How Much Debt is too Much Debt?
Canadians like their stuff. They’re not afraid to go into debt for their new cars, homes, large-screen TVs and other items, big ticket and small. As a result, many of us owe way too much.
Moody’s, one of the world’s leading credit agencies, recently gave Canada an AAA rating for its “relatively solid economic performance” and stable banking system. But at the same time it warns that the country’s high household debt levels and soaring house prices pose “a potential risk” to those strengths.
Even though debt isn’t usually a good thing, sometimes it can be justified. Rather than simply buying something we can’t afford, debt can be a shrewd way to get ahead if you’re reasonably sure that you will have the means to pay it off.
For example, a graduating lawyer expecting to make $250,000 could probably take on a mortgage and expect to pay it off in a decade, where someone freelancing in a shakier industry might find themselves on the road to financial disaster owing this much money.
So how much debt is too much?
A recent Financial Post article reports:
Statistics Canada says that the average level of household credit market debt to disposable income was 163.6% between April and June. That means we owe almost $1.64 for every $1 that we make. . . . Economists have said that a more stable ratio would be between 110% and 120%. The ratio was closer to those figures in the early 2000s when the economy was on firmer ground, says Cris deRitis, senior director at Moody’s Analytics.
From the bank’s point of view, when you total your monthly debt payments along with heating and taxes for your house, this number should not exceed 40% of your income. Lenders call this the Total Debt Servicing Ratio (TDSR). If you exceed this ratio, then you will have a hard time borrowing money.
When you make out a budget, you can figure out what minimal amount you need to support your lifestyle. Once you know this number, you can figure out how much money you can put towards your debts. If you don’t have enough money left over to pay these, then your debt level is too high.
And keep in mind that the bank doesn’t know this number when they offer you more credit. Just because you’re eligible for increased credit doesn’t mean you can afford it.
Generally speaking, if you’re worried that your debt level is too high, it probably is. The fastest way of all to measure this the 50% rule. If more than 50% of your income is going to servicing your debt load, your debt is too high. No question about it.
So in the end, if you’re having trouble servicing your debts and would like some help in assessing your prospects and options for dealing with the problem, call us at Richard Killen & Associates. We can help you sort it out and the consultation is free.
Serenity After Trial
“I thought the process was going to be hideous, humiliating and shameful,” Karen recalls of her bankruptcy more than a decade ago. “I was terrified when I went to see Richard Killen. I was in tears as I walked into his office.”
Karen’s story of battling debt is a familiar one. She had decided to make a brave midlife career change from working as a bartender. Finding employment in a Toronto health food store, she made the decision to go back to school to get certified as holistic nutritionist.
In classes for two years and working for close to minimum wage, she had to get student loans to make ends meet. And when this money fell short, she dipped into a line of credit.
“I found myself in about $30,000 of debt,” says Karen. “Things had gotten out of hand. I was scared and didn’t know what to do. But I talked to a friend who had gone through a similar crisis and he suggested I go to see Richard at Richard Killen & Associates.”
Karen was quickly reassured in her first meeting with Richard. “I sat down in the chair and he just made me laugh – in a nice way. He was just very kind to me. He assured me that this kind of thing happens to people and it doesn’t mean that they are bad or that they have to go through a humiliating experience.”
Killen points out that making mistakes simply qualifies all of us for membership in the human race. “We all make mistakes – every day,” he says from his Toronto office. “It’s what we do about them that defines who we are. This is something we forget when we are swamped by the problems.”
Killen then outlined her options, helping Karen to realize that not only could she survive but successfully manage the bankruptcy process. Most importantly, he made her realize that the choices were hers – nobody else’s. “He never left me hanging. If I called he was always available,” she says. “I always knew how I was doing during the nine months of the bankruptcy process.”
Karen was fortunate to able clear away her student loans along with her other debts when she received her bankruptcy discharge. “Student loans are different from regular debts such as credit cards,” explains Killen. “They are not given for normal profit-making reasons. They are meant to help us improve our future life by improving our education, so it’s understandable that they should be given special status under the law. A person has to make a reasonable effort to pay them back. However, sometimes no matter how hard a person tries they just can’t do it. If after seven years a person still can’t pay then the student loans qualify to be treated like any commercial debt. This is what happened with Karen”
Within a year of going bankrupt, Karen hit her new career path with full force. She managed a series of health food stores, worked in an holistic apothecary and had clients on the side for her holistic nutrition counselling.
A couple of years ago, she decided to make another major life change – less a career shift than giving herself space to understand and act upon her priorities, truly achieving that elusive work-life balance. She returned to the support network of friends and family in small-town Nova Scotia. And while she considers her next move, she is doing part-time work and volunteering in the kitchen of a Buddhist centre, practising meditation and finding a measure of serenity in the combination.
“The great thing is,” says Karen, “if I hadn’t gone through the bankruptcy process I wouldn’t be where I am today. It’s given me the space to get on with my life. As hard and distasteful it was to contemplate beforehand, it turned out to be one of the best things I could have done.”
Is Money the Root of All Evil?
As many of us struggle with our finances, we have a love-hate relationship with the all-mighty dollar. To put our problems in perspective, or to give voice to our feelings, here are some words from notable figures on the subject of money.
“Anyone who lives within their means suffers from a lack of imagination.”
“If you want to know what God thinks of money, just look at the people he gave it to.”
“Money is better than poverty, if only for financial reasons.”
“I have no money, no resources, no hopes. I am the happiest man alive.”
“I’d like to live as a poor man with lots of money.”
“You can be young without money, but you can’t be old without it.”
“Money is like manure. You have to spread it around or it smells.”
—J. Paul Getty
“A rich man is nothing but a poor man with money.”
“Anybody who thinks money will make you happy, hasn’t got money.”
“You have to go broke three times to learn how to make a living.”
“Your call to us may be the most stress-relieving call you ever make.”
The Road to Recovery
It was a perfect storm of personal and professional misfortunes. Bryan was a successful independent marketing communications consultant, well respected in the business with a good network of friends. But in his late 50s he discovered that he had adult attention deficit disorder (ADD), with a host of problems, ranging from an inability to focus to poor organization skills and depression. After years of laboured compensation for the symptoms, he felt the copying structure he had carefully built begin to fall apart.
Then he lost his biggest client. With the onset of a deep depression, he found it harder and harder to do work and make up for the lost income. He started to drain his savings and line of credit to stay afloat.
He took a consolidation loan. The Canadian Revenue Agency called about missed tax installment payments. He had to ask for a personal loan from a friend to pay for a month’s apartment rent. He spent a Christmas without money to buy presents. He missed a bank loan payment.
“It was the lowest ebb in my life. I felt like a complete failure,” says Bryan in his quiet voice. “My parents were alive at that point. They berated me for my financial mismanagement. My father had been a bank manager. He told me that if I went bankrupt I would never be able to get credit again.”
With this sword hanging over his head, and not much hope to propel him forward, Bryan went to an assessment with Richard Killen. He may have gone into the meeting with intense sense of “embarrassment” at winding up in this precarious financial position, but he was soon reassured to learn that his problems were manageable.
After a detailed evaluation of his situation and going through the ins and outs of a consumer proposal versus a bankruptcy, Bryan felt the latter would best suit his situation. The instability of his income at the time would have made it difficult to commit to the monthly payments a consumer proposal would demand. But the most important thing was that the decision was his to make. This helped put him back in control of his financial life – a luxury he had not experienced in a long time.
Almost immediately Bryan felt a surge in spirits knowing that the burden of debt would be lifted. “It was this huge sense of relief,” he recalls. “I was told by Howard that when the phone rings, just to give them his name and number, and he would take it from there. When the bank called the next week, they were very matter of fact and nice about it when I told them. It was just business for them.”
Filing for bankruptcy in 2003, Bryan was able to keep his car, since he used it for work purposes, as well as his personal assets. And he didn’t have to pay any portion of his income to creditors, since it fell under the legal threshold set in the Bankruptcy and Insolvency Act.
During the bankruptcy, he attended the mandatory credit counselling sessions held at Richard Killen & Associates. At the same time, he underwent treatment for his ADD, getting it under control with therapies that included learning the complex body motions of the martial arts.
Nine months after filing for bankruptcy Brian was discharged and able to make his life anew. What about his father’s dire prediction that he would never get credit again? “Evenbefore I was discharged, credit card companies were calling me and offering me credit. I applied for a Royal Bank Visa after discharge and have never missed a payment,” he says.
Since then, Bryan has gone from strength to strength in his life. The return of his self-esteem has enabled him to rebuild his business. He has co-founded a company that will create a smartphone app to help kids with ADD. He is poised to take his third-degree black exam in karate. He has downsized and simplified his life to better protect him from financial vagaries and to minimize the disorganization associated with ADD.
Bryan adds with pride, “It’s a great feeling to get your life back and become a fully contributing member to society again.”