Terrio warned that this figure will noticeably increase in the very near future.
“I think 20% estimates will be drastically low if this drags on for months,” he said in an interview with BNN Bloomberg. “This [virus impact] is now drastically out of control.”
Declared as a pandemic by the World Health Organization last March 11, the COVID-19 virus has ground global markets to a standstill, with economies currently on freefall.
As of press time, more than 225,000 cases have been reported in over 150 nations. Jobs markets have suffered as governments worldwide mandated various restrictions, including social distancing and work stoppages.
The possibility of lower, or even zero, income has especially dire implications upon Canadian tenants, Terrio stated.
“Renters who lose their jobs are going to be in big trouble [in major centres]” he explained. “This is going to lead to huge increases in insolvencies, it’s just a matter of when.”
“I’m hoping [the government is] aiming more funds at people who don’t own homes. If 93% of people filing insolvencies are renters, there better be support for renters,” Terrio added.
“Once people lose their jobs and absorb what happened, this is going to be crazy. Could be summer, could be early fall. But I think it will happen within six months, and I think it’s going to be way more than we thought.”
It was his fourth in 10 years, during which time he had relied on Canada’s insolvency system to rid him of more than $100,000 in debts.
This time, the buck was going to stop. The judge overseeing the case had had enough. Nantel, she ruled, did not deserve yet another fresh start.
“He’s shown no reluctance of using bankruptcy to be freed from his debts,” the judge, known as a registrar, wrote in a 2012 decision. “His past conduct demonstrates a contempt for the rights of his creditors.”
Discharging Nantel of his fourth bankruptcy — liberating him of the debt that led him into insolvency — would undermine the integrity of Canada’s bankruptcy system, the registrar said. She denied his application.
Nantel, who refused to comment for this article, persisted.
Four years after the 2012 ruling, Nantel, now working as a mechanic and living 120 kilometres east of Montreal, went before a different registrar and received a discharge from that same bankruptcy.
And eight days after that, he declared bankruptcy for a fifth time, owing more than $37,000 in new debts.
Nantel is one of a staggering number of Canadians who are washing themselves of their debt by re-using a bankruptcy system meant to rehabilitate honest but unfortunate debtors, a joint investigation by the Toronto Star and La Presse has found.
Bankruptcy system insiders and observers are surprised at the magnitude of the nationwide problem revealed in the investigation’s data analysis.
One in five Canadians who filed bankruptcy in 2018 was doing it for at least the second time. That works out to 11,500 debtors who filed their second, third, fourth or even fifth bankruptcy, according to data obtained from the Office of the Superintendent of Bankruptcy.
“One fifth-time bankrupt is probably one too many,” said Thomas Telfer, a law professor at Western University who has authored the country’s most detailed research on repeat bankruptcies.
“It shows that the bankrupt has not received the message.”
In cases of repeat bankruptcies, the courts have said focus is expected to shift from rehabilitating a debtor to protecting the public and the system from being abused.
Yet, despite the courts’ stern rhetoric, government data shows the vast majority of completed proceedings end with the person released from their debts.
The Star and La Presse have interviewed dozens of debtors and insolvency experts, including the trustees that administer bankruptcies and retired court registrars who previously presided over bankruptcy cases.
Many repeat bankrupts are people marred by bad luck, their lives sideswiped by job loss, divorce, illness or other tragedies that catapulted them back into insolvency.
Others, however, rack up the same kinds of debt over and over, then turn to bankruptcy for what the courts have called a “fiscal car wash.”
“In some segments of society, it’s become almost a game. People take advantage of the system and they take advantage of the leniency of the registrars,” said Yoine Goldstein, a retired Canadian senator and lawyer who led a task force advising the government on potential reforms to Canada’s insolvency laws.
Unpaid taxes owed by repeat bankrupts make up a portion of the nearly $4 billion the Canada Revenue Agency has written off since 2009 because of consumer and commercial insolvencies. In Quebec, the provincial tax agency has lost nearly $2 billion to insolvencies in the last five years alone.
Meanwhile, credit card lenders absorb the cost of bankrupts who do not pay their bills by charging high interest rates to their customers who do pay their debts.
The Star/La Presse investigation has also found the problem of repeat bankruptcies is greater in Quebec, home to an overwhelming number of the country’s third-, fourth- and fifth-time bankrupts.
In some cases, such as Nantel’s, four- and five-time bankrupts have shed their debt more quickly and easily than had it been their second bankruptcy.
When a person declares bankruptcy, a trustee sells whatever assets are available and distributes the proceeds to creditors (some assets, such as clothing and registered retirement savings that are more than one year old, are protected).
In some cases, when the bankrupt’s income exceeds what a government formula deems necessary to maintain a reasonable standard of living, the debtor must make “surplus income” payments, increasing the amount of money creditors recoup.
The bankruptcy is over when the person gets discharged — a release from the legal obligation to pay back what was owed, though it does not cover certain debts such as child support or alimony.
Unless someone such as a creditor opposes, a first bankruptcy is automatically discharged in nine months or 21 months. The second bankruptcy can be automatically discharged in two years or three years.
Subsequent bankruptcies go to court, where the judge can grant a discharge or refuse it. If granted, the discharge is completed after a delay, known as a suspension, or with conditions, such as the debtor having to prove he is up to date with his taxes. Often, a discharge comes with both a suspension and conditions.
Although the total number of consumer bankruptcies is going down year over year, the percentage that are repeat bankrupts has steadily climbed.
Third-time bankrupts have become common in some provinces. Fourth and fifth bankruptcies, once almost unheard of, are now “a scourge,” registrars have said, and “a clarion call to systemic integrity and to the court’s role in it.”
Repeat bankrupts include real-estate agents, roofers, restaurateurs, tax lawyers and drywallers.
With each bankruptcy, they are required to take two financial counselling sessions. Some debtors, however, take away the wrong lesson.
“They go through bankruptcy and they learn, frankly, how easy it is and how forgiving it is. Then think, ‘Gosh, why don’t I do it again?’ ” said John Owen, whose previous business helped credit lenders pursue claims against insolvent consumers.
Owen testified in 2003 before a Senate committee reviewing Canadian insolvency laws, and he warned of the country’s disproportionately high rate of repeat bankruptcies.
At that time, about 10 per cent of bankruptcies filed were repeats. That rate has now doubled.
“There’s a cost to it. No question. There is a societal cost,” he said.
It’s unknown how much lost tax revenue can be attributed to repeat bankruptcies. One thing, however, is clear: The government, sometimes, only recoups pennies on the dollar, if it gets anything at all.
Three-time bankrupt Jacques Bélanger has racked up mountains of tax debt to the CRA and Revenue Quebec. After the Laval man’s meagre assets were picked over in his most recent bankruptcy, filed in 2014, the CRA, owed more than $101,500, received just $59.20 — less than Belanger spent a month on cigarettes.
“I want to make clear that I never exploited the system. I was just unlucky,” Bélanger said in an interview.
There are few debts more important than the payment of taxes by those enjoying a good income, said registrar Nathalie Champagne in 2017 when faced with Charles Rotenberg, a former Ottawa tax lawyer. Rotenberg, who surrendered his licence after the law society found he misappropriated a client’s funds, was on his third bankruptcy, this latest leading the CRA to write off $313,000. “The Bankrupt before me has enjoyed a good income and he has not paid his fair share of taxes which is unfair to the rest of the tax-paying public.” She refused his discharge.
Rotenberg travels every year and lives in a five-bedroom house bought by his wife and works as a consultant, Champagne noted in her decision, adding “his life and lifestyle have been seemingly unhampered by his third bankruptcy.”
Rotenberg told the Star he drives a Honda. The other car in the driveway, a dark grey 2018 Cadillac sedan, is registered to his wife, vehicle records show. He said that when he travels, it is to visit family. The money that the law society found he misappropriated has been paid back, he said. His consultancy’s website says he helps clients with “Dispute resolution with the Canada Revenue Agency.”
Rotenberg said he assumed substantial liabilities from a business partner who had been managing the books which, coupled with serious health problems, left Rotenberg unable to work and continue to pay creditors and led to his third bankruptcy. He said the court will not let him re-apply for his discharge until 2021.
The courts can refuse a discharge when the debtors’ behaviour has been particularly reprehensible.
In 2015, a Quebec court decided it was the best way to handle the fifth bankruptcy of Stéphane Flynn. In an interview, Flynn blamed his bankruptcy on runaway costs in his construction business and clients who didn’t pay on time. In reviewing the case, the judge saw a man with more than $500,000 in debts who treated bankruptcy as a way to escape his debts.
“It is extraordinary that he has been allowed to do so multiple times without opposition to his release,” registrar David Cousineau wrote in his decision to refuse Flynn’s discharge.
Except it was not extraordinary. Discharge has become routine for repeat bankruptcies.
Of the 395 proceedings involving fourth- and fifth-time bankruptcies that were completed between 2011 and 2018, just 21 resulted in a discharge being refused, according to federal data. That’s five per cent.
In every other case, registrars gave a conditional or suspended discharge. (The majority of fourth- and fifth-time bankruptcies filed during these years have not yet had a discharge ruling, according to the data).
The willingness to grant discharges marks a notable shift from how courts historically treated repeat bankruptcies, their decisions guided by an often-quoted judgment that a “third bankruptcy is one too many.”
“Third-time bankruptcies are of grave concern, often demonstrating a degree of irresponsibility that justifies simply refusing a discharge,” Manitoba Justice Colleen Suche said in 2012 in upholding a decision to deny a three-time bankrupt a release, forcing him to re-apply in a year.
Michael Bray, a retired registrar in New Brunswick who presided over insolvency hearings from 1999 to 2013, said the stigma surrounding bankruptcy has diminished. He said stiff sanctions can be used to dissuade a debtor from returning to insolvency.
“It used to be that most people that came for their first-time bankruptcy…a lot of them never wanted to be here again. I think that feeling is gone now,” he said.
“If the courts don’t impose a good sanction, then it’s not difficult to be a three-, four- or five- (time bankrupt).”
Canada’s Superintendent of Bankruptcy, whose office regulates and supervises the insolvency system, would not be interviewed for this article.
In written answers, her office said insolvency laws contain “safeguards against potential abuse,” and the decision to discharge a debtor with three- or more- bankruptcies is a matter of judicial discretion based on the circumstances of each case.
Some trustees say the court’s shift stems from repeat bankruptcies becoming more common and, as their shock value dissipates, registrars are growing more sympathetic to how financially tenuous many Canadians have become.
Another theory is that registrars, aware that creditors almost never attend court to oppose discharges, are asking: If the people owed money don’t care enough to be here, why should I dole out a harsh penalty?
“That was the frustrating part of that job. You’re supposed to be somewhat of a gatekeeper but no one is complaining,” said Scott Nettie, a registrar in Toronto bankruptcy court from 2005 to 2012 with a reputation of coming down hard on debtors who misused the system.
“I know there are registrars across the country who, in those situations where no one is there (opposing discharge) and no one is complaining, they’re like, ‘go forth and sin no more,’ ” Nettie said. “Then there are others, and I was one of these, who struggled with: ‘But it’s not right.’ ”
Among the least engaged creditors, according to Nettie and other trustees and registrars, are credit card companies.
Credit lenders rarely oppose a discharge and once discharged, many repeat bankrupts have little trouble securing more credit.
A Nova Scotia man filing his fifth bankruptcy had amassed more than $20,000 in credit card debt, even though two of his earlier bankruptcies remained on his credit report. A businessman from Collingwood, Ontario, had 10 cards in his wallet and owed more than $64,000 when he filed his third bankruptcy in 2014.
Those credit card companies may only recover a portion of what they’re owed.
“They don’t care,” said Nettie. “They’ve already costed the price of losing that part of the business completely into what they charge the rest of the paying customers. Why would they pay good money after bad to pay someone to come (to oppose in court).”
A spokesperson from the Canadian Bankers Association said the country’s banks are prudent lenders that only offer credit to borrowers they believe can and will repay the loan.
Losing money to a four-time bankrupt was not something Dieter Gauger could easily absorb. In 2013, Gauger, a retired millwright, and his wife Edith hired a Hamilton contractor to renovate their Stoney Creek townhouse.
The contract said the work would cost $65,000. But after collecting $60,000, the contractor, Stephen Monahan, left the house unfinished and unliveable, Dieter said. The Gaugers drained thousands from their retirement savings to pay someone else to complete the renovations while they stayed in a Super 8 Motel. The Gaugers took Monahan to court, where in 2015, they got a default judgment for nearly $36,400.
But Gauger does not expect to see any of that.
Two months after the court order, Monahan filed for bankruptcy, his fourth. Described by one registrar as “a menace to credit system,” Monahan told the court his first three bankruptcies were his own fault, the consequences of poorly managing his business. His latest, with nearly $93,000 in debts, was the result of cancer, he said. He said his prognosis is grim.
“I’m very sorry to the people I owe money to and I’m sorry for my failures,” he told the court at his October hearing. Citing his poor health, the court issued Monahan a suspended discharge. He can be free of the debts as early as summer 2020, as long as he pays roughly $1,600 in outstanding administration costs.
For Gauger, it doesn’t feel just.
“I lost $36,000,” the 76-year-old Gauger said. “The system worked for Monahan but not for me.”
The problem of repeat bankruptcies is particularly prominent in Canada’s eastern provinces.
Since 2011, Nova Scotia has had the most repeat bankruptcies per capita in the country with 75 for every 100,000 residents — more than double the national average.
The high rates are likely fueled by a combination of low wages, an unstable job market and a high cost of living, especially in places like Cape Breton, said Rob Hunt, a trustee with Grant Thornton based in Nova Scotia.
“We find people have then relied on credit to bridge their income,” he said. “People finally get to the boiling point where they’ve exhausted their credit and they can’t afford to keep making the monthly payments.”
More than half of the roughly 9,360 Canadians who filed their third bankruptcy between 2011 and 2018 lived in Quebec. For fourth-time bankruptcies, Quebec’s portion climbs to 74 per cent.
And of the 88 Canadians who declared bankruptcy for a fifth time, almost all of them — 90 percent — lived in Quebec.
Insolvency experts within Quebec say they are stunned by the numbers but offer a variety of possible reasons.
Quebec is the only province going back to the late 1980s that has consistently had higher rates of consumer bankruptcy per capita than the national average.
The province has among the lowest rates of disposable income per resident in the country, which could mean fewer Quebec debtors can afford to settle their debts through scheduled payments under a consumer proposal and instead opt for bankruptcy. A consumer proposal, another form of insolvency, is a settlement in which a debtor repays a percentage of what is owed and is an alternative to bankruptcy.
Research has found French-speaking Canadians scored lower on financial literacy than their English counterparts.
The Quebec numbers are also partially due to inconsistencies in the sanctions imposed on bankrupts from courthouse to courthouse and province to province.
How it is supposed to work is spelled out in the Bankruptcy and Insolvency Act. A first-time bankrupt will be automatically discharged after nine or 21 months, unless there is opposition. Changes introduced in 2009 allow for automatic discharges for unopposed second bankruptcies with a waiting time of two or three years. Subsequent bankruptcies must go to court where a judge decides on sanctions.
This is where the system’s consistency unspools.
In Toronto, trustees say the court will postpone the discharge hearing of a third-time bankrupt for at least three years, then delay a discharge for another nine or 12 months.
“The court is of the opinion that a third-time bankrupt shouldn’t be able to get out faster than a second-time bankrupt,” said trustee Mark Morgan from David Sklar & Associates.
But that’s not how it works across the country. In 2018, a labourer living in small-town Quebec was discharged from her third bankruptcy just two years after she filed it. A year later, she again declared insolvency, this time filing a consumer proposal.
Consumer proposals have overtaken bankruptcies as a preferred way to handle debt, particularly in provinces such as Ontario. However, the federal government says it does not track repeat proposals, meaning the rate of repeat insolvencies may be much higher than the data suggests.
The government’s 2009 changes also inadvertently softened oversight, shielding debtors from the scrutiny of the courts until they arrive before it for a third time, according to some trustees and one former registrar.
“This may signal that going bankrupt twice is not as serious as it is. This may be in part what’s led to an increase in recidivism,” Morgan said.
Joseph Cloutier is a 48-year-old drywaller in Toronto who, at his peak, could bring in $4,000 a week. But he never put money aside for taxes. When he filed his first bankruptcy in 2008, he owed the CRA $22,000; during his second, in 2011, he owed $60,000. He received automatic discharges both times.
In 2016, Cloutier again filed for bankruptcy. His CRA debt: $124,000.
“I’m terrible at managing money. I’ve been terrible all my life,” Cloutier said. “I’m one of these people with an addictive personality. If you’re going to give me a million dollars, I’ll spend it all by next week.”
In November, a Toronto court ruled that Cloutier could be discharged from his third bankruptcy in 15 months with conditions, including that he first pay the CRA debt that had been mounting since he filed his latest bankruptcy.
Law professor Thomas Telfer said the law should be tightened so cases like this, in which a second bankruptcy is filed within three years of the first one being discharged, do not qualify for automatic discharge. Instead, the debtor would go to court where a registrar can determine whether the debtor is honest but unfortunate or abusing the system.
A decade ago, trustee Mark Morgan co-wrote an article about “the revolving door of bankruptcy” and the rising rates of recidivism. Still, he says it “blows his mind” to learn from the Star and La Presse that 88 Canadians have declared bankruptcy five times since 2011.
“It shouldn’t be that easy,” Morgan said. “They’re basically thumbing their noses at the system. I know you can’t do anything to me because you haven’t the first, second, third or fourth time.”
His article outlined strategies to stem what he saw as a growing problem. They included more financial education for youth and new Canadians, more consistent sanctions and expanded counselling, as the two sessions required under the Act aren’t enough to fix “a lifetime of bad” financial behaviour, he said.
“Recidivism will continue to be a problem as long as society, creditors, the courts and the insolvency community allow it to be,” Morgan warned.
In May 2016, seven years after Morgan’s call to action, Kenneth Nantel was again seeking to get liberated from more debt.
It was Nantel’s fifth bankruptcy in 16 years, filed just eight days after he was discharged from his fourth. Much of the $37,000 he owed was to the government, and he blamed his money problems on a loss of income.
He was earning roughly $3,300 a month as a mechanic, enough for him to make surplus income payments to increase the amount of money his creditors would receive.
“If it was his second bankruptcy, the debtor would have to pay a total of $17,748 over 36 months,” Nantel’s trustee noted in his submissions.
Even though it was his fifth bankruptcy, the registrar ordered Nantel to pay only $5,916.
When reached by phone, Nantel refused to comment. “I’m not really interested in talking about what happened in the past,” he said before hanging up.
Nantel can be discharged from his fifth bankruptcy as early as September 2020.
Source: Toronto Star – JESSE MCLEANDECEMBER 09, 2019
This investigation was done in partnership with Katia Gagnon and Marie-Eve Fournier of La Presse.Data analysis by Andrew Bailey.With reporting contributions from Bryan Meler and Jaye Williams of the Ryerson School of Journalism
After you file a consumer proposal, the last thing on your mind might be a new mortgage, but you may be a lot closer than you think.
Maybe you wish to buy a home, or you own a home and are interested in refinancing your mortgage. Let’s first talk about purchasing a home.
When Can You Buy A Home After A Consumer Proposal?
Actually, this question comes up often. People want to know how soon can they buy. Sometimes they ask right after they file their consumer proposal, and other times it’s more than five years later, after they’ve paid it off in full.
First things first: pay off your consumer proposal completely before you take on major new mortgage debt.
If you have at least a 20% down payment, you may even be able to buy as soon as you complete your consumer proposal! As in, immediately.
You will almost always be working with either a B-lender or a private lender, but it is doable. But it’s more than just a matter of having finished your consumer proposal. Make sure you have been rebuilding your personal credit history—with new credit facilities and by cleaning up reporting errors. (There are ALWAYS reporting errors after you file a consumer proposal)
If you have less than 20% down payment, you will be looking for a high-ratio mortgage, which has default insurance, from one of CMHC, Genworth or Canada Guaranty.
In that case, you will need at least two years of clean, new credit since you completed your consumer proposal. But it’s best if you have at least two tradelines (credit card, loan, line of credit, etc.) with limits greater than $2,000.
Worst case scenario, three years after you completed your proposal, or six years after you filed your proposal (whichever comes first) it will fall off your credit report and whether or not you qualify for a mortgage to purchase a home will depend on the usual mortgage qualification criteria we all face.
When Can You Refinance Your Home After A Consumer Proposal?
This, too, can happen very quickly—in fact, we have helped numerous homeowners refinance their homes so they could complete their consumer proposal early. In some cases, it was as soon as the terms of their proposal were ratified in court.
This is what we call a lump-sum consumer proposal, and can be a very attractive way to settle your debts if you are a homeowner.
Should You Pay Off Your Consumer Proposal When You Refinance?
Actually, there are a few private lenders who will allow you to leave your proposal unpaid while you extract equity from your home. But unless there are specific, logical reasons to doing this, it’s not something I recommend.
I prefer refinancing to completely pay off the remaining balance owing on the consumer proposal. There may also be other things you need money for at the same time—like a home improvement project or a child’s higher education, or other family debts.
CRA debt crops up quite a lot too, particularly for those who are self-employed. You can take care of all these at the same time, provided you pay off the consumer proposal.
Why Would You Pay off Your Consumer Proposal Early?
1) Fear of the mortgage renewal. This concern is very real if your mortgage lender had a credit card or loan product included in your consumer proposal. They might have no interest in offering you a renewal when your current mortgage matures. So, you need to get in front of this issue as soon as you can, if your situation allows for it.
2) A strong desire to rebuild your personal credit history. Once you file your CP, your credit score is going to take a major beating. All debts included in the proposal will be reporting as R7s on your personal credit report.
Worse than that, some of them will be erroneously reporting as R9s—written off completely.
And some credit cards may say they were included in a bankruptcy, even though that is not true.
A few credit cards even report ongoing late payments after the proposal was filed. And sometimes even after the proposal is completed!
If you want to fix the damage to your personal credit report resulting from your consumer proposal, you are going to have to wait until it is paid in full and you have a completion certificate from your trustee. Here is additional information on rebuilding credit after a consumer proposal.
3) Wish to be normal. When you have bad credit, everything in life seems tougher and more expensive. Even if you wish to rent a home, not buy one, the landlord will usually ask for a copy of your credit report.
And if you want a new smartphone, or lease or finance a new car, bad credit will make all this that much harder.
If you allow your consumer proposal to run the full five years, that means it could be in your credit history six years altogether. It falls off three years after you complete, so keep that in mind. You can significantly shorten the waiting time by paying the consumer proposal off early.
4) Improve cash flow. In nearly all cases when we refinance a home where the owner is paying off a consumer proposal, they see an improvement in their monthly cash outflows. In a society where half of us are living paycheque to paycheque, this is attractive.
How Do You Refinance To Pay Off A Consumer Proposal?
First, your mortgage broker will do a thorough assessment of whether or not this is even doable. S/he will assess the marketability of your property, the amount of untapped equity, the reasons behind you filing your consumer proposal, as well as all the normal stuff lenders look at when reviewing a mortgage application.
An important consideration is your current first mortgage. Was it just renewed, or is it nearing maturity? Which lender is it with, and what might the prepayment penalty be if you were to break it and refinance to a new first mortgage with a B-lender?
Another consideration is whether or not your first mortgage is registered as a collateral charge, and if so, to what amount is it registered? We wrote about this a few months ago— it can make things difficult.
If refinancing the current mortgage makes sense, your broker will present your application and a presentation to the B-lenders most likely to entertain a file like yours. And s/he will bring back quotes for your consideration. If you choose to proceed, most of the time the entire process can be wrapped up in four to six weeks.
We actually see that happen less often than the other approach,which is to first apply for a private second mortgage.
In this scenario, the first mortgage is left intact and a new lender is found who will lend enough money to cover the proposal balance, any other debts and needs, and all the expenses associated with the mortgage.
During the term of the second mortgage (usually one year), we take the opportunity to cleanse all the reporting errors from the credit report, and also to strengthen the borrower’s credit profile with new healthy credit.
After a year, (longer if that makes sense) we then refinance the two mortgages into a single first mortgage.
It would be normal to expect this new replacement mortgage to be with a B-lender, since the consumer proposal is still fairly fresh. Here are some insights into how to do this.
Ultimately, the goal is to take the homeowners back to the world of A-lenders. That is usually possible after three years, but we have seen instances where it happened much sooner.
But it was never going to happen if the clients didn’t first make the decision to pay off the consumer proposal ahead of schedule.
If you are over-mortgaged and facing negative equity in your home, can you walk away from your mortgage in Canada? We explain what you can do when you can’t pay off the entirety of your mortgage loan after a sale or bank foreclosure.
How does a mortgage shortfall happen?
If you’re a homeowner and your mortgage is higher than the equity or the market value of your home, you are by definition, underwater. Meaning, if you sold your home today, you are not likely to get the full mortgage paid out by selling. Put another way, you have negative equity in your home.
Causes of a mortgage shortfall:
Price decline: you bought at the peak with a high-ratio mortgage, and the market dropped. For example, you bought a condo or a house for let’s say a million dollars with 10% down. The market subsequently flattens, and the list price is now $800,000, so you’re underwater by $100,000 plus selling costs, real estate commissions and potential mortgage penalties.
Debt consolidation: our typical homeowner client has more than $50,000 in unsecured debt. If you consolidate this through a second, or even third mortgage and the market softens, you can easily find yourself with less equity in your home that the total of all your mortgage debt.
Negative investment cash flow: you may have purchased an investment property and are funding the rental shortfall via a secured line of credit. If the market does not increase sufficiently to cover your accumulated cash loss, you may find yourself facing growing negative equity.
Canada has full recourse mortgage laws
A theoretical shortfall is not a real shortfall. You don’t have to sell. If you can keep your mortgage payments current, and expect that the market will return before you intend to sell you can hold tight.
If you are in default your lender will begin proceedings to collect. If you do not respond and cannot catch up on missed mortgage payments, your bank or lender will likely begin proceedings to sell your home through a power of sale.
If you sell with a shortfall, or your bank forecloses, you still owe your mortgage lender any deficiency between the money realized from the sale and the balance owing on your mortgage.
Should you sell your home for less than you borrowed and find yourself unable to repay the shortfall, in Ontario, your lender can pursue you to collect the difference, as they have full recourse:
Full recourse means that a lender can pursue you if your house is underwater and you sold your home, and there’s a shortfall … your mortgage lender can come after you legally for that debt in Canada.
How do I deal with an unsecured mortgage shortfall?
Like any debt, you are expected to make payments on it. If you are unable to pay back this shortfall, your creditors will pursue legal actions like a wage garnishment. In the case of CMHC, while it may take some time, they can also seize your tax refunds.
In Ontario, any mortgage shortfall after the sale of your home becomes an unsecured debt. Initially, your mortgage lender was a secured creditor. However, because the security, your home, has been sold, there is no longer any asset attached to the debt, and they are now an unsecured creditor.
If your mortgage was subject to insurance because you had a low down payment, your first step might be to draw on your CMHC Insurance. In this case, CMHC pays your original lender. However you still owe the debt, it’s just that now CMHC is now your creditor.
The good news is you have options to deal with mortgage shortfall debt:
File for bankruptcy to eliminate what you owe faster and get a fresh start.
The best place to start is to speak with a licensed debt professional about your relief options.
I think the big myth buster here is that if you have a shortfall on a house that someone’s pursuing you for, a consumer proposal or a personal bankruptcy actually takes care of that. And that’s where I think a lot of people are pretty surprised about Canada’s legislation around this stuff.
For a more detailed look at how to deal with mortgage shortfalls and how lenders can pursue you to recover a mortgage shortfall in Canada, tune in to today’s podcast or read the complete transcription below.
Credit scores are the linchpin of the consumer lending system — and they’re mostly focused on debt.
Banks need to have a way to measure the risk that customers will default on their loans so they can decide whether to lend, how much and at what interest rate. But the main financial behaviour credit scores pick up on is the ability to pay back debt. Usually, it doesn’t matter much whether you’ve never missed rent or have been dutifully squirrelling away money into your savings account.
That may be about to change. In the U.S., Fair Isaac Corp. (FICO), creator of North America’s widely used FICO score, is rolling out a so-called UltraFico score based on how cash flows in and out of customers’ chequing, savings and money market accounts. The company is planning to roll out the new score early next year.
By signing up through an app, Americans who agree to data collection from their bank accounts will get an UltraFICO score that could boost their FICO score. That could improve their chances to be approved for a loan or allow them to borrow at cheaper rates.
WATCH: Apps that help Canadians save
The company says seven out of 10 consumers who show average savings of $400 without going into overdraft for three months will see a credit score boost. It also estimates that 15 million consumers who currently don’t have a regular FICO score could get an UltraFICO score. The idea is that this could be a toehold on the credit score ladder for many people.
It isn’t clear how soon the UltraFico score will make it to Canada. Credit bureau Equifax Canada, which uses a number of FICO scores, told Global News it’s “too early to share specific details on new scores.” TransUnion did not return a request for comment.
But others are working on coming up with new ways to calculate customers’ credit default risk.
In Ontario, DUCA Credit Union is also trying to develop metrics for lending without using borrowing history.
One of its pilot programs targets Canadians with low credit scores. Through a partnership with fintech startup CacheFlow, the credit union is hoping to be able to lend to those with low credit using their cashflow data.
CacheFlow’s software for financial advisers creates a cashflow plan that, among other things, tells clients how much they can spend every month in order to achieve their savings or debt-repayment goals.
Working with Prosper Canada, a financial literacy charity, DUCA plans to offer cheaper loans to CacheFlow users with low credit scores who would normally turn to expensive debt options like payday lenders. The credit union will structure loan repayments according to each individual’s cashflow.
The goal is to lower the share of income that goes to loan repayment and, in the long run, help clients be debt-free or graduate to mainstream lending.
“What you don’t want to do is find a new way to assess credit, only to fill a gap with another loan that’s reused all the time because all you’ve done is put a Band-Aid on a symptom,” DUCA president and CEO Doug Conick told Global News.
In a similar vein, the credit union is also focusing on professionals who are newcomers to Canada, where they have no credit history.
It can take some time for, say, a doctor from Southeast Asia to be able to practice in this country. Accreditation is often a complicated and expensive process, said Keith Taylor, executive director of the DUCA Impact Lab, which is spearheading these new lending initiatives.
With no access to credit, foreign-trained professionals often end up getting a low-paying job so they can support their families, Taylor said. And that can significantly delay and sometimes compromise their ability to get Canadian licencing.
But is it all good?
Licensed insolvency trustee Doug Hoyes is no fan of the old way of calculating credit scores.
There are some obvious problems with the current system, which “rewards borrowing,” Hoyes said.
For example, current credit rating models recommend borrowers who use a low percentage of what they can take out on revolving credit accounts such as credit cards and lines of credit. This means that someone with three credit cards, each with a $10,000 limit and a $3,000 outstanding balance, may have a better credit score than someone earning the same income who has a $600 balance on one $1,000 card, Hoyes wrote in a blog post.
“That is ridiculous,” he said.
Relying on a record of cash transactions could be a good thing, he added, but the devil is in the details.
For one, Hoyes is concerned about privacy.
“This creates a pipeline to your bank account. Is it worth it?”
After all, he noted, credit bureaus have not been immune from data hacks. In 2017, Equifax revealed it had suffered a breach that affected nearly 150 million Americansand over 19,000 Canadians.
The other question is whether a cashflow-based risk rating could also end up encouraging consumers to take out loans they can’t comfortably afford or aren’t able to manage.
Relying on banking information would eliminate the need for people to take out loans they don’t need just so they can build a credit history and work their way up to, say, being able to get a mortgage.
It could also benefit individuals with low credit scores who display financially responsible behaviour.
But Hoyes worries they could also encourage some to borrow too much too soon.
For young people and those new to Canada and its financial system, it might not be a bad idea to be able to borrow only small amounts at first.
“If you don’t pay off your $500 credit card, that will rarely be financially fatal,” he said. Missing payments on a mortgage would be a much more serious mistake.
“I can see how (the new system) could help some people but also hurt others,” Hoyes said.
For his part, DUCA’s Conick says he’s determined to stay on the right side of that fork in the road.
“What I don’t want to get us involved in is finding a much better mouse trap to assess risk and provide credit that can be abused,” he said.
Source: Global TV – By Erica AliniNational Online Journalist, Money/Consumer Global News
The volume of new mortgages across Canada has been slowing down in recent months, amid rising interest rates and tougher federal regulations, a new TransUnion report shows. But the country’s oldest homeowners are bucking that trend – big time.
Among Canadians aged 73 to 93, the so-called silent generation or pre-war generation, the number of mortgages issued between January and March of 2018 was up a whopping 63 per cent compared to the same period last year, TransUnion data shows. Baby boomers are also getting new mortgages, although the increase in loan originations among Canada’s 54- to 72-year-olds is a more modest 18 per cent.
That stands in stark contrast with what’s happening with the country’s first-time homebuyers and younger generations in general. Mortgage originations were down 19 per cent among millennials (ages 24-38) and 22 per cent among gen-Z (18-23).
Overall, the number of new mortgages issued between January and March was down 3.4 per cent compared to the same period last year. This follows at eight per cent drop in the last three months of 2017 compared to the last three months of 2016. (New mortgages include brand new loans, loans renewed at a different lender and refinancing.)
Older generations could be re-mortgaging or borrowing against their home equity in order to “support retirement or to financially support younger generation family members,” the TransUnion report reads.
Research shows that retirement expenses tend to skyrocket around age 80, due to health care and long-term care costs.
WATCH:Why women need to save more for retirement
But the pre-war generation is also joining forces with boomers to help the younger kin.
“We hear of parents and grandparents supporting their children and grandchildren, whether it’s student loans or buying a house,” Matt Fabian, director of financial services research and consulting for TransUnion Canada, told Global News.
That said, as large as the six-fold surge in new mortgages issued to Canada’s 70-to-90-year-olds may seem, the volume of mortgages in that age group remains very small, Fabian said. (The data does not include reverse mortgages, TransUnion said.)
Still, the numbers do suggest that the stricter mortgage rules introduced on Jan. 1 of this year are having a much bigger impact on newer generations.
“The stress-testing rules are about affordability,” Fabian said. Younger mortgage applicants may be either finding out that they don’t qualify or that they can’t get the amount and loan type they want, he added.
Older Canadians who have enjoyed remarkable home-equity gains in the last few years don’t have to worry about stricter standards on things like loan-to-value ratios, Fabian said.
The data also shows significant variations across cities. While new mortgages dropped by almost 18 per cent in Toronto, they remained virtually flat in Vancouver, with growth of less than one per cent in the first three months of 2018 compared to the previous year.
But new mortgage volumes rose in Ottawa (up 8.4 per cent) and Montreal (up 5.2 per cent), where relatively low real estate prices have been attracting an influx of buyers.
WATCH:How mortgage stress tests are affecting millennials
More credit cards and higher balances
Canadians may be having a harder time getting a mortgage, but they aren’t giving up their credit cards.
TransUnion reported a “surge” in the number of credit cards issued in the first three months of 2018, which was up 5.6 per cent year-over-year across all age groups.
“This represents a dramatic shift compared to an approximate 10 per cent decline year-over-year from [the first quarter of] 2016 to [the first quarter of] 2017,” the report said.
The average consumer now carries a balance of $4,200, the data shows. Collectively, Canadians now owe $99 billion through their credit cards.
Total non-mortgage debt still rising, although at a slower rate
Overall, the average Canadian had almost $29,650 in debt excluding mortgages in the period between April and June, an increase of almost four per cent compared to the same three months in 2017, TransUnion said.
“This is the third consecutive quarter where the quarterly change is less than the change seen in the previous year,” the report noted.
In other words, Canadians continue to borrow more, but at least the pace at which they’re piling on debt has slowed.
Source: Global TV – By Erica Alini National Online Journalist, Money/Consumer Global News
Here’s the litmus test for determining if you have too much debt: if your income was delayed, could you pay your monthly bills? “If you couldn’t meet those expenses, you’ve got too much debt,” says Doug Hoyes, licensed insolvency trustee for debt relief experts Hoyes, Michalos & Associates. “We often see our clients facing this situation. They might think the answer is to borrow to alleviate the immediate problem. But the solution to too much debt is not to get into more debt. You have to get off the hamster wheel.”
The cycle Hoyes is talking about goes something like this: Something happens to cause an initial shortfall. It might be that you get sick, injured, lose your job, split with your partner. You start to put too much on your credit cards and you can’t pay them off. “Then, you get an additional credit card and you continue to rack up more and more debt on your cards. The number of cards and balances keep going up.”
Now you have a problem, so you decide to solve it by consolidating your debt. You might try and apply for a line of credit, which you may not qualify for, or get a payday loan with monstrous interest rates. “Once you start getting payday loans, it’s very difficult to recover,” warns Hoyes. “In some instances, payday loans cost you $15 for every $100 you borrow. In order to pay it off, many of our clients have to get another payday loan.”
So how do you stop this cycle of debt? “Rather than continuing to add more to what you already owe, it’s important to stop borrowing and stop the bleeding,” says Hoyes. He suggests taking an inventory of what you owe and then making an honest budget to see if you can find a way to pay it back on your own. “You might also consider ways to add income rather than just deal with expenses. Perhaps you get a second job or a roommate to help with expenses.” In the likely situation where you discover you can’t do it on your own, consider talking with a Licensed Insolvency Trustee to help you find a way to pay off a few debts.
For most clients, the best way to deal with debt is a consumer proposal or bankruptcy, explains Hoyes. “In a consumer proposal, we make a deal to pay back considerably less than the amount owing. Instead of making minimum payments for decades or declaring bankruptcy — your last resort — with a consumer proposal, you pay an agreed amount that’s much less than what you owe over a five-year period. Then three years later, it comes off your credit report.”
As Hoyes explains, it’s not about consumers running from debt. “It allows them an opportunity to make manageable payments and ultimately, get a fresh start.”
Few have heard of them, but they’ve been around for a few years: Bankruptcy scores.
Most Canadians know about credit scores, and some are acutely aware of their three-digit number. Where you fall on a scale from 300 to 900 can affect whether or not you qualify for a mortgage for your dream house, a car loan or a credit card and how much you’ll pay for the privilege of borrowing that money.
But there’s often another set of numbers that could cause lenders to deny you a loan or hike your interest rate — even if your credit score doesn’t look so bad. Financial institutions often rely on bankruptcy scores to gauge the probability that you’ll go financially belly up in the next 12 to 24 months.
The latter “is an empirically-derived model designed specifically for the Canadian market,” TransUnion Canada told Global News via an emailed statement. “The score ranges from 100 to 950, with lower scores indicating a higher risk of filing for bankruptcy or [a consumer] proposal,” the company added, noting that financial institutions, telecom companies and lenders in the auto-loan industry, among others, use it.
TransUnion has had bankruptcy scores for a number of years but introduced its CreditVision score in 2015, it said.
Equifax did not respond to two requests to provide additional information on its Bankruptcy Navigator.
How bankruptcy scores work
Bankruptcy scores are aimed at detecting risky borrowers that sometimes go under the radar with traditional credit scores, licensed insolvency trustee Doug Hoyes told Global News.
“It turns out that there is a significant difference in behaviour between the person with bad credit who will not file bankruptcy and the person with a similar bad credit score who will declare bankruptcy and this is what your bankruptcy score measures,” Hoyes, co-founder of Ontario-based debt-relief firm Hoyes Michalos, wrote in a blog post.
Sometimes, there’s a lag between when an overstretched borrower reaches the point of no return and when that reality will be reflected in his or her credit score. It’s possible for people with scores in the 600-700 range to be on the verge of defaulting on their debt repayments, said David Gowling, senior vice-president at debt consultancy MNP.
“Some people come in telling me how great their credit score is, but then you find out they’re using one type of credit to pay another type of credit,” Gowling told Global News. And because they’re still able to make minimum payments, “the credit score hasn’t caught up,” he added.
According to Hoyes, compared to someone with a bad credit score who will stay afloat, someone who is at high risk of going bankrupt tends to:
Use credit more often;
Apply for credit more often and have more recently acquired debts or credit accounts;
Have fewer accounts in collection. (This is because people who rely on debt to pay more debt are often careful about not missing payments in the belief that this will grant them access to more credit);
Have a higher credit utilization rate, i.e. carrying a credit balance that takes up a large percentage of your borrowing limit.
While credit scores are a look at your borrowing history in the rear-view mirror, bankruptcy scores likely pick up on these telltale signs of might happen in the near future, Hoyes told Global News.
In general, the credit file of someone at high risk of bankruptcy tends to show much more recent activity, which is why applying for new credit in an attempt to improve your credit score can backfire, according to Hoyes.
WATCH: Lenders behave like car insurance companies: If you don’t have a driving record, you’re automatically a very risky driver.
What bankruptcy scores mean for you
Bankruptcy scores affect borrowers in three main ways, Hoyes said. Like credit scores, they can influence both how much you’ll be able to borrow and at what rate. But they could also result in lenders deciding to sell your debt to so-called debt buyers.
Debt-buyers are companies – sometimes collection agencies – that buy delinquent debt at a deep discount and then try to collect some of that debt.
If a lender has, say, 100 borrowers who are late making debt repayments, it can use a bankruptcy score to decide which ones to offload to a debt-buyer. Selling the riskiest accounts for a fraction of the face-value of the credit balance means writing off some debt, but the loss for the lender might ultimately be less than if the borrowers filed for bankruptcy.
The thing is, though, that there’s no way to know what your bankruptcy score is. While consumers can review their credit reports and purchase their credit scores, bankruptcy scores are typically only available to lenders.
The key takeaway, though, is that if you’ve reached the point where you’re using new debt to pay old debt, your decent-looking credit score is probably meaningless.
Source: Erica AliniNational Online Journalist, Money/Consumer Global News
“The Act permits an honest debtor, who has been unfortunate…” to “…make a fresh start…”.
So reads page two of the 1,841 page annotated Bankruptcy and Insolvency Act (BIA) regarding a person who files bankruptcy. The legal process of bankruptcy effectively assumes one’s ‘innocence’ and is intended to be financially rehabilitative rather than punitive in nature. The days of debtor’s prisons have been assigned to the scrapheap of history.
Yet bankruptcy—and legal insolvency generally—is one of the more mercurial and misunderstood areas of personal finance. Recently I wrote an article arguing that unsustainable debt loads have become the new normal in Canada, in which I drew on my first hand experience with people struggling with debt trouble. As such, I have personally met with thousands of clients and have fielded every type of question imaginable about debt, assets, income, investments, businesses, taxes and just about anything else you could conjure up.
Myths about bankruptcy abound. Licensed insolvency trustees and their staff, such as ours, spend a lot of time dispelling misinformation when we are asked about what is involved with bankruptcy.
From what I’ve seen there are three possible explanations for the myths that exist about bankruptcy. Firstly, the majority of people will simply never have any personal involvement with it; secondly, our proximity in Canada to our giant neighbour, the U.S., from which we get most of our TV, film and even news consumption, means we hear tales of “Chapter 7” or “Chapter 13,” yet Canadian bankruptcy law differs greatly from the U.S. Bankruptcy Code. And thirdly, we have that font of unending opinion masquerading as fact known as the Internet.
Faced with such formidable competition for legal knowledge, it’s worth taking some time to address the most common bankruptcy myths in Canada, ones we hear on a daily basis in our offices. Canadians should be aware of their rights and options in the event of financial trouble.
Here are the top 10 bankruptcy myths (in no particular order):
1. I will lose my home
Very few people who file bankruptcy in Canada actually lose their homes these days. The net equity in your home is what is of interest to the creditors, specifically. And there are even exemptions for this depending on the province you live in ($10,000 in Ontario).
If there is non-exempt equity in your house when you file for bankruptcy, you make a settlement payable to the estate (via the Trustee). Upon discharge, the trustee would release its interest in the property. Or you could file a Consumer Proposal as an alternative to bankruptcy (in which case your assets are yours to keep, anyway). Either way, you would keep your home. Or you can choose to have the Trustee sell the home and use the proceeds to pay the creditors only the amounts they are owed by proven claims.
2. I will lose my possessions
Personal effects, furniture and household goods are exempt in bankruptcy. Exceptions would be made if you had items of extraordinary value such as fine art, which you would be asked to declare on your sworn Statement of Affairs to the creditors. You can exempt one car with a net value of $6,600 or less. So if you have a fully encumbered car (financed or leased), keep it if you wish, provided you continue to make the payments in the normal course of business. Keep your stuff.
3. I will lose my job
It is illegal for an employer to terminate employment simply for filing a bankruptcy. In fact, unless there is a wage garnishing order in place, your employer will not be informed of your filing. Some professions have rules in place precluding your filing a bankruptcy, such as having a broker’s license in which trust accounts are managed. In that case, a proposal could be filed instead as it does not include such restrictions.
4. I will go to jail
Laugh if you like but we get asked this a lot. I hesitate to even mention it, but it is possible to be imprisoned under s. 198 of the BIA for Bankruptcy Offenses, but it is rare and you’d have to work hard to get there. Example: fraudulent sworn statements or conveyances (transfers of property) without disclosure. In well over two decades of practice, we’ve never had a bankrupt person go to jail.
5. My spouse’s credit will be affected
An almost universal question for married people who file bankruptcy. You cannot affect another person’s credit by filing a bankruptcy, period. If you have joint debts with your spouse and he or she does not also file, they are 100 per cent liable for those debts and only those debts.
6. I will not be able to get future credit/buy a house
As stated earlier, bankruptcy is intended to be rehabilitative in nature, not punitive. It would not be fair to punish someone forever for filing a bankruptcy, so the record of it stays on your credit report for six years following discharge for first-time bankrupts. After that, it is gone. Your ability to buy a house will always be governed by your financial circumstances: your income, your assets, your spending and obligations. Many former bankrupts have been taught budgeting by their Trustee as part of the process and are now, of course, debt-free. So on paper, as long as they have the downpayment, many look pretty attractive as a lending risk. Even while the bankruptcy is still on your report when you apply for a mortgage, most still get approved in our experience. CMHC will guarantee a mortgage within three years of your discharge from bankruptcy depending on your financial situation.
7. I will not be able to renew my mortgage
Everybody who has an existing mortgage has asked this, and we’ve never had one client not get renewed, provided they remain with their existing lender and are current with the payments. Most are set up for auto-renewal.
8. I cannot include the taxes I owe in bankruptcy
Absolutely untrue. All taxes owing are unsecured debts fully dischargeable by bankruptcy (and proposals). This includes not just personal income tax but HST and, in the case of a business, payroll tax, which is a director liability and would trail you personally. The myth about taxes not being dischargeable in bankruptcy likely derives from the U.S. Bankruptcy Code, in which only certain tax debt for specific periods are dischargeable and only in certain situations. Canadian bankruptcy law discharges all tax debt universally, unless the Canada Revenue Agency has taken steps to secure it (a lien on a property) or in the case of fraud or tax evasion.
9. I will not be able to keep any lottery winnings
Despite how few people actually win the lottery, almost everyone asks about this. Any unexpected windfall of money during a bankruptcy is considered a non-exempt cash asset of the estate that vests in the Trustee for the general benefit of creditors. In normal parlance: the Trustee would pay out all proven claims by unsecured creditors in the bankruptcy in full, and the remaining lottery winnings would be returned at the time of discharge.
10. My trustee will restrict the income I can make
The bankruptcy act sets out surplus income standards, updated annually, which govern the portion of the bankrupt’s income which should be paid to creditors. The standards are based on the number of people in a given household. So a bankrupt is technically not restricted in what they can make, but they must pay more if they make more above these levels. The bankruptcy would also be longer (before discharge) if there is surplus income.
Bonus Myth (11): Mortgage shortfalls can’t be included in bankruptcy in Canada
Wrong. Mortgage shortfalls certainly can be included in a bankruptcy (or consumer proposal). But it only matters in the provinces with power of sale legislation: Ontario, Newfoundland, New Brunswick and PEI. Let me explain by way of some background.
In Canada, certain provinces have power of sale legislation in place. In that system, a lender will commence proceedings when the homeowner defaults on their mortgage. The borrower remains responsible for any losses the lender may incur from the sale, and the lender will then commence legal action to recover the shortfall.
By contrast, a foreclosure (also the prevailing law in the U.S.) is undertaken by a lender when the homeowner defaults on their mortgage, but in this case the borrower is not liable for any loss incurred by the lender. In the U.S., many homeowners walked away from their properties during the 2008 housing crisis and were not liable for the shortfalls.
A bankruptcy (or a consumer proposal) stops or prevents any legal action taken against a homeowner for the shortfall incurred by the lender. It becomes a debt fully dischargeable in bankruptcy or via a completed proposal. This includes any type of mortgage (first, second, HELOCs, privates). The secured debt gets paid out as much as possible from the property’s sale, and any shortfall is unsecured, and therefore eligible for discharge in any insolvency proceeding.
So if you are upside down on your mortgage (you owe more than the home’s value), you could file a bankruptcy or proposal and include that shortfall amount amongst your other unsecured debts in that insolvency. That is a sizeable advantage to a debtor versus being on the hook for any loss in a foreclosure.
Source: MoneySense.ca – Scott Terrio is an estate administrator at Cooper & Co. Ltd, a licensed insolvency trustee in Toronto. Follow him on Twitter at @CooperTrustee