93 – Canada’s Rising Interest Rates and Consumer Debt

Wayne Kay 00:04
Welcome to the Debt Matters Podcast, where we help Canadians find solutions to their debt with Licensed Insolvency Trustees from across Canada. 

I’m Wayne Kay, and coming up in today’s show, we’re going to talk about the record high consumer debt and high interest rates and how are Canadians going to make it through. My guest today, Leigh Taylor from LCTaylor Licensed Insolvency Trustee with offices in Winnipeg and Northwestern Ontario. Thanks for being here, Leigh.

Leigh Taylor 00:34
Always nice to join you.

Wayne Kay 00:35
Now we had a great discussion last time we talked. We got talking about something that I figured we could really dive into a little bit more. And that is kind of the economics of what’s going on in Canada. 

I know you keep your fingers on the pulse of this, but record high consumer debts, that’s new. I believe we’re seeing some big numbers there. And then with the interest rates and everything else, how do you see this playing out for Canadians?

Leigh Taylor 01:05
Well, there’s an awful lot of factors that are coming up and they’re all coming up together. Low interest rates for many years. I think most people took advantage of that and they built a corresponding lifestyle – easy purchase of houses, interest rates were very low on mortgages, buying a new car was pretty easy. Don’t have to pay for six months, these sorts of things.

So everything was pretty good for a while. Now then we started to get inflation. Then the Pandemic and the economy was flooded with dollars. It’s really what it came down to. The government was subsidizing everybody, throwing money around to try to alleviate a problem, but really creating new problems in doing that.

And that resulted in inflation. And inflation is an insidious problem. It probably affects most the people that can least afford it. For example, senior citizens are on fixed incomes and pensions and these sorts of things and suddenly you get 8% inflation. Well, that means that what they buy with their money goes 8% less than it used to.

And when you’re stuck with rent that’s not going down or changing and food that keeps going up, that puts them in a real difficult position. So we’re faced with all of that. Plus, during the Pandemic, an awful lot of people were unemployed. If you were working for a restaurant, I can bet you were off, maybe collecting unemployment insurance, but certainly not getting any tips for your work and all these sorts of things. Your income was reduced considerably.

So when you put all those things together, it’s really hard to see us avoiding an economic fallout with all of this. There’s just too many problems all coming together. So I think we have to pay the price for low interest rates or money being thrown at us by the government and all the problems that created.

Wayne Kay 03:10
Now when we watch forecasting from economists, they’re saying, well, it shouldn’t be too bad. We should be okay. Does the word recession play a part in what we may see with all the high consumer debt and people that can’t afford all the money they’ve been putting on their cards in the last while?

Leigh Taylor 03:34
Well, it depends which economists you ask how bad it’s going to be. I think they all agree that we’re headed towards some sort of a recession. And I’m not sure what recession means to most people. 

There was an old adage back in Economics 101 many years ago. It said, recession is when your neighbor is laid off. A depression is when you lose your job, and a panic is when your wife loses her job. So the effects of recession really depend to a large degree on your own personal situation.

Wayne Kay 04:06
Yes. And there are certain communities that just don’t see these problems. They kind of almost become recession proof because they’re in industries, a lot of industry towns that don’t have it. 

But that being said, with the high consumer debt, I thought it would be great for us to discuss what does that look like for Canadians, that they’re starting to sweat over this now. They’re starting to see that things aren’t going to work out, they’re not going to be able to pay this off.

So in your business, when you look at that, what does that look like? At what point do they say, okay, we are actually in trouble?

Leigh Taylor 04:42
Well, we don’t have the statistics out yet from the government with respect to how we ended 2022, but we’ve certainly got our own statistics and have developed those. And for the first two, two and a half months of this year, we’re looking at record highs for insolvency situations, whether Consumer Proposals or Bankruptcies or workouts. So I think as I guess you called it, a tsunami of debt problems is starting to come forward.

And that’s sort of expected because when you look at people with debt problems, historically it’s usually 18 months to 24 months after the economic problem starts before people actually are in a position emotionally to do something about it. They lose their job or whatever, or mortgage rates go up. They know they’re in financial difficulty. They don’t know what to do about it. They try cutting back.

But changing your standard of living is a very difficult thing to do. So they suffer through it, max out their credit cards, et cetera. And usually they can last for a year and a half to two years before they get to the point where they’re being sued or garnished or the mortgage is going into foreclosure or something. 

That’s where we are with a lot of people right now, especially with tax season coming up. And people are finding out that suddenly they owe $3,000 more than they anticipated in their tax return because they took COVID money or small businesses took COVID relief money, and they’re supposed to be paying it back.

And they realize that their cash flow is just not going to permit it. So now they’re getting in a situation where they have to actually go out and seek professional help to solve the problem. And they’re not alone. There’s just an awful lot of people that are going to be in that position.

Wayne Kay 06:39
And when you see people coming through the doors or in many of your businesses, what is it looking like? What are they coming in for? Because of the job loss? Or is it because of the interest rates going up with mortgages? A lot of people just had variable mortgages and I hear that makes a major difference in a lot of the housing payments.

Leigh Taylor 07:02
Well, sure. Probably more than half of the payment that you’re making every month is going to be for interest. And if you go up from a 2.7% rate of mortgage suddenly to a 5.5% or 5.9%, you’ve doubled that payment. So on an average mortgage where you’re paying $1,200 in interest, now you’re paying $2,400 in interest and that just kills your budget right then and there.

Wayne Kay 07:31
And then on top of that you add in what you were just mentioning, they find out they had to get a bill for $3,000 through the government for taking COVID money and that was taxable. Now how do you get out of that?

Leigh Taylor 07:46
And then you go to the grocery store and find out that food has gone up by 8%. Yes, so you can cut back a little bit here and a little bit there but a lot of people are finding out that there’s just too much coming too quickly and all the other things it’s sort of a snowball effect. 

You find out that things are a little tight at home, you end up arguing with your spouse about what you should be cutting out of it and you have differences of opinion on that and then you end up with something less than matrimonial bliss trying to settle the problem. That creates even more hardships.

So it’s a real snowball effect. The earlier you get started on trying to find a solution to this, the better your chances of finding a solution that works. If you started two years ago when you realized that there were going to be problems, then you probably don’t have as serious a problem today. 

But if you went along with the ride, you took the money and some people paid down debts with it. But more often other people used it as sort of found money and spent it on something that would otherwise be deemed a little frivolous, perhaps thinking they’re going to come out of this pandemic without too many problems and everything starts to build up.

And now you find that an awful lot of people are going to not have much in the way of solutions to their problems. Other than seeking help through the Bankruptcy & Insolvency Act.

Wayne Kay 09:21
So can you walk us through that? Because what you’re talking about, I’m sure, is exactly what a lot of people are feeling. And the one thing I’ve done enough of these shows and learned enough that the one common phrase that’s used is, I wished I’d seen you earlier.

Leigh Taylor 09:42
Boy, I’ve heard that lot.

Wayne Kay 09:45
Probably every free consultation that you do, because the first one is initial consultation is free. And I bet you everybody walks out saying that exact phrase.

Leigh Taylor 09:56
Yeah, it’s true. Well, part of it is to go back to the beginning of it. When you first see signs of the problems, can you start cutting back on your budget a little bit, redoing your budget or in many cases, making a budget so that you can realize that, well, if I have a little less income, what are the absolute necessities and what non necessities can I cut out of the budget? That’s maybe the first step. 

And then that stops you from taking your credit cards out and subsidizing your lack of income with credit. That’s a trip down a dangerous path because you always have to pay it back, and it’s harder to pay it back than it is to get in the first place. 

So that’s the kind of thing that we like to see people doing a little further down the road doesn’t mean that you have to get a second job working for an extra day or half a day or something on the weekends to try and make ends meet. That works for some people, not for everybody.

If you’re going to be paying more in childcare than you are going to be making by working on a Saturday, it sort of defeats the purpose. Then you look at things like can you dispose of some of your assets if you’ve got two cars, can you get by with one? Even if you have a car loan on the second car, et cetera, at least by selling it off and paying off the loan. That helps your cash flow a little bit because you’re not paying the bank for the car loan. So those sorts of things can work.

If you get to them early enough, and if you wait and they’ve already seized your car because you couldn’t keep up the car payments and you still owe the money on it, you get to the point where you’re having all sorts of problems at home because you’re arguing about money and the credit cards that you’ve guided, which means using one to pay off the other. And they both get higher. You get to a point where you can’t even afford the minimum payments on it. 

Then you start saying, well, I wish I had thought about this earlier, but if I can’t make the payments, you’re lucky if you still have a job, but you may lose your job if you get garnished. And if you couldn’t afford to live on what you were making before.

Taking 30% of your wages to pay one of your creditors with a court order isn’t going to help a lot. So it’s easy to see how without too much trouble, you get yourself into a lot of trouble just by either ignoring it or not taking reasonable steps to try to reduce the problem. And it’s human nature. A lot of people will say, well yeah, I lost my job or whatever, I got my hours cut back or whatever. I’ll go look for another job and I’ll get one in another month or something.

One month becomes two months and then it becomes three months. Then when you do get another job, it turns out that you’re only making about 75% or 80% of what you’re making before. Or you have to take a job where you have to work yourself back up the ladder to get where you were. And in the meantime you got more debt and less income and it’s sort of like a downward spiral and it’s emotionally hard on people too. 

So we really encourage people to come in and talk to a Licensed Insolvency Trustee and find out what options are available.

Are some of these options still available to you? Can you get out of it by budgeting or whatever? And the LIT will be able to tell you exactly where you stand, what the options are. And hopefully you have enough options available to you at that point that you can make some choices that are in your own best interest

Wayne Kay 13:39
And you’re there to guide them along.

Leigh Taylor 13:41
Right. Because our first job is to help people, to solve problems for them. And a lot of the people we talk to don’t go bankrupt and don’t file proposals. We can find other ways in which they can overcome the problem and that’s a win-win situation for them and for us.

Wayne Kay 14:00
Oh, that’s interesting because a lot of people worry, they stress about, well, if I’m going to contact a Licensed Insolvency Trustee, that means I’m going the way of Bankruptcy. And they hate that word, they’re scared of that word.

Leigh Taylor 14:16
Sure. And they get a little discouraged and that’s sort of part of the whole problem too. But we really encourage people to contact us and find out what it’s all about, find out what the rules are, what you can do, what you can’t do, and we’ll help you to create a path through these difficulties. Now, it’s like taking medicine. Sometimes the medicine doesn’t taste all that good, but you have to solve it. You have to solve the problem.

Wayne Kay 14:42
And you always solve the problem.

Leigh Taylor 14:44
Yes.

Wayne Kay 14:45
I think that’s the most important piece. To have somebody professionally regulated in the country looking over where you’re at. I think just the pure volume of what you see will give them just hope because you pretty much have seen.It all

Leigh Taylor 15:05
Yes, we’ve been at this a long time. We’ve helped an awful lot of people. But I would put a caveat in there that Licensed Insolvency Trustees, they have to declare themselves as Licensed Insolvency Trustees in any ads or whatever. So it’s pretty easy to identify them. And they’re professionals that have been trained and have the experience and are licensed by the federal government.

The federal government audits them and makes sure that everything is being done properly. They have a code of ethics that they have to follow, et cetera. That’s not always true of everybody that calls themselves credit counselors. A credit counselor – there is no legal definition for credit counseling.

Anybody can be a credit counselor if they hold out a shingle. And they don’t always have the tools that a Licensed Insolvency Trustee has, such as proposals and binding situations or Bankruptcies. 

Oftentimes we’re seeing now where you find somebody online and they say, yeah, we can help you. Send us a couple thousand dollars. Then you do that. And then they turn around and say, well, no, we can’t help you, but we can refer you to a Licensed Insolvency Trustee. That’s been happening more and more.

Wayne Kay 16:21
Wow. And then you’re out two grand or however much they take from you.

Leigh Taylor 16:26
Yes, and it’s a little bit of a wake up call when they find out they could have gone to a Licensed Insolvency Trustee and had free consultations at the beginning of it. Save themselves a lot of trouble and pain.

Wayne Kay 16:36
Wow. Okay, well, I think this has been a wonderful chat. Any final words you want to share?

Leigh Taylor 16:43
Well, just the things we always talk about. Look at your own situation and give us a call. It doesn’t hurt, doesn’t cost you anything. And you’ll get some good answers to some questions you may not have thought of earlier. The better.

Wayne Kay 16:57
Right. Lee, thank you very much for your time. It’s always a pleasure.

Leigh Taylor 17:01
Always a pleasure for me too. Thanks, Wayne.

Wayne Kay 17:03
Well, my guest today, Leigh Taylor from LCTaylor Licensed Insolvency Trustee. And to get that free consultation, you can go check out the website lctaylor.com. That’s where you can schedule the free consultation or you can give them a phone call, lctaylor.com. 

And that’s it for today’s Debt Matters podcast. Just make sure you subscribe wherever you get your favorite podcast from. And of course, for more information, you can always check out debtmatters.ca. Thanks for listening.