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Sea of red ink

As Canadians sink deeper in the hole, bankruptcy trustees see their business booming

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Bankruptcy trustee Jillian Taylor-Mancusi warns rising interest rates will bring a rude awakening.

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Bankruptcy trustee Jillian Taylor-Mancusi warns rising interest rates will bring a rude awakening. Photo Store

He's 28 years old, up to his eyeballs in debt, and seriously thinking about doing the previously unthinkable -- filing for personal bankruptcy.

Matt (not his real name) says he got into his financial predicament by racking up nearly $70,000 in debts, most of it outstanding student loans, over the past 10 years.

Unable to find a job in his chosen field -- international development -- the Winnipeg university graduate is managing a retail store instead and facing the prospect of another 10 to 15 years of living the kind of a life he no longer wishes to live.

"I'm done school and I'm still living paycheque to paycheque. I've been doing that for 10 years, and I'm tired of living that way."

And Matt is not alone. A national network of bankruptcy trustees who specialize in dealing with personal bankruptcies -- Personal Bankruptcy Canada -- says far too many Canadians are struggling under a growing mountain of debt.

And PBC officials warned earlier this week these people need to adopt an aggressive plan for reining in their borrowing and reducing their debt loads if they hope to avoid disaster when interest rates start to climb.

"Canadian households are now as indebted as Americans were before the U.S. housing crash. To make matters worse, Canadians are taking on more debt and reducing debt payments," PBC president David Smith said. "This is an absolute disaster waiting to happen. We need to change the unquestioned attitude that living in debt is normal."

One local bankruptcy trustee -- Jillian Taylor-Mancusi of LCTaylor & Co. -- said she's worried that because consumer debt loads and personal bankruptcy rates are lower here than in some parts of the country, Manitobans may think they have nothing to worry about.

"But Manitobans are creating a standard of living that's based on credit," Taylor-Mancusi said. "And when interest rates go up, and it's inevitable they will go up, a lot of people will be in for a big surprise."

To demonstrate what kind of impact higher interest rates can have, she cited recent statistics that show the average Canadian is paying $1,398 a year in interest payments on their personal-line-of-credit debt.

If rates go up one per cent, that number will increase by $350 a year, she said. And if they climb by two per cent, which she maintains is not an unreasonable assumption, their yearly payments would jump by $699.

"Three hundred and fifty dollars, if you're living on a pretty tight budget, is a lot of money. But $700 is going to be a big surprise for some people."

She also noted lines of credit aren't the only things that will be affected when interest rates rise. So, too, will things such as credit cards and mortgages, and when you add all of the increases together, it could be enough to push borderline debt-holders into bankruptcy.

Matt admitted he's barely getting by now, even though he doesn't have a car and has little in the way of possessions.

"I can make my payments, (but only if) I want to have absolutely no life. And I won't be able to afford a house until I'm in my 50s."

He said he reviewed his situation with a bankruptcy trustee and his options are to continue living that way, try to negotiate a deal with his creditors that would allow him to write off some of his debt -- it's called a consumer proposal -- or file for bankruptcy.

'Canadian households are now as indebted as Americans were before the U.S. housing crash. To make matters worse, Canadians are taking on more debt and reducing debt payments'

He was told that even if he files for bankruptcy, he'll still have to repay about half of his debt, including his government student loans.

"But that's still far more manageable (than the current situation)," he added.

While it's cold comfort, Matt said he knows he's not alone.

"I know of four other people who are in the same situation, and three of them are thinking of doing the exact same thing (filing for bankruptcy). This is a powder keg. This is a big issue."

And it's not just university grads who have to worry about getting in over their heads.

Catherine (not her real name) and her husband were forced to file for bankruptcy three years ago when she lost her high-paying job in another city because of the recession and a downturn in the housing market there wiped out all of the equity in their home.

They eventually lost the home to their bank, and moved back to Winnipeg -- their hometown -- to begin rebuilding their lives.

She said they also discovered just because you file for bankruptcy doesn't automatically mean all of your debts are wiped out. They both found jobs here, and because they had a combined monthly income of more than $2,700 (roughly), they had to repay about half of the more than $150,000 in mortgage debt that was owing when they filed for bankruptcy.

With the help of a bankruptcy trustee and a lot of penny-pinching, they repaid it. But they're not out to the woods yet.

Her husband is holding down two jobs and she's gone back to university to upgrade her education. Because she can't get a student loan, they're having to scrimp and save to pay for tuition and books.

"It (filing for bankruptcy) devastated me and devastated him. It's taken a terrible toll on both of us," she said. "We're doing very well now... but it will take us five years, I guarantee you, to rebuild out credit."

To avoid find themselves in a similar situation, Taylor-Mancusi said it's imperative that debt-laden consumers who are barely keeping their heads above water take immediate steps to prepare for the day when interest rates rise.

Here are some of the things she recommends they do:

-- Avoid taking on any new debt.

-- Concentrate on paying off your most expensive debts, usually credit cards with a high interest rate, as quickly as possible.

-- Strive to pay off your credit card balance every month.

-- Also pay down your mortgage as quickly as possible by making a few extra payments every year. And if you're paying monthly, switch to bi-weekly payments. That can save thousands of dollars in interest charges over the life of a mortgage.

murray.mcneill@freepress.mb.ca

Republished from the Winnipeg Free Press print edition August 3, 2013 B4

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