The debt drag

Paul Salewski has worked in the debt and credit counseling business since 1985.

The biggest change he has seen in the last 15 years has been an increase in the number of people filing for bankruptcy.

“People have always had money problems,” says Salewski.  “[But] Canadian debt is at the highest level ever, so you can only expect there would be more insolvency.”

Last month BMO Nesbitt Burns reported that average household debt to disposable income ratio has reached 146.8 per cent.

People become overwhelmed by debt once the collection agencies start calling— call upon call upon call.

This latest figure comes on the heels of a Bank of Canada report that Canadians have fallen behind their American neighbours in the percentage of their income saved.

Bank of Canada governor Mark Carney, finance minister Jim Flaherty and even Prime Minister Stephen Harper have all raised the alarm: if interest rates rise— and they most likely will— woefully over-leveraged Canadians are going to feel the pinch as the cost of debt rockets upwards.

Salewski is co-founder and vice-president of Doyle & Salewski Inc., a debt and insolvency services firm with offices all around Ontario.

From the outside, his office on Bank Street looks a bit like your average H&R Block. But for a lot of the people who come through the front doors, it looks more like a life preserver.

“People become overwhelmed by debt once the collection agencies start calling— call upon call upon call,” says Salewski. “They are using one credit card to pay another credit card off [and] they can’t meet the requirements to pay their bills.”

In most cases, by the time that individuals seek Salewski’s assistance, they are typically unable to meet their financial obligations.

He will often step in at this stage to renegotiate or reorganize debt, consolidate finances, prepare a consumer proposal or file for bankruptcy.

He says that a lot of the people that come to his office are initially embarrassed but that usually gives way to a feeling of relief as the pressure comes off and they begin to deal with their financial problems.


Despite the statistics showing increasing household debt levels, Salewski doesn’t think most Canadians take the issue of debt seriously enough.

“We see a significant amount of people who come to visit us with severe financial problems, who don’t really believe they’ve got a financial problem,” says Salewski.  “They believe they can work it out or do something and sometimes they can’t.”

Sometimes the expectation of having an income to pay off all those debts doesn’t materialize.

He says a lot of events can imperil a person’s financial situation. Even those who feel that they have everything under control can experience a catastrophe.

Big events that can trigger bankruptcy include the loss of a job, a sudden illness or injury, or the escalation of a gambling habit or addiction.

Even more common as the source of financial problems are divorces.

“Marital breakdown is significant,” says Salewski, “where spouses break up and they’ve got combined debt that they can together handle but can’t handle on their own.”

According to Henrietta Ross, CEO of the Canadian Association of Credit Counselling Services, financial problems are often associated with particular age groups, with the youngest and oldest generations taking the brunt of the hardship.


Ross says that students graduating from post-secondary are often unprepared to carry the financial burden of their student loans.

“Sometimes the expectation of having an income to pay off all those debts doesn’t materialize,” says Ross. “Now they have to start paying that debt back but they really don’t have the income from the job they were expecting their studies to have prepared them for.”

At the opposite end of the age spectrum, seniors can be unprepared to leave the working world.

“A lot of people don’t really plan for retirement that well,” says Ross. “With the recent economic downturn… a lot of portfolio value has been lost, and these are folks that find that the money that they saved up, and were relying on for retirement, isn’t going to be enough.”

“They are trying to maintain a lifestyle from before they were retired into retirement and they can’t afford to do it.”

And even retirees who enjoy a greater degree of wealth have been called upon in increasing numbers to assist their children and grandchildren through the recession. Ross adds that many seniors are even going into debt to help their dependents.

But it is the middle generation, people still in their prime earning years that could suffer the most in the coming months.


Compounding the personal issues is another looming economic threat.

A hike in interest rates by the central bank is expected this fall, or even as early as the summer.

Canadians will have to prepare for the increased cost of borrowing and maintaining their debt.

“My prediction is that if interest rates go up there is going to be some hardship in terms of keeping money flowing to meet payments, “ says Ross.

Interest rates are very much a determinant of ultimately what you can afford to pay and afford to handle.

Ross says that middle-aged people are the most vulnerable to the financial pressure caused by a hike in interest rates.

“These are the folks that have very very high expectation for gratification,” says Ross. “They’ve potentially been accumulating a lot of debt when interest rates have been low and they have bought a home that is really beyond their means but was made more affordable because of low interest rates and low payments.”

A rate hike would have a “significant impact” on indebted Canadians, agrees Salewski, as many may already be over-leveraged on their credit cards and mortgages.

Salewski points out the trap that homebuyers get themselves into trouble if they are buying a home that they just barely qualify to finance.

These same people run into problems when interest rates increase and they see their  payments each month raise by $100, $200 or $300 dollars a month.

“Interest rates are very much a determinant of ultimately what you can afford to pay and afford to handle,” says Salewski.

According to Ross, many middle-aged persons are essentially living “on the edge”:

“More than likely they’ve probably tapped into their credit cards and maybe their line of credit to keep things afloat for a little while,” says Ross. “Here is a group that once interest rates start to rise are going to be experiencing a lot of difficulty keeping up with those payments on their house or their car.”


When it comes to assisting people with their debt, Salewski and Ross represent very different kinds of services.

The Canadian Association of Credit Counselling Services represents debt and credit counselors working with clients on a non-profit basis.

“We’re not trying to sell anything, or convince the public to purchase a credit product,” says Ross. “We’re putting this out just to help Canadians to understand the shape they are in.”

But for people unable to sustain their debt and interested in filing bankruptcy or obtaining a consumer proposal, currently, their only option is to consult a licensed bankruptcy trustee like Doyle & Salewski.

According to Salewski, eliminating debt requires that people have an accurate sense of their own cash flow.

The key to keeping your finances out of the red, Salewski tells his customers, is to know where your money goes and to know what your fixed costs are.

A lot of people fail to account for all of their discretionary spending on things like snacks, food, cigarettes and lattes.

“A significant number of people don’t budget,” says Salewski. “A significant amount of people just don’t understand where their money goes.”