Let’s Compare – Debt, Housing Costs and Insolvency Rates
When considering insolvency levels it would be a natural leap to equate the high price of housing to a high level of debt and subsequently a increased amount of insolvencies. That leap would be totally incorrect and the statistics below support the opposite position.
Canadians are sustaining record level debt. However regionally it becomes apparent that particular provinces are bigger consumers and better at sustaining debt than others.
Alberta has one of the lowest insolvency rate yet the debt to income ratio keeps increasing and the price of housing is rounding out the highest in Canada.
British Columbia has the highest priced housing, the highest average debt levels and yet is situated with one of Canada’s lowest insolvency rates. Vancouver BC tops the charts with $41,077 of non mortgage debt per person.
Quebec, the province with the lowest priced housing, the lowest amounts of debt per person is filing the most amount of bankruptcies. Quebec has one of the highest insolvency rates and the rate is on the rise according to OSB statistics. Quebecers ironically have the most affordable housing.
It appears there is no direct link to housing costs and insolvency rates. In fact the opposite appears to be valid, as the provinces with the highest priced homes and the most amount of debt are in fact filing the least amount of bankruptcies.
Next discussion… Why is Quebec becoming the bankruptcy capital of Canada?
HOUSE PRICES + HOUSEHOLD DEBT = CRISIS?
Ask anyone who has attempted to purchase a house recently, they will tell you it is getting more difficult to find affordable housing and even more difficult to secure a mortgage. Recently the IMF, International Monetary Fund, released data to support that Canada is top on the list for the most expensive housing in the world. Canada tops the charts in several key areas, causing concern that if things don’t change, we could see a strong correction. The IMF pointed to several key indicators,
1. House prices vs. Household Incomes
1. House prices vs. Rental Costs
Why is it the perfect economic storm?
Canadians are aggressively borrowing to buy into the housing market. Many scraping to purchase with a 5% down payment. If there is a correction in the housing prices, even a small -10% adjustment in valuation, this level of pricing correction will create a negative equity situation for many home owners. There is potential that the mortgage will be worth more than the value of the house.
Next Question… Will the high price of housing increase insolvencies in Canada?
Debts That Can Not be Included in a Bankruptcy
Laws surrounding Bankruptcy Canada dictate that not all types of debt can be included in bankruptcy.
There are certain types of unsecured debts that are not released when you are
discharged from bankruptcy.
- Fines or penalties imposed by a Court;
- Debts for alimony or child support;
- Students loans if the loan is guaranteed by the federal or provincial government
- and you have not been out of school (part-time or full-time) for a required amount of time;
- Debts arising from fraud or misrepresentation supported by a Court Order;
- An award for damages against you for intentionally causing another person bodily harm or death.
If you have concerns that some of your debt would not qualify in bankruptcy talk to a local CAIRP trustee directly.
Ontario Government has finally put legal restrictions in place to protect it’s most vulnerable citizens from “shady” debt reduction solutions.
Bill 55 | How will it help Ontario Citizens?
Debt Settlement, operated by over 35 companies in Ontario should be now following a new set of rules. Given that the industry has not been well regulated in the past, the new law should provide a solid foundation to ending rip-off companies. However, a law is only as effective as the enforcement surrounding it. Given that we have not seen strong enforcement to date in consumer protection, we highly recommend the buyer beware, read the fine print to prevent being another casualty to bogus debt help companies. If you do feel that a company is providing services that contravene the new law, contact the government of Ontario.
- Eliminating upfront fees for services
- Regulation of fees to consumers and controlling that the service be successful before payment be made.
- Requiring clear, transparent, and detailed contracts that include information about the effect of the contract on the consumer’s credit rating
- Requiring credit counsellors to disclose information regarding the nature of funding of their company, non profit or otherwise.
- Establishing a 10-day cooling-off period, providing consumers more time to consider their agreements with companies
Read the fine print, ask questions, talk to multiple professionals and the most important criteria, MEET the company in person. A solid indication of a reputable company is that you can walk in the office and talk to the principles in the business. Your future depends on your proper due diligence.
Every situation is different and there is no ABC of Bankruptcy, each person should review their entire personal situation with a trustee to determine the best course of action. That being said, there can be strategy behind filing. Especially if you have already determined that bankruptcy is your only viable solution. Just when is best to do it?
The best time to file bankruptcy for many Canadians can be before the end of the calendar year.
The timing has bearing on your future tax refunds, if you normally receive a refund from CRA - Revenue Canada, you will likely benefit by signing your bankruptcy papers prior to Dec. 31. Bankruptcy law, the BIA, Bankruptcy and Insolvency Act, dictates which tax refunds are applicable to be seized by the trustee/estate, for payment to your creditors. The law also dictates which tax refunds normally would be returned to YOU! There is significant gain to the consumer by filing before Dec. 31 .
Consumer Protection Suspends License, Freezes Accounts
Options Credit Services Canada Ltd a BC licensed debt settlement company is in the news again. On Dec 5 2013 the BC Consumer protection Agency suspended the license of the company and seized the bank accounts associated with the company. Options Credit Services,
Financial troubles and collection agencies or harassing creditors seem to come together in hand in hand.
There is nothing worse than being harassed or hounded by creditors or collection agencies, they call at work, they call at dinner, they disrupt your life. There are horror stories of collection agencies stocking people, showing up at their home in the middle of the night or even at their place of work.
The first step in bringing an end to the fear of collection calls is to understand your rights and your options.
There is a difference between a collection agency and a creditor. You should always deal with your creditor if possible.
What is a creditor- An individual or business who gave credit to a debtor, which has not been repaid, there are 2 types of creditors – Secured Creditor and Unsecured Creditor.
What is a collection agency- A collection agency is a business that obtains or arranges for payment of money owed to either a person or a company. When you have an account with a business that is “past due” or in default, the business may sell your account or turn your account over to a collection agency.
- Keep a log of who calls, time and date of call, name of person that is calling and what is said by them and by you
- Stay calm and be polite and be honest
- Do not make promises you can not keep
- Ask questions:
Will the creditor reduce or eliminate the interest on the debt?
Can the creditor reduce the outstanding amount owing?
Will the creditor extend the timelines to repay the debt?
Can the creditor remove the account from the hands of collections?
There are very specific laws that dictate how debt can be recollected and regulate how collection agencies operate in Canada. National and provincially the laws vary and can be researched in depth at the following agencies.
Understanding your rights is an important first step. Here are helpful links for every province and our federal consumer protection agency, each agency has a process to file complaints against unlawful collection tactics.
Canada – Industry Canada
Alberta – Alberta Fair Trading Act
Manitoba – Consumer Protection Act
Saskatchewan – Consumer Protection Act
Newfoundland – Department of Government Services
Nova Scotia – Service Nova Scotia and Municipal Relations
Nunavut – Community and Government Services
Northwest Territories – Municipal and Community Affairs
Dealing with your creditors is the most important factor – Ignoring the issue like an ostrich is a foolish short term reaction, not a solution.
You do have many options
Finding the solution that suits your specific situation is important. There is no one size fits all solution to debt repayment, being proactive and talk to a good professional will get you on the right track.
Offering less borrowing power against their home, Canadians face fewer options to pay off debt.
The government announced on June 21 2012 it will reduce the maximum amortization period for a government-insured mortgage, lowering it from 30 to 25 years, and also drop the upper limit that Canadians can borrow against their home equity from 85 per cent to 80 per cent.
A far cry from the CMHC rules of 2006, which allowed insurance for 40-year-amortizations, when it also moved to provide mortgage insurance on 100 per cent financing.
All these changes are sparked by the continued indebtedness of Canadians, which sits at a staggering 152 % of their income and growing.
Protecting Canadians from their spending habits the government has changed the rules 4 times in 4 years. Cutting the mortgage duration which stood at 40 years in 2008, dropped to 35 years, then dropped to 30 years and now stands at 25 years. Many of the changes are specifically tied to high ratio, government insured financing.
Refinancing and leveraging properties to a maximum of 80% of their value will form a barrier to prevent Canadians from over extending their credit. As many Canadians struggle to meet their payment obligations at historically low interest rates, the fear of financial destruction will become reality when interest rates rise.
For Canadians using a yearly influx of equity loans, to pay off their debt. That door has now been slammed closed.
We suspect this new cap on home equity borrowing will force many Canadians to face the reality of their spending and debt.
Good people have unfortunate events in their life. Getting back on your feet and rebuilding your financial life is possible.
Here is a helpful 5 step approach to rebuilding credit after bankruptcy or a consumer proposal.
Courtesy of Sands & Associates.
Unless you have been living under a rock. You have heard the warnings. Whether from the Government of Canada, Finance Minister of Canada or the Governor of the Bank of Canada. Canadians are piling on too much debt.
Those debt chickens are going to be coming home to roost. Many families are just making ends meet and some are barely able to make the minimum payments each month. The base interest rate for the Bank of Canada is at 1%. Historically low. If the debt is barely manageable with that low of an interest rate, what is going to happen to those families when interest rates increase by 2%. Every line of credit, unsecured credit card and flexible mortgage rate will rise. It will not rise proportionately to the bank rate. It will rise more, it always rises more and faster. The simple fact that the Bank of Canada announced today that rates will rise faster than expected. That announcement will have the banks increasing rates especially the long term mortgage and financing rates immediately.
Locking in any flexible debt is an immediate solution, lock in your mortgage, your car loan, line of credit or any other interest rate that is secured to an asset. Other unsecured credit, you will feel the pinch as rates increase. How big a pinch depends on the debt and type of financing you are currently using.
Reducing your debt is the best solution. Consolidating your unsecured debt through a mortgage extension or line of credit is a serious step, it takes unsecured debt and makes it completely secured, at the same time the consolidation reduces the value of the asset that the loan is tied to. So what is accomplished, that new dishwasher or trip south, that was such a great deal and you saved so much money when you purchased it on credit, that is now going to have 25 years of interest attached to it as it becomes part of your mortgage payment. Not such a great deal now.
Canadians have added debt at record levels, increasing the interest rate on that debt is going to change the landscape of many households very quickly. If you find you need help and before you consolidate your finances, look at all your options. Talk to professionals, Trustees in Bankrutpcy will be able to give you professional advice. Many Canadians are finding that filing a consumer proposal to reduce debt and lower payments is the best option. This does not reduce the value of your assets and the consumer proposal can actually be bought out or paid off with a 2nd mortgage or line of credit. There are many options available.
Be very careful not to get pulled into debt settlement or debt negotiation, this will only make your situation worse and you will likely end up with more debt. As they charge high fees with no guaranteed results.