Look in the mirror. It’s likely that you have more in common with the average person who files bankruptcy in Canada than you may think.

My name is Douglas Hoyes, a trustee with Hoyes, Michalos & Associates Inc. in Ontario, and today we released Joe Debtor, The Face of Bankruptcy, a comprehensive new research study profiling the average person who files a consumer proposal or bankruptcy in Ontario. We call this average person “Joe Debtor”.

Who is Joe Debtor? What does he look like?

Joe Debtor looks just like the average Canadian. He has a job, and may also own a home. He is very similar to the average person. The only difference between Joe Debtor and the average Canadian is that Joe Debtor has a huge amount of debt.

Here are some facts:

Comparison of Joe Debtor to Average Canadian

Personal Information: Joe Debtor Average Canadian Male¹ 58% 49% Female¹ 42% 51% Average age² 41 41 Married or Common-law³ 45% 52% Divorced or Separated 26% 10% Widowed 2% 6% Single 27% 32% Average family size³ 2.3 2.6 Average monthly income⁴ $2,240 $2,419 Total credit card debt⁵ $24,390 $3,709 Total unsecured debt⁶ $59,814 $16,399

 

The Big Difference: Debt

Joe Debtor’s Unsecured Debt

 

As you can see, the most significant difference between Joe Debtor and the average resident of Canada is debt. (That’s not surprising to readers of this blog; the most read post here on Trustees Talk is our post on Personal Debt in Canada: The Ticking Time Bomb.

The average Canadian has about $16,400 worth of consumer credit (debt excluding mortgages), while Joe Debtor has almost $60,000 in unsecured debt. That means that Joe Debtor has more than three and a half times as much debt, so it’s no surprise that Joe Debtor gets into financial trouble.

Simply put, debt is very dangerous.

To find out if you may have a debt problem, take this quick four question survey:

1 Are my debts, not including my mortgage, closer to the Canadian average of $16,400, or closer to Joe’s average of almost $60,000? If your debt is close to, or higher than $60,000, you owe more than Joe Debtor, and that’s an indicator that you may have a debt problem.

2 “Joe Debtor” owes $24,390 spread out over more than four credit cards. In other words, the typical bankrupt person in Canada has a lot of credit card debt. If you owe near that amount, and you are having trouble making your payments, you have a debt problem. If you are carrying a balance each month on any credit cards, you have a debt problem, because credit cards are the most expensive form of borrowing.

3 Am I afraid to open my mail? If you have bills that you haven’t opened because you know you can’t pay, you probably have a debt problem.

4 Am I “robbing Peter to pay Paul”? Do I take a cash advance from my line of credit to pay my credit card, and then next month will I take a cash advance from my credit card to make the minimum payment on my line of credit? If you are simply borrowing from one place to pay another, your debt, with interest, is gradually increasing, and you probably have a debt problem.

How can you solve your debt problem?

Start by taking inventory. Make a list of all of your debts, and the amount you owe. Make a budget to see where your money goes each month. If you can cut expenses and use the extra money to pay off your debts, great; that’s the perfect solution for you.

If you are like Joe Debtor and you have more debt than you can handle, consider filing a consumer proposal. You make one manageable monthly payment, and your unsecured debts are eliminated. If that’s not possible, filing bankruptcy in Canada may be your final option.

To find out more, use our free, on-line debt options calculator to review your options, then contact a consumer proposal administrator or bankruptcy trustee for a no-charge initial consultation.

 

1. Statistics Canada: Percentage of population over the age of 20, July 2010

2. Statistics Canada: Median age 2010

3. 2006 Census of Canada: Ontario

4. Statistics Canada: Personal Disposable Income per capita

5. Trans Union

6. Statistics Canada: Consumer Credit, Seasonally Adjusted per adult (18+)

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What does it cost to file bankruptcy in Canada? As a trustee I have handled thousands of personal bankruptcy filings, and that may be the most common question I am asked. For many, the answer is also somewhat confusing.

Doug Hoyes, Bankruptcy Trustee

In simple terms there are three costs to filing. There is a minimum contribution, there is a surplus income payment, and then there is the money you lose in the process due to your assets.

1 Most trustees in Canada will require you to make a minimum contribution each month towards the administrative charges of your bankruptcy. That may be in the range of $200 to $250 per month, and they may require a month or more of contributions to be contributed when you sign the bankruptcy paperwork. As each case is different, your trustee can explain this to you in more detail.

2 Surplus income is a more complicated concept, but in simple terms the government allows you to earn a base amount each month. If you earn over that amount, you are required to pay more. We have lots of details on this site, including our post on Surplus Income and Bankruptcy in Canada, and surplus income in the bankruptcy process in Canada. There are a number of surplus income worksheets available on the internet as well.

3 Finally, if you file bankruptcy you will lose any non-exempt assets. For example, you will lose any money you have contributed to your RRSP in the last twelve months. You also lose your tax refund, HST credits, and any equity you have in a car or house. More details can be found in our article on bankruptcy exemption limits in Canada.

For more information, please see our article on the cost of filing bankruptcy in Canada, or review other articles on the cost of bankruptcy.

Two final comments:

First, the calculations to determine the cost of bankruptcy are confusing, so we strongly recommend that you arrange a no-charge initial consultation with a bankruptcy trustee in Canada.

Second, if you are concerned about the cost of bankruptcy, a consumer proposal may be a better option for you, because often the monthly payment in a consumer proposal is less than the monthly payment in a bankruptcy. Please see our free, interactive debt options calculator for more information.

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Bank of Canada Governor Mark Carney has warned that Canadians are carrying too much debt. On Monday Statistics Canada released a report showing that the ratio of household debt-to-disposable income reached the highest level on record in the third quarter, at 148.1%, which is 6.7 per cent higher than last year. This means, in simple terms, that if you earn $10,000 in disposable income per year, you are carrying almost $15,000 in debt.

That may not seem like a high number, but it’s the highest number in Canadian history, and it’s even higher than the 147.2% level in the United States, which is a scary statistic given the serious economic problems faced by Americans.

So, what does this mean to you?

To start , as I have already commented in the press, I find it amusing that the Bank of Canada, which has kept interest rates artificially low to encourage us to borrow, is now worried that we are borrowing too much.

However, as a bankruptcy trustee I agree that too much debt is a problem. So, what can you do about it?

First, start taking steps now to reduce your debt. Make a budget, and look for ways to cut expenses, and then use those savings to start repaying your debt.

Next, spend less. There are lots of resources to help you spend less at Christmas, so you can avoid debt and have a stress free Christmas. Otherwise you risk having it all in December, but losing it in February when the Christmas bills come in.

Third, have a plan. Before you go shopping, decide who you need to buy for, and what you can afford to spend, and don’t overspend.

Finally, pay cash, or use debit. If you don’t borrow, you can’t get in to debt.

What do you do if you already have more debt than you can handle? Review your debt management options, and consider filing a consumer proposal or personal bankruptcy if that’s the appropriate solution to your financial problems.

The Bank of Canada Governor is correct: household debt in Canada is a problem, and we should deal with it now, before the situation becomes even worse.

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Last week we discussed Credit Cards: The Fast Route to Bankruptcy in Canada and we learned that the vast majority of people who file bankruptcy in Canada owe money on credit cards. Some of those people have money in RRSPs; should they cash out their RRSPs to avoid bankruptcy?

Under current bankruptcy laws in Canada, RRSPs are exempt from seizure by the trustee if you go bankrupt, except to the extent of your contributions in the twelve months prior to bankruptcy. In other words, if you go bankrupt, you only lose the contributions you have made to your RRSP in the twelve months prior to bankruptcy.

(The rules are somewhat more complex than this. For example, if an RRSP is locked in as a result of previous employment, or if there is a life insurance component, it may also be exempt. Consult a bankruptcy trustee to review your specific situation).

This means that in many cases you can declare bankruptcy, eliminate your debts, and not lose your RRSP. What should you do?

Your first option would be to cash in your RRSP and use the proceeds to repay some or all of your debt, thereby avoiding bankruptcy. Here are some thoughts to consider before cashing in an RRSP to repay debt:

First, all withdrawals from an RRSP are taxable in the year you receive them. If you make significant withdrawals, you may bump yourself into a higher tax bracket, leaving a significant tax liability at the end of the year. The bank may with-hold up to 30% on your withdrawal for tax, but if you end up in the 40% or higher tax bracket at the end of the year, you could still have a significant tax liability. So, before cashing in an RRSP, speak to a tax professional to determine exactly what you will owe in tax.

If you are in the 50% tax bracket and you take $50,000 out of your RRSP, you will only net $25,000, so be careful.

Second, cashing in your RRSP to pay only some of your debt may not be a wise move. It all depends on how much debt you have remaining. If you currently have $20,000 in debt and $100,000 in your RRSP, cashing in $25,000 (or whatever is necessary to net $20,000 after tax) is probably a prudent financial decision. You eliminate your debt, and still have money in your RRSP.

However, if you have $100,000 in debts and only $20,000 in your RRSP, cashing in your RRSP and paying the tax still leaves you with significant debt; in that case a consumer proposal or other debt management solution may be more prudent.

Finally, the interest rate you are earning in your RRSP, and the interest you are paying on your debts is also a consideration. If you are earning 1% interest in your RRSP, but you are paying 25% interest on your department store credit card, it may be wise to cash in your RRSP and pay down the high interest debt. Remember that credit card interest is after-tax interest, so it’s very expensive.

There is no one correct answer for everyone. If you have debts, and you have an RRSP, start with our free, instant interactive debt options calculator to review your options, and then consult a bankruptcy trustee to review your specific situation.

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Personal bankruptcy filings in Canada increased in June, 2010, according to personal bankruptcy statistics released by the Office of the Superintendent of Bankruptcy. In the month of June 11,900 Canadians filed a bankruptcy or a proposal, up 7% from the 11,123 filings in May, 2010. Over the twelve months ending in June, 145,233 residents of Canada filed a proposal or bankruptcy, up 6.2% from the 136,749 who filed over the twelve months ending in June, 2009.

For the twelve months ended June 2010 the rate of filings increased everywhere but in Manitoba and Nunavut. Here’s a summary of the rate of increase in personal insolvencies (which includes bankruptcies and proposals) filed by consumers in Canada for the twelve months ended June, 2010:

• Bankruptcy in Newfoundland & Labrador up 4.3%
• Bankruptcy in Prince Edward Island up 7.9%
• Bankruptcy in Nova Scotia up 10.6%
• Bankruptcy in New Brunswick up 12%
• Bankruptcy in Quebec up 2.7%
• Bankruptcy in Ontario up 4.3% (and consumer proposals in Ontario increased by 29.3%)
• Bankruptcy in Manitoba down 0.7%
• Bankruptcy in Saskatchewan up 11.4%
• Bankruptcy in Alberta up 18.4%
• Bankruptcy in British Columbia up 15%
• Northwest Territories up 28.2%
• Yukon up 28.6%
• Nunavut down 60% (there were 10 filers in 2009, and only 4 in 2010, so although the percentage drop is large, the absolute numbers are not large).
• Bankruptcy in Canada up 6.2%

What does the increase in insolvency filings in Canada mean for the average Canadian?

A quick review of the number shows that in virtually every province the number of insolvencies filed increased, but a more detailed look at the number reveals a very important trend: personal bankruptcy filings in Canada are actually decreasing, while the number of consumer proposals filed is increasing dramatically.

As noted above, over the last twelve months in Canada the total number of residents of Canada declaring insolvency increased by 6.2%, to 145,233. However, the number of personal bankruptcies actually decreased by 1.5%, from 106,933 to 105,360. So why are total filings up 6.2%? Because the number of proposals filed by consumers increased by an astounding 33.7%, from 29,816 to 39,873 filings in the last twelve months.

These numbers prove that the average Canadian is increasingly choosing to file a consumer proposal as an alternative to personal bankruptcy.

Why are consumer proposal filings increasing in Canada?

Bankruptcy numbers are falling, and consumer proposals are increasing for two reasons:

First, the economy in Canada is still showing weakness, which is why overall numbers are still increasing.

Second, and most importantly, in September 2009 the federal government implemented new bankruptcy rules that make filing bankruptcy a longer and more expensive process for many Canadians. The most significant new rule involves the calculation of surplus income. In simple terms, under the new surplus income and bankruptcy in Canada rules, if your family income is higher than the allowable limit set by the government, your bankruptcy will last for an extra year, and you will be required to make extra payments for that extra year. That means that a first time bankrupt, instead of being discharged in nine months, may not be discharged for 21 months.

Clearly, many Canadians with debt problems have analyzed their options, and have decided that a consumer proposal is a better option than bankruptcy for dealing with their debts, and that’s why consumer proposal numbers continue to increase.

With a consumer proposal you make one fixed monthly payment, and that payment doesn’t increase even if your income increases. You know exactly what you are required to pay to discharge your debts, and that’s a great feeling.

To find out if a consumer proposal is right for you, contact a licensed consumer proposal administrator today for a no charge initial consultation. The numbers don’t lie; a consumer proposal may be the right option for you.

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An interesting debate has emerged in the pages of the Financial Post over the last two weeks regarding the need for senior citizens to file bankruptcy in Canada. The debate started with an article by Jonathan Chevreau published on August 11, 2010 titled No Immunity to Bankruptcy. That day Mr. Chevreau also published a blog post titled Freedom 60? 33,516 Canadians 60 or older filed for bankruptcy from 2008 to 2010. I was interviewed for both the newspaper column and the blog post; here’s a quote from the newspaper:

Between 2006 and 2010, between 7% and 9% of the debtors handled by Toronto bankruptcy trustees Hoyes Michalos & Associates Inc. were 60 years of age or over, says principal Doug Hoyes.

In the two and a half years between January 2008 and May 2010, 33,516 Canadians age 60 or over filed for bankruptcy, according to Industry Canada.

That quote is accurate. In fact, after holding steady in the 7% range between 2006 and 2009, in the first seven months of 2010 the percentage of people aged 60 or over who have filed a consumer proposal or a personal bankruptcy has increased to 9%. That statistic clearly indicates that more seniors are experiencing financial difficulty, and are making the decision to formally deal with their debt.

Here’s the key problem, as quoted in the Financial Post article:

Of course, the problem with carrying debt into retirement is that it must be serviced with less income than when working full-time. Some adapt by making only the minimum monthly payments on credit cards, which leads to a downward debt spiral, a journey that often ends with a trip to offices like Hoyes.

In the past, most seniors were able to retire with no debt. The fortunate ones owned their own house with no mortgage, so when they retired they were able to live comfortably from their savings and pensions. Unfortunately today an increasing number of seniors are retiring with debt, so when their income drops at retirement it often becomes impossible to both service debt and pay normal day to day living expenses. I’ve met with a number of seniors who retired in good financial shape, but as the recession worsened they ended up helping their grown children deal with their money problems, and that often depletes their retirement nest egg, and can even lead to new debt.

But there’s more to the story than that; here’s another excerpt from the Financial Post article:

Hoyes guesses half the seniors he sees choose bankruptcy, although he lays out four less extreme options. He points out that most retirees don’t need to file for bankruptcy because the main reason for considering it is to ward off creditors that threaten to garnishee wages or seize assets. Retirees have no full-time wages, so don’t have significant wages that can be seized. Also, “it is very difficult, if not impossible, for a creditor to garnishee a pension,” Mr. Hoyes says.

This is where it gets interesting. On the day the article was published, Mr. Chevreau was contacted by a reader who said that he was 70 years old, and he owed a significant amount of back taxes, and CRA was taking all of his Canada Pension Plan income each month. As any good journalist would do, Mr. Chevreau contacted me to ask for my side of the story, since Revenue Canada’s actions to seize pension plans would appear to contradict my statement that “it’s very difficult for a creditor to garnishee a pension.”

My response to Mr. Chevreau was that yes, it is very difficult for a typical creditor, like a bank or credit card company, to garnishee a pension. However, Canada Revenue Agency is not a “typical” creditor. CRA has more power than your typical credit card company or other creditor.

On August 18 Mr. Chevreau reported on this continuing story in an article in the Financial Post titled Government gives with one hand, garnishees with other, where he tells the story of “Sam” (not his real name), the 70 year old who is not getting any CPP or OAS benefits because CRA is taking all of it, and applying it against his tax debt. Here’s an excerpt from the story:

Generally, if you owe money on credit cards or other unsecured debt, there’s no mechanism for creditors to garnishee a pension, says Doug Hoyes, a principal with Toronto based bankruptcy trustee Hoyes Michalos & Associates Inc.

According to Hoyes, the Ontario Wages Act only permits creditors to garnishee up to 20% of a person’s wages or 50% for child support. However, he says, “standard garnishment rules don’t apply to the CRA. They can do whatever they want.”

Hoyes regards the legal definition of garnisheeing wages as a court order to take some of your paycheque. But the rules are different when the government is itself the creditor. “It doesn’t go to court. They can just decide to take CPP and OAS until they get what they want.”

He has seen cases similar to Sam’s in the past, but they were “rare circumstances, generally where the tax debt was large and often where the taxpayer was delinquent in filing tax returns on time.”

CRA spokeswoman Caitlin Workman confirms the tax agency can garnishee “all types of pensions,” both government and private. This is permitted under Section 224.1 of the Income Tax Act, with similar provisions in five other acts. However, she says it’s rare to garnishee more than 20% of such benefits. “It’s very much a last resort after the taxpayer’s ability to pay has been determined.”

So there you have it. If you owe taxes to CRA, and if you get Canada Pension Plan or Old Age Security payments, Canada Revenue Agency can withhold some or all of your monthly pension payments in satisfaction of your tax debt.

As I said in the article, while I have seen cases like Sam’s, it is generally very rare that CRA would take all of someone’s pension. They will typically only take everything if you owe a significant amount in taxes, and if you were delinquent in filing your taxes on time. As the CRA spokeswoman stated, it is rare that they will garnishee more than 20% of pension benefits, but it is possible.

What Can You Do if CRA is Taking Your CPP Pension For Taxes Owing?

If you owe back taxes and CRA is taking your pension, you have a number of options.

First, you can contact CRA and work out a re-payment plan. If you have other assets that you can sell to raise cash, you may be able to pay your taxes with that money, at which point CRA will stop taking your pension. You may also be able to negotiate a monthly payment plan to free up some of your pension.

If you can’t make a plan directly with Canada Revenue Agency, you could try to get a debt consolidation loan; you borrow from a bank, and use the money to repay CRA. If you pay your taxes in full, CRA will release the flag on your pension payments.

If you don’t qualify for a loan, which is often the case once you retire because your income has dropped, your next option is a consumer proposal. In a consumer proposal a settlement is reached with all of your creditors, including CRA. In many cases you may end up paying less than the full amount owing. If your largest debt is taxes, CRA must agree to your proposal, so a consumer proposal is not always an option where tax debts are involved.

If a consumer proposal isn’t possible, your final option for dealing with tax debt is personal bankruptcy. Upon your discharge from bankruptcy in Canada your tax debts are discharged.

Owing money to the tax man isn’t fun at any age, but it can be even more stressful if you are a senior citizen on a pension, so if you have tax debts, contact a licensed bankruptcy trustee for a no charge initial consultation to review your options.

Finally, my thanks to Mr. Chevreau and the Finanicial Post for bringing this issue, and possible solutions, to the attention of senior Canadians.

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