Canadians couldn’t get answers on mortgage deferrals at Canada’s biggest bank because information and eligibility requirements kept changing almost by the hour, a source who works for RBC tells CBC News.
When the first details were eventually given out to frontline employees at RBC’s Mississauga call centre, they revealed deferrals would be available to all mortgage holders, but in a way that appears to ensure the bank would not lose money in the short term and may even come out ahead.
“Deferrals actually meant that interest accrued from each deferred payment was being added back into the principal balance of the mortgage,” said the source.
“Technically clients would then be [charged] interest on top of interest for those payments [that were] deferred,” they said.
In effect, it’s as though the bank is loaning you the amount that you would have paid in interest during the deferral period and then charging you interest on that loan as well.
“They’re going to make more money because they’ve just loaned you more,” said Peter Gorham, an actuary with JDM Actuarial Expert Services.
“I don’t know that I want to say it’s profiting. I would say it’s not costing them a penny.” he said.
“People are increasing their debt load. If you are not desperate for the financial relief, don’t take it,” Gorham said, adding RBC and other banks are taking on increased risk from deferrals, a risk that could grow significantly if the COVID-19 crisis runs from months into years.
When it comes to repaying the increased debt load from a deferral, there may be other complications for mortgage holders.
“This also means an increase in clients’ payments at their next renewal period due to the increase in mortgage balance,” the source at RBC said.
If the client doesn’t want a bigger payment, they can extend the amortization period, the source added. But that typically requires a full credit application which may affect their credit score.
The other option is making extra payments after the deferral period ends to bring the mortgage back down as quickly as possible to its original amount.
Two other big banks have mortgage deferral polices similar to RBC’s.
In an updated set of deferral FAQs posted on its website, Scotiabank too says interest will continue to accrue.
“You will pay more interest over the life of your mortgage, but a deferral will also help you with your short-term cash flow,” the banks states on its website. Scotiabank is also offering deferrals on personal and auto loans, lines of credit, and credit cards.
On its website, BMO also states interest will continue to accrue on mortgages.
The Canadian Bankers Association issued a statement late Sunday night saying, “Customers should understand that [a deferral] is not mortgage forgiveness. Mortgage deferral means that payments are skipped for a defined period of time, during which interest which would otherwise be part of the deferred payments is added to the outstanding balance of the mortgage.”
Credit card deferrals
RBC is also offering six-month deferrals on credit card payments, according to an email obtained by CBC News. But once that period ends the minimum payment would include all accrued interest from the deferred payments. Meaning the minimum payment could jump significantly.
Most minimum payments on credit cards are interest plus $10. But Quebec passed a law in 2017 changing minimum payment requirements in an effort to counter rising household debt by making people pay off more than just accumulated interest.
Minimum payment on credit cards in Quebec is 2.5 per cent of the balance owing and will eventually rise to five per cent.
Last week, all of Canada’s big banks agreed to a request from Federal Finance Minister Bill Morneau to defer mortgage payments for up to six months for people suffering financially due to COVID-19.
The banks issued a joint statement saying they “have made a commitment to work with personal and small business banking customers on a case-by-case basis to provide flexible solutions to help them manage through challenges such as pay disruption due to COVID-19; child-care disruption due to school closures; or those facing illness from COVID-19.”
But initially many Canadians looking for deferrals said, after waiting for hours on hold, they were told they didn’t qualify. One BMO customer — who is actually a former BMO branch manager — said he was told he needed a full credit check and credit application and even then the bank would not tell him their criteria for approval.
It turns out the person he spoke with may not have known the criteria themselves at that point.
By midday Wednesday, workers at RBC’s Mississauga call centre still hadn’t been informed.
WATCH | Consumer frustrated at lack of information about mortgage deferrals
Confusion surrounds COVID-19 mortgage deferrals
Many Canadians looking for relief from mortgage payments during the COVID-19 pandemic are met with a confusing process. 2:00
“Anyone calling in to RBC between 8 a.m. and noon was directed to call back ‘later’ as we had been given no direction or timeframe as to when relief procedures would be implemented, other than ‘soon,'” a source told CBC News.
On March 13, the finance minister said that he had already spoken with the CEOs of the big banks. The banks issued their statement promising to work with Canadians on a case by case basis on the evening of March 17, around 7 p.m. ET.
Canadians began calling their banks the morning of March 18.
But, as late as March 20, Canadians were still being told no information was available.
“I was on hold for 11 hours [March 19] and then five hours [March 20],” said Lindsay Gillespie, who has a mortgage and a line of credit with FirstLine Mortgages, a division of CIBC.
“I finally got through and was told there’s nothing that can be done right now, they don’t have anything set up. I was told to call back another time,” she said.
Also as late as March 20, some RBC customers were still being told they didn’t qualify for a six-month deferral.
“We called RBC and were told that deferrals are being assessed on a case-by-case basis and that our eligibility for a deferral is limited to six weeks,” said Jeff Hecker, a principal at a Toronto Marketing research firm.
“No explanation was provided,” he said.
In a statement issued Sunday evening, RBC said “the developments around COVID-19 are moving quickly and we understand that clients have questions. Our frontline employees are doing incredible work to respond to clients quickly and effectively, and we are staying close to them to ensure they have the information they need to support clients.”
Some in the mortgage industry say the confusion over deferrals is understandable, given the unprecedented and rapidly changing nature of the COVID-19 crisis.
“You’re going to get hiccups in this process; it’s never happened before,” said Robert McLister, mortgage expert and founder of RateSpy.com.
“It’s case-by-case, it’s completely at the lender’s discretion as far as I understand it. Even though the big banks have agreed with the federal government to offer these programs, there’s no mandatory federal guidelines that I’m aware of,” he said.
McLister says it’s possible some people are being declined mortgage deferrals because they can’t prove their income has dropped.
“But generally speaking if you are in legitimate need and you’re about to default on a mortgage payment the lender is going to work with you,” he said.
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.
Increasing the length of mortgage terms isn’t just about allowing consumers greater choice; it could have the added benefit of enhancing financial stability, writes Michael K. Feldman in the latest report from the C.D. Howe Institute, an independent not-for-profit research organization.
The idea of longer-term amortizations got a lot of attention in the lead-up to last fall’s federal election. PC Candidate Andrew Scheer was particularly vocal about his intent to raise amortizations for first-time homebuyers, along with various real estate boards. Lengthening mortgage terms would also have a big impact on consumers as well as the overall economy.
Feldman first waded into the conversation regarding longer-term mortgages in 2018. He has since been joined by Bank of Canada Governor Stephen Poloz, whose remarks to the Canadian Credit Union Association in 2019 noted three ways that more variety in mortgage durations would contribute to a safer financial system: if more borrowers had longer-term mortgages, they wouldn’t face the risk of having to renew at higher interest rates as often; homeowners would have the potential to build more equity within a single term, giving them more options upon renewal; and fewer borrowers would be renewing their mortgages in any given year.
Feldman adds that longer-term mortgages act as a protection in the event of systemic instability.
“A significant downturn in the real estate market could result in the insolvency of some mortgage lenders, particularly unregulated lenders. If this were to happen, borrowers from these lenders may not be able to renew their mortgages if their lenders were being liquidated and may not be able to refinance their mortgages due to the downturn in the real estate market,” Feldman writes. “This would lead to additional defaulted mortgages, which could further depress the real estate market. This risk decreases with more longer-term mortgages because there will be fewer renewals throughout the amortization term.”
There are, however, some regulatory obstacles that stand in the way of longer mortgage terms becoming commonplace in Canada, and one of those is demand.
The government would have to provide incentives to both borrowers and lenders to jump-start this demand, and/or make some regulatory changes. Feldman writes that these changes could include revising the stress-test for longer-term mortgages.
“Since the main purpose of the stress test is to predict the ability of borrowers to continue to service their mortgages if they must renew at maturity at a higher interest rate, it would be logical to loosen the stress test for borrowers willing to fix their rates for terms longer than five years. For example, if the stress test for a 10-year mortgage was set at the contract rate plus one percent (or zero percent) without any reference to a “Bank of Canada 10-year mortgage rate” (in recognition of the added refinancing flexibility after 10 years compared to five years), then borrowers could qualify for larger mortgages by opting for 10-year mortgages. This would encourage them to seek out longer-term mortgages and require lenders to offer competitive rates to retain market share.”
Other changes include amending the Interest Act to reduce the pricing premium that a lender would have to charge for its reinvestment risk on mortgages up to 10 years and reducing that risk in general by giving borrowers a short-term redemption period; increasing covered bond limits, and developing a private residential mortgage-backed securities market.
Limiting mortgages to five-year terms is thought to have grown out of a 19th-century statute that allowed the borrower to pay off the mortgage with a set penalty of no more than three months’ interest any time after five years following the initial date of the mortgage. The practice then evolved to where borrowers could renew their mortgage for another five years after the initial five-year period, with that renewal date becoming the new date of the mortgage. As long as the lender provided borrowers the opportunity to “redeem” the mortgage once every five years, they could prevent borrowers from prepaying the mortgage in full during the rest of the term without penalty.
As a result of this evolution, lenders can avoid reinvestment risks associated with prepayments by offering mortgages and renewals with terms no longer than five years, Feldman writes. From a borrower perspective, however, if there were increased desire for 10-year mortgages and increased competition from lenders to meet the demand, the cost of prepayment penalties would be reduced.
The majority of regulated financial institutions in Canada fund most of their uninsured residential mortgages by accepting deposits, including GICs that are insured by the CDIC. The CDIC, however, may only insure deposits having a term of five years or less. This limit posts a challenge for issuing longer-term mortgages from institutions that rely on these deposits.
This hurdle, however, may soon be removed. The federal government amended the CDIC Act to eliminate the five-year term limit on insured deposits, which comes into effect on April 3rd, 2020. This, Feldman believes, should make it easier for federally regulated financial institutions to fund longer-term mortgages—in theory.
“This will depend upon the retail demand for longer-term deposits,” he writes. “In a flat yield curve environment, as we have now, one would expect that most retail demand would be for shorter-term deposits; however, once the yield curve reverts to a more common rising curve, a demand for longer-term deposits may develop.”
Ultimately, Feldman writes, the current five-year term is “too well-entrenched to be overcome organically” and that the federal government will have to modify certain rules and create policies and programs in order to change the status quo.
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
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.
Not all consumer debt is bad but it’s wise to be cautious: expert
Increasing the amount of consumer debt isn’t necessarily bad as long as it’s affordable, according to Matt Fabian, director, research and industry analysis, at credit research company TransUnion.
TransUnion studies Canadian debt and produces a report every quarter. Their latest report is for the second quarter, ending June 30. In an interview, Fabian said the study is providing an overview of debt in relation to how fast income rates are rising and household net worth is increasing.
“Our study this quarter suggests that Canadians are still increasing their debt, up 3.9 per cent in the second quarter, compared to the same quarter a year ago,” he said.
“A couple of things that we note are, although debt continued to go up, the rate with which it increased has started to slow for the past couple of quarters, when you compare it annually,” said Fabian.
“It might be too early to say we’re at … an inflection point but the combination of interest rates increasing and some economic uncertainty in different regions of Canada are giving people pause and maybe they may not be accumulating as much debt as they were, at the rate they were,” he said.
There is some good news coming from the Atlantic region, Fabian said of the quarterly study.
Although the economy can be volatile in the Atlantic region, he said, TransUnion sees provinces like Nova Scotia performing much better than the national average.
The average non-mortgage consumer debt in Nova Scotia is about $28,400 and only went up about 1.24 per cent on a year-over-year basis, said Fabian. New Brunswick is similar, even slightly less, at $27,300 and it went up about 2.37 per cent. Prince Edward Island had average non-mortgage consumer debt of $28,426, which is up 2.16 per cent in the second quarter, compared to the same quarter in 2017.
Newfoundland and Labrador came in under the national average in the second quarter as well, he said, with average non-mortgage consumer debt landing at $30,169, up 2.16 per cent when compared to the second quarter of 2017.
Generally, the Atlantic provinces are well below the national average non-mortgage debt, which increased by 3.87 per cent in the second quarter, said Fabian. From a delinquency perspective, however, the region scored “a little bit higher” than the second quarter national average of 5.33 per cent.
New Brunswick’s consumer delinquency rates on non-mortgage debt in the second quarter – 90 days past due – was 8.37 per cent, the highest in the region.
According to TransUnion, Newfoundland and Labrador’s consumer delinquency rate was 6.88 per cent, Nova Scotia’s delinquencies were 6.87 per cent and P.E.I. had a consumer delinquency rate in the second quarter of 5.74 per cent.
“Newfoundland (delinquency rate) trended up .32 per cent while Nova Scotia went down about 0.7 per cent,” Fabian said. “Halifax among the major cities has amongst the lowest consumer debt, about $26,000, and it was the only major city in Canada that had negative consumer debt growth (in the second quarter).”
When one takes into context growing household net worth consumer debt is not necessarily a bad thing, Fabian said. “I think the fact that delinquency rates are a little bit higher might be a little bit concerning from a risk perspective but they’re not way out of whack and delinquency rates tend to have a long tail. So, some of the Atlantic provinces for sure are coming out of a little bit of a slump economically and it takes, sometimes, 12 to 24 months to manifest itself in delinquency rates.”
Fabian said as the economy bounces back it leads to jobs and increased salaries, so it seems reasonable to be optimistic about the debt situation.
“We tell people, generally, there’s two things to keep in mind. Understand how much you can afford. So, from a delinquency perspective there’s the notion of stress testing and you should kind of stress test yourself.
“When you’re looking to take out debt or increasing your credit card payments, by putting something on your credit card or taking out a line of credit for a renovation, or whatever it might be, don’t just consider the position you’re in right now and say, ‘Yeah, I can afford that $300 monthly payment.’ But kind of consider your cash flow and maybe, take into account your circumstance to say: ‘Could I cover that payment in the event that I lose my job.’ Or, ‘Can I cover that payment for three months while I’m looking for another job.’ This is what we call … stress testing yourself to see if you can absorb that shock should there be some unforeseen event.”
By taking a realistic view of debt and one’s ability to manage it, Fabian says it will provide a little bit of comfort for an individual to realize they really are comfortable taking on some additional debt, he said.
“From a balance perspective, as long as you feel like you can take that on, I don’t know if taking on credit debt is necessarily a bad thing, it depends on what you’re doing it for. If it’s a mortgage or a line of credit to renovate your home or something like to improve the value of an asset or property for investing then that might be a good use of your debt. If it’s to buy new shoes or go on a vacation because you just want to, might not be the best use of your debt,” Fabian concluded.
Source: Cape Breton Post – Roger Taylor Published: Sep 24, 2018 at 3:34 p.m.