For the first time ever Debt Free in 30 was broadcast LIVE on video, via YouTube.
The response was fantastic. We asked our listeners to leave us questions through sound clips, email, Twitter and Facebook in advance of the show and took questions during the show. Ted Michalos and I answered as many of those questions as we could during the webcast.
Canadians Debt-To-Income Ratio
Why did we talk about debt? Because for many Canadians debt is a huge issue. The household debt to income ratio in Canada has doubled in the last 16 years and that’s alarming.
Yet some are still not too concerned. We had one caller ask why he should be worried about his mortgage debt given the fact that house prices are skyrocketing in Toronto. In his experience his home is now worth significantly more than than his mortgage so why worry? As Ted pointed out:
until you sell the house, you haven’t made any money at all. What you’ve got is a house with a mortgage payment.
Ted points out the risk that the housing market may not stay elevated and interest rates may rise. A prudent debtor has to look at their personal capacity to handle each of those risks. A quick chart shows just how volatile housing equity has been over the past 16 years. Because of the increased volatility in the Ontario housing market, our team put together this Homeowner’s Bankruptcy Index.
Rebuilding Your Credit
Those with poor credit, are facing tough challenges in finding low cost credit options as one caller found when looking for a car and car loan. With cars being the second biggest purchase most Canadians make, the best approach is to:
- do your homework like looking at the black book value if you’re buying a used car,
- get advice from family & friends, in fact take them with you as a second opinion,
- take steps to rebuild your credit before you need to get a car loan.
During the show, we addressed quite a few questions about credit repair, how to repair credit and why you can start that process right way, even if you’ve filed a bankruptcy or proposal.
Doug and Ted both talked about the best tactics and tools to use to re-enter the credit market wisely after filing a consumer proposal or bankruptcy.
It’s the first two years after [a bankruptcy discharge] that you have the most discomfort … usually by the third year you qualify for mortgages and car loans, even regular credit cards if you take the steps to rebuild your credit report.
Planning for Retirement
A past podcast guest Jonathan Chevreau asked Doug and Ted about how those approaching retirement are able to save enough when they carry debt. This is a major concern when the average senior who files bankruptcy owes $60-$70,000 in unsecured debt and seniors are the fastest growing risk group for filing insolvency in Canada right now.
But it’s not just seniors that are struggling.
- Those with student loans and single parents are also facing higher bankruptcy risk.
- The increased use of payday loans, despite new legislation in Ontario, is also a significant risk factor.
- The prevalence towards longer term auto loans, in some instances up to eight years, are also an indicator that debt loads for Canadians are a major concern.
UPDATE: our 2017 Joe Debtor study shows that one in four insolvent debtors held at least one payday loan at the time they filed.
How to Deal With Your Debt
At the end of the show we talked about the options facing those who are struggling with debt. We looked at the cost and benefits of each alternative by reviewing a fairly typical scenario of someone who owes roughly $40,000 in unsecured debt. While each individual case will be different, these costs are a good estimate of how each option compares in terms of how each solution will cost.
FULL TRANSCRIPT show #107 with Ted Michalos
Doug Hoyes: It’s 7:00 pm on September the 14th, 2016 and we’re broadcasting live from the Hoyes Michalos offices here in Kitchener, Ontario. Today’s topic is ‘Everything You Were Afraid to Ask About Debt’. We know that debt is an uncomfortable topic. You probably don’t like talking about debt with your friends and your family. If you have too much debt you may not even know who to turn to for help. If you have friends or family who have too much debt, you may not know how to help them. It’s embarrassing. You’ve got questions. We’ve got answers. That’s why we’re doing this first ever live broadcast of Debt Free in 30 where we’re going to answer your questions about debt. You can watch this programme in the privacy of your own home. No pressure. No embarrassment.
For the last two weeks we’ve had a link on our Hoyes.com website and on the Hoyes Michalos webpage and we’ve invited you to ask your questions about debt. The response has been huge. We won’t be able to get to all of the questions today but we’ve had a number of similar questions, so we’re going to do our best to get through as many of the most asked questions we can on today’s broadcast. This is a live broadcast and you can get in on the conversation in three different ways.
You can go to Twitter and use the hashtag dfi30. Or you can put your comments on YouTube if you’re watching this live on YouTube. You might be watching it at Hoyes.com/live if you click on the little YouTube button on the bottom right hand corner of the video. That’ll take you to YouTube itself and you can enter some comments there. Or you can send us an email at dfi30 @ hoyes.com. So the hashtag on Twitter and you can see the Twitter stream there on the right hand side of our screen. The hashtag is dfi30 for dfi30. Comments on YouTube or you can email us at dfi30 @ hoyes.com.
So to us help discuss it I’m joined by my Hoyes Michalos co-founder Ted Michalos. Ted how are you doing today?
Ted Michalos: Not bad. Good evening everybody.
Doug Hoyes: So, let’s get started. We’ve got a whole lot of things we want to cover. Now Ted, you and I make a lot of appearances on TV and on radio and we’re quoted in the paper and for years and years and years you and I have been warning people about debt. And Canadians today have more debt than ever before. So I’d like you to start, Ted, by telling me some numbers. What level of debt are we talking about?
Ted Michalos: Okay. Well let’s start with something that’s easy for everybody to understand. Currently Canadians have $1.65 in debt for every dollar of disposal income that they have. If that doesn’t sound like a big number, well think about it then. If your pay cheque is $100, it means that you owe $165. For me that sounds like a problem.
Doug Hoyes: Well, what’s a big problem about that, and I’ve thrown a graphic up on the screen here, is that level is twice as high as it was in 1990. So, clearly things are getting worse. I guess the real questions though is, I guess, is that a problem or is that something we need to worry about.
Now we had a, we’re taking questions today. And as I said we’ve had some listeners who have actually sent in some questions for us so what I’d like to do is start by playing a question from one of our listeners and who kind of addresses this exact topic. So let’s listen to the question and then Ted, you can give me your thoughts on it.
Ted Michalos: Okay.
Caller Mike: Hi guys. Mike here. First off, love the podcast, but I disagree with some of things I’ve heard you say about debt. I was listening to one of the podcasts that you’ve had with the guest Hilliard MacBeth about the real estate bubble bursting. And quite frankly, you know, it hasn’t. Actually got a condo in Toronto about two-years ago now with a really low down payment and it’s actually way up in value so I’ve made lots of money and even if prices go down a bit, I’m still actually way ahead because I took out such a big mortgage. So I don’t really see a problem with debt, you know, if it’s good debt used to buy something that goes up in value like your house. Anyway, again love the show and looking forward to hear some of your thoughts on this and an answer to this. Cheers.
Ted Michalos: I love that term. Good debt.
Doug Hoyes: He loves the podcast but isn’t totally in agreement with some of the things we say. So, but that’s fine. Let’s kind of break this down and for people who are new to this, he’s referring to a podcast I did with Hilliard MacBeth who wrote the book, When the Bubble Bursts Surviving the Canadian Real Estate Crash and that show number 89 of our Debt Free in 30 podcast which was broadcast back in May of 2014. We actually put the audio of that show up on YouTube which you find on the Hoyes Michalos YouTube channel and it’s been downloaded and listened to like four thousand times or something like that. So anything to do with real estate obviously is a big issue.
So let’s talk about what this particular caller is telling us. He’s saying, okay, so I bought a house, and I’m just going to make up some numbers here. You know I own a house that’s worth $500,000. I have a $300,000 mortgage on it. So the equity that I’ve got in the house is, you know, $200,000. I had a really big down payment. I get a twenty-five year amortization on my mortgage, five-year fixed rate so I can get a mortgage for, I don’t know, for 5% percent, sorry 4% percent or something like that if you’ve got good credit, so the payment that you’re making is $1,500 – $1,600 a month. So if you make $5,000 a month, that’s $60,000 a year, so you’re debt to income ratio would be $300,000 in mortgage debt, $60,000 in income, that’s five to one. That’s way higher that the 1.65 we just showed on the last screen. Is that a problem or is the caller right that, no, no this is all great. Everything is good. What say you Ted?
Ted Michalos: So there are a number of different ways to look at the caller’s situation. The first thing is, he said he’s made a lot of money and that’s only true if he actually sells today. So, until you sell a house you haven’t made any money at all. What’s you’ve got is a house with a mortgage payment. There’s nothing wrong with that. We all have houses with mortgage payments. That’s just the way the world that we live in.
But the risk here, well there’s a couple. So let’s say that this housing market that’s gone up really fabulously for him in the last couple of years so he thinks he’s made a lot of money, suddenly corrects and goes down the same way. If it went up that fast, it can go down that fast. I think that’s reasonable. Well, so the mortgage doesn’t go down proportionately. If there’s a correction in the market, the corrections going to be in your equity. In addition, the thing that’s got me most concerned these days is interest rates are at historic lows. I think you can get a mortgage now at 2 ½% or 3% percent. Ten years ago it was 5% or 6% percent. So if the mortgage rates go back to what they used to be, that $1,600 dollar a month payment that Mike’s got right now is going to suddenly become, well, let me do some math in my head, probably $2,300 – $2,400. So instead of being a third of his pay, now it’s half of his pay and things are going to get interesting.
Now, Mike will say to me, well Ted I’ll just sell the condo then and I’ll get out of trouble. Well, if the markets depressed that much it’s because people aren’t buying and psychologically it’s harder for people to make that decision to sell when they think that they’ve lost money even though there’s been no money changing hands because you’re still going to get more that what you paid for it.
So it’s a lot more complicated that what Mike alludes to. I’m glad that he’s in a situation where things have gone up, but I don’t think it’s the rosy deal that he thinks it is.
Doug Hoyes: Yeah. And we’ve got some numbers that we’re throwing up on the screen here. So this is housing what we called ‘housing unaffordability’. So this is household real estate as a percentage of your disposable income. Well, obviously the higher this number is, the more risky it is. You also talked about it’s not a profit until you sold. Well here’s a chart showing price vulnerability. So this is owner’s equity as a percentage of real estate and again, you can see that owners equity was a lot higher if you go back to, you know, 2000, 2002 something like that. Obviously the bottom of the crash it was a lot worse than that. And then you also raised the issue of interest rates and I through that while you were talking about that. Right now interest rates are very, very low. Interest rates go up and we’ve got a serious problem. So, are you saying that people should not buy houses now? Are you saying people should buy houses now? Or are you saying, be aware of the risk?
Ted Michalos: Well, always be aware of the risk. But it depends on why you’re buying the house. You have to live someplace. So if you budget the payment that you can afford for the house that you can afford, then I still don’t see houses as a bad thing. And there are people who disagree with me these days. But if you’re buying it as a speculative investment, a way to make a lot of money fast, then you are automatically assuming more risk. The more risk you assume, the more risk that something can go wrong. It’s as simple as that.
Doug Hoyes: Yeah. And, I mean, I’m obviously, as people who listen to the podcast will know, I’m kind of more on the side of, oh boy, I’m really worried.
Ted Michalos: Stay out of real estate.
Doug Hoyes: Yeah. I’m just worried about it now when you look at where, certainly the prices are in the Toronto area and that’s bubbled out all over Southern Ontario. I’m mean if you owned a house in Calgary, it’s worth a lot less now than it used to be and you look at things like the Vancouver market and things have kind of faded there as well. So, it’s, I don’t know, it’s something that I think that we’ve got to worry about.
But okay, we want to get to as many listener questions as possible. So that was some thoughts on real estate. There are two big things people get loans for. Houses are one, cars are the other. So our next caller has a question about, well it has to do with a car and a few other things. So, let’s listen to the question and again, you can give me your thoughts on it.
Lynn Caller: Hi Doug and Ted. My name is Lynn. I was just wondering if you could tell me, I got soaked for a second hand car after I finished my consumer proposal and I was just wondering, are there government guidelines about what they have to tell you about the car and how much they can actually charge you? For a 2012 Chevy Cruise I was charged $25,000 and unfortunately I went by myself and I’m just wondering, do you have anybody that actually goes with you when you are looking at cars, or anything of that sort? Obviously you would be paid by the hour, but I’m just wondering, is that a possibility? Okay. Thank you very much.
Doug Hoyes: So, there’s a very good question. She covers a lot of ground on that question so let’s kind of break it down. And first of all Lynn, thanks for sending us in the question. I’m glad that your consumer proposal went well and that you’ve completed your – yeah, that’s fantastic.
For people who are tuning in and aren’t quite sure what we’re talking about, Ted, why don’t you start us off at the basics. What is a consumer proposal? What’s Lynn talking about here?
Ted Michalos: A consumer proposal is a procedure whereby you offer to repay a portion of your debt, a portion of your unsecured debt. You’re probably saying well why would anybody take part of what I owe them, instead of all of what I owe them?
Well, it’s designed as an alternative to bankruptcy. In bankruptcy you’re saying I can’t afford to repay any of my debt. There’s very specific rules and if you look on our website we detail what all those rules are. The proposal is designed to be a deal. An arrangement you make with people. A win-win for both sides. You afford to repay the portion that you can, your creditors receive more money back then they would have received in a bankruptcy. I mean it’s a great solution. A lot of people still haven’t heard about it though.
Doug Hoyes: Well that’s one of the reasons why we like to do these sorts of things. So let’s get back to Lynn’s question then. She asked if she got, her word was soaked. Soaked for paying $25,000 for a 2012 Chevy Cruise. Now I’m not a car guy, as you know. You happen to be a car guy. You have nice cars. Me, not so much. So, a 2012 Chevy Cruise, is that worth $25,000 bucks?
Ted Michalos: Well, a brand new Chevy Cruise is probably worth about $35,000 bucks and so, you know, for a four-year old car, $25,000 certainly seems high. I don’t know if that’s the price she paid or if that’s the price of all the borrowing. Those cars actually go in the $13,000 to $14,000 range on Auto Trader, so it sounds like there’s a problem.
Doug Hoyes: Yeah. And we don’t know exactly when she did the deal, whether it was a two-year old car, a four-year old car at the time she did it. So, let’s leave that aside and I guess our advice would be, if you’re buying a car and you’re like me, you’re not a car guy, then what’s your advice?
Ted Michalos: Well, so cars are the second largest purchase most of us ever make. So, houses being the first one. You might buy two or three houses over the course of your life if you’re lucky. The power is all with the people selling them. The real estate agents, the people selling houses, they do this all the time. They do it day in and out, you do it almost never.
Cars are almost as bad. You got not power. You got no experience. Maybe you go to a new car dealer five times in your life if you’re really diligent about buying new cars. So, are there people that can help you? There aren’t services out there that I’m aware of at reasonable fees that will do this for you. You need to rely on family and friends. People that you trust that will help you. In fact, it’s always good to take somebody with you just to make sure there aren’t any pressurized sales tactics that you fall for because it’s, you know, them against you.
Doug Hoyes: And obviously doing your research in advance. Looking at the Black Book, all that sort of thing. So, I guess on the car side of it that’s probably what I’d be focussing on. Now, I think there is more to this question than that. I think what Lynn is really saying is, okay, let’s assume that the car really was worth $12,000 or $15,000 and her payments are now going to be $25,000, well, there’s a huge chunk of interest there. Correct? And the reason there’s a huge chunk of interest was because her credit was not perfect at the start of this. She had filed a consumer proposal, completed it and then went to finance the car. So, what happens to your credit when you file a consumer proposal? You already told us the good stuff. All your unsecured debts are wiped out but how does that affect your credit and your credit score?
Ted Michalos: So, while you’re in a proposal actually the debts are still going to show on your credit report. They’re just in a holding pattern. There’s no interest new on the debts. You’re not making payments on the debts directly, you’re dealing with them through the proposal. When the proposal ends, the fact that you filed one of these things, and you offered a deal to your creditors to get out of debt, will show up to another three years. So, you’re done your payments, the fact that you did the proposal is still going to hang around for another three more years. That probably means for the first couple of years you’re looking at higher rates of interest when you borrow. So I could easily see, in Lynn’s case that maybe the car was $15,000 but her payments totalled $25,000 so she’s paying $10-grand in interest. Well, that’s probably 21% or 22% percent. That happens a lot with car loans after a proposal or a bankruptcy.
Doug Hoyes: And so, if you are going through a proposal and you know that you’re going to be financing a car in the future, what are some steps you can take either during the proposal or before it’s over to begin to rebuild your credit so that you don’t get hit with those kind of rates?
Ted Michalos: One of the most important things is to start building your credit as soon as possible. You’re probably thinking I’m in a proposal how can I rebuild my credit. Well, what you’ve got to do is access some new forms of credit. It might be a car payment. More likely it’s going to be something like a secured credit card. What your creditors are looking for, people that are going to grant loans to you in the future, is how have you handled yourself since filing the proposal. So, are you using credit as a tool, or as a necessity. Probably before the proposal, when you accumulated all this debt you didn’t have a choice. It was a necessity. Now, as part of the education process of the proposal we’re going to try and teach you better ways to look at credit and better ways to handle it so that you can use it as a tool instead of a necessity.
Doug Hoyes: And one of the pieces of advice we would give people is, okay if you know in the future you’re going to need to access credit, you want to make yourself look as credit worthy as possible and there are strategies, the obvious ones are make sure you’re paying all your bills on time. Things like cell phone and cable like that are starting to report to credit bureaus or at least have some minor impact. So you want to keep your bills up to date. But it is possible to do things like get a secured Visa card or a credit card. Get an unsecured credit card. This is not something that we go out and tell people, make sure that you do it. But if you need to begin to re-establish credit and you’re going to make sure you’re not racking up huge fees on it, or racking up huge credit on it, then that would be one possible strategy.
Ted Michalos: Yeah. The analogy I use with people, is when you’re filing a proposal or a bankruptcy for that matter, when you’re done it’s like being a teenager again except you’ve got this added black mark of having had a credit problem in the past. If you wait till the procedures over to start rebuilding your credit, then you’re going to be behind the eight ball. You need to start rebuilding it as soon as you are able and that means again, using credit because you want to as opposed to need to. So, as crazy as this may sound, we’ll encourage you to get a secured credit card and actually use it every month, because what you’re demonstrating is that you can handle the payment stream. You use the card, you pay it off. You use the card, you pay it off. If you never use it, you don’t demonstrate that you’re actually using credit properly. If you use it and don’t pay the bill, you’re not demonstrating that you use credit properly. So, it’s a balancing act that you want to do going forward just to show that you are handling credit responsibly.
Doug Hoyes: Well, and that raises another interesting question that we had emailed in this week. And it was from one of our clients and they said they were very happy with their consumer proposal. They plan to have it completed in about a year. They were very happy with their Advisor here at Hoyes Michalos, but they are not sure that Hoyes Michalos should be in the business of making money on credit renewal because they’re already enough credit card scams out there. So, their advice for anyone is to focus on completing their consumer proposal. So, you know this is a happy enough client, but tell me Ted, what’s your response to that? Are we making money off credit renewal?
Ted Michalos: That’s the part of this that confused me a little bit because we don’t get paid any fees for any of these types of credit instruments we telling people to get. If you go out and get a secured credit card, I don’t get some kind of kick back or anything like that, so I’m not sure how I’m making money. Having said that, I think I would be irresponsible not to tell you how to handle your credit properly in the future. So if I simply dealt with your old debt problem and cut you loose, the odds of you of repeating the problem are higher than if we take the time to educate you on how to handle credit properly in the future so you don’t come back and see me again.
Doug Hoyes: And that’s really what we’re trying to do. I mean people come in to me and they say well, I’ve got, you know, I’ve got all these debts so I’ve got to do something but I don’t want to go bankrupt or do a proposal, because if I do I’m going to end up not having a credit card and I have to book a hotel room cause my kid plays hockey up north and I got to, you know, rent a hotel room or I’ve cut my cable to save money. I’ve switched over the Netflix, which is only $10 bucks a month, but I’ve got to have a credit card to make the payments on it. I need to, you know, buy stuff for my business on line, or whatever. And so, because people are asking us about how can I have access to credit during a proposal, at the end of it, or whatever, that’s why we give them this kind of advice. It’s not something we’re pushing though and a lot of our clients say, hey, you know what, I never want to have credit again. Well that’s fantastic. Then don’t. So, we’re trying to …
Ted Michalos: It’s a balance act like everything else.
Doug Hoyes: Yeah. We’re trying to bridge the two and that’s kind of what we do. So, we’ve got another question here and again, this relates to a consumer proposal, so let me bring this one up and you can give me your answer on this one Ted.
Caller: Hello. What happens if you were employed when you signed up for consumer proposal, and now unemployed and have no money coming in?
Doug Hoyes: So, this is not a horribly uncommon scenario.
Ted Michalos: No. In fact it’s probably more common than anybody realizes.
Doug Hoyes: So, what say you Ted? What’s the answer?
Ted Michalos: Well, so the most important aspect of this for the fellow asking the question is, reach out and tell somebody that your situation has changed. So, the law requires when you file a proposal that you disclose your income and your situation at the date that you started and you’re not required to do it again. I mean, so we make a deal on day one and that’s the deal. You got to pay $200 a month for the next five-years, you pay $200 a month. You don’t have to tell me if you get a better job, you don’t have to tell me if you lose your job. Realistically, if you lose your job, how are you going to make the payments?
So, a couple of things we encourage. If your proposal is to pay $200 a month, then maybe you should try find the means to pay $250 at the outset so you build yourself a little buffer. That way if something does go wrong, you’ve got a couple of months that you can build up as a buffer zone that nothing happens, I can’t pay this month, but it’s okay, I’m already a head of things. Alternatively, and again more importantly, if something goes wrong, something changes in your life, go in and see the person administering your proposal. You’ve got the right to go back to the creditors and say look, my situation has changed, we need to change the deal. And in most cases the creditors will accept the revised deal if your situation has changed. It just makes sense. In fact, there are cases where somebody’s lost their job and possibly you’re three or four of a five-year proposal, and we’ve just gone back to the creditor and say, look he’s paid you for four-years, let’s call it done because he’s lost his job and they agree to that too. The creditors aren’t stupid. They’re looking for you to get out of the proposal so that you can be rehabilitated and get back in the credit using community again.
Doug Hoyes: And so it’s really a two-part answer. It’s get yourself set up for success to begin with.
Ted Michalos: Always plan for the worst to happen, so prepay those payments if you can.
Doug Hoyes: And again, if something happens then try to deal with it again by talking to us. Sorry, go ahead.
Ted Michalos: The biggest mistake is that people think that they’re stuck with this payment and there’s nothing anybody can do so, and so they don’t talk to us. I mean, the way the law is written, you fall three payments behind and your proposal is automatically cancelled. It’s important that you see somebody before that happens. You want options. You want alternatives. Well the sooner you talk to somebody, the more options and alternatives that you have.
Doug Hoyes: Well, and like you said, this is a not uncommon scenario for someone to use their job for a month or two is not unusual at all and so I mean, one of our tricks, if I can give out all our secrets here, is that proposals are always worded as a monthly payment. The maximum time period is five-years so it wouldn’t be uncommon to have a proposal of $200, $300, $400 a month for five-years which takes care of perhaps $50,000, $60,000, $70,000 worth of debt. Well, if you get paid bi-weekly, or weekly, then you can make your payments more frequently. So, a $400 dollar a month proposal, you could pay $100 a week if you get paid every week.
Ted Michalos: And you’d make the equivalent of thirteen months payments every year.
Doug Hoyes: And yet you wouldn’t notice it because it would be $100 bucks coming off every pay cheque.
Ted Michalos: In fact, it’s safer to do that because it’s a $100 bucks coming off every pay cheque instead of trying to come up with $400 once a month.
Doug Hoyes: Yeah. And that’s how we like to do it to do it. So, again, so if we can get it set up correctly, and obviously we’re going to look at your budget and make sure you can afford it, but then if things go wrong, then obviously get on the phone with us and we can help you through that.
So, we’ve got another question from a listener that’s, you know, along the same lines.
So the question was, after you file a bankruptcy or consumer proposal, how long does it take for the creditor calls to stop?
Ted Michalos: Well, that’s a good question. We probably get that from everyone that we see so I’m glad that we decided to pick that as one of the ones that we’re going to deal with.
Couple of answers. So when you file a proposal or a bankruptcy we’re required to send out notices to your creditors within five business days, so it doesn’t mean, we don’t count weekends or holidays. It’s done electronically now so usually it’s done much quicker than that. So, five days is the maximum. So the creditor gets it. Probably it takes them three or four or five days to process it to get to the right person’s desk. So, we’re talking about at least two-weeks for the paperwork to get to the person where it’s supposed to be to get the phone stopped. So, one strategy is just ignore the phone for those two weeks and see what happens. Probably something more productive, answer the phone and say, look I filed a proposal with Hoyes Michalos yesterday. If you contact them directly they will send the paperwork to you. And that happens all the time. So, a creditor will call us and say, you know, did John file a proposal yesterday? Yes. And then we’ll send the information directly to the person making the call, instead of them having to wait for their processing department to get it to them two weeks later. So the answer is, the phones, if you do nothing, will probably ring for a couple more weeks. If you’re proactive and answer the phone, we can get them stopped very, very quickly.
Doug Hoyes: Yeah. And we keep a list of the major creditors, the big banks, the collections agencies they use and so on, and so if for some reason you’re still getting calls, like you say, a few weeks after we’ve notified them, and so that everyone understands, when a bankruptcy or proposal happens, we are electronically sending the information out to the creditors. It’s not like we’re photocopying it, licking a stamp and sending it out and then there’s a postal strike.
Ted Michalos: I remember those days by the way.
Doug Hoyes: Yes. We’re not young men unfortunately. We do remember. It goes out electronically. It’s usually in their system pretty quickly, but sometimes, you know, bank ABC will turn the account over to a collection agency, you don’t even know, we don’t even know that a collection agency now has it. We send it to the bank. It’s the collection agency that is phoning you. So if you tell us who it is that’s calling, we can usually get through to an actual live person. So, and that’s how we would do it.
Now I said that this is a live broadcast and in fact, that’s exactly what it is and we’ve had a question come in on YouTube. So as I said, people can send us questions through our website or on Twitter at dfi30.
So the question that has come in is this, and it’s from I believe RightQ is what the person’s YouTube handle is. So my bankruptcy was twenty-one months and will be discharged in November 2016. How many years until the bankruptcy will no longer show on credit checks?
Ted Michalos: So, if this was your first bankruptcy likely it will be displayed in the legal section for up to seven-years from your date of discharge. So if you’re looking at discharge November of this year, you’re looking at November of 2023 as the last likely date for it to show on your credit report. That’s important. But what’s more important is how long is it likely to interfere with the way that you handle your finances. And experience has shown us that it’s the first two-years after your discharge that you have the most discomfort. That’s the period of time where you’ve got, and you haven’t done it already, do the most to rebuild your credit worthiness in the eyes of the lenders. Usually by the third year you qualify for things like mortgages and car loans and even regular credit cards, if you put the right steps in place beforehand.
Doug Hoyes: And it’s key to remember here that just because something is showing up on your credit report, it does not mean life has stopped.
Ted Michalos: Oh, it doesn’t. I mean this is a fact that nobody ever talks about but it’s about 11% of all Canadians ends of filing bankruptcy or a proposal at some point in their life. So it’s one out of nine people. Next time you’re at a hockey game looking around, you look around the stadium. If five thousand people are there, well that means, you know four hundred and fifty of them have probably filed bankruptcy or a proposal at some point.
Doug Hoyes: Or will at some point. So, it is a big number. So, a bankruptcy will appear on your credit report for six or seven years after the date of your discharge depending on which credit bureau you’re talking about. If it’s a second time bankruptcy, it will be longer. A consumer proposal, we already hit this one earlier, is three-years in most cases from the date you finished paying your proposal. But that does not mean, as you said, that you can never borrow or you have to wait for the end of that three years, or six years or seven years. They key is start taking steps to rebuild your credit sooner if you’re going to want credit in the future. And if you can do that, it sets you up.
Ted Michalos: Put a plan in place and start executing it early as opposed to letting things happen to you.
Doug Hoyes: And if you file a consumer proposal or bankruptcy there are two credit counselling sessions that are part of that. And these are the things that are discussed at those sessions. And obviously our professionals are happy to sit down with you and talk about these issues. We want you to leave the process saying, well, you know, it wasn’t the happiest day of my life when I went to meet with Doug and Ted and their people, but you know what, I’m glad I did it.
Ted Michalos: I mean, you got a toothache you go to the dentist. Well, at least we’re not sticking our hands in your mouth. I don’t believe I said that.
Doug Hoyes: That’s okay. It’s not live. It is live. We’ll have to edit that out.
So, we’ve got another question and this is kind of an interesting one because it’s a question from Jonathon Chevreau. Earlier today I recorded a podcast here in Kitchener with Jonathon Chevreau and Mike Drak who have written a book called Victory Lap Retirement. The podcast that we recorded today will be released on September 24th so you can go to iTunes or wherever you get your podcast and subscribe to Debt Free in 30 so you don’t miss it and we’ve had more downloads this last weekend then we’ve had in any other weekend, so there’s more and more people who are listening to it.
So after we recorded this show Jonathon and Mike and I were talking and Jonathon asked me a question and I said, hey, that’s a great question. Would you mind recording it so I can answer it on tonight’s show? And he said, well can I plug my book? And I said, yeah, sure Jonathon. You can, he didn’t actually say that, I’m embellishing the story here.
So by way of background, Jonathon wrote the book Independence Day about how to become financially independent and his new book with Mike is about a different view of retirement and in both books he makes the point that debt is something you have to get under control well before retirement. So let’s listen to Jonathon’s question and then Ted you can give us your thoughts on it.
Jonathon: Hi Doug this is John Chevreau, co-author of Victory Lap Retirement and I have a question about the senior debtors. I know that a lot of the people in your studies, the seniors are really badly hurt by debt and in fact some of them are so desperate they have to resort to payday loans. I wondered what kind of solutions you see. Personally I think they need to work a little bit more at least part time, semi retirement but in particular I’m worried about the, if a combination of longevity, living to ninety or a hundred, plus the rising medical costs, whether it’s long term care, nursing homes, etc, how do you tell seniors how to get out of debt and simultaneously build a nest egg that will take care, not only of their leisure time in retirement, but also their possible raising medical bills?
Doug Hoyes: This is a very good questions and so there you go, if you’re interested in Jonathon’s book, Victory Lap Retirement.com. This is not a paid commercial. We don’t do paid commercials here, but I did read the book and it was quite interesting, so that’s why I put it up there. So, Ted let’s talk about seniors, the problems they have, what you see. Give me your thoughts on all of that.
Ted Michalos: Yeah, so let’s start with some basics. The number of seniors filing an insolvency proceeding or bankruptcy proposal is the fastest growing segment of our client base. So, we’re seeing more and more seniors that have gotten themselves in more and more trouble. Interestingly, the average person that files with us owes about $55,000 – $56,000 worth of unsecured debt. Credit cards, loans, that sort of thing. The average senior that files with us owes about $69,000. That’s 20% percent more. It’s heavier credit card debt and the scariest thing of all is they are the largest user of payday loans. The average person we see might have one or two payday loans totally $800. The seniors, its $3,700. And their average income every month from pensions and other sources is only like $2,400. So I mean I don’t know how anybody can do that. And obviously, they can’t.
Doug Hoyes: Yeah. It’s obviously a serious problem and I put the slide up there about the different, I mean seniors are the fastest growing risk group and there’s a whole bunch of others as well. You know, one in five insolvent debtors that we see are lone parents. So, if you’re watching this today and you are a lone parent, a single parent, then you are at greater risk than someone who’s got two incomes in the household.
Student debt is a huge growing issue and it’s especially a problem for women and we’ve talked about that in many cases. You hit on the idea of payday loans. One in five people who we deal with have had at least one payday loan and in most cases more than one. And fast cash loans, predatory instalment loans are growing and we talked about auto loans too. They are becoming more and more unaffordable and a lot of that is because you can now get an eight-year car loan, which is …
Ted Michalos: For a car that will last four-years if you’re lucky. Right?
Doug Hoyes: Yeah. It’s just absolutely crazy. So, back to the issue of seniors then. Why it is we are seeing more and more seniors compared to the past? I mean we don’t have medical bankruptcies here like they do in the U.S. What’s the real issues?
Ted Michalos: I mean, well one of the issues here is the seniors are becoming part of that sandwich generation. They’re looking after kids that have returned home because something’s gone wrong for them and now they’re looking after their parents, who have survived longer than perhaps anybody thought. That’s a good thing. We want grandpa and grandma to be around as long as possible, but somebody’s got to foot the bills and what we’re finding is that those fifty-five through seventy year olds are finding themselves squeezed from both sides. So that’s big source of why they’re incurring so much debt.
The other thing is of course, they may not be planning properly for the use of debt and so it’s not uncommon now for someone to get downsized or to find new employment in their fifties. Twenty years ago that just wouldn’t have happened. Anytime you’re downsized you generally take a 25% or 30% percent pay cut. So you might have had a comfortable life where you could afford your debts and suddenly you are earning significantly less, while your car payment hasn’t gone down and your mortgage payment hasn’t gone down. You got to get that money from somewhere and so they incur more unsecured debt, lines of credit, loans after they’ve eaten up whatever savings they had.
I mean there are a number of factors that contribute to how much debt seniors are carrying these days. Some of it, it’s quite distressing.
Doug Hoyes: Yeah. And like you say, they’re a lot of different factors that factor into it. I mean we don’t have guaranteed pensions like we all used to. Nobody works at the same job for forty-five years and retires at age sixty-five. You’re much more likely to be working longer to work at a series of job.
Ted Michalos: And like Jonathon said, people are living longer.
Doug Hoyes: Yup. Yup. I mean if you live to be sixty-five you’re probably going to live to be ninety. And when our pension concept was originally created, we were thinking well, okay maybe seventy. The CPP in the sixties was kind of a projected out, well the average person is going to die at sixty-nine, so it’s not going to cost much and obviously things have changed.
So if you are either a senior right now or if you have perhaps parents who are seniors, what are the types of advice you would be giving them to be prepared for their later years?
Ted Michalos: Well, so the critical element to this is all cash flow. You’ve got to learn to live within your means, and then well within your means. So, it’s not just that the amount of money going out is less than the amount of money coming in, at some point it needs to be significantly less. You want to make sure that, as Jonathon said, you retire your debt before you retire yourself. Anyone who is thinking that they can service a significant credit card debts or payday loans on a pension is probably fooling themselves and they’re setting themselves up for some serious trouble.
Doug Hoyes: Yeah. It’s just not possible. You just can’t do it. You have to be out of debt before retirement or your senior years gets there or else it’s just not possible to do it. So, well that’s good and I see by the clock that we have of course, as we always do, gone on much longer than thirty minutes so I guess this show will have to be called Debt Free in 43 or whatever it is we end up finishing up on.
But that’s great. I think we covered a lot of ground and there’s two more questions that I want to ask you before we close and like I say, I think it’s been a great show. We’ve covered a lot of different items and I’m watching the YouTube ticker here. We’ve got more people watching than I was expecting so that’s worked out great. They’re watching so we’re certainly happy about that.
So, for everyone who didn’t get their question answered today, and obviously there were a bunch of them because kind of ran out of time, you can always go to Hoyes.com click on the contact us button and send us a message or give us a call and we’d be happy to help.
So, I want to close by asking you two question. So, the first question is, we’ve got a lot of people who are watching us today, or who will be watching a recording of this, and they’re sitting there going, you know, okay I hear what you guys are saying about debt, but it’s not a problem for me. You’re obviously talking about somebody else. Right? So, sure I’ve got a credit card, absolutely, but so does everybody. You know, I’ve got a car loan, but of course, how can you buy a car without a car loan? And yeah, I’ve got a mortgage, but again, you can’t buy a house without a mortgage. So, sure I’ve got debt, but it’s not really an issue. How do you know if the debt that you’ve got really is an issue and is something that you should be worried about?
Ted Michalos: I think the critical thing is, if you are at all concerned or worried about your debt, then you probably have more than you’re comfortable with. I mean that just goes without saying. So, some danger signs to watch for. You run out of month, sorry you run out of money before the end of the month. So, you get paid bi-weekly and you always find yourself short at the end of the month when you’re waiting for that final pay cheque to come in. You’re worried about who’s on the phone when you see one of those eight hundred numbers. Is it a collection agency calling? Are you behind in your payments? Are you getting past due notices in the mail? Are you actually considering going to get a payday loan to make ends meet this week? I mean, all those things are indications that there’s probably something wrong with your cash flow. The money coming in is less than the money going out and we’ve got to deal with it somehow.
But fall back on the first one. If you are at all concerned about this, if you’re losing sleep, you’re getting stressed about it, probably you should be trying to find somebody to help you. I don’t know if that’s your mother, your father, your uncle, your brother, your banker, somebody like Doug or myself. I mean if you’re having a problem with debt and it’s something that you’re not familiar with, getting somebody else’s advice and help is a first grade step.
Doug Hoyes: And you’re talking about it not in terms of numbers but in terms of stress.
Ted Michalos: Yes. I mean the numbers on black and white usually make this pretty obvious. But most of the people I talk to don’t do the black and white until they sit down with me. So, it’s the stress of, I think I’ve got a problem so I don’t really want to look at it and be told how big a problem it is, because once you actually list out who you owe, and what your payments are, it becomes obvious that you got to do something.
Doug Hoyes: Yeah. And if you’re sitting there watching this video or listening to this as a podcast at home, go take a look at your kitchen table. Do you have a pile of unopened bills sitting there? And is the reason because I don’t want to know what’s happening. Is your phone light flashing because you’ve had fifteen calls and you just don’t want to pick up the message. That’s what causes a lot of the stress. It’s the unknown.
So, okay let’s talk about then, as the final question, what can actually be done about debt? So let’s make up a scenario of a person, male or a female, because our clients are pretty evenly split between both and obviously we deal with a lot of seniors, but we also deal with lots of people who are also thirty, forty, fifty years old.
So let’s say I’ve got $40,000 worth of unsecured debt. So unsecured debt being credit cards, bank loans, even income taxes which are able to be included as well, and I’m looking at my different options. So, we know that the first option would be keep trying to pay it back yourself and we’ve kind of crunched some numbers here. So, to pay it back on your own, I mean obviously it depends on the what the interest rates are and how long it’s going to take, but we could be talking a $1,000 bucks a month.
Ted Michalos: Sure at least. I think that’s a pretty conservative number actually.
Doug Hoyes: And is that realistic if I bring in $2,500 bucks a month?
Ted Michalos: That’s 40% percent of your pay. That’s probably equal to what you’re paying for rent at least.
Doug Hoyes: Yeah. So if you’re bringing in $10,000 grand a month, fine no problem. Pay it off on your own and we are certainly advocates, if you can pay it off on your own, fantastic.
Ted Michalos: Pay it off on your own.
Doug Hoyes: That’s exactly what you should do but if you’ve got that much debt and you can’t pay it off, so I think that’s probably the biggest warning sign of all, how long is it going to take you to pay off your debt on your own?
Ted Michalos: And that’s why the credit card bills, the government introduced that, right? You got on the bottom of your bill it shows you how many years it will take you to pay it off if you make the minimum payments.
Doug Hoyes: And if it’s going to be many, many, many years, ten years, twenty-years, thirty-years, then obviously that’s not an option. So paying it off on your own, if you can do it fantastic. If you can’t, well the next option would be a debt consolidation loan. So explain what that is and why there could be an advantage to that.
Ted Michalos: So consolidation loan is where you go to a lender and you ask them to give you enough money, either through a loan or a line of credit to pay off all of your other debts. The primary reason for doing this is to simplify things and to get a lower rate of interest. So, let’s say you’ve got four or five credit cards and they’re somewhere between 12% and 28% interest. You get a consolidation loan or consolidation line of credit, it’s probably going to be at 7% or 8% or maybe 9% interest. So that in and of itself is going to save you a significant amount of money every month and it will make your life easier. You only have to worry about the one payment.
Now, there’s a bit of a fallacy to consolidation loans in that most banks won’t give them anymore. If you’ve got a bunch of debt with bank A, so you’ve got a loan, a line of credit and a credit card, probably they will consolidate their own debts, but what we find is that people are dealing with bank A, bank B, credit card company C, finance company D and maybe a payday loan company. And you won’t find a bank anymore that will actually loan you enough to pay off other people’s loans. Their concerned that it’s putting all the eggs in one basket and it’s too risky.
So, consolidation loans are a great solution. They’re just not available to many people anymore, which is too bad.
Doug Hoyes: I guess that’s a pretty good summary. Fantastic idea. And if you got a $100,000 bucks of equity in your house and you need $10-grand, no problem, but if you don’t then it’s just not going to work.
So, the next solution that people would think about is a debt management plan. So, in the example that we’ve kind of crunched the numbers on, so okay, if I’m going to pay it back myself with all the interest maybe it’s going to cost me a $1,000 bucks a month. If I could get the interest rate lowered a bit and do a debt consolidation loan, then maybe I’m talking $800, $900 a month. What is a debt management plan and why is it cheaper than a debt consolidation loan and paying it off on your own?
Ted Michalos: So a debt management plan, your debts aren’t actually paid off. They’re pooled together and in most cases the interest is reduced or completely eliminated. So, what you’re doing is you’re making payments directly against the principle. Now the example that we’ve used on this $40,000 we’re looking at you paying it back over five-years, sixty-months. That’s possible. It’s a little misleading in that most credit counselling agencies that do debt management plans want you to repay them over forty-eight months, so the payment’s likely going to be higher than this. But still, if you can afford to repay your debt in full and it’s the interest that’s killing you, debt management plan is a good solution. It’s not very well known, because these not-for-profits don’t have the money to advertise their services.
Doug Hoyes: And as a result they’re not an option for everyone. And I guess if you’ve got a $40,000 worth of debt and in our example here we’re saying, well maybe $667 to do it over a five-year period, to do it over a four-year period obviously you’re looking at more than that. You’re up into the debt consolidation loan range, and again if I can’t afford $1,000 or $900 or $600 or $700 then I’ve obviously got a problem which is why people come to us and we talk about the, you know, on this slide, the final option which is a consumer proposal. So, you explain briefly what that was before, but give us the $30,000 view again of that. What is a consumer proposal?
Ted Michalos: So again, the idea behind a proposal is you’re offering to repay a portion of your debt. In this particular example, so we’re saying somebody owes $40,000. Typical repayment would be $12,000, somewhere in the neighbourhood of 30% of what you owe. There are no hard and fast rules. You’re making an offer that the creditors get to agree to. Remember what I said earlier, there has to be a reason for them to agree. Well, proposals an alternative to bankruptcy where they generally get significantly less. So, even though it sounds crazy that somebody might take thirty cents on the dollar, thirty cents on the dollar is better than nothing. Which is the real premise behind a consumer proposal.
Doug Hoyes: Yeah. So in this particular example we’re saying that consumer proposal may end up costing $200 – $300 a month. Well okay, if I’m bring in $2,300, $2,400, $2,500 a month, rather than paying $1,000 on a debt consolidation loan to pay $200 or $300 a month on a consumer proposal, that sounds like it makes sense.
Ted Michalos: Again we have to look at your situation to make sure it’s manageable but just on the face of things, $230 a month versus a $1,000 a month, I mean it’s not complicated. I get one of the problems we have is that a lot of people have never heard of this as a solution and it just sounds too good to be true. Remember, it’s a legal procedure and you’re doing it as an alternative to bankruptcy, so there are downsides to it, but for most people it’s an excellent way to get out of debt.
Doug Hoyes: Yeah. And that’s why it’s obviously something that we suggest and you know, bankruptcy is an option as well, but we do fewer bankruptcies now than we do consumer proposals.
Ted Michalos: Yeah. That’s true.
Doug Hoyes: By a significant margin actually, so it’s not something that is a number one option for a lot of people.
Well, that’s great Ted and we’ve covered, as I said, a lot of ground today and so really appreciate you being here for this and as I say, all the people who have been watching this live on YouTube and all the other different vehicles that were out there.
Ted Michalos: This Debt free in 48, so whatever.
Doug Hoyes: Yeah, so whatever. Well, and frankly, you and I always sort of become a little bit verbose and that’s one of the reasons why we changed the format of the podcast. For the first two seasons it was thirty minutes because that’s what the radio stations required. We decided this year to take it off the radio, so that if we wanted to talk for forty-eight minutes we could. Obviously our listeners can fast forward and stop unless they’re watching something live.
Ted Michalos: There were no commercials so don’t try to skip the commercials.
Doug Hoyes: Yes, that’s absolutely right. But, and we’re also going to be doing a lot of episodes that are a lot shorter than that where we key in on one specific issue, so I think we’re giving people the, both sides of it. Giving them what they need. So, again we encourage everyone to, you know, go to our website at hoyes.com. You can look up everything we’ve talked about. We’ve got the full show notes and everything.
If you didn’t get your question answered today, then we’re happy to answer questions going forward. We’ve got lots of staff, many different offices, so if you send us an email at, well go to hoyes.com. That’s the easiest thing to do because we’ve got a contact link there. You can find all our different offices, all our different phone numbers and we’d be happy to talk to you there.
So, in closing Ted are there any final thoughts that you would like to leave people with?
Ted Michalos: Well, I mean debts not something that most people are familiar, well I’m sorry that’s wrong, they are familiar with it, they don’t know how to deal with it when it becomes overwhelming. The trick with all of these things are, if you need help, reach out and get it from somebody. I mean we’re obviously trained professionals and we’re happy to do this for you, but even if you just talk to a close friend, a family member, your banker, your accountant, somebody. The trick to dealing with a debt problem is to try and identify it early and make plans while you still have options. Don’t let people force you into a corner because you’re ignoring the problem.
Doug Hoyes: And what’s the cost when you come in to see us?
Ted Michalos: There isn’t any cost to come and see us the first time. Obviously we’re trying to figure out whether or not we can help you. In fact, half the people we talk to generally, we can just point them in the right direction.
Doug Hoyes: They’re going to refinance their house, they’re going to talk to a credit counsellor or whatever. So, it doesn’t cost anything to talk to us. It doesn’t cost anything to send us an email. So that’s obviously –
Ted Michalos: We’re starting to sound like a commercial.
Doug Hoyes: Yeah it is. So we better close it off there then because we wanted to make this informational. I think that’s what we’ve done. So, Ted thanks very much for being here today. Certainly appreciate it and I think, hopefully we’ve answered a lot of question for people as well. That was what we were trying to do. As I said, we’re going to put up full show notes on our website at hoyes.com so please go to hoyes.com. That h-o-y-e-s.com for more information on everything we discussed today. Until next time thanks for watching and listening. I’m Doug Hoyes. That was Debt Free in 30.