Everyone knows the statistics: Canadians are carrying more debt than ever before. And yet, based on a review of data from my clients, it takes less unsecured debt to force individuals to file a consumer proposal or bankruptcy.
Back in 2012, the average person filing a consumer proposal or bankruptcy with Hoyes Michalos owed $60,000 in unsecured debt. That number has dropped every year since, and now stands at just over $49,000.
Why are debtors hitting the tipping point sooner?
Five years ago, they waited until they owed $60,000 before seeking relief through the insolvency process. Today, they get to $49,000 and say, “I need help!”
I have three theories to explain why debtors are hitting the tipping point sooner:
Higher Servicing Costs
First, the level of debt doesn’t matter; all that matters is your ability to service that debt. Is it a problem if you have mortgage payments of $2,000 per month? Not if you earn $10,000 per month and have minimal other expenses. But, if your income is only $2,500 per month, a $2,000 per month mortgage payment is impossible to service.
While average troublesome debt levels may be decreasing, servicing costs are increasing. We know that the Bank of Canada raised their prime rate by 50 basis points in 2017 (and a further 25 basis points in January, 2018), so anyone with debt with a variable interest rate (like a line of credit) is paying more in interest now than they were at this time last year.
But the problem is more than just higher interest rates: the problem is higher interest debt. In 2017, 31% of my clients owed money on payday loans (as compared to 12% back in 2012). On average, they owe almost $3,500 to payday loan companies. In 2017, the maximum a payday lender could charge was $18 on every $100 borrowed. So, if you had $3,500 in payday loans, and paid them off every two weeks, then borrowed them again, and did that for the entire year, you would end up paying over $16,000 in interest (and you would still owe the original $3,500).
So, the size of the debt is not the problem; it’s the carrying costs!
(The government lowered the maximum an Ontario payday loan company can charge in 2018 to $15 on $100, so this year you would only pay $13,650 in interest on your $3,500 in payday loans, but I digress).
What’s more, payday loan companies now offer “installment” loans. I met with a client a few weeks ago who had a $15,000 installment loan from a payday loan company. The interest rate on that loan was about twice as high as a high interest rate credit card, so not surprisingly you reach the tipping point twice as fast as if you only had credit card debt.
More Knowledge About Our Options
When I first meet with a prospective client, I ask them how long they have had debt problems. A few years ago the answer typically was “I’ve had problems for many years”. Today, the answer is more likely to be “I’ve been fighting this battle for a year or two”. I then ask why they came to see me, and they explain that they understand they have options, and they want to discuss a consumer proposal. That’s a significant change from a few years ago.
If you had debt problems 10 years ago, and didn’t want to go bankrupt, you talked to a not-for-profit credit counsellor. They would then file a debt management plan, where you paid back your creditors in full, but with little or no further interest. If you wanted to avoid bankruptcy, but couldn’t deal with your debts on your own, credit counselling was your only option.
Due to proposed government rule changes, most small, not-for-profit credit counselling agencies (a fixture in most medium sized towns in Ontario for the last 50 years) are shrinking, and it’s likely that most of them will not exist by the end of this year. The survivors in the “not-for-profit” credit counselling industry are the big organizations. As the small, local agencies have been pushed out of business, the big agencies, like the Credit Counselling Society of British Columbia (branded as “No More Debts” or “The Credit Counselling Society”) have grown from around $3 million in revenue in 2008 to over $12 million in revenue in 2016. They are “not-for-profit”, but they only issued $64,000 in charitable donation receipts in 2016. They generated $12.6 million in fees charged to the big banks and other creditors for whom they collected payments as part of debt management programs. It’s hard to view a company that collects huge fees from banks, but does minimal charitable work, as a charity. In fact, legally, they are a collection agency.
Consumers understand this; with the internet, they can research their options. It is very common for a prospective client to tell me “I’ve done my research. I want to file a consumer proposal”. They know their options. In the past, credit counselling was their only option. Today, they know they can file a consumer proposal, so they don’t have to suffer with their debts for many years. They “pull the trigger” on a consumer proposal much earlier than they have in the past.
Creditors are Willing to Make a Deal
When Debt Management Plans were more prevalent, creditors, like the big banks, were less inclined to accept a consumer proposal. Why take 30 cents on the dollar in a consumer proposal when they might get 100 cents on the dollar (less the fees they pay to the credit counsellor) in a Debt Management Plan?
Today, the big banks know that a Debt Management Plan is not a viable option for many debtors. So, they are faced with two options: accept the consumer proposal or reject it and force the debtor to go bankrupt. Since creditors get less in a bankruptcy, the decision is simple: take the deal.
Creditors don’t automatically accept every proposal; we negotiate with them on almost half of all proposals filed. But, in most cases a reasonable resolution is reached, to the satisfaction of both the debtor and the creditors.
As a result, debtors who in the past would have had to offer an unrealistically high proposal, are now able to file an affordable proposal that is acceptable to the creditors. It’s a win-win.
In summary, although debt levels are increasing, debtors, faced with high debt service costs, are more knowledgeable about their options. Therefore, they’re more proactive in pulling the trigger on a solution to their debt problems.