Jewellers making mortgage and car loans in the shadow lending market are afraid of the truth
If you really knew who you were dealing with for that loan and what the real costs were, and how they felt about you, you certainly would question the wisdom of doing it. Here is what one such jeweller famous for his television commercials said:
The shadow lending market Canada and the shadow lending mortgage market Canada
How times have changed! Did you ever think you’d see the day when television commercials featured jewellers offering you mortgages? Yes, there are now a growing number of “alternative lenders” offering mortgages; of course at interest rates well above what traditional financial institutions are charging. One mortgage broker (who was not identified by name) said that although major Canadian lenders offer five-year fixed mortgage rates at about 2.5% to qualified borrowers, rates in the private market range from 7% – 15%. In addition to higher service fees, the market is also weakly regulated, allowing lenders to take advantage of the estimated 20% – 30% of Canadians with limited or no options at traditional financial institutions due to low income or a poor credit score.
The shadow lending market is growing fast
This shadow lending market is growing faster than it can be regulated and preying on the most indebted, vulnerable Canadians. A CIBC report from earlier this year noted that lending by non-commercial bank lenders has doubled since 2012. The Bank of Canada warned about the risks inherent in the shadow banking sector in its most recent Financial System Review last month. The shadow market is estimated at less than 10% of Canada’s mortgage market, much less than the 30% estimated for the pre-crash U.S. market. Low interest rates make it very attractive for people to continue borrowing and pile up debt, making it an ideal climate for the shadow lending market to continue to grow at an ever faster pace.
Why are Canadians falling prey to these shadow lenders?
They have multiple mortgages, taking equity out of their homes to cover other debts
When they get into financial difficulty, the homes have been used as ATM machines because of the increasing values
Then they fall behind on mortgage payments and are threatened with foreclosure. Mortgages in Canada are considered “full recourse” loans, which means the borrower is responsible for repaying a loan even in the case of the lender taking over and selling the home through power of sale proceedings because you could not keep up the mortgage payments. Canadians who don’t qualify for a bank loan have been forced to refinance in the shadow lending market to avoid losing their home.
When do people generally want information about personal bankruptcy alternatives?
Personal bankruptcy alternatives are always sought after an economic downturn. The economic downturn is causing more people to rely on credit to supplement their income and/or their lifestyle. This mountain of debt will ultimately result in bankruptcy or hopefully, an alternative to bankruptcy.
What Bank of Montreal and Statistics Canada say about Canadian household debt
In BMO’s Annual Debt Report, the average household debt of those surveyed is $92,699, more than $4,000 higher than the four-year average dating back to 2012. And servicing that debt, which includes mortgages, lines of credit and credit card debt, is costing $1,165 a month.
According to Statistics Canada:
The debt-to-income ratio of Canadian households is 163.3% which means for every dollar Canadians earn, they owe $1.63 in debt
Canadian households now owe $1.841 trillion in various forms of debt
Adding debt to more debt is not a solution to the problem; it compounds the problem. If you are using credit cards to supplement your income or your lifestyle, you have a serious problem that needs professional help. Don’t wait until bankruptcy is your only option. You should be learning about personal bankruptcy alternatives before it is too late.
Is there such a thing as bankruptcy solutions?
We are asked this question all the time. Before even considering bankruptcy, I always want to discuss 3 formal alternatives to personal bankruptcy:
Credit Counselling Credit counselling is in reality debt counselling. Professionals provide assistance with a host of issues related to debt including budgeting, finding debt solutions, working with your creditors and rebuilding credit.
Debt Consolidation Debt consolidation is a single loan that allows you to repay your debts to several or all of your creditors at once, leaving you with only one outstanding loan.
Consumer Proposals Consumer proposals are formal offers made to your creditors under the Bankruptcy and Insolvency Act (BIA) to modify your payments. e.g. paying a lesser amount each month for a longer period of time and paying a total lesser amount than you owe, all on an interest-free basis!
In addition there are informal personal bankruptcy alternatives including budget review, contacting your creditors (including your mortgage lender), selling an asset and contacting the Federal Government’s Repayment Assistance Plan (if you’re having difficulty repaying your student loan debt).
Payday loan lenders only no credit checks are predators
There are 10 ways a payday loan charges an illegal interest rate. Payday loan companies (also known as alternative lenders, fringe lenders and high risk lenders) are predators. Payday lenders prey upon the population that can least afford it – people in financial difficulty who don’t qualify for a loan from a traditional financial institution because they deem them too high risk. Some of these predators don’t even have to pay for store fronts as many are payday loan lenders online and issue a payday loan online only.
There is no such thing as the best online payday loan companies
The legal limit for interest rates on a loan is 60% per annum according to the Criminal Code of Canada. So how do online payday loan companies get away with charging way over 60% for payday loans online?
The ten ways payday loan companies charge illegal interest
They get away with it by charging fees instead of calling it interest, however the Criminal Code of Canada considers the following interest, which are all charged on a payday loan:
Interest
Administration fees
Setup fees
Processing fees
Convenience charges
Verification fees
Brokers’ fees
Collection fees
Loan repayment fees
Renewal fees
What does this mean in dollars and cents? Service fees for high risk loans online usually cost $10 to $35 for every $100 borrowed, or 10% to 35% of the amount of the loan. A $300 payday loan, due in two weeks, may cost you between $30 and $105, depending on the fees that apply. This is the amount that you’ll owe in two weeks! Not a per annum interest rate! As you can see in almost all cases these charges by this type of lender only will push the true interest rate for payday loans way above the legal limit of 60% per annum.
Are new payday loan companies regulated?
Alternative lender companies online, or in store fronts, new or old, are privately owned and not regulated by the federal government; however, several provincial governments have taken payday lenders to court over the amount of interest and fees that they charge for these high risk loans. In the U.S. 25 states have passed laws against predatory lending, placing restrictions on high-cost loans.
Can payday loan companies sue you?
The answer is yes, but it will be worth your while to challenge the fees charged by payday loans online (which are actually interest in disguise) and allow yourself to be taken to court. Otherwise the consequences can ruin you financially. There are many cases where when people defend and show they are not intimidated, these companies do not pursue the lawsuit.
There was a recent case in the U.S, where a $1,000 loan ballooned into a $40,000 debt and the worst part was that it was legal. A woman in St. Louis borrowed $1,000 from an alternative loan company and like many, she couldn’t pay it back in time. The lender sued her and even though she agreed to pay it back in instalments, the loan continued to grow at 240% interest. Investigative journalists stepped in and the case settled quietly. Had there been no settlement the $1,000 loan would have ballooned to $40,000.
For more information on the risks of payday loans online please review our blogs on the subject:
There is never a good reason to take out a high risk loans online. There is also no such thing as safe payday loan companies. Contact a professional trustee instead. The Ira Smith team can help. Starting Over, Starting Now you can take the first step towards financial health.
Our insolvency clients, be they personal or corporate, usually want to start a consultation by asking us bankruptcy questions. However, I first start by obtaining a full understanding of the person’s or company’s financial challenges, so that we may consider all of the realistic options before discussing the topic of bankruptcy. I first wish to find the best alternative to bankruptcy.
I am finding now that many families, even high earners, are struggling in the “new economy”. We’ve spoken about their plight in our blogs:
There is yet another group that is now in great danger of bankruptcy – families whose previously very healthy income has taken a serious downturn and are now struggling to maintain a lifestyle they can no longer support. These families need to act fast and consider their alternatives to bankruptcy before it is too late to take remedial action. The natural inclination is to tough it out and hope for better times, but serious financial times demand serious financial decisions, not a hope and a prayer. As these families wait for better times to come they are burning through whatever savings they have, going further into debt by living off credit and will eventually run out of both money and credit.
This is not the best approach. At the first sign of financial trouble, these families should seek the advice of their legal counsel or accountant. These trusted professionals will be able to refer the families in financial trouble to a trustee in bankruptcy that they trust. With the trust factor bridge now in place with the trustee, that trustee can review the situation and provide the families with their realistic alternatives to bankruptcy.
If you’re struggling to support a lifestyle you can no longer afford, take immediate action and contact a professional trustee and explore your alternatives to bankruptcy. There are alternatives to personal bankruptcy – credit counselling, debt consolidation and consumer proposals. However, regardless of the choice that’s right for you, a balanced budget is always part of the equation. As we’ve stressed before, a balanced budget is to financial health what a balanced diet is to physical health. You’ll have to take a realistic look at your lifestyle and a serious look at your big ticket items – luxury home(s), exotic vacations, luxury cars, designer clothes and expensive entertaining and start living within your budget in order to benefit from one of the alternatives to bankruptcy .
The Ira Smith team approaches every file with the attitude that corporate or personal financial problems can be solved given immediate action and the right plan. Contact us today and Starting Over, Starting Now you can be on the path to a debt free life.
This blog was originally published on July 21, 2015. It was updated on March 22, 2021.
Bankruptcy Sales: What Is a Stalking-Horse Bid?
A stalking horse bid, in the Canadian insolvency context, is an attempt by a company (and/or its Monitor,Receiver or Trustee ) in a Court supervised insolvency proceeding, to set what will be the baseline that must be met and beaten by any other bids for the assets. The intent is to maximize the value of its assets as part of a Court supervised sales process and to discourage any bid below a certain value.
A stalking horse is a process that allows a potential buyer (the stalking horse bidder) to make a public bid for a company’s assets in order to set a floor price for the amount of money to be received by the company’s creditors in a (bankruptcy) sale. The stalking horse bidder will get to purchase the company’s assets if no other bidder comes forward. The stalking horse provision allows for the bidding process terms and conditions to be set in a court-supervised sale.
In this Brandon Blog, I describe the stalking horse bid process and how it works
What’s a stalking horse bid? Example of a stalking horse bid
According to Wikipedia:
“The term stalking horse originally derived from the practice of hunting, particularly of wildfowl. Hunters noticed that many birds would flee immediately on the approach of humans, but would tolerate the close presence of animals such as horses and cattle. Hunters would therefore slowly approach their quarry by walking alongside their horses, keeping their upper bodies out of sight until the flock was within firing range. Animals trained for this purpose were called stalking horses.”
In an insolvency context, a stalking horse bid stands to test the market to see how the market values the assets for sale. If the market values the assets less than the amount of the stalking horse bid, then no one will bid higher and the party who made the stalking horse bid will be successful in acquiring the assets.
If the market values the assets more than the amount of the stalking horse bid, the higher offers will be made for the assets and for the Court to consider for approval. Presumably, a higher offer will be approved, the purchaser will purchase the assets and the stalking horse bid will not prevail.
stalking horse bid
How a Stalking-Horse Bid Works
The stalking-horse bid method allows a distressed company to avoid receiving low ball bids as its assets are being sold. Once the stalking-horse bidder has made its offer and it has been negotiated and court-approved, other potential buyers may submit competing bids for the company’s assets.
By setting the low end of the bidding range, the insolvent company hopes to realize a higher price on its assets. Insolvency proceedings are public. The public nature allows for the disclosure of more information about the deal and the buyer than what would be available in a private deal.
Stalking-horse bidders can generally negotiate which particular assets and liabilities it hopes to acquire. After the stalking horse bid is negotiated resulting in an asset purchase agreement, it will be necessary for the company, Receiver or Trustee to obtain Court approval of not only the stalking horse bid but also for the entire sales process to be implemented.
If the company is attempting to restructure and requires “bankruptcy protection”, then those corporate proceedings would be either under the Companies’ Creditors Arrangement Act (“CCAA”) or the Proposal provisions of the Bankruptcy and Insolvency Act (Canada) (the “BIA”). In that situation, it is the company making an application to the Court with the support and assistance of the monitor or proposal trustee.
If it is a corporate receivership or bankruptcy proceeding, then it is either the receiver or bankruptcy trustee making the application. In the case of bankrupt corporations, then it is the bankruptcy court that needs to approve the stalking horse bid, the entire sales process and approve the sale.
What does it take to get bankruptcy court approval?
When applying to the Court, approval for an entire sales process is being sought, a component of which is the stalking horse agreement. The Court has various considerations in determining if a stalking horse sale process should be approved. They are:
Is a sale transaction warranted at this time?
Will the sale benefit the whole “economic community”?
Do any of the debtors’ creditors have a bona fide reason to object to a sale process of the business?
Is there a better viable alternative?”
In the event the stalking horse bid is not the successful winner because of the other potential bidders at least one made a better offer, it is normal for the stalking horse purchaser to receive some form of compensation. The compensation is for the time, cost and resources invested to perform its due diligence, to make its offer which was found to be reasonable in the circumstances and to expose that offer to the marketplace to stand as a stalking horse bid, and for that bidder to not end up as the successful purchaser.
Our Firm has been involved in situations where the stalking horse bid has been both the successful bidunsuccessful bid. If the compensation, commonly known as break-up fees, is fair and reasonable, it will not dissuade other purchasers from coming forward in the sales process, and it will also be fair to the stalking horse bidder if they are unsuccessful. It is fair to the stalking horse bidder to have these bid protections incorporated into their offer.
The Court in considering the approval of a stalking horse bid also considers if the breakup fee, and the entire stalking horse bid, has been negotiated between arms’-length parties and has the support of the stakeholders involved in the insolvency proceeding.
stalking horse bid
The Pros and Cons of Being A Stalking Horse Bidder for Assets In Bankruptcy
There are various pros and cons to being a stalking horse bidder and making the stalking horse bid. First the advantages:
First to tie up the company’s management, perform due diligence thereby dealing exclusively with the company for the proposed purchase of its assets.
Gaining the advantage of time and access to the company’s financial information.
Having the time to be able to understand the company’s problems and challenges.
Getting under contract for the assets the purchaser wants to acquire.
The cons of making the stalking horse bid are:
Making sure that you set the break fee high enough to fully compensate the stalking horse bidder.
Not having too long a time period between approval of the stalking horse bid and the time when other bids must be submitted to avoid the assets or the company’s operations worsening through the process.
Would it have been better not to have been the stalking horse bidder and see how the company and its assets fare before having to submit a bid?
If the stalking horse bidder is not a secured lender, is there a likelihood the secured lenders will bid their security which will outbid yours?
If there is more than one acceptable bid, then an auction process is required to determine the successful bidder. The stalking horse bidder may not wish to participate in such an auction and will end up losing out.
Can a secured creditor credit bid? Cirque du Soleil agrees to ‘stalking horse’ takeover bid from lenders worth $375M
One of the most recent high-profile successful stalking horse bids was the Cirque du Soleil insolvency proceeding under the CCAA. In that case, a takeover proposal from the Cirque du Soleil’s secured creditors has been approved as the benchmark bid for a court-supervised auction of the insolvent entertainment company.
That is called a credit bid. When the secured creditor bids all or a portion of its outstanding loan. This will be done in situations where the secured creditor believes that the value of the assets to be sold is less than the amount owed, yet the company’s assets can be used to run a viable business. In that situation, the secured creditor would rather bid its security with the company debt to take over the assets.
By making a credit bid, the secured creditor potential purchaser does not need to come up with cash for the purchase price. However, cash will be required to make certain payments to parties the company business cannot operate without and to have working capital going forward.
If they bid the full amount of their loan and get outbid in other purchase agreements, it means they get fully paid out. Otherwise, they get the assets to run the company, bring it back to financial good health and profitability. Eventually, then they will sell the healthy company to recoup their money plus make a profit.
Stalking horse bid summary
If your company is experiencing financial difficulties, don’t waste your time stalking horses or any other animal. Seek the advice of your professional advisers. The earlier you seek financial help the more options will be open to you. ContactIra Smith Trustee & Receiver Inc. today. We’ll review your corporate issues and come up with a sound plan so that Starting Over, Starting Now you can enjoy financial peace of mind.
Canada’s middle class is a huge topic these days. There’s been a lot of talk recently about the growing gap between Canada’s affluent and middle class. Before we can begin to understand what’s happening to Canada’s middle class, we must first be able to define it.
“One of the troubles with the term middle class is it’s so elastic and there’s not a clear-cut definition,” said Charles Beach, an economist and Queen’s University professor emeritus. Beach says surveys have shown most Canadians consider themselves part of the middle class without quite defining what it is. “There is no consensus definition of ‘middle class,’ nor is there an official government definition,” said the memo, obtained by The Canadian Press under the Access to Information Act.
The New York Times defines the middle class as families earning between $35,000 and $100,000 a year. This would seem to hold true in Canada as well. According to Employment and Social Development Canada:
The middle 60% of families earned an average of $53,500 after tax in 2011
According to Statistics Canada:
The total median 2012 income for families, defined in this case as all couples with or without kids, was $81,980
The problem is that it’s now difficult to make middle class. Paul Kershaw, policy professor at the University of British Columbia reports:
The typical 25 – 34-year-old is now making wages that are 11% lower than they were for the same aged person in 1976, even though their education levels are higher
The typical older worker is making wages that are 3% – 7% higher than a similar person did 30 years ago
House prices have nearly doubled in that time, meaning more wealth for the older person and more debt for the younger person
“It takes longer now to do anything that looks like a middle-class lifestyle,” says John Myles, professor emeritus of sociology at University of Toronto, as young people stay in school longer than in generations past, get more credentials, start careers later, get married later and buy homes later. And the gap between the affluent and the middle class is growing.
Canadian Centre for Policy Alternatives report finds most affluent families in their 20’s have net worth over $500,000, more than most middle-class families save over decades. Real estate is typically the reason the affluent are able to meet such a high net worth at such a young age. Their parents buy a property for them, help purchase the property and/or give the down payment. In addition the affluent are starting off life with no student debt as their families were able to fund their educations. Conversely, those striving to make middle class are often buried under a mountain of student debt. This in and of itself is problematic enough, but it also delays being able to purchase a house. And with the cost of housing rising exponentially (the average price of a detached house in Toronto is now over $1 million), the gap between the affluent and the middle class will continue to grow.
Many trying to make a middle class lifestyle are struggling financially, living paycheque to paycheque and need professional help. Trustees are experts in dealing with debt. The Ira Smith Team has a cumulative 50+ years helping people and companies facing financial crisis or bankruptcy that need a plan for Starting Over, Starting Now. Call today. Stop struggling and start enjoying life again.
Financial infidelity is on the rise and for some strange reason marriage finances is a taboo subject for many married people. Spouses are lying to each about how much they earn. Forty percent (40%) could not correctly identify which salary range their spouse falls into. Couples are not being honest about what they spend, what they spend it on and the amount of debt that they are carrying. As you will see below, financial infidelity is a major issue. Couples break their promise of being financially faithful to each other.
Financial infidelity: What some studies say
A new study from the National Endowment for Financial Education conducted with Harris Interactive reports:
33% of people who have joint accounts said they have committed financial infidelity
35% said they have been the victim of their spouse’s financial deception
According to CreditCards.com:
2 million Americans have a bank account or credit card that their spouse doesn’t know about
20% of Americans have hidden a purchase of $500 or more from their significant other
Financial infidelity: We can help get you back on the right path
Financial infidelity can be a “recipe for disaster,” said Matt Schulz, a senior analyst at CreditCards.com. “It’s incredibly difficult to keep a household budget when you don’t know how much money is coming in and out, he said. It could lead to late bill payments, which can harm your credit score”. As we have previously discussed, a balanced budget is to financial health what a balanced diet is to physical health.
When it comes to marriage finances, honesty is the best policy. If you have been either the perpetrator or the victim of financial infidelity, you may be in serious financial jeopardy. Don’t wait until you are out of options. Contact a professional trustee as soon as possible. The Ira Smith team is a full service insolvency and financial restructuring practice serving companies and people throughout the Greater Toronto Area (GTA) facing financial crisis or bankruptcy that need a plan for Starting Over, Starting Now. We can help. Call today.
Is there really good debt? Debt is a four letter word and it’s strangling many Canadians. Even if you have what people refer to as good debt, if you are having difficulty servicing it, then you have debt problems, no matter how you classify the debt itself. However, many believe that mortgages and student loans are good debt.
Let’s have a look at mortgage debt. Mortgages have been considered good debt because they allow you to buy an appreciating asset which you can then sell at a considerable profit. According to the Royal Bank of Canada:
Canadians have taken on $80-billion worth of mortgages, personal loans and credit card debt in the past year
Most of the growth came from new residential mortgages, which rose 5.4% per cent in January compared to a year earlier, to nearly $1.3 trillion
Non-bank lenders, which represent about one-fifth of mortgages, drove the residential housing market over the past year, with outstanding mortgage debt rising 6.3% compared to 4.3% cent among banks
The Globe and Mail received a memo from the Canadian Mortgage and Housing Corporation (CMHC) stating that it was “concerned about reduced household flexibility resulting from elevated debt levels as well as diversion of capital into residential housing investments.” Ten to twenty years ago Canadians were able to buy into an affordable housing market that greatly appreciated. However, with detached housing prices rising above $1-million in Toronto and Vancouver, it’s increasingly difficult to buy into the housing market and unlikely that level of appreciation will ever be seen again. So if you have a reasonable down payment and you can handle the monthly mortgage payments within your budget, then you can handle this debt and therefore it is good debt.
Let’s have a look at student loans. Student loans have always been considered good debt. In years past a university degree guaranteed you a good job upon graduation. However, in today’s world we have record numbers of unemployed and under-employed graduates with a mountain of student debt. Statistics Canada’s Survey of Financial Security reports that student debt grew 44.1% from 1999 to 2012, or 24.4% between 2005 and 2012. And, one in eight Canadian families is carrying student debt. The average student is having a great deal of difficulty paying off their student loans and according to the Canada Student Loans Program, most students take nearly 10 years to pay off their loans – with some taking the maximum 14.5 years. Under this scenario, is it really good debt?
The reality is that both good debt and bad debt can strangle you. Returning to financial health requires the help of a professional. Struggling from paycheque to paycheque is no way to live. ContactIra Smith Trustee & Receiver Inc. With immediate action and a solid financial plan we can set you on a course to a debt free life Starting Over, Starting Now.
Arestructuring and turnaround process that does not garner the support of the creditors can lead to bankruptcy. Bankruptcy ends up being a result of an attempt to save the business that has gone awry.
Bankruptcy and Insolvency Act (“BIA”): Contains 275 sections and is intended to be a complete code for bankruptcies. The law dealing with bankruptcies is within the BIA itself
Companies’ Creditors Arrangement Act (“CCAA”): Deals with corporate restructuring and turnaround (as does the BIA) and contains 22 sections. Most of the law dealing with the CCAA has developed from Court decisions as the statute is very thin!
Once in motion it’s extremely difficult to set aside an assignment into bankruptcy. That is why the interests of all stakeholders must be carefully considered and addressed in order for a restructuring and turnaround plan to be successful. Take for example the motion which was recently brought before the Ontario Superior Court of Justice (In Bankruptcy and Insolvency) by Casimir Capital Ltd., an intermediary or broker of various underwritings and placements. Up until January 31, 2014 when it resigned, it was a member and registered as a securities dealer with the Investment Industry Regulatory Organization of Canada (“IIROC”).
Casimir Capital Ltd. brought a motion seeking to set aside its deemed assignment into bankruptcy, and a review of a decision of a trustee to allow certain creditors to vote against a proposal put forth by the firm to settle its debts. At that meeting, 93.7% of the creditors voted against the proposal. However, in the motion, Casimir argued that some of the creditors should not have been allowed to vote as it disputes the validity of their claims.
The decision: In Re Casimir Capital, 2015 ONSC 2819 (CanLII), Casimir’s motion was dismissed. In his ruling The Honourable Mr. Justice Pattillo stated that the trustee “…was correct in allowing the Disputed Creditors to vote.” and “…the steps taken by the Proposal Trustee in reviewing and validating the proofs of claims filed, including the Disputed Creditors, for the purpose of voting at the first meeting were more than sufficient.”
The court noted that even if the votes of the disputed creditors were disallowed, 69.4% of the other creditors, whose claims are not disputed, voted against the proposal. The Court also agreed with the trustee that the debtor’s motion to have its deemed assignment in bankruptcy set aside fails in any event because even if the disputed creditors votes are set aside, the votes of the remaining creditors still defeat the proposal. As you can see, this restructuring and turnaround attempt was doomed for failure, as essentially none of the needs of the stakeholders were successfully addressed. Therefore in this case, a deemed assignment in bankruptcy was the end result. I am sure the professionals involved did the best they could with what they had to work with, but it obviously was not enough.
Unfortunately many companies and individuals find themselves in financial difficulties and surviving these financial difficulties can be a daunting task. Ira Smith Trustee & Receiver Inc. has helped many companies to not only survive, but prosper. Our corporate restructuring and turnaround strategies not only deal with short term crisis management but the long term viability of corporations. Contact us today so that Starting Over, Starting Now once again your company can a financially viable entity.
