Robert and Martha were afraid to answer their phone.
In fact – they simply stopped picking up.
With $15,000 of debt, the Abbotsford couple feared it was the collectors calling.
They had been trying to balance their six credit cards by borrowing from one to pay the other. When that failed, they used two lines of credit, one for $5,000 and the other for $12,500.
Then they used the cards to pay the lines of credit, taking them back to square one.
The downward spiral started seven years ago, after Robert’s fifth knee surgery. He was no longer able to work at the box factory in Richmond where he had been employed for 33 years.
At the time, Marie, 56, was working as a nanny. While Robert, 65, was receiving disability pay, the two incomes weren’t enough to cover the bills. Interest charges were building.
Finally, they decided enough was enough.
“I was close to having a nervous breakdown,” said Robert.
Following a suggestion from Martha’s sister, the couple visited Abbotsford’s Credit Counselling Society.
The non-profit organization helps individuals and families find solutions to their debt problems with free credit counselling services, credit education and debt management programs.
With the help of a counsellor, the couple made a plan to get back on track.
That was five years ago. Now, they’re debt-free.
Credit card debt is a common scenario, said Scott Hannah, president and CEO of Credit Counselling Society.
“For a lot of people, it can happen over time and then sneak up on them,” he said.
“It starts with the month they find themselves a little short and then use credit to cover the shortfall, and then continue to spend more than what comes in each month. Maybe it’s $200 or $300 extra.”
It tends to reach a peak when someone loses their job, an injury occurs, or when a credit card reaches its limit and the minimum payment isn’t affordable.
Often, a lack of “strong money managing skills” is what leads to people finding themselves in financial difficulty, said Hannah.
People are also saving less than they used to.
“The average savings rate was over 10 per cent of what people were making. Now it’s less than two per cent.”
The key in avoiding this situation is creating a spending plan, which means accounting for living costs, retirement, seasonal savings and so on.
According to Hannah, 95 per cent of people aren’t operating with a budget in mind.
For more information about the Credit Counselling Society, call 1.888.527.8999 or visit www.nomoredebts.org.
Counselling may not be enough
For some people, counselling may not be enough to get them out of a financial nightmare.
Sheila Smelt is a trustee in bankruptcy with Sands & Associates, and has dealt with hundreds of cases throughout the Fraser Valley and beyond.
She said the most common mistake people make is not taking action soon enough.
“A lot of people come to me after they’ve talked to someone else – they’ve talked to everyone from their mechanic to their next-door neighbour, to the girl at the grocery store. Everybody’s got all sorts of stories about what’s good about bankruptcy and what’s bad … most of it is urban myths.”
Smelt said credit counsellors are great for people “with the ability to make the payments” but need somebody to act as a “referee.”
“But by the time somebody has got to the point where they recognize they have a problem, the problem is too big for them to deal with.”
As a trustee in bankruptcy, Smelt is a neutral party, who officially works for the court. She does not work for the creditors or the person in debt. She merely enforces the bankruptcy and insolvency act. However, she does guide people through the process, deal with creditors and debtors to arrange payment proposals, and provides financial counselling, “Which is helping people understand how they got into the mess and how to avoid making that mistake again.”
And these days, it is easy for people to get into money trouble.
Smelt says 90 per cent of the population is “one paycheque away from financial ruin” – living paycheque to paycheque.
If what’s coming in is what’s going out, and you’re not creating any savings, you are skirting with trouble, she said.
A classic example is someone who doesn’t pay attention to what they are doing, but wants to have everything now.
“Advertising is a big contributor. All the ads tell you you can buy now and pay later. You deserve it, you need the rewards – people can’t afford the things that they’re buying.”
And with high interest rates kicking in after the promotion period is over, “it’s not buy now, pay later; it’s buy now and pay forever.
“When a person uses credit, they’re borrowing from future income to make current purchases. And the more money you owe, the farther into the future you’re working – for free.”
Smelt offers a typical example.
A young couple starts out; both have jobs and want to create a life for themselves. So they buy a house.
And “that stretches their income.”
Then they decide to buy a car, which stretches it even more. Then, she gets pregnant.
“Now, all of a sudden, they want to maintain the same lifestyle on 50 per cent of the income.”
And Smelt said it’s the unwillingness to change that causes the problem. People begin to use more credit, to cover other debts.
Often it isn’t the amount of debt that brings people in to see Smelt; it’s all about the level of income in comparison to the debt.
She said someone on social assistance or receiving emergency funds from welfare has no ability to pay anything.
“For them, $5,000 in debt may as well be $500,000.”
On the other end of the scale, Smelt has seen people more than $2 million in debt, usually because of a failed business endeavour.
“Most banks are smart. They get people to give personal guarantees on business debt. So if the business fails, the person is on the hook.”
But on average, debt sits in the $30,000 to $50,000 range and consists of a broad mix of credit cards and lines of credit.
“When you see plastic, you don’t see money. It makes impulse buying easier.”
According to Smelt, the average number of cards in the average wallet is 11.
“So for everybody out there that has one or two cards, there’s somebody out there with 20.
“I have an individual who has been on welfare for their entire life. How this person got a credit card, I don’t know … $20,000 later I’m dealing with it.”
When to ask for help
Don’t wait until you’re in over your head to ask for financial help.
That’s the advice of Scott Hannah, president and CEO of Credit Counselling Society.
The society, which has a location in Abbotsford, helps individuals and families find solutions to their debt problems with free credit counselling services, credit education and debt management programs.
Their average client has between $25,000-$40,000 of credit card debt and seven cards, said Hannah. That doesn’t include car payments.
“People tend to procrastinate before getting active about debt,” he said. “Often, people come in when they’ve reached a point when they’re not getting anywhere with their debt because it’s too overwhelming.”
To avoid heading into financial difficulties, Hannah suggests watching for a few clues, which include constantly being in account overdraft, always paying monthly bills and utilities late, and only being able to afford the minimum monthly payments on bills.
“Even when you use a credit card to pay for a latte, it’s a sign. You’re doing it because you don’t have the cash on hand to manage everyday living expenses.”
Hannah also suggests creating a spending plan and remembering to always pay yourself first. That means putting money into savings, retirement, bills and discretionary spending.
And while it is hard for some people to pick up a phone and ask a stranger for help, Hannah said it’s better for the call to be made sooner rather than later.
If it’s done early enough, the individual, couple or family may only need to make a few simple arrangements, such as reducing payments at the bank, to get back on track.
In addition, when the society gets involved, creditors often stop adding interest.
For financial advice on how to avoid debt, visit mymoneycoach.ca or nomoredebts.org.