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The purpose of this blog is to allow Debtors to compare debt solutions to better understand their options. Results for everyone will of course vary according to your individual circumstances
Scenario: (For an average Canadian Debtor
For the purposes of this exercise, we have an imaginary couple, with two children. He has a full-time job, and she works nearly fulltime hours. Each month our couple has a combined monthly, after tax, income of $6,222
According to the Government’s statistics, the average Canadian income earner makes about $40,000 per year and the mean full time worker brings in $54,000
The couple purchased their home, in London. Ontario, during February of 2022, they took out a mortgage for 75% of the value at a variable rate of 1.4% – their monthly mortgage payment was $2,465.
In February of 2022 the average house price in London, Ontario, according to Re/Max, was $832,000, with their mortgage at (75% of the value) $624,000.
The economy has changed rapidly in the past eight years, and the average Canadian now owes about$32,000 in credit card debts. So, our couple owe a total of $64,000 on credit cards, with minimum monthly payments averaging $1,280 per month.
According to TransUnion and Equifax, the average charge on a credit card $2,447 per month, the Canadian Bankers Association’s (now redacted) credit card data indicates that Canadians have more than 80,000,000 bank issued credit cards.
Additionally, each of our Debtors drives a car and each owes for a car loan, with combined monthly payments of $1,200.
The average Canadian car loan is between $400 – $800 per month.
According to readily available statistics, the average family of four is spending $1,400 per month on groceries. And, the cost of clothing the family is about $500 per month.
In 2017 the average cost of clothing was about $114 per person, per month.
The couple are average users of their vehicles and between them spend $413 per month on gasoline, plus they pay $230 per month for auto insurance, and need about $200 per month for maintenance.
The average driver will cover about 16,000 kms per year with gasoline costing an average of $1.55 per liter, and their usage at about 10 liters per 100 kms, vehicle insurance averaging $115 and repairs and maintenance upwards of $100 per month.
The couple are looking for some relief – as noted above, they have a combined monthly income of $6,222, and without creating an exhaustive budget their average monthly outflows are far in excess of $7,688 per month.
Solutions:
There are always a variety of ways to approach a problem, it is never a case of one size fits all, even when we generalize.
Pay your bills in the ordinary course of business:
This is always the preferred option, if you can find a way to stay on top of your bill payments, you should. Do you have any resources that can be used to help you along, or can you create opportunities yourself? For example, taking on a side gig to increase your income, or finding a way to reduce some expenses.
There are only three things that can be done from a budgetary perspective, the first is to increase income, the second is to decrease expenses and the third is to do a little of each.
When we look at the scenario above, there are a few options for reducing expenses such as buying used clothing, getting rid of one of the vehicles, using clip and save coupons for groceries, but even then the family would see a monthly reduction of $672 from their current monthly expenses, far from enough to balance their budget.
And remember, the scenario above has completely missed other expenses, medical, electricity, heating costs and so forth.
Real Estate Dilemma:
Notice that the monthly mortgage payments were only $2,465, but now with rates at more than 6% that monthly payment has increased to $4,015 per month. The price of housing has plummeted since the apex in early 2022, and now, according to Re/Max are at $664,000 (a drop of over 20%) showing the couple’s equity has been completely wiped out.
To sell the house would mean that couple would incur a shortfall on sale, with average power of sale costs being around $20,000 and real estate commissions at 5% the total sale cost would be about $60,000 leaving the couple some $60,000 – $70,000 deeper in debt.
The average rental cost for a three bedroom unit in London is about $3,000, if one can be found. Based on this information our couple would need to think very carefully before selling or remortgaging. Some high-risk lenders may very well contemplate providing a speculative second, or even third mortgage, banking on a continued rise in property prices.
Bank Consolidation Loan:
The old saying “A banker is a fellow who lends you his umbrella when the sun is shining but wants it back the minute it begins to rain.” is not a slight, it is an apt description of how banking works. Bank employees have been caught cheating and fudging numbers (condoned by management) to qualify people for debt they ought not have, in order that they may obtain bonuses.
Banks routinely encourage customers to pile on debt in the form of credit cards, RSP loans, overdraft, lines of credit etc. However, banks are not very helpful when people are struggling. Recently they have reduced minimum monthly payments and offered a wider variety of credit card offerings (knowing the most consumers are using debt to make debt payments).
Consolidation loans are far less common that they used to be and are typically secured through mortgage financing. Banks are also reticent to assume the risks of other lenders by consolidating external lenders’ products. Looking at our couple’s exposure, overleverage, and debt service ratio, it is highly doubtful they would qualify for a consolidation loan.
In any event, a $64,000 consolidation loan over 48 months (typical) with interest of 11% would require monthly payments of $1,654. Although the credit score may remain unchanged, the couple’s debt service ration wold be astronomical, inhibiting them from obtaining any other financing for many years.
Credit Counselling – Debt Management Programme:
Credit Counselling Agencies are licensed under the Collection Agencies Act and are “soft collectors” funded largely by the Banks and other institutional creditors. They are paid a commission of 22.5% of the money they collect from you, in addition to a monthly administrative fee (also collected from you).
A Debt Management Programme (“DMP”) requires that you repay 100% of your debts to participating creditors and stay on top of regular payments to non-participating creditors. A DMP will last for five years (60 months) and your credit rating during the process will be the same as if you had filed for bankruptcy.
Payments on a DMP, including the administrative fee would be about $1,210 per month. Your credit rating is upgraded from R-9 to R-7 after the final payment is made and remains on your credit report for three more years.
Bankruptcy:
Bankruptcies have become extremely burdensome and ineffective, costly, solutions for many consumers. Our legislation needs to be seriously reviewed in light of recent court precedents that have resulted in questionable burdens being placed on consumers.
The couple in our scenario, using the Superintendent’s Directive 11R2 for surplus income, would have the couple paying $748.5 per month for 21 months – for a total of $15,718. They would also be required to have their home valued at the beginning and the end of their bankruptcy, and if prices bounced back would be subject to make a settlement for the equity in the property.
A first time bankruptcy remains on your credit report for six years following discharge, and a second, or more, bankruptcy will be visible for fourteen years following discharge. In neither case does that mean credit will not be available for that length of time, it simply means that credditors will have awareness of the babnkruptcy. Most people find that their credit life returns to normal within one or two years of discharge.
Proposal:
From this scenario it is easy to see why Consumer Proposals are Canada’s number one choice for debt solutions. A proposal is based on presenting facts, and not future (unpredictable) changes in circumstances.
In the presenting situation, it is clear that the only “asset” available to creditors would be surplus income in the amount of $15,718, most of which would be chewed up by administrative fees, leaving about $6,000 to be distributed amongst the creditors.
By contrast even a “quid-pro-quo” proposal would yield a higher return, almost $11,000 for the LIT to share amongst the creditors. Unlike the bankruptcy situation, creditors are given the option of voting on acceptance of a proposal and even renegotiating the terms if they believe the Debtor is capable of making more significant payments.
Since a proposal can run for five years (60 months) monthly payments would be about $262 for a total of $15,718. Therefore a proposal would add more certainty in terms of the cost and would be much easier to cashflow. Proposals, in the same manner as DMPs, will remain on a credit report for three years following completion. As with bankruptcies most people filing proposals will find their credit accessibility will return much faster than they anticipate.