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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.

Must-reads from Globe Advisor this week

Your CPP questions answered: Strategies for people who collect CPP and U.S. social security

Globe Advisor invited readers to ask questions about their Canada Pension Plan (CPP) benefits we can then pose to experts to answer. This week, Julia Chung, co-founder and chief executive officer of Vancouver-based Spring Planning Inc. and president of the Financial Planning Association of Canada, answers questions about those eligible for the CPP in Canada and Social Security in the U.S. Read more here.

This advisor’s entrepreneurial mom inspired him to seek a career in finance and eventually start his own firm

In the Behind the Advice series, Globe Advisor asks advisors about their relationship with money from a young age, lessons learned over the years, and how their experiences influence the advice they give clients. An-Lap Vo-Dignard, senior wealth manager and portfolio manager with Vo-Dignard Provost Wealth Management Group at National Bank Financial Wealth Management in Montreal, talks about saving for his first bike, watching his mother buy and grow businesses, and why he thinks new advisors shouldn’t ask family to be their clients. As told to Brenda Bouw.

Why this money manager is buying utilities and pipelines while cutting back on banks and tech

While many investors are predicting a soft landing right now, Craig Basinger still sees an increasing risk of a global economic slowdown. As a result, the chief market strategist and his team at Toronto-based Purpose Investments Inc. have been increasing their exposure to more defensive, dividend-paying companies in telecommunications, utilities and pipelines and reducing their exposure to cyclical sectors such as banks, technology and industrials. “For the past couple of decades, with bond yields falling, investors were moving en masse into the dividend space. That’s not the environment we’re in anymore,” says Mr. Basinger, whose team oversees about $1.8-billion of the firm’s $20-billion in assets. Brenda Bouw asks what he’s been buying and selling.

Why Canada’s former chief actuary says you should wait to take your CPP benefits

Jean-Claude Ménard was Canada’s chief actuary from 1999 to 2019, responsible for preparing actuarial reports on programs such as the CPP and the Old Age Security (OAS) plan, among others. Mr. Ménard says Canadians should wait to take their CPP or Quebec Pension Plan (QPP) benefits, including his decision to start taking his QPP benefits last year at age 67. Brenda Bouw reports.

Also see:

Do Canadians’ saving goals match their ability to retire?

Can the uranium bull market keep its new glow?

How complacency has set the stage for another financial crisis

When does it make sense to take out an RRSP loan?

What happens to an RRSP when a client relocates to the U.S.?

What you and your clients need to know

A deep dive on the OAS clawback: How many people are affected, and how much does it cost them?

The Old Age Security recovery tax, known widely as the OAS clawback, starts to kick in when a recipient makes more than $90,997 in 2024. A little more than 500,000 seniors were affected by the clawback, or 8.3 per cent of total OAS recipients, according to the most recent data from Statistics Canada. That may sound like a modest number, but it’s enough to rank the clawback second on the retiree’s fear-and-loathing scale, behind mandatory annual withdrawals from registered retirement income funds. Expect more clawback exasperation ahead. Rob Carrick has more.

Canadians regularly shortchanged in banking and investment disputes, analysis contends

Canadians mistreated by financial firms routinely accept less compensation than independent mediators say they deserve, according to a coalition of investor and consumer advocates. The new analysis, detailed in a comment letter submitted Wednesday to securities regulators across the country, represents the latest salvo in a decade-long battle to establish a binding regime for investment-related disputes. Currently, the non-profit Ombudsman for Banking Services and Investments can only recommend compensation up to $350,000, which firms can just refuse to pay. Jameson Berkow reports.

New tax rules have many Canadians in a bind: It’s hard to find an accountant but risky to DIY

Canadians subject to Ottawa’s new trust-reporting rules who don’t already have an accountant or can’t afford professional tax advice face an urgent question: Can regular people, with enough research, fill out the paperwork on their own? Federal rules aimed at increasing transparency around trusts have introduced new filing and disclosure obligations, including for what’s known as “bare trusts,” which often aren’t documented in writing. The requirements affect many Canadians who had their names added to a family member’s home title or financial accounts, even if they never intentionally or formally set up a trust. The deadline to submit the required forms for the 2023 tax year is April 2, and failure to do so can result in penalties. Erica Alini explains.

Gen Z finance terms such as ‘doom spending’ and ‘loud budgeting’ is a rebranding of old concepts. Is there a downside?

Millennials first entered the personal finance scene “walking around like they rent the place.” They rebranded having roommates as “co-living.” Now, we have Gen Z and, frankly, anyone on social media, rushing to develop new financial vernacular that generally just reinvents well-worn concepts. Doom spending, a much more financial existentialist-rooted version of retail therapy, quiet luxury (stealth wealth) and loud budgeting (spending less than you earn) are not new phenomena. But is there a downside to emphasizing buzzworthiness over substance? Preet Banerjee has more.

– Globe Advisor Staff

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