Maintaining Debt on the Edge of a Fiscal Cliff

The Canadian Debt Industry

This increase in credit card debt, bank loans and mortgages is partially attributed to the recession, but in fact, this increasing debt will continue to rise as long as interest rates are kept low, which in turn stimulates spending and artificially sustains the market at a time when costs of living continue to rise and incomes stagnate or stay the same. This structured debt, which seems to provide the bulk of economic activity in Canada and around the world, requires a system by which it can be regulated and serviced. As the risks associated with increased insolvency continue to threaten economic security and stability, and with Canadians carrying an average personal debt of 140.8 percent of their disposable income, servicing debt has become a large priority and has resulted in the emergence of a rapidly growing sector of the economy – the debt industry.

Gregory Thomas, Director of the Canadian Taxpayers’ Federation, points to the actions of the Canadian government which have caused economic insecurity, citing unnecessary economic stimulus spending as a bandage, as opposed to a concrete solution to secure post-recession growth. Bank of Canada Governor Mark Carney warns that household debt, in its current capacity, is the largest major domestic threat to the Canadian economy. Although many people who find themselves in debt are responsible for their own financial misfortune, individual challenges that emerge from times of uncertainty such as divorce, death, illness, disability, and unemployment may lead to increasing levels of insolvency and should this trend continue, it could shake the very foundation on which the global economy is built – consumerism.

When consumer debts cannot be serviced, there are very few options left for the consumer who is facing creditors and collection agencies. When creditors are unable to secure payments from their debtors it is common practice to employ the skills of collection agencies and debt recovery agents; this is an industry which continues to grow exponentially as more and more past due accounts become bad debts. In fact, without collection agencies, the economy would likely find itself in a far worse deficit. Collections agents are able to recuperate some losses while increasing employment within a new sector.

With this increase in collections agencies over the past couple of decades there has also been a serious effort to protect consumers who can no longer service their debts and provide them with alternatives in the face of collection activity from their creditors. Credit counseling services are another emerging sector of the job market and economy as a whole, as people increasingly require these services.

In 2009, statistics were released detailing the 156 225 total insolvency filings in Canada. Of these, 149 350 were individual filings whereas 6 905 were businesses who filed insolvency. These numbers proved to be a 34.5 percent increase over the previous year on an individual scale, but represented a decrease in business filings. In 2010, approximately 93 000 people claimed personal bankruptcy. Although this number is down, there was a marked increase in those who filed for consumer proposals (42 314, up 19.8 percent from 35 331 in 2009). In 2009, several changes were made to the Bankruptcy and Insolvency Act, making bankruptcy a lesser used option. In light of these changes, those suffering from financial hardships are left with these alternatives to bankruptcy: debt consolidation, debt management and increasingly, consumer proposal.

Debt consolidation is used when a consumer has a number of high interest rate loans, such as credit cards (unsecured debt). Essentially, debt consolidation is the use of more credit, borrowed at a lower rate of interest than the previous loans – but higher than conventional bank loans – used to pay off all previous debts with a lump sum, resulting in a lower single monthly payment. This alternative to bankruptcy often leaves credit scores with the least damage, so long as the new debt arrangement is upheld. This is most commonly done with Home Equity Lines of Credit (HELOC) and mortgage refinancing. For some, this serves as a temporary solution to pathological credit problems, however it seems to be an attractive option, as HELOCs and refinancing equalled $64 billion in 2010. By relying on home equity to finance debt, a ripple may be sent into the housing market and impact on housing prices in the near future.

Debt Management Plans (DMP) are established through cooperation between credit counselling agencies and creditors/collection agencies to establish an agreement to have unsecured debts resolved over a period of time (five year maximum). Unlike a bankruptcy, debts are not erased but are better managed in terms of the ability to repay. DMPs serve well for debtors who are employed and are able to pay a portion of their debts back (they are usually able to make interest payments), but require assistance in paying down the principle. One set payment amount is made to the counselling agency each month and the agency distributes these payments to creditors on its client’s behalf. The agency may also try to negotiate a lower rate of interest in certain cases. Not all creditors/collection agencies accept DMPs. There have been many instances, specifically in the United States but increasingly in Canada (as many U.S. agencies are making their way across the border), of negligence by these agencies resulting in further consumer loss with substantial profits for the agency. With very few agency regulations in place, it can sometimes be a risky approach to debt resolution, especially if the agency is not accepted by many creditors.

A consumer proposal is filed with a trustee, just as in bankruptcy. The trustee is charged with proposing an offer to creditors to accommodate a percentage of the unsecured debt. Similar to the DMP, consumer proposals are based on a five year maximum and it is the creditor’s discretion to accept or deny any proposal. Consumer proposals differ from bankruptcies in that assets are not liquidated, although it does appear on a credit report.

It should be noted that although alternatives to bankruptcy do exist, they too are to be used as a last resort. By the time these financial mechanisms are considered, credit scores have already started to be impacted as these accounts have likely remained in collections for some time. Relying on third parties to manage debt can leave people worse off in the long run – by relying on an agency that may fail to make payments, may make payments in the incorrect amount, may leave you paying fees for a service some of your creditors may not accept as you remain financially helpless facing a barrage of correspondence from collection agencies.

There is a large push in Canada and the United States to create regulations and enact policies that decrease the federal deficits over time to prevent the global market from going over the forecasted “fiscal cliff,” as taxation and spending measures could send the United States – and ultimately, Canada too – back into a recession. Finance Minister Jim Flaherty has touted Canada’s recovery from its own debt crisis of the 1990s and its steadfast approach to dealing with the wake of the most recent global financial crisis and has encouraged United States lawmakers to work swiftly to resolve their political economic turmoil before it again impacts the rest of the world. Based on the statistics, Canadians also need to take time to consider their own individual finances and be proactive when it comes to debt.

What can average Canadians, in varying states of financial struggle, do to protect themselves in an unstable market? The reality is that many Canadians need to start living within their means. For Canadians who are already living in what feels like a debt trap, it may be time to consider making the following resolutions: do not take on new debt unless you know you can maintain it (basically, do not buy anything you cannot afford to pay off in the foreseeable future); reduce your expenses (this may require a reassessment of your standard of living and may take a degree of sacrifice); and pay more than just your interest payments each month. If not, you may find yourself facing the debt industry, which continues to grow rapidly alongside the national and individual deficits.

June 4, 2020, 10:01 PM EDT