Raymond C. McMillan, BA., Mortgage and Real Estate Advisor – May 17, 2020
In our previous blog we briefly touched on the importance of your credit profile and debt, and how it affects you in the mortgage application process. Your credit profile or credit report gives the lender a snapshot at the way you manage your finances, so they can determine if you are a good or bad credit risk when it comes to lending you money. So how is your credit profile or credit score determined? There are five categories that impact the calculation of your credit score. They are:
Types of Credit
Length of Credit History
Each category has a weight that is used in your credit score calculation and impacts your credit rating.
TYPES OF CREDIT used by you will have an impact on your credit rating. What do we mean by type of credit? Here we are referring to the types of lenders that currently hold any loan you have outstanding. Someone who has finance company credit products and department store credit cards will usually have a lower credit score than someone who uses the financial products of major banks, credit unions and trust companies. Similarly, financing your automobile through the manufacturers finance division or your financial institution will also more positively impact your credit score than using a secondary automotive finance company.
NEW CREDIT also has an impact on your credit score calculation. A high amount of new credit accounts will usually have a lender asking questions. You may wonder why? Usually it is because it is usually an indication of two things, the person has had credit issues in the past and are currently rebuilding their credit rating or they are a credit seeker trying to get access to as much credit as they can in a short space of time. The former is not a major issue for most lenders, providing there is a reasonable explanation, but the latter could be a red flag for some lenders.
LENGTH OF CREDIT HISTORY has a relatively significant impact on your credit score. The longer you have had credit products, the more comfortable the lender will be with you as it displays financial maturity and responsibility. So, it is important to keep that first credit card you ever got with a five hundred dollar credit limit when you sixteen or seventeen years old. While most lenders will want to see a credit profile that is one to two years old, a recent credit profile with a 800 credit score may not be as impressive as a 680 credit score that has reported for more than ten years. Mortagge lenders want to see more than just a high credit score, they want to see how you have managed your debt and credit repayment over an extended period.
AMOUNTS OWED on your credit cards has the second highest impact on calculating your credit score. When applying for a mortgage, lenders are more reluctant to loan money to potential homebuyers who have high amounts of consumer debt – either revolving or instalment. If the amounts owing on your credit cards are at or near the limit for most of the credit reporting cycles, this will significantly lower your credit score. However, of all the variables that impact your credit score, this is perhaps the easiest to remedy. If you have an established credit profile with no payment delinquencies but have credit cards that are all at the limits, paying them off or down to less than half of the credit limit can see your credit score increase by several points in a month to two months.
PAYMENT HISTORY is our final and perhaps most important variable in computing your credit score. The approach here is quite simple – pay your bills on time to maintain a decent credit rating. I always say, “bad things sometimes happen to good people” and these bad things could be anything from job loss to illness to divorce, could significantly affect your ability to pay your bills on time. If you find yourself in any of these situations my advice is to contact your credit grantor and let them know your circumstances so they can work with you and protect your credit rating. It is important to make your payments on time both on your credit cards and instalment loans and avoid late payments and delinquencies. Most mortgage lenders will look at your payment history over the last year or two when reviewing your application to make a lending decision.
Keep in mind a poor credit score is not a life sentence and can be fixed with a few steps. In the case of delinquent debt that has been transferred to a collection company, settling that debt and repairing your credit is a quite simple process.
As a consumer, it is important to check your credit profile periodically to ensure there are no inaccuracies. To check your credit score, you can contact one of the three major credit reporting agencies: Equifax Phone: 800-685-1111, Experian Phone: 888- 397-3742 and TransUnion Phone: 800-909-8872.
The writer: Raymond McMillan is a mortgage broker and real estate consultant and principal of The McMillan Group who has been in the banking, mortgage and real estate industry since 1994. He has been licensed as a mortgage broker since 1999 and has helped many people purchase their homes and invest in real estate. You can reach him at 1-866-883-0885 or visit www.TheMcMillanGroupInc.com
Up to 6% of Canadian home owners said they missed a mortgage payment recently as a consequence of the COVID-19 pandemic, according to a mid-April poll by Forum Research.
The survey also found that 76% will fail to pay another loan instalment before the crisis ends. Meanwhile, 46% were unable to secure mortgage deferrals and other similar forms of aid from their lenders, CMT reported.
Renters were hit especially hard, with 14% saying that they missed a payment recently.
Mobility restrictions and work stoppages since late March have severely affected householdsand landlords alike. The global outbreak has upended the national economy as a result, said Todd Skinner, TransUnion’s regional president for Canada, Latin America, and Caribbean.
“Whether it’s their health, financial well-being or changes in day-to-day living, the lives of millions of people in Canada and abroad have been dramatically changed,” Skinner said.
Data from TransUnion indicated that 57% of Canadians saw their incomes fall over the past few weeks. Another 10% are bracing themselves for further declines in the near future, with the possible losses pegged at an average of $935.
The most acute effects were seen among millennials and Gen Z-ers, TransUnion said. Approximately 78% and 74%, respectively, of these cohorts expressed fears about not being able to fulfil their monthly bills.
Mortgage refinancing in Canada is the latest domino to topple in the wake of the COVID-19 pandemic’s impact on our economy.
In fact, all forms of mortgage financing have been increasingly more challenging the past several weeks. Fortunately, most purchase transactions already committed to during these early transition stages are still going through.
Refinances are another matter though. They are uninsurable, so the lending risk sits squarely with the lenders; whereas purchase transactions facilitate changes of ownership, and the associated mortgages are a necessary and essential part of that process. Mortgage refinances are arguably a non-essential process.
When people refinance their mortgage, it is quite simply to get to a better place financially. For some, it is to reduce the mortgage interest rate, lower the monthly payment, and extend the term. For others, it is to extract equity from the home, often for one of the following reasons:
consolidating high-cost consumer debt
combining a second and first mortgage
financing home renovation projects
funding post-secondary education
assisting with a down payment for children buying their first home
paying off a consumer proposal early
funds to pay CRA tax arrears
tapping into home equity to help children with the down payment or closing costs on their first home
Market uncertainties have rendered most of these more difficult than a month ago, and in some cases impossible.
Three Reasons Why Mortgage Refinances Are Tougher For Canadians
The other day one major chartered bank announced:
“In view of the ongoing COVID-19 situation, the following changes are being made to lending policies affecting new applications submitted to us on or after Thursday, April 9, 2020. These changes are required due to declining employment, energy sector impacts, unstable property values, and restrictions on appraisers being able to access properties for appraisal reports.”
But as a result of COVID-19, there are three main reasons why mortgage refinances have become much tougher for Canadians…
More Stringent Scrutiny of Applicants’ Income and Employment
Lower Appraisal Valuations Than Expected
Lender Cutbacks in Maximum Loan-to-Value Ratio
1. Tougher Scrutiny on Applicants’ Income and Employment
Lenders are understandably skittish about income stability in the current market. They aren’t just worried about whether you have sufficient income today, but also whether your employment is safe and you will continue to have an income in the months ahead.
Canada lost a record one million jobs in March 2020 according to BBC News, and you can expect more layoffs and job losses as the full impact of COVID-19 becomes known. The Conference Board of Canada said on April 6th that a combined 2.8 million jobs could be lost during March and April, equal to nearly 15% of total employment.
Even though many of these job losses may prove to be temporary, no one knows.
And if you are in the business of lending money to people, you are going to be looking very carefully at all applicants’ employment income – both for what it is now, and what it might become when the current stay-at-home policy runs well past the month of April, as many experts feel it will.
Prime Minister Trudeau said recently [there will be] “No return to ‘normality’ until a coronavirus vaccine is available.” And that might not be till 2021!
What this means is that even if you had sufficient income to qualify for the desired mortgage amount two months ago, that might not be the case now, and as such, lenders have become more conservative and risk averse.
Mortgage Lenders Now Want to See All Income Documents Upfront.
If the borrower’s income and employment cannot stand up to scrutiny, there is no point going further. Here is what lenders are saying right now:
One Chartered Bank Says:
For any application using self-employed (BFS) income, in addition to standard income documents, the broker must provide us with a description of the business, when established, number of employees, and its current status (e.g., operating, shut down).
Note: we may request additional income documents or conduct additional due diligence at our discretion to verify current income/employment status.
Additional due diligence will be required to assess the viability of the business post COVID-19. To assist in the assessment, please consider asking your client for their most recent financial reporting, i.e., interim tax reporting.
One Monoline Lender Says:
If a borrower has been laid off, we will not use their income to service the file unless an exception is granted by us and the mortgage insurer (if required). Neither EI nor the Government of Canada Emergency Response Benefit are eligible for inclusion in qualifying income.
As you would expect, if your applicants do not work in one of these essential service sectors, we will require additional confirmation of their employer’s commitment for continued pay during the COVID lockdown.
We will not utilize any temporary Canada Emergency Response Benefits in qualifying calculations.
2. Appraisal Valuations Are Coming In Lower Than Expected
Appraisers rely on recent sales data to come up with comparable properties for their appraisal reports. But sales are down so much since mid March there are fewer to compare to. As reported in the Globe and Mail, Carolyn Ireland on March 31, 2020, wrote:
“Ontario remains under a state of emergency, and while the provincial government deemed most of the real estate industry “essential,” it did so in order to permit transactions to close – not to allow the industry to carry on with business as usual.”
And there is no incentive for appraisers to go high on their estimates – in the teeth of so much pessimism and conservatism. I think we will start to see more and more transactions fall off the rails because of low appraisal values.
Anecdotally, I’m seeing behavioural changes among appraisers that will lead to more values coming in lower than would have been expected a short while ago.
For example, some appraisal values are being submitted with a low, medium and high value. The other day a colleague had a mortgage amount cut back with a major chartered bank. The low was $1.5 million; the medium value was $1.6 million and the high value was $1.7 million. The bank had to take the medium value and the loan was cut back by 130k.
And, Actual Resale Values Are Starting to Drop
Rob McLister over at RateSpy notes, “If HouseSigma is in the ballpark, median GTA home prices are sliding hard in April. It estimates the median GTA home value is down to $740,000. That’s a 6% drop from the February peak of $789,000. Of course, these are just estimates and the data for April is volatile and incomplete.
“A couple of my sellers are nervous that things are going to get worse, so they’re taking what they can get.”
The fact is listings are down dramatically, and there are no open houses anymore. Buying a home for many is a luxury to be deferred till things settle down.
So the net is, it appears appraisers are being more cautious today, and there is nothing on the horizon that’s likely to change this. No one knows how fast buying activity will pick up when the dust settles from COVID-19, so cautious valuations are probably the new normal.
3. Lower Loan-to-Value Ratio Lending Maximums
Before COVID-19, only private mortgage lenders could refinance higher than 80% of the appraised value of a property. It’s against the rules for institutional lenders. Mind you, there are not many brave souls who want to lend over 80% these days.
One small bank has quietly announced they will only refinance to 75% of the appraised value. And many B-lenders, on their own volition, have already cut their maximum loan to value (LTV) to 75%, and that is in densely populated urban areas.
Their maximum LTV is less in rural areas and smaller cities. This percentage will face further downward pressure in the coming months.
And right now, private lenders are also exercising more caution than usual, pulling back on their maximum LTV. The individual retail lender has already gotten cold feet and isn’t at all happy over 50% LTV. Mortgage Investment Corporations (MICs) remain open for business at decent LTVs, but many are expecting higher overall returns on their capital.
These lower loan-to-value ratios, coupled with declining appraisal values, are shrinking the number of fundable mortgage refinance transactions.
Is There a Bright Spot for Refinances?
There’s an old adage that lenders like to give loans to people that don’t need it. That is probably more true today than ever, including for refinances.
In the United States, mortgage rates have already begun to fall quickly, especially for terms of 10 and 15 years, and there is rising interest among many to take advantage of a once-in-a-lifetime opportunity to refinance for a lower rate and radically reduce the remaining term of their mortgage. If you have sufficient equity that a light valuation doesn’t matter, and secure income, this could be a really great time to refinance.
This hasn’t happened yet in Canada, but could be the next phase for us as well. And, in general, if you have good enough income, have lived in your home for a while, and haven’t borrowed against your growth in equity, you may still be a good candidate for refinancing. (I’ll write more about this in a future article).
It’s a completely different world for mortgage refinancing than just a month ago.
Factoring together loss of income, lower real estate values, tougher appraisals, and lower loan-to-value ratios, it’s not hard to understand why the landscape for mortgage refinances has cooled considerably. Some refinances for specific types of borrowers will still be possible, but most of the typical cash-out deals we’ve seen for the last several years using home equity to solve debt problems, or large cash needs, are going to be fewer, and much harder to do.
Final word on this topic comes from respected industry veteran Ron Butler, who says, “Nothing will be the same for maybe the next two years. The old world of lending is gone.”
In order to qualify for certain mortgage and loan products, a minimum credit score is essential. Even if your score is sufficient to qualify, you might find the rates being offered will be lower than if you had a higher score.
Having worked with thousands of personal credit histories over the years, we have developed some strategies that sometimes give you that much needed quick score boost—sort of like jumper cables for credit!
Here are a few scenarios this might help with:
You are being pre-approved for a mortgage, but your bank or broker remark your score is too low and you don’t qualify.
You want to qualify for a mortgage AND a home equity line of credit (HELOC), but your lender says you need a higher score to get both.
You are working with a mortgage broker who is arranging a mortgage with a B-lender for you. She tells you that your interest rate will be lower if your Equifax Fico score is over 680.
And it’s not just about homeownership…
You are preparing your pitch to prospective landlords. These days, that often includes your credit report. Your chances will be better if your score is in the 700s or even 800s.
You want to apply for a personal line of credit or a high-end personal credit card, but your score is too low.
1. Use The Optimal Utilization Strategy
When maximizing your personal credit score, you should look at your utilization of available credit for each individual credit facility. By this I mean what percentage of your available credit is the balance being reported?
Percentage utilization can have a significant impact on your personal credit score. Equifax Canada states utilization has a 30% weighting on your personal credit score.
One scenario: maybe a furniture store or a home improvement store offered you “don’t pay for one year.” The balance you are carrying on this card might be relatively small, but if it’s at or over the actual card limit, this is dragging down your personal credit score. Consider paying it off now!
Another scenario: suppose you have three credit cards, each with a limit of $10,000.
And let’s say one card has a balance owing of $9,900 and the other two have zero balances. This might happen because you are trying to earn rewards on one particular card, or maybe you said yes to a balance transfer promotional offer.
Chances are your credit score is lower than if the usage was spread across the three cards equally—i.e., each with a balance owing of $3,300, or 33% of the limit.
Overall, your usage remains unchanged, but now you no longer have an individual card reporting at 99% utilization.
If you can afford to cover or reduce the balance owing on the one with a balance of $9,900, you should see a nice little score boost.
2. Use the Statement Date Strategy
It may be that the best thing for you to do is simply reduce balances owing on your credit facilities. If time is of the essence, you should plan this carefully and do it in the correct order.
Gather up your most recent available statements for all relevant credit facilities. And note the day of the month when the statement was printed. Most of the time it’s the balance on that statement date that is being reported to the credit bureau.
And give or take a day, it is safe to assume that same day of the following month is when the next statement will be issued.
So, plan your payments accordingly. And allow several business days for online payments to process in time. If you are paying a credit card issued by your own bank, you should see transfer payments being processed either instantly or overnight.
3. Pay It Down and Keep It Down
This is especially important when your limits are not very large. Suppose you are a model citizen who uses her credit card frequently, and pays the balance in full every month after receiving the monthly statement, and before the due date.
That is the “correct way” to manage your credit—taking advantage of the grace period you are given by all card issuers.
But these days, there is little benefit to trying to use up the entire grace period because current account interest rates are so low they are pretty much negligible. It’s far better to pay your balance in full before your statements come out. You are even more of a model citizen, and now the balance being reported to the credit bureau will always be extremely small, if anything.
4. Exercise All Dormant Credit Cards and Lines of Credit
Some people have credit facilities they never use. People tend to favour one particular credit card (maybe we like their rewards program) and we might neglect our other cards. And most of the time we don’t even need our personal line of credit.
If you are trying to maximize your credit score, it is good to use all available credit fairly regularly, even if it’s just for a nanosecond.
It will rarely be correct to close these older credit facilities since they are contributing ‘score juice.’ Equifax Canada states your history can have a 15% weighting on your personal credit score.
These credit facilities can become stale and may not be not pulling their weight on your personal credit history. Update the DLA (date of last activity) with a modest transaction and then pay it online immediately. If it’s a personal line of credit, just transfer $10 to yourself and the next day transfer back $10.50.
If you notice you have credit cards that have not seen daylight for months or years, take them to the supermarket or gas station, use them just once, and pay online right away. After the next statement these cards will report the date of last activity as the current month and year, and that may give you some much-needed points.
5. Scour & Clean All Reporting Errors
There might be some incorrect information in your personal credit history that’s needlessly dragging down your score.
A few examples include:
You have two or more personal profiles with the credit bureau and your information is scattered and diffused. Combining it all into one credit report could well increase your score and strengthen your look. (This often happens to people whose name is hard to spell, or who have legally changed their name).
Late payments being reported when it’s not you. Maybe you have a relative with the exact same name.
That router you returned to the cable company is showing as a collection; but in fact you returned it to the local store.
You completed a consumer proposal and all the debts included in the proposal should be reporting zero balances and should not carry an “R9” rating. This generally means an account has been placed for collection or is considered un-collectible.
There may be incorrect late payments. Equifax Canada states payment history has a 35% weighting on your personal credit score.
Mortgage brokers can fast track an investigation with Equifax Canada for you. What might take you two months, we can get done in a few days. Keep that in mind if time is of the essence.
This overview is a fairly simplistic way of looking at your personal credit report and highlights initiatives specifically intended to give your credit score a quick boost. These tips are not necessarily the same as when you are managing for optimal credit health or interest-expense minimization.
Ideally, you are working with someone who understands all the nuances and who can help you determine what your priorities should be.
“American families are finding themselves trapped in cycles of debt, simply for trying to afford basic needs like healthcare and education.”
Rep. Ayanna Pressley says she is “thrilled” that the House of Representatives passed her bill to reform the credit report system, though the legislation’s future in the Senate is unclear.
The House approved the Comprehensive Credit Reporting Enhancement, Disclosure, Innovation, and Transparency (CREDIT) Act on a mostly party-line vote Wednesday afternoon.
Pressley — who has championed often-arcanefinancial reform bills during her first term in Congress — says the legislation would address a “fundamentally flawed” system that can impede upward economic mobility in a country where “our credit reports are our reputations.”
“When credit reports determine where you can live, work and how much you will have to pay for everything from a car to a college degree, consumers deserve a system that ensures equity, transparency and accountability,” the Massachusetts congresswoman said in a statement. “American families are finding themselves trapped in cycles of debt, simply for trying to afford basic needs like healthcare and education.”
The Comprehensive CREDIT Act includes measures to make it easier for the estimated 20 percent of consumers who have a “potentially material error” on their credit report to seek corrections; limit the use of credit scores for employment purposes; expand the opportunity for student loan borrowers to improve their credit scores; restore credit to victims of predatory agencies; ban the reporting of debt incurred from “medically necessary procedures” and delay the reporting of other medical debt; shorten the time that most adverse credit information stays on a report from seven years to four years, and from 10 years to seven years in the case of a bankruptcy; and bolster the Consumer Financial Protection Bureau’s oversight of the industry.
According to CFPB data, the watchdog agency has received more than 326,000 complaints against credit reporting agencies since 2012, which accounts for nearly 22 percent of the total complaints filed during that time period.
According to Pressley’s office, the Comprehensive CREDIT Act comprises tenets of several other bills introduced by fellow members of the House Financial Services Committee. However, the Boston Democrat authored the student loan-focused section of the bill, which would:
Establish a credit rehabilitation process overseen by the CFPB for borrowers facing economic hardship to repair their credit profile.
Prohibit credit reporting agencies from including any information on a credit report relating to a delinquent or defaulted student loan after the borrower makes nine on-time monthly payments.
Provide a grace period for borrowers seeking rehabilitation but experiencing significant financial hardship or other extenuating circumstances such as certain military deployments or residing in an area impacted by a major disaster.
Require private lenders offering repayment plans to borrowers seeking rehabilitation to offer affordable monthly payments and additional assistance.
Student debt has become an increasing burden for students in Massachusetts. A study in 2018 found that the average debt load for Bay State graduates increased by 77 percent between 2004 and 2016, faster than in any other state in the country except Delaware. According to Pressley’s office, more than 855,000 borrowers owed a total of $33.3 billion in student debt last year in Massachusetts — and nearly 100,000 are behind on their loans.
“Even if we wipe out all student debt tomorrow, the devastating impact on consumers’ credit would remain for years to come,” Pressley said in her speech. “For that very reason, we must give folks a real chance at recovery and repair.”
The bill passed the Democrat-controlled House by a 221-to-189 margin. With the exception of two moderate Democrats who joined Republicans to vote against the legislation, the vote was divided by party lines.
For the legislation to proceed any further, Democrats will likely have to wait until at least another election. Sen. Mitch McConnell, the Republican-controlled Senate’s majority leader, has repeatedly ignored the hundreds of bills passed by House Democrats.
Massachusetts state lawmakers have also recently proposed new protections for student borrowers in the wake of relaxed federal oversight under President Donald Trump.
Many Canadians are taking risks with their financial security and some of those that say they know better are building up higher levels of debt.
A new survey shows that 67% of respondents said that they are financially literate but when tested two thirds are not repaying credit cards in full each month (30% believe making the minimum payment stops interest charges); 72% are not saving on a regular basis; and 43% are not tracking their monthly expenses or spending habits.
The survey from loan search and comparison platform Loans Canada also reveals that 46% of respondents are ‘loan stacking’ or taking on multiple loans from several lenders for emergency funds or just to cover everyday expenses.
When arranging a loan 60% do not call the lender and 38% don’t compare lenders.
Almost half of the credit-constrained Canadians carry high-interest debt in the form of payday loans (45%) and credit cards (55%).
“The purpose of this survey was to learn more about credit-challenged Canadians and the role their financial literacy plays in the financial decisions they make.” said Loans Canada CTO Cris Ravazzano.
Source: Real Estate Professional – by Steve Randall 24 Jan 2020
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