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February 20, 2015
We asked J. Douglas Hoyes, bankruptcy trustee, founder of Hoyes, Michalos & Associates, and advisor for MoneyProblems.ca, how big of a problem debt was for individuals today. He said the answer really depended on your perception.
While the average Canadian now owes $1.62 in debt for every after-tax dollar they earn (a number that keeps growing), many don’t worry about carrying all this extra consumer debt, he says.
Historically, low interest rates have made the cost of carrying the debt small, so the attitude seems to be that since people can borrow money at such low rates, why not buy a bigger home, more furniture, or a few extra items today and pay for it tomorrow?
“The concern, however, is that eventually you have to pay the piper,” Douglas says.
Some individuals have found they’ve accumulated so much debt that, while they can keep up with their monthly minimums, they will never be able to pay off the principal. They’ve tipped the scales of debt versus income so far they’ve become insolvent and don’t even know it yet.
While other at-risk debtors may be able to afford their debt today, what happens when interest rates rise, even a little bit? Or they lose a job or become ill? While not insolvent today, they are at high risk of becoming insolvent tomorrow.
Douglas recently checked in with us to talk more about debt, particularly how it can affect those who are retired or nearing retirement. Read on to get his insight on getting your financial house in order before you stop working.
Tell us about MoneyProblems.ca.
Moneyproblems.ca was started in 1999 by a group of Canadian bankruptcy trustees to provide free information for Canadians about how to deal with money problems. The idea was to provide free, unbiased information about different alternatives for getting out of debt. Since that time, we’ve added authors like Gail Vaz-Oxlade, a prolific writer and educator on debt and money management; and Sarah Milton, an inspirational money and debt coach. Our goal is to provide people with the tools, ideas and motivation to reduce their personal debt load.
Who should be reading your site?
Anyone who has trouble making ends meet because they carry too much debt, or anyone who wants to reduce their personal debt load. Although it was started by a group of bankruptcy trustees, MoneyProblems.ca is more than a site about bankruptcy. We provide tools and resources like budgeting worksheets, debt calculators and advice to help people in debt find ways to eliminate their debt and work toward a debt-free lifestyle.
What are the most common and/or most problematic types of debt we are carrying today?
Debt problems seem to run in waves.
Historically, the big problem was credit card debt. To some extent it still is in that many people still use credit cards as a stopgap when they run out of money at the end of the week. They build their balances while expecting things to turn around, but eventually find they owe more than they can repay.
The good news is, more consumers have become financially aware of the high cost of credit card debt and have moved away from that form of debt to lower cost options like lines of credit. However, even these can become a problem if not properly managed with the intent to pay off the principal.
Yet today, one of the most worrisome trends is the increase in the length and size of car loans. It’s the new “it” loan for lenders. It’s not uncommon now to see car loan terms as long as eight years. Car buyers are attracted to the fact that their monthly payments will be low, but what they don’t factor in is the reality that their car will eventually be worth less than what they owe. This has led to the second troublesome trend in car loans. Consumers who face the need to buy a new car because their old one is no longer serviceable (perhaps because of a car accident or just because it’s too old) find themselves in the bind of still owing money on a worthless car. Car lenders have jumped at the opportunity to roll this old car debt into their customers’ new car loan. The problem is, the customers now owe even more, and the interest rate is often higher because of the added risk.
How common is it for today’s retirees to carry debt going into retirement? What are the risks associated with this?
Statistics Canada estimates that roughly one-third of retirees still carry debt. Worse, two-thirds of those 55 and older carry debt as they are approaching their retirement years. It’s a huge concern.
At my firm, Hoyes Michalos & Associates, we conduct a study every two years of those who have had to file either a bankruptcy or consumer proposal with our firm to deal with their debt. We know that 10 percent of all insolvency filings involve seniors, and that percentage is on the rise.
The average insolvent senior carries an unsecured debt load of $68,800, and that doesn’t include their mortgage. Seniors carrying debt find themselves unable to sustain both their debt payments and living expenses when they enter retirement. A reduced or fixed income, when combined with debt, is a recipe for disaster. Senior debtors are highly likely to cite illness, injury or other health problems as the cause of their financial problems. It’s always the unexpected things that trigger a financial disaster; and in our senior years, we are just more at risk for the unexpected. For that reason, eliminating your debt before retirement is the safest approach.
What steps can we take to start paying down debt as we near retirement?
The first thing is to recognize that retirement is going to change your income level. Use this knowledge to take steps to make sure you are prepared:
1. If you don’t have one, sit down and make a budget of what your income and expenses will look like when you retire.
2. Use this information to change your lifestyle before you retire. Many find their consumer debt grows during retirement because they did not adjust their living expenses soon enough.
3. If you’re carrying consumer debt, like credit cards and lines of credit, pay them down fast. Start with the highest interest debts first.
4. Once all these debts are paid off, move into term loans. Make extra payments toward your mortgage. As you age, your house should be your asset, not the bank’s asset.
5. Don’t take those costly retirement trips until you are debt-free. Never put living expenses on credit.
What do you think are the worst decisions or actions someone nearing retirement can take when it comes to managing their debt?
There are two big things that I see that can lead to financial problems for seniors.
The first is continuing to use credit to fund their lifestyle during their retirement. If your debt is growing but your income is not, the end result will be more debt than you can repay.
The second problem is seniors continuing to financially support their children and grandchildren; and in doing so, placing their own finances at risk. And the risk goes beyond just providing them with money. One of the worst decisions a senior can make is to agree to cosign a loan for their child or grandchild. If that person cannot repay the loan, the financial institution will expect payment from the cosigner. This can put any retirement savings a senior does have at risk.
What are the advantages of retiring debt-free?
The two biggest advantages of retiring debt-free are flexibility and security. If you’re not making debt payments, you have more of your income left to spend on what you need and what you prioritize. If you owe $10,000 in credit card debt, your priority has to be, or at least should be, debt repayment. If you or your spouse becomes ill, without debt you don’t have the added stress of keeping up with debt payments when you add in the costs of medical bills.
What money-management decisions can retirees make to help ensure they remain debt-free through their golden years?
Manage your lifestyle to suit your new income level, don’t take on new debt during your retirement and have an open and honest conversation with your children about how you can help. Don’t let your family pressure you into feeling the need to help them out of their money problems.
What are the biggest headlines or issues you think seniors should be mindful of when it comes to their money?
Beyond managing their money carefully, seniors need to be extra cautious about financial scams and fraud. Con artists target seniors for a reason: they are often isolated from day-to-day support and are not always up to date on the newest technology.
Anytime you make any form of financial decision, whether hiring a contractor or investing your money or signing up for something online, do some research and get a second or even third opinion. Never make a decision or sign a contract under pressure. If you’re not computer savvy, ask your children or a younger friend to help you do some research. Knowledge is the best way to avoid costly mistakes.
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