You’re getting used to letters that start with “Past Due” and “Immediate action required.” You don’t pick up the phone when it’s a 1-866 number. The last time you tried to use a credit card the sales clerk almost started laughing. You’re maxed out, in over your head, drowning in debt, and you need out.
The first thing to remember? You’re not alone. With the economy writhing and unemployment rising, many of us are realizing that we’ve borrowed more than we can afford. Statistics Canada says the typical Canadian family owes $20,300 in credit card debt, lines of credit and other consumer loans — and that’s on top of their mortgage. In 2008, more than 123,000 of us filed for bankruptcy, an increase of 13% from 2007.
But there is hope. No matter how bad your debt problem is, you have at least four strategies to consider. Here is what you should know about each of them.
James Whitlock, 38, had a nasty split with his wife a couple of years ago. Legal fees were an expensive shock. Then there was the unexpected cost of setting up a new house. “I wanted my new house to be comfortable for my kids,” says Whitlock (whose name and hometown we’ve changed). “Otherwise it’s all, ‘We don’t want to go stay with dad. ’“By the time he had finished charging a bunch of new furniture on his credit card, he had run up $32,000 in debt.
Whitlock, the manager of a store in Mississauga, Ont., soon realized that he couldn’t make the minimum payments on his loans as well as carry his mortgage. Collection agents started calling him at his home, his work and his cell phone. They suggested he sell his house and his car. When Whitlock said no, they suggested he borrow money from a friend to pay off his debts. He tried, and the friend turned him down. “I was desperate,” he says.
Whitlock turned to his local credit counseling agency for help. He met with a counselor in June 2008. The counselor contacted his creditors and explained that, from now on, he would be representing Whitlock. Within a week, the angry calls stopped.
The credit counselor sat down with Whitlock several times over the next few months and went over his finances in detail: how much did he spend on groceries, gas, mortgage, and alimony payments? “He was very thorough,” Whitlock says. “He even asked me how much I spend on birthday gifts per year.” The counselor made simple, practical suggestions on ways that Whitlock could save more money: eat at home, depend less on fast food, stop buying coffee. “I make coffee at home now,” Whitlock says. “I don’t need to buy coffee on my way to work.” The sessions resulted in a budget and an agreement. Whitlock will pay $650 a month to the credit counseling agency for five years. Creditors will no longer harass him and, at the end of those five years, his debt will be paid in full.
Credit counseling agencies, like the one that helped Whitlock, started in the U.S. in the 1950s. They came to Canada in the 1960s. Now, there are nearly 40 non-profit credit counseling agencies across Canada and they help more than 250,000 people a year, providing them with detailed advice on how to save money and get out of debt.
Credit counselors can be a life saver if you’re being hounded by creditors, but they are not altruistic organizations. They’re supported in part by donations from retailers, banks and other large lenders. Those businesses are eager to help bankroll credit counselors because counselors encourage people to pay off their debts. “Banks are happy to contribute,” says Elena Jara, education co-ordinator with Credit Canada. “If that client goes bankrupt, then they get nothing. But if that person goes on a debt repayment plan, then they get their money back.”
Credit counselors meet with clients and help them draw up a budget. They also instruct clients on money saving tips — taking public transport instead of cabs, buying second hand instead of new. “We educate people. It’s not sexy, it’s not quick, but it works,” says Scott Hannah, a director at the Credit Counselling Society.
Is counseling right for you? If you have a chronic spending problem, you can gain an enormous amount from talking to a credit counselor. He or she can educate you about money, provide a structure for you to work within, and provide valuable assistance in sticking to your payment schedule.
But don’t rush in blindly. Credit counseling will work only if you’re comfortable baring your financial soul to a stranger. And not all credit counselors are the same. There are some for-profit counselors that charge extremely high fees, so you should deal only with non-profit agencies accredited by Credit Counselling Canada or the Ontario Association of Credit Counselling Services. Even with non-profit agencies, you should realize that counselors have mixed motivations — they have to keep in mind the lenders who help to fund their agencies as well as the borrowers who come to them for help. They will encourage you to pay back every penny you owe, rather than trying to arrange a compromise with your creditors.
Finally, you should be prepared to pay for the service. Whitlock’s credit counselor charges 10% of his $650 monthly payment. By the time Whitlock is free of debt in five years, he will have paid the counseling agency nearly $4,000 in fees. “I’m OK with that fee,” says Whitlock. “No one does anything for free.” Perhaps. But if your problems with money are the result of a one-time accident and not because of habitual overspending, you may conclude that you can do a lot of what credit counselors do — setting up a budget, contacting creditors — all by yourself. We’ll talk more about that option later.
Bob Wolff, 39, a social worker in Whitby, Ont., says debt almost destroyed his marriage. When he met Jenn, his future wife, they each had four credit cards. Ten years and two kids later, the couple were laboring under a mortgage as well as a whopping $106,000 in consumer debt. Jenn, a planner at a manufacturing company, spent nights in front of the computer, poring over Excel spreadsheets, doing family budgets, and worrying about their future. Bob did his best to ignore her. “I’m a social bug,” he says. “Too busy chatting to people, hanging out, having fun. My wife did all the worrying about the money, and she’d had it.”
Things finally came to a head in 2007, when the Wolffs (whose names we’ve changed) realized they were paying $2,000 a month to Canadian Tire, Visa, American Express, Future Shop, Zellers, and a host of other companies. “I swear, the interest I was paying on some of those cards, I was an indentured servant,” Bob says. He and Jenn had a combined income of $88,000, no savings, no way to pay for their kids’ education. They worried they were going to lose their home. “We couldn’t do it any more,” he says.
To figure out their options, they met with Karen Adler, a bankruptcy trustee in Toronto. Bankruptcy trustees such as Adler are officers of the court and are licensed to administer bankruptcy and proposal estates.
Adler looked at the Wolffs’ finances, and suggested that instead of filing for bankruptcy, they do a consumer proposal. Consumer proposals involve contacting your creditors and saying, in effect, that as much as I would like to pay back my debts, I can’t afford to do so, so will you accept partial payment and call it quits? “Creditors are often very open to this idea, because they recognize that for some people, the next step is bankruptcy,” says Adler. “They’re thinking: well, at least I can get some of my money. With bankruptcy, they generally get nothing.”
The Wolffs were good candidates for a consumer proposal. They didn’t want to file for bankruptcy — “it was a pride thing” — but they couldn’t face more years of $2,000-a-month interest payments. Adler met with them in September 2008 and worked out the numbers. “She was very direct, she didn’t sugar coat,” Bob remembers. The Wolffs agreed on a figure that they could reasonably pay back — $33,000 — and Adler sent out letters to all their creditors, asking them to agree to writing down the couple’s debts. Creditors have 45 days to respond: if they say nothing, they are considered to have agreed to the plan. The creditors agreed. The Wolffs now make payments of $700 a month to Adler, and she distributes the money to their creditors. “We can breathe again,” says Bob.
The idea of simply wiping out a big part of your debt sounds too good to be true, and in some ways it is. A consumer proposal works only if you’re committed to paying back what you have agreed to pay. If you miss several payments, you can expect the agreement to be annulled and you will be back where you started. Also, consumer proposals are limited to situations where debt is less than $75,000 per person.
Your decision to do a consumer proposal will remain on your credit report for three years and, during that time, it will broadcast the fact that you did not pay debts as promised. You may find it difficult to arrange an unsecured loan or get a mortgage. Remember, too, that a proposal doesn’t fix any of the habits that got you into trouble in the first place. Still, if you’re in over your head with debt, you should talk over the option with a bankruptcy trustee.
Ethan Daniels, 40, was making $30,000 a year as a courier in Surrey, B.C., when his wife got pregnant and stopped working. Her income on her maternity leave was a fraction of what she normally received. The couple already had one child and Daniels (whose name we’ve changed) was paying $300 a month in child support to an ex in Ontario. On top of all that, he owed $20,000 in credit card debt and car debts. He was months behind in payments when he went to a for-profit debt counseling centre. He paid them $749 a month, which they said they’d dole out to creditors. But two years later, he was still $17,000 in debt.
He hired Susan De Jong, an insolvency counselor at KPMG, to look over his records. She concluded the company was taking high fees and paying very little out to his creditors. Enraged, he cut ties with the debt counselor and decided to file for bankruptcy with the help of De Jong. “I really felt like this was my last resort,” he says. “I was paying out everything I had to rent and child support and some groceries and I had nothing left. I needed a clean slate.”
Daniels filed for bankruptcy in December 2007. Over the next nine months, he had to send De Jong an income and expense report detailing where every penny of his income went. He also had to pay KPMG $100 a month in fees and attend mandatory counseling sessions. On September 22, 2008, he got a letter saying all of his debts had been discharged. He was, for the first time in years, debt free. “I feel a lot better,” he says. “Finally, I can get back on track.”
If you, too, are deep in debt, bankruptcy may sound tempting. Odds are, though, that it’s a lot less attractive than you think. You will be asked invasive questions about your finances and you will probably be ordered to document every financial transaction you’ve made in the last year. You will have to turn over all of your credit cards to your bankruptcy trustee, and you’ll need to list all of your assets. Most of them will be sold to pay creditors. You can keep only a limited set of possessions. In Ontario, for example, a bankrupt can retain a car worth up to $5,650, clothing worth $5,650, household furniture and appliances worth $11,300 and tools of trade worth $11,300. Everything else, including the family home, is up for grabs. (To figure out the specifics in your province, visit www.bankruptcy canada.com/bankruptcyexemptions.htm.)
You will have to wait nine months from the day you file for bankruptcy before your debts are discharged. Like Daniels, be prepared to send in statements accounting for every cent you spend. If you screw up in those nine months — if you forget to send in accounting sheets, skip any of your mandatory counseling sessions, hide assets, or apply for more credit — it’s unlikely your debts will be wiped clean. “You’ll probably get a conditional discharge, which means your debts won’t be wiped out until you meet whatever conditions your trustee sets out,” says Adler, the bankruptcy trustee.
Debts that won’t be wiped out with bankruptcy include alimony payments, child support payments, court-imposed fines and student loans taken out less than seven years ago. You still must pay all of these in full even after bankruptcy. And bankruptcy itself isn’t free: count on paying around $1,600 to your trustee. Finally, there are the lingering effects. A bankruptcy sticks around on your credit report for seven years. A second bankruptcy lingers for 14 years. Forget about getting a mortgage with a low interest rate or arranging unsecured credit during that time. “Bankruptcy,” says Adler, “is a very serious process.”
Do it Yourself
Jerrold Mundis, author of How to Get Out of Debt, Stay Out of Debt and Live Prosperously, says that the problem with credit counseling, consumer proposals and bankruptcy is that none of them get to the rootcauses of your debt trouble. He advocates a more therapeutic approach. First, try to understand why you’re in debt, then contact creditors yourself, and work out a payment plan. “It’s all about accountability,” says Mundis. “You have to be a grown-up and say: I got myself into this trouble, I’ll get myself out.”
Mundis believes there are usually deep psychological issues behind debt. That’s why so many people who get into credit problems go right back to running up debt the moment they can. “Bankruptcy does nothing to alter the beliefs and behavior that are the cause of the debting problem: it leads to a sense of failure and shame, which makes people debt more, it plagues your credit report and it encourages you to think that if things get tough you can always go that route again,” he says.
Mundis’s program is not for the faint of heart. First, you come up with a spending plan that works for you, then you figure out how much you can realistically pay to your creditors each month. You call your creditors, one by one. You explain your situation and tell each creditor how much you can pay. Creditors may say no, they may try to bully you, but be firm, Mundis advises. Even if creditors don’t say yes, start sending in your payments. Most likely they’ll wind up accepting, because they want to get some money out of you after all.
Mundis’s approach is embodied in the Debtors Anonymous (DA) movement, which advocates a 12-step program similar to that made famous by Alcoholics Anonymous. Kate Green, 62, an entrepreneur in Ottawa, was $160,000 in debt when she started a DA chapter in Ottawa in 2001. She told mental health counselors about her group, but no one other than Green showed up for the initial meeting. She kept the faith, though. Every Saturday morning, she sat in a rented room in a high school, reading the DA literature and hoping others would appear. A year later one man showed up. They started the program together. Eight years later, Green (whose name we’ve changed) says her group has expanded to include about 10 members that meet once a week. “It fluctuates,” says Green. “We get a lot of dropouts around Christmas time.” Green has paid back $100,000 of her debt, and says DA made her sane about money. “I was, emotionally, a five-year-old around money when I started the program,” she says. “Now I know that I can’t have everything I want, that I have to spend less than what I earn. Basic stuff, but it took me years to learn.”
THE BIG OWE
Where to go for help with your debt questions
Run by the Office of the Superintendent of Bankruptcy, this website includes a directory of trustees and a helpful section called Alternatives to Bankruptcy.
Contains basic info about the 12-step program. It also tells you when and where Debtors Anonymous meetings take place.
Contains a directory of accredited Credit Counselling Agencies, organized by location.
A good website that lists non-profit credit counseling agencies in Ontariom plus an excellent section on money management tips.