Bust! Managing Debt

Bust!
Managing Debt
Continuing Education for
Financial Service Professionals

Copyright 2016 CLIFE Inc.
All rights reserved. Any reproduction of parts or all of this book and its contents by
any means electronic or mechanical is prohibited.
Bust! Managing Debt is relevant to all those who work in the financial services
industry or in association with life insurers. The information in the course is
provided for educational purposes only; it should not be construed or interpreted
as providing advice. Agents and advisors should always seek guidance from their
principals and compliance experts in regards to informing themselves and others
about details of the products they sell and other considerations of their business.
We welcome all feedback and suggestions for additions to the course. Please send
your comments to info@clifece.ca.
CLIFE INC.
6 – 14845 Yonge Street
Suite 139
Aurora, ON
L4G 6H8
www.clifece.ca
Bust! Managing Debt provides continuing education credits upon satisfactory completion of an
online test. Please see the website for details or email info@clifece.ca.
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Table of Contents
1. The Debt Problem 4
2. Good Debt, Bad Debt 7
3. Some Causes of Debt 9
4. Understanding the Credit Report and
Credit Scores 22
5. The Money Under the Mattress 28
6. Digging Out: Debt Consolidation,
Management and the Consumer Proposal 40
7. The Last Resort 45
8. How to Reduce Debt 49
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1. The Debt Problem
This course addresses one aspect of personal
finance about which most of us would rather turn
a blind eye: debt.
In 2015, Canadian household debt to income ratio
hit a record high of over 165%. That means
households held more than $1.65 in debt for
every dollar of disposable income.
The Bank of Montreal reports that roughly 80% of Canadians are in debt and
nearly two-thirds would have trouble affording their debt if interest rates rise
by 2%. 1
Consumers have been drawing down their savings to buy houses, cars,
furniture and clothing. Credit-card spending rose by 8% in 2015, with spending
on restaurants and fast food up more than 12%.
Canadians now spend an average 14% of after-tax income on their debts.
Some will manage these debts, and some will not. Those who don’t are going
to find themselves in financial difficulty and some will go broke.
Being broke is quite different from being poor. Poverty results from little or no
money being present for the individual or the household. It is a condition that
tends to be permanent, or almost so. Being broke is event-based. It occurs as a
result of ill fortune or improvidence. A person had money, something
1 http://www.theglobeandmail.com/globe-investor/personal-finance/household-finances/canadianhouseholds-still-adding-debt-but-pace-slowing-equifax/article26366796/
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happened once or a number of times, and the money they have is now gone ---
or it just isn’t enough to pay the bills. He or she is broke.
Being broke gives rise to a witches’ brew of emotions:
o Blame, such as the type of blame that arises from financial
mismanagement or squandering savings.
o Guilt;
o Sorrow;
o Greed;
o Anger.
Failure to take personal responsibility for finances due to lack of interest or
lack of knowledge can also be a root cause of financial disaster. However,
pointing the finger at a spouse or partner doesn’t turn the tables.
However, being broke --- too little money to pay the bills --- can result from
circumstances that can’t be anticipated. Even when planning and saving may
have been done in better times, due to circumstance, it is no longer enough to
shoulder the financial burden.
The issue of insolvency is also especially pertinent in regards to seniors. A
review of 6,000 insolvency files in 2013 and 2014 by a bankruptcy trustee in
Ontario found the highest-risk groups for insolvency are seniors followed by
single parents, and people with large student loans who do not qualify for
traditional low-cost borrowing options, such as lines of credit. 2
As the saying goes, tough times call for tough measures.
o Let’s see how people go broke so that you can advise clients on
behaviour that might be leading in this direction. An ounce of
prevention is worth a pound of cure!
2 http://www.theglobeandmail.com/report-on-business/payday-loans-predatory-loan-sharks-or-crucial-fix-ina-pinch/article24463029/
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We’ll review the importance of the credit score.
We will also look at ways of finding “money in the mattress,” to find
money that can be used for debt payment.
We’ll look at what happens when being broke becomes insolvency and
the only avenues open are a consumer proposal or bankruptcy.
Finally, we’ll look at some smart and easy ideas to reduce debt.
This information gives perspective on one side of financial management that is
often overlooked. It helps the advisor prepare answers if he or she detects
trouble ahead or receives the distressful phone call from the client who is in
debt trouble and needs solutions.
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