When he filed for his fifth bankruptcy, Gerard Ongo had Capital One and Canadian Tire credit cards in his wallet on which he had racked up roughly $20,000 in debt. Alarmed, the court official reviewing the insolvency saw a glaring problem.
“Enabling…Mr. Ongo to have access to credit would be akin to providing a firearm to a child,” registrar Raffi Balmanoukian said in his ruling refusing to grant Ongo a discharge, which would release the debtor of his legal obligation to repay what he owes.
The cards had been given to Ongo despite his credit report flagging at least two previous bankruptcies. As the court saw it, Ongo could not be trusted to live within his means.
Faced with the court’s refusal, Ongo, a Nova Scotia cook, struck a settlement with his creditors to pay back a percentage of his debt, voiding his fifth bankruptcy.
As he makes those monthly payments, what’s in his wallet?
Another credit card.
There is a public perception that declaring bankruptcy will devastate a person’s credit, making it near impossible to get credit cards or a loan.
But repeat bankrupts have had little trouble picking up new credit cards from a credit industry that insolvency experts say is overly eager to lend.
A Toronto Star/La Presse investigation into the alarming rate of repeat bankruptcies has found many debtors reusing Canada’s insolvency system have accumulated significant amounts of credit debt.
“You’ve got credit granters falling over themselves to grant credit,” said Scott Nettie, a former registrar who presided over Toronto’s bankruptcy court from 2005 to 2012.
“You asked who the victim is in this whole car washing of debt,” Nettie continued. “There is a victim because who is paying for all of this fun? The people who pay the credit granters through our interest rates.”
Among those who have recently lined up for this car wash:
A businessman from Collingwood, Ontario, owed more than $64,000 on 10 credit cards when he filed his third bankruptcy in 2014.
A Hamilton contractor described by one registrar as “a menace to the credit system” had at least five credit cards when, in 2015, he declared bankruptcy for the fourth time.
Canadians are swimming in household debt. They owe roughly $1.77 in credit market debt — things like credit cards, mortgages and other loans — for every $1 of disposable household income, according to September 2019 figures from Statistics Canada.
The Star and La Presse interviewed dozens of experts within the insolvency community, including registrars and trustees, who administer bankruptcies and disburse any assets among those owed money.
These insiders say that debtors need to be held accountable for spending credit they can not repay, whether they were swept up in a lifestyle they could not afford or using plastic in an ill-fated attempt to make ends meet.
Many believe the credit lenders also bear responsibility.
“If you are, as a credit card company, going to give a credit card, or two or three to someone who has filed two bankruptcies, in my mind…maybe you’re partly to blame,” said Guylaine Houle, a veteran insolvency trustee with the Quebec firm Pierre Roy & Associates.
A spokesperson for the Canadian Bankers Association — an organization that represents many of the country’s largest lenders — said banks “want to see their customers succeed financially” and go to great efforts to prevent people from defaulting on their payments.
“Banks in Canada are prudent lenders and monitor their customers’ borrowing to ensure that debt levels are manageable. They manage risk carefully and extend credit only to qualified borrowers who they believe can and will repay the loan,” a spokesperson said in a statement.
A first bankruptcy stays on a credit report for six or seven years from the date of discharge. A second bankruptcy — or third, or fourth or fifth — stays for 14 years before being erased.
Ongo was discharged from his third bankruptcy in 2011 and from his fourth in 2014. Those previous bankruptcies would have been on his credit report and available to be viewed by any of the companies that chose to lend him money.
In an interview, Ongo said his earlier bankruptcies stemmed from an unsuccessful pizza business, and the debts were primarily tax-related.
“In any of those bankruptcies I had in the past, none of them were for credit cards,” he said.
He said his current credit card is a secured card, backed by a cash deposit that serves as collateral. He said he needs the card to rent a car or book a hotel.
A Capital One spokesperson said its secured credit cards provide consumers looking for a fresh start after bankruptcy “the opportunity to responsibly manage and build stronger credit.”
“We take a conservative underwriting approach to ensure customers with challenging credit histories aren’t taking on more debt than they can handle, starting with low initial credit lines that gradually increase over time based on factors, including history of on-time payments and use of financial education tools,” the spokesperson said.
“Our goal is to provide Canadians with reasonable access to appropriate levels of credit and critical access to the payment system to include those who have experienced challenges in their credit history.”
Canadian Tire said in a statement that it uses sophisticated modelling to determine whether a customer is creditworthy.
“While previous bankruptcy is a factor in the assessment process, it is not the only one that determines whether to extend credit,” a company spokesperson said. “We engage in prudent lending practices, and it is in neither Canadian Tire’s interest nor our customers’ that we extend credit to those who may have difficulty managing it.”
For Jerzy Szachrajuk, the credit card company didn’t offer a lifeline but an anchor. The Toronto senior filed for bankruptcy in 2015, owing more than $90,000 across at least seven credit cards.
A long-time teacher, Szachrajuk said he had built up a retirement nest egg of several hundred thousand dollars through investing, but a string of deaths in the family hurled him into depression. When he emerged from the fog, he said, his inattention to his online trading accounts had left them worthless. He relied on credit cards to make ends meet. Even though he couldn’t pay his bills, he said the companies kept offering to extend his credit.
“It was getting ridiculous. You didn’t really have enough money coming in to even cover the interest and they’d still … give you more credit,” he said. “It’s the way the credit cards handle the situation. They completely exploit the situation, in the sense, they give you the credit and they’re allowing yourself to get more extended.”
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Houle, the Quebec trustee, says she has seen many insolvent Canadians whose credit debt was to pay for nothing more than the basic necessities. In some of these cases, she added, it’s not society that needs to be protected from the debtor and their use of the credit system. “I think the debtors need to be protected from the credit card companies,” she said.
The potential culpability of credit card companies in personal bankruptcies has come up in the past.
In the early 2000s, as the government, the Senate and an independent task force reviewed Canada’s personal bankruptcy laws, an idea was floated to change the laws by imposing more responsibility on credit lenders to restrain consumer borrowing, and in doing so limit the growth in consumer bankruptcies.
The Bankers Association, in submissions to a Senate committee, argued that “no empirical evidence has been provided that shows a correlation between the availability of credit and the level of consumer bankruptcies.” Personal bankruptcies, the association insisted, were mostly the consequence of “unexpected life events” such as illness, divorce or job loss.
The Bankers Association rejected a suggestion that Canada’s bankruptcy laws be changed to make credit card debts a deferred claim — so the credit card companies would have a lower ranking than other creditors in line to get a piece of what they’re owed.
The association said “there is no evidence” that making this change would meaningfully affect bankruptcy rates, and warned that consumers could have a harder time getting credit.
The change was never made.
Credit lenders rarely attend bankruptcy court to oppose discharges. In the eyes of many trustees and retired registrars, the companies don’t bother because they have already absorbed the losses through the interest rates they charge other customers. Sending a representative to court would just be throwing good money after bad.
In a statement, the Canadian Bankers Association said credit card delinquency rates are at one of the lowest levels seen in the last 15 years, and that 99 per cent of credit card balances “are kept in good standing.”
The association said its members provide resources to customers struggling to make payments, including flexible repayment arrangements.
“These arrangements, however, require personal commitment from the borrower to conduct their affairs responsibly, address repayment issues early and have a clear, actionable plan to pay down and eliminate debt,” the spokesperson said.
Part of the problem, insolvency experts say, is a pervasive paucity of financial literacy.
Another contributor has been the emergence over the last two decades of payday loans and their exorbitant interest rates, which have dragged many debtors into a financial death spiral.
Inside Toronto’s bankruptcy court earlier this year, the judge — registrar Janet Mills — paused from the case she was handling and addressed the room, her eyes focusing on the seats filled with debtors waiting to be heard. She was going to give a lesson about payday loans, she continued. Pay attention.
“Even someone with bad credit can get a loan from a bank for about 28 per cent on an annual basis,” she said. The money from payday lenders are supposed to be two-week loans. If you don’t repay them quickly, the interest grows, fueled by added fees, making an annual interest rate of several hundred per cent, Mills said.
“The worst I ever handled was 1,100 per cent,” she said. “At that rate, you can never get ahead of them. They are relentless.
“There are many people who have come through this courtroom who otherwise could have held on if not for the cash stores. They’re rapacious in their collecting.”
Javed Mian has never earned more than $20,000 a year. But that didn’t stop the Montreal truck driver from obtaining a mortgage, a car loan for an Audi SUV, two lines of credit and eight credit cards. All he had to do was lie.
He embellished his income to get credit, Mian said. Credit cards were easy to come by, offered by businesses inside the mall, he said. Mian said these were “mistakes” and he did not understand how credit worked. He said it was all to fund a fruitless attempt to win back his wife.
Mian’s eight-year abuse of the credit system ended in 2014, when he filed for bankruptcy with more than $530,000 in debts.
“He was the cause of his bankruptcy through dubious decisions and unjustifiable extravagances… For nearly eight years, the debtor spent in an outrageous manner with no consideration to his obligation to repay his debts,” the registrar said in refusing Mian’s discharge.
Under the ruling, Mian isn’t allowed to re-apply for discharge until 2022.
Last year, Mian earned just $11,000, he said. He splits his time between Canada and his homeland of Pakistan.
He also has a credit card in his pocket.
Mian said the card is registered to a friend, who speaks neither English nor French and relies on Mian when interacting with the bank. The friend had a card issued in Mian’s name, according to Mian.
“I can use it then when I have money, I pay him back,” he said.