Consumer debt is at an all-time high.zhuweiyi49/iStockPhoto / Getty Images
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Consumer debt is off the charts as a person’s income purchasing power doesn’t stretch as far as it used to due to rising cost of living and higher interest rates. What’s different about debt these days is that people are likely to run into trouble paying for the essentials, such as housing, versus discretionary purchases that can be cut easily from one’s budget.
Globe Advisor reporter Deanne Gage spoke with Scott Terrio, manager of consumer insolvency at Toronto-based Hoyes, Michalos & Associates in a LinkedIn Live event to discuss the causes of spiraling debt loads and why the Canada Revenue Agency (CRA) has stronger powers than most creditors.
How did we get to a place where household debt is at an all-time high?
We had a 12-year run of near-zero interest rates, so debt built up organically even without the pandemic, or inflation and rates going back up. But those things compounded the problem.
For instance, years ago, the rule of thumb was not spending more than 30 per cent of monthly net income on housing. Today, we see people spending upward of 50 per cent to 60 per cent. We know we shouldn’t spend more but we have no choice due to the rising cost of living. We’re all paying more for the basics. It’s a huge societal problem … and it’s not like our wages are going up [to keep pace].
What are the biggest money missteps that you see as an insolvency expert?
Divorce and separation are the number one wealth killer. Try managing your budget when your income has just been halved or less. Unexpected illness and being unable to work are other huge ones. It’s easy to get into a lot of debt quickly if you’re off work for a long time.
But it isn’t the balance sheet that drives people into our office. While they may have more debt than assets, what makes them call us is that they can’t make their debt service payments anymore.
What happens if an individual owes a substantial debt to CRA?
If the CRA has been calling and sending e-mails, you’re on its radar and the CRA can do a lot more to you than other creditors. The Big Five banks and other lenders need a court order to make you pay. The CRA skips all that – they can freeze your bank account and garnish your wages by simply sending a note to your employer or bank.
They can also put a lien on your house, which limits how I can help. The CRA will take unsecured debt, such as tax debt, and secure it against the equity in your house. While I can help with unsecured debts, unfortunately, I can’t undo a lien from CRA.
So if someone has multiple debts, does this mean they should pay the CRA debt first?
They should try to pay them all. It’s tempting to knock off one creditor if you come into a lump sum of money to devote to your debts. But preferring one creditor over another one can cause its own problems.
This interview has been edited and condensed. The entire interview can be viewed here.
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What happens to an RRSP when a client relocates to the U.S.?
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– Globe Advisor Staff