you settle your debts for pennies on the dollar. In general, these debt settlement companies are not cost-effective. They often charge an ongoing fee during which time they are either not in contact with, or cannot get agreement from, all your creditors. In the end, they often refer you to a Licensed Insolvency Trustee to file a consumer proposal, but only after you have made large, unnecessary monthly payments, often under some form of written contract.
Avoid Bankruptcy With a Consumer Proposal
Another option that is becoming more common is a consumer proposal. A licensed insolvency trustee, acting as an administrator, will negotiate on your behalf with creditors to come to an agreement and settle your debts. The great thing about consumer proposals is that they can help you to negotiate an extremely low settlement.
For example: If you owe $40,000 to different creditors, they may be willing to negotiate for as little as 30% of the amount you owe. In our $20,000 example, your monthly payment could be as low as $100. This can help tremendously, because your debt will be paid off faster. You will typically make one monthly payment over a period of up to 5 years and you can pay it off earlier if your financial situation improves.
Creditors will accept a deal offered through a consumer proposal administrator because they would rather receive some amount of money from you as opposed to less in a bankruptcy. Often, when someone uses the services of a consumer proposal company, they are not too far away from having to declaring bankruptcy. Their creditors are looking for the best recovery for themselves and sometimes a that is a consumer proposal. As a result, a proposal is a win-win for both the debtor and their creditors.
Advantages and Disadvantages of Avoiding Bankruptcy
If you are considering filing for bankruptcy, talk to a debt expert first. In some situations, a bankruptcy turns out to be the best option. The key is to talk with a licensed professional about the advantages and disadvantage of avoiding bankruptcy, so you can make an informed decision.
There are other options available to you. To help you choose which option is best for your personal situation, contact Hoyes Michalos to book a free consultation with a Licensed Insolvency Trustee today. We’ll help you find relief from your debts.
November is financial literacy month in Canada, and for the seventh straight year the government will encourage Canadians to “take concrete actions to better manage their money and debt, including making a budget, having a savings plan and understanding their financial rights and responsibilities.”
So, the solution to all of our financial problems is to make a budget? I disagree.
In my experience, budgets don’t work for most people because they don’t stick to them. They get discouraged, and they end up worse off than before.
I’ve talked a lot about what I believe is a better alternative to budgeting.
However what I want you to take away from today’s podcast is that I believe the solution to our financial literacy problem runs deeper than budgeting.
Financial Literacy Means Asking The Right Questions
Canadians are carrying record levels of debt, so obviously we have a problem, and despite the government’s best intentions, budgeting won’t solve it.
So what’s the solution?
On today’s show I make two comments:
First, my clients have an income problem, not a debt problem, with our average client earning income about 40% less than the median income in Ontario. Obviously budgeting won’t help if you don’t earn enough, so that needs to be a focus for discussion.
Second, we need to teach critical thinking, which is more important than basic budgeting. We need to have the skills to make real life decisions about where to save, whether to rent or buy. Even making the right choice about what cell phone plan you should buy requires critical thinking. On the podcast I talk about how and why we should design financial literacy lesson plans for students around these topics. How we can teach them to ask the right financial questions.
If you have kids, listen together and talk to them about how they can think critically about their finances.
FULL TRANSCRIPT – Show #166 Financial Literacy Solutions
November is Financial Literacy Month in Canada. The first financial literacy month was in 2011, and in 2012 the Parliament of Canada proclaimed that each November would be Financial Literacy Month. The Financial Consumer Agency of Canada, a division of the federal government, under the leadership of the Financial Literacy Leader, co-ordinates activities across Canada.
This year the theme is “Take Charge of Your Finances: It pays to know!” and the government is encouraging Canadians to “take concrete actions to better manage their money and debt, including making a budget, having a savings plan and understanding their financial rights and responsibilities.”
Okay, that all sounds good. Who can disagree with making a budget, and having a savings plan, and understanding your financial rights and responsibilities?
Well, I can disagree with it, and I will.
Today on Debt Free in 30 I want to give you a completely different take on financial literacy. I think the experts have it all wrong.
Financial literacy is an issue we cover every November on this show. Back in 2014, on show #9, my guest was Jane Rooney, Canada’s Financial Literacy Leader, who continues in that job even today.
Should financial literacy be taught in high school? That was the discussion back in 2015 on show #62 with Dave Mitchell, a retired high school teacher with decades of experience.
Then last year, in 2016, my guest on show #116 was Prakash Amarasooriya, who at the time was a member of the Toronto Youth Cabinet who launched a petition urging the Ontario Ministry of Education to beef up their Grade 10 career studies course to include basic financial skills like budgeting.
And here we are in 2017, and once again we are talking about financial literacy.
Is there any point in continuing this discussion?
The government has been working on their mandate to improve the financial literacy of Canadians for 7 years. Yet during that time:
Total household credit has increased 31% from 1.6 trillion to 2.1 trillion dollars
Consumer credit including credit cards, lines of credit, car loans and similar revolving debt has increased 17% from 503 billion to 590 billion dollars
Total household mortgage debt has increased 37% from 1.1 trillion to 1.5 trillion dollars
And the debt-to-income ratio in Canada has ballooned from 160% to almost 168%.
I think that, given these numbers, you could easily argue that the entire financial literacy education process has been a dismal failure.
The counter argument, of course, is that our precarious financial situation proves more than ever that there is a big need for financial literacy education. Just because the message hasn’t gotten through to everyone yet doesn’t mean we should stop trying.
Here’s my take on this issue.
I said at the start of the show that the government is encouraging Canadians to “take concrete actions to better manage their money and debt, including making a budget…”
Okay, let’s start there. The government is suggesting that our financial problems are caused by not having a budget, and therefore if you make a budget, you can solve some of your problems.
I disagree, for two reasons.
First, as we know from our Joe Debtor study, the average person in Ontario with so much debt that they have to file a consumer proposal or bankruptcy has an income that is about 40% less than the median income in Ontario. That’s often caused by the lack of a good, steady job or having reduced work hours.
So tell me this: if you are a recent college graduate, with a lot of student loan debt, and you can’t find a full time job in your field, and you are surviving working two lower paying part time jobs, how will making a budget help you?
If you had to take substantial time off work because of an injury, or to take care of a sick child or aging parent, is budgeting going to take care of the fact that your income is too low to pay all of your bills?
If you have an income problem, you already know it. A budget won’t help you manage money that you don’t have.
But what about people who have a decent income; wouldn’t a budget help them manage their money? As regular listeners to this podcast know, I’m not a big fan of budgeting, because most people don’t stick with it. What good is a spreadsheet or budgeting app that you abandon after three months, or three weeks?
Sure, a budget might help you identify some spending you can cut back on. But based on my experience a budget doesn’t keep people out of debt. If it was that easy, we’d all be doing it.
Managing money effectively means more than balancing your budget. It means:
Making sure you keep up with all your bill payments and, once you have reduced your debt, setting aside some savings for your future, and
Not getting in over your head in the first place.
I think there are a lot of better ways to manage your money than budgeting. I won’t go into those ways now, but I’ll put some links in the show notes to two You Tube videos I’ve done on the subject, and it’s also covered in Chapter 17 of my book Straight Talk on Your Money.
The second objective – not getting in over your head in the first place – is a lot harder.
The truth is that the cause of our money problems, if you actually have a decent income, is not that you aren’t budgeting, but that we don’t give enough thought in advance to the decisions we need to make.
Money decisions are difficult, because they involve math. Money is numbers, and numbers are math, and most of us don’t like math and think it’s just too hard. So when we are sitting with the mortgage officer at the bank, and we’re trying to decide if we should go for the 20 year or the 25 year amortization, we freeze. We don’t know how to calculate an amortization schedule in our heads, but even if we have an app that can do the math for us, we still aren’t sure how to make that decision.
Having some math ability certainly helps when answering mortgage questions like:
How much do I need for a down payment?
Should I choose a fixed or variable rate mortgage?
Should I make monthly, bi-weekly or weekly payments?
What kind of pre-payments can I make?
What’s the pre-payment penalty if I have to sell early?
What’s better a second mortgage or home equity line of credit?
Do I need mortgage insurance?
And here’s a math question almost no-one asks: What is the effect on my monthly payment if interest rates rise?
We have the same problem when we are trying to decide if we should get a car loan, or a car lease. Which is better? How long should the term be? How much interest am I paying?
Should I contribute to my TFSA, or RRSP? Should I pay down my mortgage, or put more money in my RRSP?
These are all, at least in part, math questions, and if we don’t think we are good at math, we don’t know how to make the correct decision.
So if we don’t know how to do the math to make the decision, what do we do?
We let our emotions decide, and we follow the crowd.
Should I buy a house, or rent? That’s partially a math question, and math is hard, so we let our emotions guide us. “I really want to buy a house, because all of my friends have one” is often how we make decisions. “If I don’t get into the market now, I never will” is letting our fear of missing out rule our decision making.
So what am I suggesting here? Math is hard, so we should just give up?
No.
I think there is a solution but it’s not just about teaching financial math.
If you listen to the financial experts, they will tell you that yes, they agree, we have a math problem, so we need to teach kids about compound interest, and amortization schedules, and lots of other money math.
But think about it: does it make sense, in Grade 10, to be teaching high school students about mortgage amortization schedules? What are the chances that a kid in Grade 10 is going to be buying a house and getting a mortgage anytime soon? Not very likely, I suspect.
Let me say it again: math is an issue, but it’s not our primary problem; our problem is that we don’t think through our decisions before we make them. We use our emotions, and we follow the crowd.
So here’s how I would teach financial literacy to high school students.
I would teach them using real life case studies.
Lesson #1: you want to buy a new cellphone, so you go to the kiosk at the mall, and they say “hey, here’s a phone, it’s free, you just sign up for this plan”. That’s a very common situation for a high school student. So here’s the lesson: what questions should you ask to evaluate how good a deal you are getting?
My guess is that most people think “free phone, this is great!” and that’s it. That is obviously an emotional response, and we are following the crowd because we want a new cellphone because all of our friends have the latest phone.
So what questions should you ask? That would be a great class discussion. Off the top of my head, I would want to ask:
What would the phone cost if I bought it without a plan?
What would the phone plan cost per month if I provide my own phone so I don’t need to buy a new one?
What is included in the monthly fee?
How many cellphone minutes?
How much data?
What are the long distance charges?
What are the overage charges?
What is your service coverage area?
What does the phone’s warranty cover?
What if my phone is lost or stolen?
How much is the security deposit?
How do I pay the bill each month? Can I pay electronically?
How long is the contract for?
What if I want to cancel early?
Off the top of my head I just came up with over a dozen questions that you should ask before signing on the dotted line for a new cellphone. I’m sure if I thought about it longer I could come up with another dozen good questions to ask.
How many of those questions would a high school student know to ask?
The class project could be to compare contracts from different providers.
Obviously there is some math involved here, but it’s mostly critical thinking. At the end of the course the students will have created a questionnaire they could use in real life to help them make a cellphone buying decision.
That’s the first section of the course. I’m not a professional educator so I don’t know if that’s one class or many, but that’s where I’d start: using a real-life example to teach critical thinking.
Lesson #2: payday loans. Students aren’t getting payday loans, but one class could be spent walking through the concepts. It’s scary, so if done correctly it would make an impression on them. If you understand how high payday loan rates are, you would be less likely to try to access them in the future.
As an aside, almost 4 in 10 graduates with student debt have a payday loan in our bankruptcy study. So teaching this lesson early is way more important than teaching them about mortgage amortization.
As I said earlier, most of my clients who get payday loans have an income problem, so just understanding how high the payday loan rates are is not a solution. People get payday loans because they think they have no other options.
So here’s the project for the class: Your parents get paid on the 5th of the month, but the rent is due on the 1st of the month. How do you pay the rent without having to resort to a payday loan?
That would be an interesting class discussion, and I know that that is actually a situation that many student’s parents will have faced. And it’s a situation that some of them will face soon after graduation, so it’s a very practical and useful discussion topic.
The obvious answer is to save money up in advance, but that’s not always possible. What else can you do? My answer would be to talk to the landlord and work out a plan, which is a lot cheaper than getting a payday loan, but it would be interesting to see what ideas the students come up with.
Lesson #3: credit cards. The question for the class: if your parents let you use their credit card to buy a new pair of jeans, and the deal is they will give you one year to pay them back, but you have to pay the interest, how much do those jeans cost you? How is interest calculated? What’s a minimum payment? How much money can you save by saving up to buy the jeans, instead of putting them on credit?
Lesson #4: Student loans. How do they work? How do you qualify? How does repayment work? What if you can’t find a job after you graduate; how do you repay the loans? What is financially better: college, university, or learning a trade?
You get the idea. I would pick areas that students are likely to encounter, and then I would teach them how to think through the decision. There would be some math, but the math would be secondary to learning how to ask questions and think critically.
Of course, these same concepts could apply to adult financial literacy education as well.
Instead of spending our time teaching an adult how to make a budget, perhaps a series of case studies on the rent vs. buy decision for housing, or how to evaluate a car loan, would be more productive.
These wouldn’t have to be in class sessions. A series of You Tube videos, done properly, could easily demonstrate these concepts.
In fact, there are already a lot of good videos out there. For example, Preet Banerjee has a You Tube video called Is Renting Always a Waste of Money? …that’s had more than 2.5 million views, and it does a great job of explaining the math and other factors in the buy vs. rent decision.
Now of course you can’t blindly believe every video you see on YouTube, but if you watch a few of them you’ll start to see some basic themes and understand the concepts, and you can learn a lot, for free. You just need to spend the time and effort to do your own research.
That’s how I would tackle financial literacy education, but I suspect we’ll be having this same discussion again next year.
That’s our show for today. Full show notes, including a full transcript and links to everything I mentioned today, include a link to Preet Banerjee’s You Tube video, can be found on our website at hoyes.com, that’s hoyes.com
Thanks for listening. Until next week, I’m Doug Hoyes, that was Debt Free in 30.
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