There’s a certain guy on Twitter — I’m not going to give him the publicity of saying his name — who has built a reputation by talking about the very worst of his bankruptcy cases and tweeting about them, further cementing that the average Canadian with too much debt is doomed. DOOMED I TELLS YA.
I’m not a fan of this for a number of reasons.
- Who wants the details of the most embarrassing moment of their financial lives aired for everyone to see, even if there’s no name attached to it? Imagine going to this guy and then seeing a tweet a few hours later that basically says “hey take a look at this dumbass?”
- You can see the underlying glee in all of this in every tweet. It’s like he wants people to go bankrupt.
- He’s a bankruptcy trustee, which means he stands to benefit by more folks declaring bankruptcy or opting for a consumer proposal. No wonder he’s so excited.
- I’ve seen a lot of trash personal balance sheets during my time as a private mortgage lender, and he’ll tweet about six different cases a week that are far worse than the most terrible debt burden I’ve seen in years of doing this.
There’s also a big ol’ case of recency bias here too. If all you saw was the most indebted folks out there, the ones with nowhere else to turn day after day, you’d start to think the rest of the country was screwed as well. I fully admit I have the opposite bias — I’m constantly amazed at how rich Canadians are.
But maybe I’m wrong here. Maybe Canadians are screwed and a wave of bankruptcies are around the corner. Hell, maybe there’s a bunch of bankruptcies happening right now. Why don’t we take a closer look.
Fortunately for us nosy folks (I’m talking about you, Italics Man), the government keeps track of how many bankruptcies there are in the country. And 2018 was not a particularly bad year, even though interest rates crept up a little.
There were a total of 30,313 bankruptcies and consumer proposals in the most recent quarter, up a whole 2.6% versus the same quarter last year. On a rolling year-over-year basis there were a little over 123,000 bankruptcies, which is up just 0.9% versus the year before.
Let’s dig a little deeper into the underlying numbers. Only three provinces had big increases in the number of bankruptcies and consumer proposals. These are, not surprisingly, Alberta, Saskatchewan, and Newfoundland. All three of these provinces have been hit hard by a slowdown in the energy patch, a main driver of their economy.
Numbers in Ontario and B.C. were down on a year-over-year basis despite both Toronto and Vancouver having ridiculous real estate prices.
Putting the bankruptcy “problem” into perspective
Yes, Canadians have too much debt. And I’ll be the first to admit some folks will have problems servicing that debt if rates shoot up another percent or two.
But the bottom line remains: bankruptcy just isn’t that big of a problem in Canada.
There are close to 37 million Canadians. And 123,000 of them filed for bankruptcy in the middle of the biggest debt boom in the history of the world. That’s 0.33% of the population. 99.67% of the population manage to muddle along each year not declaring bankruptcy. And I thing that, like divorce, the repeat filers who manage to screw themselves every decade skew statistics upwards.
A condom is 98% effective at preventing pregnancy when used correctly. That gives it a 2% chance of malfunctioning.
See what I’m trying to get at here? This isn’t a very big problem, no matter what a guy who sees this every day says.
Even Alberta, a province battered by a crummy economy for a few years now, is hardly seeing a massive influx of bankruptcies. It had about 14,000 proposals over the last year for a population of four million. That’s just 0.35% of the population.
Newfoundland, which is widely considered a poor province, has a bankruptcy rate of a little more than 0.40%.
And so on. The stats across the country prove it. Bankruptcy just isn’t a very big problem in Canada right now.
How about historically?
In 2009 bankruptcy and consumer proposal rates hit a peak of about 6 people per 1,000. This gives us a total proposal rate of 0.6%. That’s during the worst financial crisis of the last what, 80 years?
Oh, and the trend has been clear over the last decade. The popularity of consumer proposals is up significantly versus bankruptcy, which has seen a significant downward trend. This means creditors are getting at least a portion of their debt back. This trend should continue even when the economy sputters.
Don’t sweat bankruptcy
Let’s take a minute and talk about bankruptcy and real estate. And let me tell you a little secret from a private lender’s perspective. I’m going to bold this because it’s super important.
People will do anything to keep their house.
This actually bodes well for the underlying real estate market. That wave of overfinanced people selling as they hit a position of negative equity? It just won’t happen. They’ll hunker down and start paying off debt. They’ll search for other innovative solutions. But, for the most part, they won’t throw up their hands and go back to renting.
Look, we all have friends who are terrible with money, right? And yet they don’t go declaring bankruptcy. They muddle along, not really getting ahead but not screwing themselves either. This is the most likely scenario, not a tsunami of bankruptcies.
Your investments and bankruptcies
So what does this all mean with your investment portfolio? Is now the time to sell your bank stocks and run for the hills, AKA the safest part of town?
Normal economic cycles aren’t a big deal. A bad year gives bank stocks the chance to write off some of their garbage loans. The market anticipates this, which means bank stocks will usually bottom months before.
The real risk is in buying the subprime lenders, which in Canada means Home Capital Group (TSX:HCG) and Equitable Group (TSX:EQB). They will struggle if the underlying economy sputters. And they will be more impacted by bankruptcies than regular banks. They also have an additional reputation risk. You’ll start to see deposits leave these two banks if the underlying economy gets too bad.
If you are worried about this, the play to make is shorting Goeasy (TSX:GSY), the purveyor (apparently a word!) of trash loans to dirtbags.
Let’s wrap this up
I’m the first to admit I know very little about macroeconomics, even though I did listen to a series of podcasts about the subject once. Some of the smartest minds in finance can’t get big picture stuff right on a regular basis. So what chance do I have?
But there is one thing I’m sure of, something that constantly influences investing decisions. I believe there’s no way interest rates can ever move back up again in a major way. We’re not going to be paying 8-10% again for mortgages in my lifetime.
A move from 2% to 4% will hurt a lot of people. Then the economy will sputter and central banks will panic. So they cut interest rates and the cycle repeats itself. Canadians are too indebted to support much higher interest rates. That’s the bottom line.
If there’s anything more hated in the world of personal finance and online money talk, I’ve yet to encounter it. And y’all know how much I’m hated.
Yes, I’m talking about the financial equivalent of doing meth off of a hooker’s cleavage, the payday loan. Feel free to become outraged enough to throw things at your computer screen. In fact, I insist.
There have been some changes in the industry since the last time we last looked at payday loans, back in 2013. In Canada at least, legislation has been put in place that caps interest rates, restricts the amount of late fees that can be charged, and limits the number of times a borrower can just pay off the interest, which lets them stretch out the loan. Hell, Quebec and Newfoundland went a step farther, essentially banning payday loan shops from setting up in the province. In Quebec, you can only charge people a maximum of 30% interest, compared to 59.5% everywhere else in Canada.
No, that’s not a typo.
These changes have actually proven pretty disastrous for at least one payday loan company, The Cash Store. (I went once, expecting to be able to buy cool old banknotes or money from other countries. It was the biggest piece of false advertising since Otto went to Stoner’s Pot Palace.) The company basically got kicked out of Ontario because it refused to play by the new rules, and it had to declare bankruptcy. A company called Easyhome ended up buying all the stores, ultimately proving being a rebel never pays.
At least that’s what my mom told me. She also said I was handsome.
Easyhome was big into the rent to own business, AKA the easiest way to spend $3000 on a $1400 couch EVER. It was a natural progression for the company to get into the loan business, so that’s what they did, calling it Easyfinancial. But instead of offering payday loans, they offer loans for anywhere from $500 to $10,000 for a time of 9 to 48 months.
The interest rate?
You guys are gonna like this. It’s 46.96%
Now before you get all outraged (too late, probably), consider a few things. First of all, it’s actually much cheaper than a payday loan, which charges 23% (in Ontario and Alberta, anyway) for just a couple of weeks. If someone does two payday loans a year, they’re paying the same annual interest rate as an Easyfinancial. They also approve about 80% of borrowers, and will do so pretty quickly. That’s what these types of lenders specialize in. I don’t care what business you’re in, it’s stupid to try and change a customer’s mind.
Easyfinancial has gotten to the point where it’s pretty big. It has more than $200 million in customer loans outstanding, which, at a 47% interest rate, looks to be a license to print money.
But as you all know, the world is not quite that simple. In 2014, the whole company (including the rent to own furniture business) made just $19.75 million after taxes, interest, and other expenses. There’s nothing wrong with 5% net margins, I know I sure have invested in companies with worse. But it’s hardly the cash cow many people envision.
Why? Because there are expenses, obviously, but the big hit to earnings comes from all the write-offs. Write-offs have averaged more than 15% over the last six years. Compare that to a bank, which is writing off between 0.1 and 0.2% of their mortgages. Credit cards are higher, but still. That’s a lot of write-offs.
Don’t fight the Easyfinancials of the world
According to Easyhome, the Canadian credit market breaks down something like this:
- Prime consumer credit: $450 billion
- Below prime consumer credit: $65 billion
- Payday loans: $1 billion
The Canadian banks essentially control the prime market. If the average person reading this needs some money, they’ll go to a bank or bank equivalent. Most of the time, the bank is happy to deal with them.
But what about the person who can’t qualify at the bank?
According to the average personal finance blogger and concerned-type person, they’ve got the following options:
- Improve your credit and go back to the bank
- Do without, nobody needs credit
- Have an emergency fund!
- Force the banks to lend to everyone
You can see how these aren’t viable options for somebody who needs the cash now.
Now don’t get me wrong. I’m still a believer that most of the time, somebody running out of money is their own fault. We all know guys who make a decent amount of money but still struggle to make ends meet on account of their own stupidity. And a lot of the loans issued by somebody like Easyfinancial are for things people don’t really need.
But we’re all hopelessly naive if we think there isn’t a need for these types of loans. We can’t just will people into being good with their money, no matter how hard we try. There will always be a subsection of the population that refuses to get better. There will also be a subsection that falls onto hard times.
To anyone who really thinks Easyfinancial and their peers are ripping people off, I propose a challenge. Open a business that lends people money at 6%, while helping them get back on their feet financially. Make them attend a monthly budgeting meeting, and help them along with the whole process.
If you do, I’m willing to bet your store will be empty, while 14 different kinds of dirtbags steadily stream into the Easyfinancial office. These borrowers don’t care about improving. Then just want the money, dammit.
Understand that, and you understand the need to those kinds of lenders. It’s that simple. They’re like cockroaches, they will always exist.
Declaring bankruptcy is never a choice people want to make, however sometimes the burden of debt is just too much for a person to handle. Sometimes life has a way of throwing curve balls that we just can’t adapt to. Intentions may have been good at the onset of taking on debt, and then something has changed making repayment extremely unlikely. Or maybe the excessive debt is just the wake up call someone needs to regain control of their financial life. Either way, the following is a guide on declaring bankruptcy in Alberta.
Whatever the reason, declaring bankruptcy is a hard road to go down. It’s a decision that one shouldn’t enter into without weighing all the pros and cons and without knowing all the answers. This post will help people from Alberta with the specific rules and regulations of their province’s bankruptcy process.
Should You Declare Bankruptcy?
Even though you can declare bankruptcy with as little as $1000 of debt, bankruptcy is a long, hard process that shouldn’t be taken into for such a small amount. Realistically, a debtor should take a hard look on whether they legitimately can’t make their payments anymore. Steps should be taken with creditors to negotiate payments lower to give the borrower more flexibility. If a borrower is current on their payments (or even most of their payments) then other steps should be taken rather than bankruptcy.
If the borrower is actually drowning in debt, then bankruptcy is the only option left. Bankruptcy will kill a debtor’s credit rating, however that rating is probably pretty low already. Unfortunately, the process isn’t quite as easy as Michael Scott makes it out to be.
The First Step: Find A Trustee
If you’re declaring bankruptcy in Alberta, the first step is to find a trustee.The trustee will help the debtor prepare a Statement of Affairs, which lists all assets and liabilities, including a list of all debts included in the bankruptcy. The trustee is registered and licensed with the Government of Canada, meaning they have expertise and knowledge of the bankruptcy process. The borrower must pay the trustee for their assistance.
Typically, there aren’t many assets to speak of. If there are, the trustee is in charge of selling those assets.Certain assets are exempted though, including:
A small amount of equity in a principal residence ($40,000)
A reasonable amount of equity in one vehicle ($5000)
Clothing, furnishings and personal effects ($4000 each)
RRSPs, food and tools you need to earn a living are typically excluded as well.
Anything above and beyond is fair game for the trustee to sell.
The trustee will also provide debt counselling for the bankrupt client.The client will report their income on a monthly basis to the trustee in Alberta.
The trustee may also not suggest bankruptcy and will work with both the borrower and creditors on some sort of settlement.
What Payments Won’t Go Away
For those looking for the easy way out of all their debt obligations, bankruptcy won’t give them all what they’re looking for. The following debts will not be eliminated by a bankruptcy:
Any payments on a secured asset (a house or car)
Any child support or alimony payments
Any debts arising from fraud
Any debts assigned by the courtsAny student loan debt (if the debtor has been out of school for less than 7 years)
Any tax debt
Bankruptcy only covers unsecured debt.Credit cards, payday loans and other forms of high interest, unsecured debt are what will go away with a bankruptcy. Wages are also unaffected by a bankruptcy.
Once a borrower enters bankruptcy, creditors must deal with the trustee. Creditors cannot take a borrower to court or garnishee salary or a bank account once the bankruptcy process has begun.
How To Be Discharged
Once 9 months is over, the bankruptcy process will be over, as long as nobody has any objections. For a borrower to get a discharge, they must complete the process and credit counselling required by the law. They must also show the trustee the ability to handle their finances responsibly. Once all this has been completed, a discharge will be granted and the bankruptcy process will be over.
Bankruptcy is a process that should only be entered into as a last resort. Luckily for those thinking about it in Alberta, the province is more generous than many others about assets a bankrupt individual can keep. Once the process is done, rebuilding credit is no picnic. Getting a loan at anything but the highest interest rates is next to impossible for at least the next 3 years. If someone is serious about rebuilding their financial life after bankruptcy, then debt should probably be avoided at all costs.