Toxic Assets – The Family Home and Credit

Wikipedia defines toxic assets as “a nontechnical term used to describe certain financial assets when their value has fallen significantly and when there is no longer a functioning market for these assets, so that they cannot be reasonably sold.’’
Great media attention has been placed on toxic assets. So much so they have assumed the inflated role of causing the financial collapse in the US and the global recession. It is somewhat baffling that hardly anything has been said about the millions of debtors who are stuck up to their depreciated assets in what may be appropriately described as toxic debt.

One reason for this may be the focus on investor losses, high risk bonds, overzealous peculation, and the gratuitous lending practices of a wide spectrum of financial institutions (including Canadian banks) that brought the toxic realities of debt to the forefront. Something urgent had to be done to prevent the collapse of the American financial system. Generous rescue packages for lenders and a long list of financial groups were legislated and duly presented to the wounded financial giants of American finance, including General Motors and Chrysler. Occasionally, some faint reference could be heard about people, real wage-earners with families, losing their homes and how something should be done ‘to help these poor people.’

The spectre of families losing their homes is frightening. A family home normally qualifies as the largest and most significant family asset of all. Purchasing a home has a long historical past as a fundamental financial planning concept. Statistics Canada reported in a 2006 that the single most important asset for Canadians was their principal residence, which accounted for one-third of the $5.6-trillion total. The prospect of losing this central family asset contradicts the philosophy, the great promise of the ownership of private property for middle and lower income groups. The family home is at the centre of their financial universe and it is no less catastrophic for their world to collapse due to forces beyond their control, ability to plan for and ultimately to recover from.

When the credit crunch first arrived in the US in 2008 a cavalier attitude was prevalent with many commentators and pundits. They criticized and ridiculed the stupid lenders who lent to all of these unworthy, tainted borrowers who should never have been lent the money to start with.

Soon after, ‘toxic assets’ became a convenient label used to leave the less than favourable impression that this was some sort of rare disease that government should fix. If you were a lender and had a toxic asset, you should try and get rid of it. Meanwhile, very little was said about job loss, the mass devaluation of middle class families’ single biggest asset, or that the wage-earning debtor was not stupid or financially irresponsible.

Today, the casualties of a deep, global recession are more conspicuous, particularly with respect to job loss in the auto sector and how this will effect a co-mingled network of numerous, subsidiary business interests. However, only their status as workers is highlighted. Very little is said about their role as debtors.
Over the last thirty-five years it has become commonplace to avoid public attention to debtors and the consistent, unstoppable dependency of individuals and families upon credit. In Canada individuals and families have been sinking into a troublesome morass of debt for the last 35 years as the following chart illustrates:
Consumer Credit – (excluding Mortgages) Statistics as reported by the Bank of Canada:

1975 – $23 – billion
1985 – $58 -billion
1990 – $98 -billion
1995 – $116-billion
2000 -$187-billion
March 2009 $ 416- Billion

There is much more than a mortgage payment on the list of family bills. It’s not quite so simple to narrow everything down to toxic assets either.

In the same report in 2005 Statistics Canada categorized the debt loads/increases of Canadians as follows:

Between 1999 and 2005 –

Total debt in Canada increased by 47.5%. This was largely due to two factors: the increase in the cost of purchasing a home and the increase in the proportion of families who owned a home with a mortgage. The second largest contributor to the increase in debt load was lines of credit, at $68 billion. About 3.3 million families, one-quarter (24.9%) of the total, reported having a line of credit debt in 2005, up from only 15.4% in 1999.

Families reported holding about $46 billion in loans on owned vehicles, a 41.3% increase $25.8 billion in outstanding credit card and instalment debt, up 58.4%.

Student loans approached $20 billion, a 15.8% increase. Almost 11 million families reported owning at least one credit card in 2005. Lenders have been lending more and more credit and borrowers have been going further and further into debt each and every year, in Canada, since the 1970s. There has been something deeper than a mercurial stock market – especially for middle and lower income consumers – individuals and families.

It may be more accurate to see the recession as a culmination of events and that the undue reliance on credit, in its many forms, has been tenuous at best.

The recent announcement by the government of Canada to give consumers a 21 day grace period before charging interest, when the balance is paid in full, falls in to the category of ‘slightly better than nothing’ but it completely overlooks the financial realities of real individuals and families struggling to make ends meet today – not to mention the millions hanging on the cliff of predictable job loss, corporate reorganizations and bankruptcy.

Not capping or regulating the actual interest rates reaffirms this unspoken, unforgiving attitude to debtors. It ignores the sacrosanct status of charge card interest rates – in some cases the rate of 28% per year has remained untouched for the last 35 years – even now when the Bank of Canada’s rate is almost zero at 0.25% for its overnight rate. There doesn’t seem to be any relief for pre-existing debt and debtors – all $416 Billion of it.

For those facing financial adversity, what is most needed is compassion and a much better understanding of the realities of personal finance – especially from the federal and provincial governments. Debt is a huge part of the family economic pie. We cannot shrug our shoulders or pretend that all of the bankruptcies are caused by toxic assets or some temporary, international, economic blip creating job losses. Similarly, it is equally sinister to ignore the pain and suffering of hard working and honest individuals and families and the inescapable losses of the accumulated family wealth of millions of people over, in many cases, a lifetime – such as the family home or the RRSPs that have been cashed to meet family expenses and pay creditors prior to reaching a state of absolute destitution.

John Kenneth Galbraith drew attention in The New Industrial State to the abandonment of profit maximization for modern corporations in favour of stability and predictability. Perhaps it’s time to revisit such principles, especially with respect to interest rates and a recession that has the potential to devastate the middle and lower income groups.

This is a time for compassion for the less fortunate and vulnerable and an opportunity to take preventative steps to mitigate the losses, for both lenders and consumers.

This would be an excellent period to redefine the enemy. Is it the debtor?

Governments need to look beyond a debtor-creditor contract and see real people with families and children. People should not be swept away from public attention under the ominous veil of a bankruptcy. Instead, there needs to be more creativity and flexibility with interest rate reductions for honest individuals and families caught in the recessionary malaise; moratoriums on monthly payments and interest for both mortgages and consumer loans, where appropriate; and the overall willingness to help their customers, co-operate with proposals and be reminded that bankruptcy is a tragedy, the final step in the debt collection process.

Douglas Welbanks is the former Director of Debtor Assistance and Debt Collection for British Columbia.

The final solution to insolvency is to apply for protection under the federal Bankruptcy and Insolvency Act, either by filing a proposal or by making an assignment in bankruptcy.

What is a Proposal?

Under the Bankruptcy and Insolvency Act a trustee or an administrator files a Proposal, which is an arrangement between you and your creditors, to have you pay off only a portion of your debts, extend the time you have to pay off the debt, or to provide some combination of both. To be acceptable, your creditors must be better off financially under a Proposal than if you were to go bankrupt.

Retirement Savings Plan Loans

Money can be borrowed from your Registered Retirement Savings Plan without attracting tax to the withdrawal of funds if the funds are used to purchase your first home – the maximum withdrawal is $20,000 and must be repaid within 15 years even if the person files for bankruptcy. The writer does not recommend the withdrawal of RRSP funds for any reason other than retirement or a home purchase.

Consumer Proposals – A person is eligible if the total debts, excluding debts secured by a principal residence, do not exceed $75,000. The consumer proposals cannot be for more than five years. If the creditors do not accept the Proposal the debtor is not automatically bankrupt.

Insolvency counselling is required.

“Other Proposals” – There is no restriction on the amount of money a person owes. If the creditors do not accept the Proposal, the person is automatically bankrupt effective the date of the creditors meeting.

Insolvency counselling is not required.

What is Bankruptcy?

Bankruptcy is a legal proceeding that is available to a person to cope with a financial crisis. One of the main purposes of bankruptcy legislation is to afford the opportunity to people, who are hopelessly burdened with debt, to free themselves of the debt and start fresh with “a new financial lease” on life.

To go bankrupt it is necessary for a person to be insolvent. To be insolvent means to:
a) Owe at least $1000 b) Not be able to meet your debts, as they are due to be paid.

Will my creditors stop harassing me?

Yes, they will. By law, all actions against a bankrupt must cease once the documents are filed. This does not apply to secured creditors such as banks holding, for example, a lien on a car or a mortgage.

Who will know that I have gone bankrupt?

Any legal filing of a bankruptcy is a public document that the general public has access to. The credit bureaus – Northern Credit Bureau, TransUnion and Equifax are notified and the bankruptcy will report on your credit bureau report for 6 years from the date of the discharge in the case of a 1st bankruptcy. For a second or subsequent bankruptcy, the information will report for 14 years on the Equifax Bureau and for the rest of your life with TransUnion. This however does not mean that credit cannot be obtained during this time. (rebuilding your credit after credit problems – another column)

How much am I allowed to keep?

There is a list of property in your province that is exempt from seizure in a bankruptcy and it’s the #1 site for bankruptcy information. If you are even considering a bankruptcy, I highly recommend you visit this site.

When is the bankruptcy over?

For those people who have not been bankrupt before, an automatic discharge can take place after nine months if the creditors, Superintendent of Bankruptcy, or your Trustee have not opposed your discharge and you have received insolvency counselling.

The law allows for a formal process of declaring insolvency by filing either a consumer proposal or an assignment in bankruptcy. Declaring insolvency is a last resort for the overcomitted debtor because of the social stigma attached to this drastic measure and of the detrimental effect on the bankrupt’s credit rating (Credit ratings will be discussed in a later column). However, bankruptcy may be the only alternative for individuals or families that do not have enough income to cover their regular living expenses and also repay their debts in full.

 

Bankruptcy is a sad economic fact of Canadian life and for the most part financial insolvency is not about money, it is about circumstances in life. Just remember your credit rating is not a reflection of your personal worth, it is a credit industry tool.

 

  1. Contact your bank and let them know what has transpired.
  2. Ask the bank to close your account number and open a new account – or to monitor the transactions on your account very closely.
  3. Several times a day (if you have online banking) I recommend that you log into your account and view what is going on.
  4. Contact the credit bureaus and let them know at:
    1. Equifax Canada Inc.
      Consumer Relations Department
      PO Box 190, Jean Talon Station
      Montréal Quebec  H1S 2Z2
      Telephone: 514-493-2314
      Toll-free: 1-800-465-7166
      Fax: 514-355-8502
    2. TransUnion Canada
      (For residents of all provinces except Quebec)
      Consumer Relations
      709 Main Street West
      PO Box 338, LCD 1
      Hamilton, Ontario  L8L 7W2
      Telephone: 905-525-0262
      Toll-free: 1-800-663-9980
    3. Contact Phone Busters – the Canadian Anti-Fraud – Call Centre at 1-888-495-8501
    4. Contact RECOL – Reporting Economic Crime online
    5. Visit the Consumer Measures Committee (CMC) and read the information about identity theft.
    6. Contact the Service Alberta Consumer Information at 1.877.427.4088
    7. Contact the BBB (Better Business Bureau)

At CAICCA we are very concerned about this situation. If you have any questions regarding membership in our Association please feel free to contact me directly at 1.877.588.9491