Personal Debt is a Problem Even in a Booming Economy – Lessons From Alberta
On today’s show Barton Goth, a bankruptcy trustee from Goth & Company in Edmonton, Alberta, talked about how the money from the oil industry has impacted the economy in Alberta. He also talked about how this creates challenges when it comes to managing money for both job seekers and those retiring in a booming economy. And we learn that the money management lessons from Alberta apply to most Canadians.
Alberta’s Economic Boom
The oil industry has made Alberta the fastest growing economy in Canada. With growth significantly outpacing other provinces, Alberta has plenty of jobs to fill, where many other provinces may not. This entices many Canadians from other provinces move to Alberta to find work. In fact, Alberta leads in terms of inter-Canadian relocation.
When then economy improves, when people are employed and incomes increase, the insolvency rate tends to decline and Alberta is no exception. In fact, recent government statistics show the number of personal bankruptcy filings are down almost 20% in the last year. No surprises there.
What is surprising is that the number of consumer proposal filings has increased. The main reason for this is the benefit of a proposal when you have good income but are carrying too much debt.
As Bart says on the show:
“A consumer proposal is an excellent opportunity to avoid bankruptcy. It allows you, through a court sanctioned mechanism, to negotiate a settlement with your creditors, or basically to make a deal. You avoid a bankruptcy, but also bring your finances back down to a level that makes sense and is manageable.”
This shift from personal bankruptcy to consumer proposals is a profound shift. In the past most people filed bankruptcy. Now however, in both Alberta and Ontario, the number of consumer proposals filed is in fact over-taking the number of bankruptcy filings.
What Is It Like to Live in Fort McMurray?
Workers in the oil sands are faced with expensive living conditions. It’s not uncommon for four or five guys to live in a small apartment so they can share costs. Plus many are maintaining a home for their family in Edmonton and commuting which adds to their cost of living.
While workers in the oil industry make very good money, they also spend a lot, and that can lead to financial problems. The oil industry is cyclical, so often periods of high income are followed by periods of unemployment, which further strains personal finances.
Practical Advice from Barton Goth
Bart advises everyone to realize that there will be periods of time when your income drops, so you must prepare for those periods of reduced income. Bart recommends a two fold approach to dealing with cyclical income:
- Prepare by setting money aside when your earnings are high. That way when your income drops it won’t be such a shock to your finances.
- Look at how you buy things. Don’t be so quick to finance everything. If possible, save up a larger down payment, or what you can with cash, so that you don’t have financing costs when your income drops.
Retirement in Alberta
In the second segment we discussed the implications of retiring in Alberta. The booming economy has increased the price of housing, which makes it difficult for retired people on a fixed income.
Bart advises people approaching retirement age to work to reduce debt before they retire, so that they don’t have debt payments to worry about when they go on a fixed income. In some cases this may require the filing of a consumer proposal before you retire to eliminate your debts. If your income is fixed, or will be reduced, a bankruptcy is also a good option for seniors.
Bonus Podcast Only Segment – Differences Between Alberta and Ontario
Barton Goth gave a summary of the RESP and bankruptcy rules in Ontario and Alberta. Bart also discussed the principal residence exemption. This only applies in Alberta, and it allows a resident of Alberta to keep the first $40,000 of their house equity in a bankruptcy. In Ontario, there is no house equity exemption, so in Ontario a consumer proposal is often an option for a home owner.
Resources Mentioned in the Show
- Goth & Company, Bankruptcy Trustees and Consumer Proposal Administrators, Edmonton, Alberta
- RESPs and Bankruptcy, Debt Free in 30
FULL TRANSCRIPT show #12 with Barton Goth
Doug Hoyes: Welcome to Debt Free in 30 where every week we talk to industry experts about personal finance, debt and general money management. My name is Doug Hoyes and I am joined today by yet another guest expert. Who are you, what do you do, where do you work?
Barton Goth: I’m Barton Goth, I’m from Edmonton, Alberta. I work at Goth and Company, a small bankruptcy and insolvency practice here in Edmonton.
Doug Hoyes: So let’s talk, Bart, about Alberta in general, in terms of what’s happening with the economy, with debt, with bankruptcies and so on. Over the last few years, what have you seen? Have you seen increases, decreases, what’s been happening?
Barton Goth: Well right now the Alberta economy leads in Canada of all of the other economies that exist. We have oil. Now oil tends to drive things up –
Doug Hoyes: – You guys have oil?
Barton Goth: Oh, we’ve got a bit of oil. In fact they’re saying we have lots of oil.
Doug Hoyes: Lots of oil, okay.
Barton Goth: And with oil comes lots of jobs, higher incomes, in fact, right now the growth in our economy, in our provincial economy, they’ve marked at 3.6% per year. Just to give you some perspective, you compare all other provincial economies, the next highest one is 2.3% increase. So we have lots of jobs. As a result lots of people are moving to the province. We lead in terms of inter-Canadian relocation because there’s jobs in Alberta. There’s not jobs in lots of other places.
The interesting thing this does from a bankruptcy perspective, when the economy’s good your insolvency rates usually drop. And so in one of those periods where we’ve had a reduction in insolvency rate, at least most recently, we’re sitting at about nine and a half percent on a year per year basis at this point, down from where we were previous. Now bankruptcies are down a lot more, proposals are actually up.
So for those of you that don’t know what a proposal is, is it’s an excellent opportunity to be able to avoid a bankruptcy. It allows you through a court sanctioned mechanism to negotiate a settlement with your creditors, or basically to make a deal. So you can avoid a bankruptcy, but also bring your finances back down to a level that makes sense and is manageable.
Doug Hoyes: And that split has been changing now over the years or if we were to go back ten years ago, there were a lot more bankruptcies, a lot fewer proposals as a percentage? Is that correct?
Barton Goth: Absolutely. We’re – we’re approaching the point, at least across the country, we’re getting closer and closer to an equal split. Almost 50 percent bankruptcies versus 50 percent proposals. I know in Ontario, you guys have been at the 50-50 for a little bit longer than we have been in Alberta.
Doug Hoyes: Yeah, we’re there and have been there for a couple of years now. And a lot of what’s driving that I guess in Alberta, like you said, is the oil patch, the oil revenue. So – now you’re in Edmonton, do you see a lot of that oil money where you are or is it in other parts of the province? How does that work?
Barton Goth: The oil money is throughout the province. It may not necessarily directly be jobs for people that are in Edmonton themselves, or at least working in Edmonton themselves. But as the oil money comes in, the secondary services to support the people that have come in definitely increase.
Now we do have a – we’re seen as the gateway to the North as well, so we’ve got a lot of people that live in Edmonton but don’t work in Edmonton. And they work up in Fort McMurray or other places in Northern Alberta where a lot of the oil interests are. And lots of them don’t want to live in small – or small communities, they don’t want to live up in Fort McMurray, which can be a little bit rougher at times. And so they’ll keep their house in Edmonton and their family in a house, and they’ll simply go up to the camps for work and come back off.
Doug Hoyes: And so how long does it take to get from Edmonton to Fort McMurray? Am I going to drive that, am I taking a plane? What’s the normal way to get there?
Barton Goth: It’s a combination of both, probably 50-50 split on that. Lots of people take planes. Lots of companies have landing strips up there, particularly the large ones, so they’ll fly in their workers from Edmonton. However, there’s still a huge portion of them that do take the highway. It’s become a relatively dangerous highway. It’s only one lane, it’s not divided and so it becomes a bit of a rat race getting to and from.
Doug Hoyes: And how long does it take to drive from Edmonton to Fort McMurray?
Barton Goth: How long? I’ve never driven that. I believe it’s about a six hour trip.
Doug Hoyes: Wow. So that’s huge. So – and I’ve heard the stories about Fort McMurray as well that, you’re right, it’s a rough town. And the living costs are actually fairly high there.
Barton Goth: Oh, it’s through the roof. You’ll often find they’ll be four or five people that share a one bedroom apartment because there’s very little in terms of accommodations available. And those accommodations cost a fortune.
Doug Hoyes: Wow. So you go up there and you’re making good bucks. I mean a guy working in the oil sands, you know, driving a truck or working the machinery, whatever, can make really good money. But you’re describing a scenario where he or she is paying a lot of money for their accommodation and everything else up there. I assume everything else costs more too, you know, food, everything. And they may also have a second house back in Edmonton or somewhere else. So you’ve got double the living expenses, maybe triple the living expenses. So are you really that much better off at the end of day when you’re going up there?
Barton Goth: The numbers they make as a result of their income, the sacrifice they make being there, the living out allowances they receive, it definitely is worth the trip. The problem is most people that I see at least, they don’t do a great job managing those monies that are coming in.
It’s very common to see the biggest, most expensive truck that you can get, the F-350 on a lift-kit and they’re paying 1,200 dollars a month. They also have two quads because of course they can’t go quading by themselves. They have a fifth wheel, often a motorcycle and, unfortunately, all of those things tend to be financed. Which as we all know is usually the most expensive way to accumulate items.
Doug Hoyes: And then those are the people that end up becoming your clients then because they’ve – they’ve over-extended themselves. And I guess you’ve got to make the distinction between the money that’s coming in and the money that’s left over at the end of the week. So if I’m making huge dollars but then I’ve got, like you say, my truck and this and that, and my two houses and everything, it’s pretty easy to – to get into trouble. Are those the kind of people who end up filing proposals with you then?
Barton Goth: We’ll often see that. One of the challenges though is in the oil patch, things are cyclical. There’s always down periods. You’ll have Spring break up every year. And that’s one that you can predict. You’ve got long periods of time where certain oil rigs will simply stop working. And so it might not be something that the person is aware of.
There may be a temporary lapse in the contracts that they have, and the oil rig doesn’t want to lose their workers. They know who they are, they’ve trained them, they know what to expect. And so they try and string them along as long as they can until the next job comes up.
So as a result there’s some difficulty because in a proposal you’re typically supposed to make a monthly payment. There’s some flexibility in how we word that through the proposal itself, but because of that uncertain income, sometimes it makes it a little bit challenging for them to file a consumer proposal.
Doug Hoyes: Yeah, I didn’t realize that, but I guess you’re right. So when you say they have to keep their workers around, so it may be that, “Well, we’ll give you a few hours every week,” or something like that? Just to, you know – is that how they do it? Or –
Barton Goth: It’s not so much a few hours every week. When they’re busy, they’re busy. They’re working as many hours as legally is allowed. But as soon as there’s a – as soon as there’s a downturn, as soon as the rig has to be moved, as soon as something hasn’t lined up as anticipated in terms of the process that those rigs have to go through, then there’s no work what’s so ever. So it dries up completely. And the individual has a relationship with the company, knows that there’s lots of money and lots of hours available, when it’s available.
Oftentimes there’s rigs that have a reputation for not being very good to their employees or being very rough circumstances to work in. So when you find a good crew to work with you don’t want to change that crew very quickly. And so they’re often willing to be patient because they feel like they have a good place, they have above average ability to earn money there. The unfortunate thing is the bank doesn’t want to wait for the truck payment.
Doug Hoyes: Yeah, and that’s what gets you into trouble. So what’s your advice for those kind of people then? And I think we’re obviously talking about, you know, the oil sands, the oil patch, whatever in Alberta. But really what you’re describing is anybody, anywhere in Canada who has a sporadic income.
So here in Ontario we see it in construction for example. Very busy in the summer, not so busy in the winter. It’s really exactly the same as what you’re describing, “Well okay, I know there are periods when I can make tons of money, but there’s also periods where I can’t make so much.” So what do you have to do to counter-balance that? What’s the advice you would give to someone in that situation?
Barton Goth: Well, you’ve got to do two things. You first got to realize and recognize those periods are going to occur. And B you’ve got to prepare for them in advance. And the best way to prepare for those, and I think it’s a two-fold approach. Is first, when things are good set some money aside so when you have those periods of low employment it’s not going to be a shock to your system.
The second part of that, this relates to how you purchase items. Maybe not finance quite as much, perhaps save up a little and buy them so they’re owned outright. So when these periods come and work does dry up, now there’s one less expense item that you have to worry about.
Doug Hoyes: Very good. So that’s good advice. We’re going to take a quick break here and come back with Barton Goth, talk a little bit more about what’s happening in Alberta. But also as you can see this is, I think, advice that applies pretty much everywhere. We’ll be right back. This is Debt Free in 30.
Retirement Pressures in Alberta
Welcome back to Debt Free in 30, my name is Doug Hoyes and I’m joined today by Barton Goth who is a bankruptcy trustee and consumer proposal administrator from Edmonton, Alberta.
Before the break we were talking about the economy in Alberta. How when you’re looking at it from an individual person’s point of view it can be very up and down. Very sporadic. So there are weeks where the rig is moving, the rig is going full tilt, I’m getting every hour I can. And then okay now the rig needs to be moved and I don’t have any hours for a while. It goes up and down.
One of the other implications of the Alberta economy with the oil money is things have gotten even more expensive. So that’s a problem if I’m a worker there. Particularly if I live in the South and work in the North and have two different houses that I’ve got to keep up. I would assume Bart that that’s also a problem for older people or people who are on a fixed income. Do you see that a lot as well?
Barton Goth: Absolutely. We see that on a regular basis. And we – there’s no secret in our economy, in our society right now is there’s a very significant number of people that are approaching or have already approached that retirement age. And as we all know when you get to retirement age, you’re income and earning potential will often be reduced. Maybe that’s health wise, maybe there’s something else that’s causing it.
But the challenge that exists there is when you’re living in a vibrant economy and the cost of living, particularly house values and rents and all of those things are pushed upwards. Well your income doesn’t change. And we’ve seen a huge number of people that are getting to the point in their life where they’re relying more and more on those fixed items, those fixed incomes. But they can’t afford their rent like they have in the past.
Doug Hoyes: Because the rent continues to increase, because there’s greater demand and their incomes just aren’t keeping pace with it. So what kind of advice can you give to those people that are living on a fixed income in an economy like Alberta’s, where expenses are going up? Because I guess even things like real estate are – it is more expensive than it was in the past.
Barton Goth: Absolutely. Our real estate may not be quite as expensive as it is in a Toronto or a Vancouver. But throughout Alberta it’s getting up there. It’s definitely larger than it was five years ago and it’s continuing to move forward.
Doug Hoyes: So obviously that drives rents up. It also drives up house prices and so on. So what kind of advice can you give to someone who is on a fixed income, but in an environment where their expenses are increasing?
Barton Goth: Really it comes down to preparation in my eyes. And it’s not preparation that you’re immediately going to think. Because you’re going to think RRSP’s and investing in advance. The biggest problem that I see is they haven’t prepared in terms of their debts.
So a lot of these people are approaching retirement age. Some of them are carrying very large mortgages, some of them are carrying very large credit card balances, those types of things. Often it’s a case of sacrificing some of the – some of your future by getting home equity lines of credit, by taking on more debt and trying to enjoy things when you’re a little bit younger.
And that causes significant problems when your life circumstances change. And now you find yourself perhaps unable to work, perhaps having to rely on the fixed pensions and things that are in place. But unfortunately with that high level of debt, whether its mortgage, whether its credit card, you just simply can’t do it.
Doug Hoyes: So you really have to go into retirement with no debt.
Barton Goth: That would the ideal. Unfortunately it’s no longer the norm.
Doug Hoyes: So you’re seeing a lot of people who are retired or close to retirement, but they’ve got significant debt.
Barton Goth: Absolutely.
Doug Hoyes: And so your message makes perfect sense. Okay this is something you’ve got to think about 20 or 30 years before you retire. You’ve got to spend a little bit less while you’re working so that by the time you get to retirement age not only do you have no debt, but you’ve got some assets built up.
But what do you do if I’m already on the verge of retirement or I am retired right now? It’s too late for me to build up my assets, I’ve got some debts, I’m heading into retirement, what do I do?
Barton Goth: Well typically in those circumstances you should come and meet with someone like myself. We can talk about where you are and talk about what you’re going to need in the future. And look at different strategies for reducing that debt in the now. Some of those strategies could very well include a bankruptcy, it might be a consumer proposal, you never know until you sit down and you see exactly how the numbers add up. But it’s becoming more and more common in that demographic.
Doug Hoyes: And so how would I decide – how would you help someone decide whether a bankruptcy or a consumer proposal or some other option is going to be the best option? What are the typical factors that would go into that?
Barton Goth: Well in that age category it’s a little bit interesting because normally I find its best in most circumstances to avoid a bankruptcy. But when I find you’re older and you’re getting to a point where you’re going to have to rely on fixed income – one of the major advantages to avoiding a bankruptcy with a consumer proposal is to protect your ability to use credit in the future.
Now if I’m on fixed income and I’m just worried about making my living expenses and nothing else, maybe credit is not so important as it once was. So a lot of times in those circumstances people end up filing more often a bankruptcy than we might – had they been 15 or 20 years younger.
Doug Hoyes: Well I guess the whole surplus income calculation factors into that as well then.
Barton Goth: Absolutely. And so when I sit down with somebody the first thing that we always do, is we look at their income versus their expenses. And from that we project. We project how long someone we think is going to be able to work. We also project what we think it would cost if they filed a bankruptcy based on what’s going to happen income wise.
And then we have to have a frank discussion of, okay where are our priorities? Do we need to deal with this debt in as quick a fashion as possible? Or do we need to mitigate the cost each month by perhaps reducing the monthly amount that goes out. Like you do in a proposal, but extending the payment over a long period of time.
And you know, Doug, I wish I could tell you there was one answer for everybody in that situation. But I have to tell you it’s every different situation as I’m sure you’ve seen over the years.
Doug Hoyes: Yep. So I’ll scratch my next question which is, is there one answer for everybody in that situation? And you’re right, it’s – that’s really what it all comes down to. Everybody’s situation is unique. Some people perhaps have, you know, adult children who have good resources and can help them out. Some people have assets they can sell. Well they’ve got a house, they can sell that, you know, turn that into some money. They could get a line of credit against the house, use that to service their higher interest debt.
But for other people, okay maybe it does have to be a consolidation loan, credit counselling, a proposal, bankruptcy, a settlement, something. So it’s – I agree with you, there is no one size fits all option. You got to look at all of them and decide what’s going to make the most sense in that particular case. It’s the only way to do it.
I appreciate your being here today, Bart. Thanks very much. Very interesting to hear what’s happening in Alberta and all the parallels between Alberta and what’s happening in Ontario, as well. Thanks for being here.
30 Second Recap
Doug Hoyes: Welcome back. It’s time for the 30 second recap of what we discussed today.
My guest today was Barton Goth, who gave us some great insights into what it’s like to live in a booming economy. Bart works in Edmonton, Alberta, and he helps many people who work in the oil industry, where you can make a lot of money, but also spend a lot of money, and that can lead to financial problems.
Bart explained why there are more consumer proposals filed in Alberta and Ontario than personal bankruptcies, and why they are a good option for many people.
That’s the 30 second recap of what we discussed today.
So what are my thoughts on what Barton had to say?
I don’t live in Alberta, but I’ve dealt with many people over the last few years who have moved from Ontario to Alberta to find jobs and to improve their income. For some people it works out great. They find a good job, make good money, and can use that money to pay down their debts and save for their future.
For others, it doesn’t work out so well. In some cases they move to Alberta but can’t find an appropriate job. In other cases they find a job, but find their living expenses are also very high, often because they are sending money back home, so they don’t generate much extra cash flow.
So what’s my advice for people from Ontario, or anywhere else in Canada, who are considering re-locating to Alberta?
First, do your research. It’s great if you can line up a job before you get to Alberta, but make sure you know all of the details. What does the job pay? How many hours are you likely to get? Where will you live? What will it cost?
In some cases you will live in a company-run camp, very close to the work site, so your rent and most of your food costs are provided by the company. In other cases you will be living in town and commuting to the work site each day, so you must pay all of your living and transportation costs. In places like Fort McMurray where accommodation is scare, you’ll be paying a lot, so be sure you understand in advance the costs to live in Alberta.
My second piece of advice is to have a plan. I know that’s not surprising from the guy whose company phone number is 310-PLAN, but this is a crucial point. What’s your plan?
Do you plan to live in Alberta temporarily, make a few bucks, and then return to Ontario? Or do you plan to relocate to Alberta permanently? That’s a big decision, and it has profound financial implications.
If your Alberta adventure will be temporary, you may be keeping your house in Ontario. Who will take care of it for you? Can you afford the rent on two places? What about your stuff? Do you put it in storage? If you plan to move permanently, can you find a place? At what cost?
Even more important is what you plan to do with your money.
A work camp in Fort McMurray is a very tough environment. The winters are cold, and there’s not much to do for entertainment. Even going out for a beer or two isn’t cheap. If your goal is to sock away some money, are you disciplined enough to do it without going crazy?
I suggest you talk to whoever you know who is already there, and find out from them what it’s really like before you make your decision.
On the show Bart talked about how the oil industry is cyclical. You may be working lots of overtime for a few months, and then due to the weather, or moving the oil rig, or other factors there may be no work for a period of time. You have to plan for those work interruptions.
During the boom times, save money, so that you have some cash in reserve when work dries up.
This advice is particularly important if you are approaching retirement. In a booming economy like Alberta, living costs continue to increase, and that’s a problem if you are on a fixed income. If you have debts and are approaching retirement, Bart advises you to deal with your debts now, so that when you retire you don’t have the added stress of debt payments. A professional like Bart can explain your debt management options.
That’s our show for today.
This show is on the radio every week, and also available on our website, on iTunes, on Stitcher, and whatever other pod-catcher you use, so please go to hoyes.com for a full list of participating radio stations and details on how you can download the show to listen on your smartphone or computer.
Full show notes are available on our website, and I’d love to hear your comments which you can leave right on our website at hoyes.com, that’s h-o-y-e-s.com.
Thanks for listening.
Until next week, I’m Doug Hoyes, that was Debt Free in 30.
Bonus Podcast Segment
Doug Hoyes: We’re back on Debt Free in 30, this is the bonus podcast only segment. The regular radio show runs for exactly 22 minutes which becomes 30 minutes with the commercials. We have only a limited amount of time to get to everything we want get to. And as it invariably turns out that we’ve got other things to talk about, so I’ve asked Barton Goth to stick around for the bonus podcast segment.
I thought what would be interesting to talk about would be some of the differences between what happens in Alberta and what happens in Ontario. Because some of the things that are happening in Alberta right now may end up morphing their way to Ontario and other parts of the country.
So Bart, give me a bit of an overview. So in terms of debt and bankruptcy legislation, I know that early in 2014 the RESP rules changed. So give me the quick overview of how does it work with an RESP if you go bankrupt? Because in Ontario and in most provinces the way it works, is if you go bankrupt you lose your RESP. It’s real simple. How does it work in Alberta?
Barton Goth: In Alberta things changed in April of 2014. Before that if you filed bankruptcy you lost RESPs no question. Now it’s a completely different situation because RESPs are 100 percent protected. So if you file a bankruptcy you do not lose your RESP. I know there’s no other province in Canada at this point that’s adopted that.
One of the concerns that comes from me, from that, is they’ve left it wide open. So to me there’s opportunities to try and take advantage of the system or at least there’s perceived to be opportunities. Because you could have somebody who comes and meets with me in my office, hears that this exemption exists, disappears, I hear nothing from him.
Later he takes the money, deposits directly into an RESP, knowing that he can try and protect that from his creditors using that exemption. Now unfortunately for him it’s not always that simple. Because any time he does go and file a bankruptcy somewhere else, as you well know, there’s a number of transactions that are examined on the first 12 months or even longer than that. And lump sum payments to an RESP would be that. But unfortunately he’s not aware of that going forward. So that’s something that’s obviously an issue and something that I would suggest the Alberta Government consider.
On the plus side I do like the fact that a child who didn’t make the choice to charge up all these debts isn’t out future opportunity from mistakes of their parents. I can’t disagree with that.
Doug Hoyes: Well that may be a change that ultimately comes to the rest of Canada. I know that as we record this late in 2014 the Government of Canada is looking at possible changes. So it may be by 2015, 2016 or however long it takes, the government may make some changes on that, or not. So if you’re listening to this podcast at some point in the future then you’ll want to check with someone like Bart or my company to find out what the current rules are.
One of the other big differences between Alberta and most other provinces, certainly between Alberta and Ontario, is something called the Homestead Exemption. What is a Homestead? What’s the Homestead Exemption? What’s that all about?
Barton Goth: Well I refer to it as a principal residence. I think that’s a little more clear. So basically what happens in Alberta, is we’re allowed to have up to $40,000 equity in your principle residence divided by your percentage ownership. So the idea is you’re allowed $40,000 in the house that you live in between you, your wife, whoever else might live there.
Doug Hoyes: And so if you file bankruptcy and the equity in the house is $50,000, only $10,000 is at risk.
Barton Goth: Correct.
Doug Hoyes: In Ontario, whatever the equity is you’ll lose it. That’s just the way it is. There’s nothing that can be done about it. And what we’re talking about, and I assume it’s the same in Alberta, we’re talking about the net equity. So if the house was to be sold and you had to pay off the mortgage, the penalties to break the mortgage, the legal fees, the real estate commissions, that’s the number we’re talking about. Is that how the math would work in Alberta as well?
Barton Goth: If you owned the – if you owned the house by yourself, correct. If you owned the house with your wife, so you had a 50 percent interest in it. Then only 50 percent of those real estate and commission fees can be considered.
Doug Hoyes: Got you. So do you – do you do the equity calculation and then divide it by 50 percent? I guess that’s in effect is what you’re saying then. And is that something you see quite frequently? Or is that relatively rare? Or how often does that particular exemption come into play?
Barton Goth: Oh it’s common. It’s probably 50 percent of the files that I see.
Doug Hoyes: And if those people lived in Ontario, would they end up with equity in their house, filing a proposal instead of a bankruptcy? Do you have more bankruptcies in Alberta because of that do you think?
Barton Goth: Honestly I don’t think we do. I think the rule is what it is and people deal with it differently in the different provinces. So I – in Alberta for instance, you see – you see higher bankruptcies right now, but that’s been changing. You’ll also find that certain firms are the exception to the rule.
My firm, we’ve been doing about 50 percent proposals, 50 percent bankruptcies for the last four or five years. That’s well ahead of the curve for everyone else. But I think that just comes down to people want options. Most people that I meet don’t want to file a bankruptcy regardless of whether there’s equity in their house or not. And if you have a trustee who takes the time and properly explains all of the different options, I find naturally many people gravitate to the proposal because they don’t want to file a bankruptcy.
Doug Hoyes: And why do you think that other firms aren’t the same? So, I mean is it as simple as well you make sure you explain to everyone their options? I mean I would assume the other firms in Alberta also explain to people their options. Is there a reason you think that you’re ahead of the curve on that?
Barton Goth: I just think we’ve been fairly open to changes in the legislation throughout the years. And lots of other people it takes time for them to adjust and wrap their head around something. Now consumer proposals have been around for a long time. I believe they came in back in 1993, the whole notion came in. But it was a very slow uptake. You’ll see a lot of the trustee community across the country, there was rarely above 30 percent of the files were consumer proposals for years and years and years.
And then dramatically that seemed to change back in 2007 when they made some significant changes to the surplus income guideline. But I don’t think everyone’s reacted as quickly and changed the practices necessary to maybe administer the proposals as efficiently as they had the bankruptcies prior to that. So I don’t think it’s anything they’re purposely doing. But I think there’s a lot of consumers who want options.
Doug Hoyes: So if someone is sitting listening to this today, and they’ve got some financial problems and their going to go in and talk to a trustee. Maybe they live in Alberta, in Edmonton, they’re going to talk to you. Maybe they live in Ontario, they’re going to talk to my firm. What should they be looking for when they’re talking to that trustee then? I guess what you’re saying pretty obviously is well they better be talking to you about more than one option.
Barton Goth: Well quite frankly that’s not me that says that, Doug. The legislation that governs trustees’ says we have an obligation to discuss all of the options with individuals that come in.
Doug Hoyes: And when you say all of the options you’re not just talking about the two things that you’re selling which is proposals and bankruptcies.
Barton Goth: No. We need to be talking about consolidation loans, orderly payment of debt exists in Alberta. I know that doesn’t exist in Toronto. But we need to make sure the individual coming in has a good understanding of what to expect and what options they can choose regardless of whether it’s options my shop provides or not.
Doug Hoyes: So when you say orderly payment of debts. And you’re right, that doesn’t exist in Ontario. It obviously exists in Alberta. Are there other provinces it exists in? Or do you know?
Barton Goth: There’s two other provinces. I can’t remember which ones off the top of my head. But basically it’s a program that’s similar to a consolidation loan except it’s done through the courts. They actually refer to it as a consolidation order. So it freezes the rights of the creditors where they sit, it charges a five percent interest rate which is set by the legislation or by the court order. It’s not set by the institutions. Then they pay the debts in full, typically over a 48 month period of time.
Doug Hoyes: So if I’ve got 20,000 dollars’ worth of debts and I do an orderly payment of debt program. I’m going to end up paying 20,000 dollars plus five percent interest calculated on the balance throughout those four years. Is that how it’d work?
Barton Goth: That’s correct. Now they do have a small administration charge each month. I don’t know what that administration charge is because I don’t run any of those types of files. But it is definitely an option that works well, particularly for someone who in a bankruptcy would be worth payment in full to their creditors because they have a very large surplus income. Perhaps that makes a proposal not necessarily as sensible because then they would have to pay their creditors in full. Often in those circumstances, is when I’ll make a referral to orderly payment of debt.
Doug Hoyes: And so there are a few specific firms that do them. You’re not one of them?
Barton Goth: No. There’s only one firm in Alberta. It’s – it goes under the name Money Mentors. I think their legal name is Credit Counselling Services of Alberta, but they haven’t operated under that for quite some time. They were set up at the bequest of the government back in 93 or 94, somewhere around that timeframe. And really they’re the only people in Alberta that run that program.
Doug Hoyes: But it sounds to me like it would be a very specific circumstance where that would make sense. So you’re paying the debts back in full, plus you’re paying five percent interest on the outstanding balance, plus you’re paying an administrative charge. So if I’m talking about my line of credit that has a three percent interest rate, well there’s no point doing an orderly payment of debts I guess. I might as well, you know, continue to pay it. And if I can’t afford to pay the debts in full, it also doesn’t make sense.
Barton Goth: Absolutely. If you can’t afford to pay things in full then you’re much better looking at a consumer proposal. One of the things that often people don’t realize about the orderly payment of debt program, is you have the exact same impact on your credit as you do as a consumer proposal. I believe it’s Equifax that lists R7 for three years in both of those circumstances. And that’s measured from the date of completion. So in my opinion, if you’re – if you’re going to be able to pay a portion, a lower payment each month, and end up at the same place credit wise, in most circumstances the consumer proposal makes more sense.
Doug Hoyes: So the other one typically doesn’t. Well and I think that’s good advice. The point I guess is there’s a lot of little tricks, things you need to know here. Certainly in Alberta there’s different exemptions. Obviously in Ontario it’s different. And so I guess it certainly pays to talk to someone who, as you say, is required by law to make sure you understand all your options and can figure out what needs to be done.
Barton Goth: Absolutely.
Doug Hoyes: Excellent. Well thanks very much, Bart, for sticking around for this bonus segment available only on the podcast. Thanks for being here. This was Debt Free in 30.