Doug Jones here from BDO, Canada’s debt help professionals since 1958. For this week’s video blog, let’s talk about student loans and the financial problems they are causing for many people.

The Canadian Federation of Students estimated in September 2012, that the average student debt in the country is $27,000 with most students needing 10 years to pay it off. Around the same time, the Canadian government published statistics that suggested the total cost for a four year, undergraduate post-secondary education was $14,500 a year, or almost $60,000 for the four years. Other sources have put this price tag as high as $80,000.

The real worry about these very high student debt loads is that they are only for one, four year, under graduate program. Most students need to take additional education, after their four year program, to increase their employment chances. Moreover, many meet a life partner with similar debt amounts, so young couples can often find themselves with over $100,000 in debts they need to pay off – just as they are starting out !

As a result of these shocking debt loads and the challenges of finding employment after graduation, our offices are seeing a significant rise in the number of recent graduates in need of debt help. Often scared, many think bankruptcy is their only option to solve student loan debt problems.

In reality, you have three general options to deal with student loan debt if you’re struggling to pay them back.

The first is the Repayment Assistance Plan offered by the Canadian government. While this program doesn’t reduce your debt, it assesses your income and family size and helps find a more manageable monthly payment, in some cases a deferral of payments until your income increases. Some provincial government programs also exist to offer interest relief, a revision of loan terms and other initiatives to help you repay your loan.

Your next option is to have a Trustee examine your situation and see if a consumer proposal could help you. This is a legal debt relief strategy that allows you to prevent bankruptcy, keep all your belongings and pay back less than what you owe on your various debts.

Now, the time since you have been in school will determine if you can use a consumer proposal and, if so, how it would apply to your student loans. If you have been out of school for seven years, then you can use a consumer proposal to negotiate a repayment of less that what you owe on your student loans, as well as your credit cards and other credit debt.

If you have not been out of school for seven years, you cannot use a consumer proposal to settle your student loan debts completely. You can file a consumer proposal during this time to settle your other debts on things like credit cards and lines of credit. This would make it easier to manage your student loan payments. A trustee can explain how a consumer proposal would work in your individual circumstances and what your monthly payments would be reduced to.

Your last option with any debt problem situation, including student loans, is filing a personal bankruptcy. However, unlike other types of debts (like credit cards or a line of credit), student loans cannot be discharged – meaning you don’t have to repay them – with a bankruptcy unless you have been out of school for seven years.

If you have been out of school for seven years, a bankruptcy will remove your obligation to repay your student loans, along with other forms of debt. This should only be considered after other solutions, like the consumer proposal, have been investigated to see if they would work for you.

If you have not been out of school for seven years, you may need to look at the consumer proposal or Repayment Assistance Plan to find a way to reduce your other debts or make your monthly student loan payment less.

Our BDO team will sit down with you and explain how every option would work in your individual situation in a free, no obligation assessment. Take action today and get your student loan debt solved, so you can control your future.

A recent report from the Bank of Montreal (“BMO”) indicated that 59% of Canadians spend impulsively (click here to see the full story). What was more worrisome in the BMO report, however, was that 43% of consumers spend more than they earn, adding to their debt problems with every purchase. As a result, 23% of Canadians were unable to purchase an essential item or something they actually needed because they had bought something that did not need. High income households can be just as likely to fall prey to the “impulse buy”, as another statistic showed that 19% of households that earn over $100,000 per year could not afford something they needed because they had spent the money on something else.

The report indicated that “impulse buys” are often made to make us feel better, or because the item is on sale; however, the report stated that some these items that are purchased are never used. The study lists the following items as the most common types of “impulse buys”:

Overall                                                   Men                                                       Women
1. Clothing                                               1. Dining Out                                        1. Clothing
2. Dining Out                                          2. Clothing                                            2. Dining Out
3. Shoes                                                    3. Magazines & Books                       3. Shoes
4. Magazines and Books                     4. Shoes                                                 4. Magazines & Books
5. Movies and Music                            5. Software                                           5. Cosmetics

Another statistic indicated that 31% of Canadians have been forced to borrow money, take out a loan and/or use their credit cards to support a non-essential purchase. This becomes problematic when you start paying interest on the borrowed money. Is this interest payment taken into account in your budget and if it is not, where is the money coming from to pay the additional interest costs? Also, if you are using your credit cards to support these purchases, you are often incurring extremely high interest rates. Interest rates in the 18-20% range profoundly worsen (or create) debt problems and make getting out of debt a much steeper hill to climb in order to take control and regain financial stability

In some cases, debt help professionals frequently see some consumers using one credit card to make minimum payments on another credit card! Many actually think this is a ‘good idea’, as they incorrectly believe their credit rating won’t be .  by using this strategy. When this approach is used to make monthly bill payments, an “interest death spin” has started whereby the person is now paying interest on interest. Most of the time, it is highly unlikely that this spin can be corrected and the person will have sufficient income in the future to pay off all your debt.

At this stage, debt problems can reach a critical point very quickly affected the family in numerous ways. When debt warning signs like this appear, it is recommended that people get accurate, legitimate information about the options that exist in their individual circumstances to legally solve their debt trouble and take control of their future.

When facing debt problems, of course, the first step is to stop adding more debt. This can be hard to do, but one has to find a way to put away credit cards and refuse to use any other credit, such as a line of credit or overdraft. Creating a reasonable budget (click here for tools to create and monitor a family budget) and then sticking to that budget is also critical and this is where seeking credit and debt counselling can be beneficial in solving financial troubles.

When these basic steps are not enough, the recent news article showed how creative some people can be at finding a solution to their debt challenges. The article started off with the popular suggestion of getting a second job to help supplement the family income. Indeed, in helping people solve debt problems every day, this is a routine suggestion made by many debt professionals. The problems, however, is that a second job is not always do-able, due to child care obligations, a limitation of available part time jobs, or many other factors. Showing the creative capacity of many people, the news story discussed how one person, when faced with a lack of part-time jobs available, started to knock on doors and offered his services to his neighbours to do odd jobs and household work that his neighbours could not or were not able to do themselves.

Another individual described in the article started collecting loose change and returnable bottles and soda cans as she was jogging and she found that this gave her extra money each month. She also stopped using her car and started to ride her scooter which reduced her gas costs and other related travelling costs (insurance, maintenance, etc.).

One family in the article even started to make their own soap and detergent and found that this was costing them much less than buying the same thing at the grocery store. They combined this with eliminating all their wants, such as a gym memberships, cable and internet. They also reorganized and cleaned out their house by identifying all the items that they found were not necessary and then sold these items on eBay to generate additional money to pay down their debt.

As any debt help professional would remind a person, however, these creative ways to save money and pay down debt still have to to go hand in hand with plans to reduce spending and use the saved money to pay off debt. The article illustrated the impact of such budgeting by outlining a recently married couple who found they could save $300 to $500 per month by reducing discretionary expenses, such as entertainment items like dinners out and shows, etc.. This “found” money helped them pay down their debt and also allowed them to start an emergency or savings fund.

The bottom line is that if you want to eliminate your debt, you must be motivated and you must create a plan to tackle your debt. Like any other activity, seeking professional help can ensure you cover all bases, from budget plans to the creative ideas shown in this news story.

This survey raises the concerns about Canadian’s personal debt levels shared by debt help professionals, the federal government and the Bank of Canada alike. That is that Canadians may find themselves with significant debt and financial problems when interest rates eventually rise. Having enjoyed some of the lowest interest rates in history, Canadians have taken on so much debt that they now have the highest debt-to-income ratios in history. When rates go up (and it is inevitable that they will) making the monthly payments on all that debt will become very hard for many people. Many will find themselves unable to make the payments and facing some very real debt problems.

So the CIBC survey should be seen as a wake up call that is consistent with the warning of the federal Finance Minister and the Bank of Canada governor. It encourages all of us to avoid debt problems and a financial crises by getting control of our personal debt loads now – before interest rates rise.

Seeking professional advice from a licensed professional is, as in all areas, wise advise. Canadians should understand all their options to reducing their debt and solving problems if they have already arisen. Budget and credit counselling, debt consolidation, consumer proposals and even bankruptcy are subjects those with high debt levels should understand. Using debt calculators and the resources of many websites is a good place to start. Setting up a free consultation with a professional may be even better.

As debt ratios for Canadian households continue to rise, the dream of being debt-free at the time of retirement, may grow to be out of reach for many Canadians. With increasing interest rates, this point becomes all the more true as making bill payments will require more money every month, leading to worsened debt problems for many Canadians. It therefore becomes imperative for individuals to take stock today of their financial health to allow them to achieve their retirement goals. There are many tools on this web-site (found under the financial tools menu – click here) that will provide assistance to conduct an analysis of your financial health. Taking control of debt problems and learning about options to solve financial troubles is possible, but the public is encouraged to learn the facts. Debt help requires licensed and regulated professionals and with the government, O.P.P. and media all having warned the public about the ‘debt relief’ programs advertised on TV, this point has become all the more true.

If you find that you are not as financially healthy as you thought, or your concerns and fears have been confirmed, consider scheduling a free, confidential and no obligation meeting with a local debt help professional. Ask to have all legitimate debt solution options explained to you and learn about strategies like a consumer proposal which can prevent bankruptcy, allow you to keep your belongings and take control of your debt stress.

In a press conference, Governor Carney identified that 50% of all Canadians’ credit and debt in 2011 were home equity loans. These lines of credit and loans are backed, or secured, by the equity borrowers have accumulated in their homes. In 1995, the rate of such home-backed loans was at 11%, revealing a significant increase due to a rise in housing prices and decline in borrowing interest rates over the period.

With 50% of Canadians’ debt backed by their homes, their homes become even more important to their overall financial health. If their house goes down in price, their equity in their house (which is securing 50% of all their debts) also goes down. The loan backed by the house could become in jeopardy, as the lending financial institution could get worried. A higher interest could be also be demanded by the lender for the increased ‘risk’ of having the equity that backed the loan decline.

Houses are one of the main assets for most Canadians. When total assets go down in value and total debts (ie. all loans, credit cards etc.) stay the same, a family’s ‘balance sheet’, or financial picture, becomes worse. The ratio between what is owned and what is owed worsens and this makes financial institutions see the family as a higher risk. The result to the family with such a situation is that is becomes hard to get new credit, mortgage and loan renewals might require higher interest rates (due to a worsened financial position) and, in some cases, loans and lines of credit may be demanded by the bank to be closed out (requiring repayment in full).

The level of Canadians’ debt now backed by home equity brings up a key point in debt management. Canadians need to make sure that they have a plan in place that ensures all debts can be paid if interest rates go up. While it may be tempting to take a larger loan or mortgage, since interest rates are so low, the Bank of Canada encourages people to consider whether, or not, they could still make the payments on a larger debt loads if: a) interest rates went up and (b) the value in their home went down.

The Bank of Canada’s warning about home equity loans is good advice and worthy of Canadian’s thinking about, given personal debt levels in the country. BDO’s debt help experts throughout Ontario usually see people when their debt levels have gotten to the points that they can’t pay their bills and their debt problems have lead to actions being taken against them (like a ‘wage garnishment’, ‘lien’ against their home etc.). Following the advice of the Bank of Canada and managing debt levels while everything seems ok prevents the need for many of the debt settlement solutions BDO provides people with daily throughout Ontario.

CIBC’s predictions for rising personal bankruptcies comes at a time when the bankruptcy rates in Canada are at their lowest level since 1993.The low level of bankruptcies at present, however, is somewhat misleading. This is because the overall insolvency rate (ie all people whose debts exceeds their assets and are unable to keep up payments on their debts) is actually higher than it was before the recent recession. These people facing insolvency and needing debt help, however, have been able to increasingly use other options than bankruptcy to solve their problems. In particular, more people are using consumer proposals as a debt help solution. The result is decreasing bankruptcies while insolvency rates remain high.

The Canadian government changed the rules governing consumer proposals in 2008 which lead to a dramatic increase in the use of this debt relief strategy. By 2011, the use of consumer proposals was at an all time high and this contributed to the decrease in actual bankruptcies over the same period.

The CIBC’s predictions really put the spotlight on the underlying concern with the real status of Canadians’ finances. In particular, the recent decrease in the number of bankruptcies in Canada has not been due to people getting better control of their debts. In fact, Canadians’ debt-to-income ratios are now at 153%, their highest level in Canadian history. This means people have more debt now, in 2012, than any time before and this is a problem if interest rates on those debts start to increase in the coming years. The point is that decreasing bankruptcies has not meant improved financial health for many people. It has just meant people have been able to use other solutions, like the consumer proposal, to solve their problems without actually filing a bankruptcy.

The CIBC’s prediction should be seen as an important warning to those struggling with debt payments. The message may be to seek help as soon as possible, before bankruptcy is the only option. With the assistance of a BDO debt help professional, those struggling with debt problems can examine all their options to avoid bankruptcy. Some can consolidate their debts using existing equity in their assets to get control of their debts. Others can use budgeting tools found on this website to solve their issues. The consumer proposal can be discussed, as it allows people to keep their assets, stop all legal actions against them and usually pay back less than what they owe to their creditors without interest continuing to accumulate.

All these options will prevent a bankruptcy, but the CIBC’s prediction needs to be taken seriously by Canadians and actions taken at the earliest signs of trouble.

The FCAC’s alert stated that Canadians need “to be very cautious about companies that claim they can negotiate a deal to cut the amount of debt you must repay to your creditors. This process is often called ‘debt reduction’, ‘debt settlement’, ‘debt relief’ or ‘debt negotiation’.” In providing reasons for this statement, the FCAC pointed out that these companies use “misleading information about protecting your credit rating” and “unrealistic claims about slashing your debt”, along with “high-pressure sales tactics”, to get consumers to sign up with their companies.

Of greater concern to the government, the FCAC stated that these companies use “false claims about government involvement or approval”. This statement referred to the use of the Canadian and / or Ontario government logos in the advertising of many of these companies. Increasingly this has become a major problem, as the companies using these non-authorized logos in their advertisements have been effective in leading Canadians to believe that they are legitimate, government authorized companies, which they are not. In fact, many of these companies are not even from Canada and are targeting Canadians from the United States.

With the tremendous volume of advertising from these ‘debt relief’ companies on TV, radio, the internet and newspapers, as well as the recent use of a Canadian celebrity to promote one specific ‘program’, the FCAC’s alert is very timely. So significant is the problems that our BDO Newmarket office is seeing people daily who have paid thousands of dollars to these companies, only to find out that their debts remain unresolved and their creditors have started legal actions against them. These people are shocked to learn that these companies do not attempt to contact creditors until their up-front fees are collected and that they actually reduce credit ratings to their lowest levels.

The public is encouraged to read the entire alert on the FCAC’s website. It provides a detailed summary of steps to take to protect yourself when dealing with these debt settlement companies. Such steps include asking about up-front fees, learning exactly when and how they will deal with your creditors and understanding how the approach these companies take will actually reduce your credit rating to its lowest possible level.

Legitimate debt help options are available for those in Ontario. They include debt consolidation, consumer proposals and bankruptcy filings. The consumer proposal is the legitimate, legally binding solution available in Canada that allows you to keep all your assets, avoid bankruptcy and pay off less than the total amount of debt owing. These are detailed on our site, as well as on the website of the government regulator of the debt relief industry (see: http://www.ic.gc.ca/eic/site/bsf-osb.nsf/eng/home). BDO is the most used firm in the country for these legitimate debt management solutions.

As many are unfamiliar with the consumer proposal, this debt help option needs some explanation. A consumer proposal is a formal and legal binding debt settlement agreement that is set into law by the BIA. The consumer proposal allows a person with debt problems to make an offer to all creditors at once, with one plan and one monthly payment, to settle all outstanding debts in five years or less. The amount offered to be repaid to creditors is usually less that the total outstanding debt. More importantly, interest on the debts is eliminated (interest stops accumulating effective the date of signing the consumer proposal), any legal actions (such as wage garnishees, or liens on a house) are immediately ‘stayed’, or lifted and all assets are kept.

A consumer proposal can be used to solve debt problems ranging from $1,000 to $250,000 for individuals and up to $500,000 for joint proposals. Such joint proposals can be used when the majority of the debts in question are joint responsibilities, such as with married or common-law couples.

As consumer proposals settle several debts with one plan and one payment, many confuse these with debt consolidation loans. Unlike a debt consolidation loan, however, a consumer proposal is a debt consolidation that works with your cash-flow (there is no cash advanced to you); therefore, you must be employed or have a source of income. Debt consolidation loans are just that – loans that give you money up front to repay your debts and then charge you interest as you repay the loan. The similarity between the approaches occurs in the sense that both options are consolidating all unsecured debts into one monthly payment. The difference is that payments made on a consumer proposal come from your monthly income, they are interest free and they will not exceed a 5 year term. In addition, consumer proposal payments are open – meaning that, if possible, you can pay the agreed settlement amount earlier than the anticipated completion date.

If this is something that has sparked your interest we encourage you to make that call to a BDO Trustee. The initial consultation is free and there is no obligation to file. According to the OSB, more Canadians chose BDO more than any other firm for their debt solutions. BDO has been a trusted source holding more than 50 years experience and holding 95 offices throughout Canada. With all the information available out there today, it’s easy to fall prey to an advertising gimmick. Rest assured that when you contact a BDO representative you’ll be meeting with a professional that will conduct a financial assessment that will present ALL available options to you – from budgeting and counselling, to consolidations, to potentially contacting your creditors and making arrangements with them; in addition to consumer proposal and bankruptcies. What do you have to lose – but all the debt and the interest?

On the surface, the basic concept between the two debt help plans is somewhat similar. They both seek to set up an agreement between you and your creditors to settle your debt. Critical differences, however, arise when one examines the protection from creditors these different approaches offer you, the ability of the differing approaches to strike an agreement with ALL of your creditors and the existence, or not, of up-front fees paid by you. These differences are outlined below and are significant.

DEBT SETTLEMENT PLANS

Debt settlement plans try to negotiate an agreement on behalf of a person and their creditors, on a reduced amount which will settle outstanding debts in full.

With these ‘debt settlement’ plans, you make monthly payments to the debt settlement company and these payments are supposed to go into a “holding” account until your debts can be settled. With many of these debt settlement companies, however, the initial monthly payments you make go directly to the company as “administrative fees”, as they take their fees up front. Other companies request their up-front fee as a lump sum, rather than monthly payments. While the amount of these fees varies, $1,500 seems to be an average. Our Ontario debt help offices have seen fees in excess of $3,000. These up-front fees are collected regardless of whether or not the debt company is able to successfully negotiate a settlement to your outstanding debts. If they are not successful, your fees are not returned to you.

After retaining one of these debt settlement companies (on-line, by direct mail, or in person), most will instruct you to stop making your monthly payments to your creditors. This is because these companies have no ability to influence, or negotiate with, your creditors if you are still making payments, as the creditors assume you have the ability to make your payments to settle your debt. The problem with this approach is that if you stop making payments to your creditors, they will likely begin legal actions against you to collect the money owed to them. This is a concern, as these ‘debt settlement’ companies have absolutely no legal capability to stop collection actions taken against you, once they are started. As a result, you may find that collection calls begin, or that court actions like a wage garnishment or a lien against your house, are initiated. This is very different from a consumer proposal, as described below, which offers you immediate protection from creditors taking action against you.

Only after a period of time of having you not make payments to your creditors, usually many months in length, the debt settlement company will then try to settle your debt. To do so, they need to contact each one of your creditors individually and try to get an agreement from each one of them one by one. Any one of these creditors can simply refuse the suggested settlement plan and, if so, your debt with them will remain unchanged. Increasingly, this is the case, as many large financial institutions are choosing not deal with these debt settlement companies. This is a significant difference from a consumer proposal.

Throughout this process, your creditors will get none of the monies you have paid to the debt settlement company until they decide to settle. In the meantime, you are still making monthly payments (or having paid a lump sum fee up-front) with no resolution to your debt, or protection from your creditors taking legal action. Equally problematic is that your credit rating will remain poor and in fact, in no better condition than if you had filed bankruptcy. In reality, the debt settlement company is not doing anything for you that you couldn’t potentially have done yourself by contacting your creditors and trying to negotiate a settlement on your own.

CONSUMER PROPOSALS

A Consumer Proposal is a legal agreement between your creditors and you, the debtor, on an amount that your creditors will accept to settle your debts to them. This process is legally binding on your ‘unsecured’ creditors, immediately stops interest from accumulating on your debt and protects you from legal actions against you by your creditors. The consumer proposal is ‘the’ legitimate debt settlement plan, administered by licensed trustees and defined by federal government legislation. Increasingly, consumer proposals are becoming one of the most popular debt relief strategies used in Ontario to legitimately and effectively solve debt and financial problems.

In a Consumer Proposal, you and a BDO proposal administrator will review your financial circumstances to figure out what amount you could afford to pay, over a maximum of five years, to settle your varied debts. If the amount you could afford to pay appears realistic and fair to both you and your creditors, then your BDO team will prepare the Consumer Proposal for your signature. They will then ‘file’ the proposal with all of your creditors at the same time.

Unlike ‘debt settlement’ plans, consumer proposals do not have to be accepted by each one of your creditors individually. Only a majority of your ‘unsecured’ creditors (defined as those owed 50% or more of the dollar value of your total debt) have to accept the proposal. If this creditor majority accepts your consumer proposal, it becomes legally binding on ALL of your unsecured creditors. Furthermore, your creditors must provide notice to accept, or decline, your consumer proposal within 45 days of it being filed. This provides you with a quick and effective process to get control of your debt problems. These are significant advantages that consumer proposals hold over the various ‘debt settlement plans’ being marketed in the media, on-line and by direct mail.

Another key advantage of a consumer proposal is the protection it provides to you right away. Immediately upon filing a Consumer Proposal, a “hold” is placed on your unsecured debts that prevents your creditors from pursuing (or continue existing) collections activities against you, such as court action or wage garnishments (except child support obligations). Better yet, the consumer proposal prohibits your creditors from continuing to accumulate interest on the debt that you owe them.

While these technical, or procedural differences, are obviously important, a critical difference between consumer proposals and the advertised debt settlement plan has to do with fees. You do NOT pay up-front fees to BDO Trustee to file a consumer proposal. All you pay are the monthly payments that you agreed upon with your trustee and you ONLY pay these if the consumer proposal is accepted by your creditors. The fees your proposal administrator gets come out of the monthly payments you agree upon with them and are determined by government rules, not by a company selling you a plan. They are only paid when the consumer proposal is accepted by the majority of your creditors. There are never up-front fees that are non-refundable if the proposal is not accepted, as is the case with the ‘debt settlement’ plans.

Clearly, there is a significant difference between ‘debt settlement’ plans and actual consumer proposals. As many of the debt settlement companies promoting ‘debt settlement plans’ are out of town (or even our of country) companies with big advertising budgets, many Canadians are being convinced to pursue debt help based upon aggressive and misleading advertising, rather than upon a full understanding of the facts. Such decisions can result in unresolved debt problems, after paying sizable fees for assistance.

This website provides a detailed description of consumer proposals, so read up on it and let your BDO team know if you have any questions.