Financial Difficulty with Scott Terrio | E014
Transcript:
Jason Pereira: Hello, and thank you for joining me for The Wisdom Of Wealth, a show where we help educate Canadians about fundamental financial literacy topics to help you make better and more informed decisions and know when and where to reach out for help. I'm your host, Jason Pereira. Today on The Wisdom Of Wealth, we're going to talk about coping with financial difficulty.
Jason Pereira: So let's face it. Life happens. The best laid plans often go to waste because essentially, things get in the way unexpected expenses crop up, maybe job loss or something more severe, but life has a way of changing course quite frequently. And today we're going to talk about coping with that, specifically about a few things. How to plan for it in advance, adjusting when it happens, and what to do when you need help.
Jason Pereira: So, one of the foundational concepts of financial planning is having an emergency fund. This is a fund that helps you with unexpected expenses, and really, it's meant to be somewhere between three to six months worth of expenses. Now let's get realistic. Few people actually have that set up. Also, it really doesn't make a lot of sense to have a lot of money sitting around in cash if you're sitting on a large mortgage or other forms of debt. So really this is something that is best to use when debt-free, but you should have a little bit of money, maybe not six months worth, in case something goes wrong. But a really good starting point, or alternative, is a line of credit because you can focus on paying down your debt and only borrow when you need to and pay it down when the emergency has passed. Once debt free, though, if you are debt-free, you should absolutely focus on having that three to six months worth of expenses. If something goes wrong, you basically can use that money, and then when that money has been used and you need to replace it, you can replace it slowly over time with savings.
Jason Pereira: So when the unexpected happens, if you have an emergency fund established, then you have a safety net to fall back on. The line of credit can also serve as that. Now, if it's something more severe, like job loss, that's where employment insurance, or during the time of COVID, the various programs established for COVID support come in. But often in cases you will have to temporarily go into debt. That is not something to be ashamed of, but what you should do is try to avoid, at all times, consumer debt, things like credit cards. Not just when you're in financial difficulty, but basically at all times. Carrying that form of debt can be really expensive, and if you do find yourself carrying that at all times, try to pay that off first and wherever possible, consolidate that debt into a lower interest loan.
Jason Pereira: Sometimes I will see people with a line of credit and a mortgage and credit card debt and not think to pay off the credit card debt with the line of credit. The credit card debt may be at 18% and the line of credit might be somewhere around seven, so the savings can be substantial. But over time, what you want to do is pay down the highest form of debt first, once you've had that difficulty and then, and escaped it and then continue to work that down.
Jason Pereira:Now, unfortunately in life, there are times when consumer debt goes from being manageable to preventing you from being able to live just your normal life and pay for the essentials of life. Getting out of this situation can be very difficult and you're going to need professional help to do it. Now to tell us a little bit more about what options you have in a situation like that, I invited my friend and colleague Scott Terrio to the studio today.
Jason Pereira: So talk about what to do when you're facing a lot of consumer debt. I've invited my friend and colleague, Scott Terrio, to the studio today. Scott, thanks for coming in.
Scott Terrio: Thanks, Jason.
Jason Pereira: Scott, so tell us what it is you do.
Scott Terrio: So we're a licensed insolvency trustee firm, Hoyes, Michalos and Associate's, and that means we're licensed by the federal government to file consumer proposals and bankruptcies, and that's all we do is consumer work at our firm. There are firms that do corporate and business filings as well, and we strictly work with consumers who are in debt.
Jason Pereira: Excellent. So that term bankruptcy scares people. That is a scary term.
Scott Terrio: It should.
Jason Pereira: It almost ... Yeah, it should. But it also ... I mean, first off I got to think that there's a lot of resistance to going to see someone like you for almost an admission of failure. Is that what you find and how do people get past that?
Scott Terrio: Right. So as early as possible is when they should be talking to us. Now, I realize that's not natural because humans, and Canadians in particular, I think are very resourceful as far as kicking the can down the road, making things go. So I think in, by my estimate, all the files I've done probably take between 12 and 24 months between when somebody realizes they're in trouble and they're not going to get out of it, likely, until they actually see us. So all of the people that I meet with their soul searching has all been done. They're not phoning us in a panic. They're not freaking out. They're very calm.
Jason Pereira: They've accepted.
Scott Terrio: Yeah. They've accepted ... Exactly. There's acceptance. They've often talked to people who've said, "You got to do this," and by the time they reach us, we're pretty much just ... There's still a lot of sort of counseling going on as well, but pretty much people have decided, and now we're looking at, "Okay, here's the facts. Here's what we've got to do," and we go from there.
Jason Pereira: So what does that process look like? They pick up the phone, they call you and they say, "Look, I'm up to my eyeballs," or, "I just can't deal with this debt anymore." What happens?
Scott Terrio: Yeah. So they call us and we meet with them and we sit down and we say, "Okay, well, give me the background," right? I mean, how did this come about, and only because it's informative to know where they're coming from in terms of their finances, right, and it's like, I don't know. Did you own a house at one point? Or did you get divorced? Did you lose a job? I kind of want to know the story? No judgment. It's just entirely business at that point. There's no point in that anyways. I've actually had clients tell me that, "You know, I met with this other guy and he was just making me feel bad for ..." I mean, there's no room for that. There's no point to that.
Jason Pereira: It doesn't accomplish anything.
Scott Terrio: There's no ... there's no nothing. It doesn't accomplish anything. And so we sit down and say, "Okay, who do you owe money to? Give me the list," right? And when you start doing that, you can see people really kind of lighten and change because now they're focused on the "what do we do" instead of "why am I here" and all that stuff. So you're listing your debts, you're listing your assets. You talk about your income. We talk about your family situation, that kind of thing, and I think that really brings them into feeling like building a trust relationship.
Jason Pereira: Excellent. So one of the things people don't understand about this process is that it's not just bankruptcy as an option. There's also the insolvency piece, right? There's the ... what is it called? A proposal?
Scott Terrio: Consumer proposal.
Jason Pereira: Consumer proposal. So tell me about what the difference is between both of those and the implications of both.
Scott Terrio: Right. So the term insolvency refers to both because you're filing ... They're both legal proceedings. A consumer proposal is nothing more than a legal alternative to bankruptcy. So under the bankruptcy act in Canada, without getting technical, you can file a bankruptcy or a proposal. Bankruptcies, we don't do many of them, frankly. Probably four to five of our files at any given time are proposals, and there's a reason for that. A bankruptcy is very restrictive on a number of things. Professional licensing, if you're sponsoring someone for immigration, you can't be the director of a corporation while you're bankrupt. There are things there are severe restrictions for some people that you want to stay out of bankruptcy because of that.
Scott Terrio: Biggest thing about bankruptcy is the more you make, the more we take essentially. So you could start a bankruptcy off, basic bankruptcy is nine months if you've never been bankrupt before, and you have no what's called surplus income. So the bankruptcy law restricts how much monthly net income you can make and it doesn't give you much. It's like a single person in Canada can make $2203 a month after tax.
Jason Pereira: That's not going to go very far.
Scott Terrio: No, not in Toronto. Not even in moose jaw. And so the problem is if you stand to be making more money during the nine months, so maybe you're out of work now and you know you're going to get a job back the bankruptcy's going to get longer and more expensive because it's measured every month and we also have to do your taxes for you in a bankruptcy. You get an R9 credit rating for six years after the bankruptcy and ever after past that R9, if you're ever asked by somebody
Jason Pereira: You have to disclose.
Scott Terrio: You have to disclose that you did a bankruptcy, even if it's off your credit record because otherwise it's fraud.
Jason Pereira: So what does that R9 mean?
Scott Terrio: So on a scale of one to nine, without getting in the weeds here too much, but your credit score is made up of five elements. One of those elements is that scale and it's called transaction history and nine is the worst. So bankruptcy or a written off debt or something is a nine rating.
Jason Pereira: You got the scarlet letter on you.
Scott Terrio: It's pretty bad. Yeah, exactly.
Jason Pereira: Basically saying, "Hey, this person's been a terrible lending risk in the past."
Scott Terrio: Exactly. Yeah. And so one being the best ... There's actually a zero. That's when you, when you're 18 and they give you your credit card and you have no credit history.
Jason Pereira: Yeah, I was going to say, "How do I get to zero
Scott Terrio: There's nothing down there.
Jason Pereira: I don't want the zero. I want the one. Okay. Fair enough.
Scott Terrio: I mean, anything in between is some other measure, okay. So one is where you've paid your credit back every 30 days. You're great. Two, you've missed a 30 day payment. Three, et cetera. Eight is a repossessed asset, so if you didn't pay for your car [crosstalk 00:09:35]
Jason Pereira: Says, "Hey, this person, you have to go to restructure their debt because guess what? It was just bad."
Scott Terrio: Yeah. So they all mean something, but that one's the worst.
Jason Pereira: So they get that. So tell me about the consumer proposals as an alternative.
Scott Terrio: Right. So a consumer proposal is nothing more than a legal settlement that you make through a trustee with all of your unsecured creditors, okay. So credit cards, lines of credit, student loans if they're over seven years since you went to school
Jason Pereira: So we're not talking about mortgages here or home equity line of credit
Scott Terrio: No. No, exactly.
Jason Pereira: Or car leases.
Scott Terrio: Nope.
Jason Pereira: So anything that's got an asset attached to it is not eligible for this.
Scott Terrio: Exactly. Anything that's encumbered is not included. Now you can give up the asset before you file and therefore put the shortfall in because that's unsecured, but that's another thing. Taxes owing are eligible in bankruptcy or proposal. So you put all of those on the table because you can't leave any out because that's considered a preference. So if you say to me, "Well, I want to keep my Royal Bank Visa," well, you can't do that because if you do that, the other creditors are going to see that and they're going to say
Jason Pereira: "Why are they being treated special?"
Scott Terrio: Exactly. So you have put all your unsecured debts in and what you do is you make a monthly settlement for five years. So a consumer proposal is maximum 60 months, we set them all up for 60 months because they're open terms. You can pay them off sooner if you're able to.
Jason Pereira: Yeah. So you give them the most open duration to pay it off. So you can pay it off faster if you can. Otherwise you don't have to.
Scott Terrio: And because it's not a loan, it's just a settlement, exactly. If you pay it faster, you're done sooner. You rebuild your credit sooner. We're done sooner administering the file and the creditors get paid sooner. And the nice thing about a proposal is there's no interest so the creditors are going to give you a break on the principle. So say you owe $30,000. You can probably offer your creditors $12000. $200 a month for 60 months. People go, "You're kidding? Each?" No, that's for everybody. And that includes our fees and that includes court fees and taxes and everything. So
Jason Pereira: Because they know that if they don't give you a break now, the next step is bankruptcy. In which case
Scott Terrio: Right.
Jason Pereira: Longer, more expensive, and they may get even less than that.
Scott Terrio: Right. They might, and that's exactly the thing is when creditors get a proposal notice from a trustee, they know I've had the bankruptcy discussion with you too, so they know, "Okay, well, I can ask you for more," so they can counter offer, but they've got to be a little careful because if you push somebody too far and their budget can't handle it they're just going to file bankruptcy and they're going to get less.
Jason Pereira: Yeah. The guns pointing the other way now. It's like
Scott Terrio: It's the one time in your life
Jason Pereira: Yeah, exactly. "Well, so I owe you this much, but I can only pay this much."
Scott Terrio: It's also the only time that your life
Jason Pereira: "If we go any further, guess what?"
Scott Terrio: It's also the only time in your life. You're probably going to be on the negotiating side of CRA where you actually have kind of an advantage. So people react quite interestingly to that, so.
Jason Pereira: Talk to me about what is up for grabs in a consumer proposal versus a bankruptcy, right? What assets can be attacked or potentially taken by creditors?
Scott Terrio: Okay. So none in a proposal. So in a proposal, all assets are off the table. There's no ... The assets don't vest in the trustee in a proposal.
Jason Pereira: So let's define assets here. So we're not talking about like cash in the bank, right? We're talking about like RSPs, education savings plans, your house, your cars.
Scott Terrio: Exactly.
Jason Pereira: Stuff like that.
Scott Terrio: So there are exempt assets in a bankruptcy, okay? For example, your household goods. They don't come and raid your house for your stuff. You can have a car with a net value of $6,600. So even if it's owned, you can have a car as long as it's
Jason Pereira: So I can't buy the Ferrari and then file for this.
Scott Terrio: Well, you can, but you're
Jason Pereira: I'm not going to be able to keep it.
Scott Terrio: I'm going to get it. Yeah. So, but I mean, very rarely do trustees actually take assets anyway, because we're having the discussion beforehand and we're saying, okay, if you do have the Ferrari, okay, well, you're going to do the proposals, you want to keep the Ferrari. But then you got to pay more because the Ferrari is worth a lot.
Jason Pereira: So get rid of the Ferrari.
Scott Terrio: Well, but then you got to wait five years.
Jason Pereira: Yeah.
Scott Terrio: So there's all these where every loophole has been figured out over the years and of course the bankruptcy act like most laws starts off this thick and now it's this thick.
Jason Pereira: Well, like all things, just like sports, as you figure out ways to beat the system, the system gets more and more advanced.
Scott Terrio: Yeah. So there's ... I mean, all that is taken into account in the first beat. So in 15 minutes, you and I meet, I say, "Here's everything," right, and as long as I know everything then ... Because we don't want any surprises. Surprises aren't good in our business. They're always bad. So yeah, we just sit down and look at everything and make sure that you know exactly what you can and can't do, should and shouldn't do.
Jason Pereira: So in my experience, when I've had clients or met people who've had financial difficulty, I've often said, "You need to go talk to someone like Scott," and unfortunately there is a lot of reticence to do that because essentially what happens is that they're feeling a little bit of shame about their situation.
Scott Terrio: Yeah.
Jason Pereira: The problem is, and this is why I very much emphasize they need to just get informed with people like you, is because a lot of times people will start tapping on those assets, right? They'll start going into their RSPs. They'll start going into ... I've seen them go into locked-in RSPs, which are under pension legislation, which are like bulletproof basically from a standpoint, and use that to pay off debt as opposed to potentially getting absolved. Like, what's your advice around that?
Scott Terrio: Yeah. So this is where we're back to your earlier question of the sooner the better, because I've seen people where in that 12 to 24 month period where they realized they're in trouble before they come see us, the problem is they talk to people who don't know
Jason Pereira: What they're talking about.
Scott Terrio: What they're talking about. "So my brother, the cop, told me I should empty my RSP." So then the problem is you can't undo that very easily.
Jason Pereira: Or at all.
Scott Terrio: Or at all. And there are periods that you have to wait before which you can't file an insolvency without it being a clawback or a reviewable transaction as they call it. So the sooner the better, because it's easier to prevent bad moves than it is to try and undo them.
Scott Terrio: For example, your last 12 months contributions to an RRSP are a factor. So if you went, and of course you can understand the reasoning, you stuffed your RSP with a hundred grand and said, "I've got to go bankrupt."
Jason Pereira: Exactly.
Scott Terrio: So yeah. So they can't do that. Now, most people I meet are not in the position where they're contributing. They're actually, as you said, they're draining them.
Jason Pereira: Exactly.
Scott Terrio: And that's okay. You can do that because you're just hurting your own asset, and of course there are penalties to doing that stuff and people don't realize tax implications
Jason Pereira: That's the problem, right, is that there's tax implications
Scott Terrio: Massive ones.
Jason Pereira: And then there's withholding tax, right? So you take out five grand, you're only holding back ten and then it goes up to twenty and thirty. But the issue is, is that people think that the tax is taken care of, right?
Scott Terrio: Yeah.
Jason Pereira: If they're in trouble and they have a high income already, they may owe on ... 10% withheld, they may owe 40% more.
Scott Terrio: Yeah. Oh yeah.
Jason Pereira: Right? So then the shock is that they did this to pay off their credit card, but they basically paid the credit card ... The thing is that instead of paying 20% interest, they basically ... $10,000 cost them 20 grand right? Like that is [crosstalk 00:15:57].
Scott Terrio: And when people realize how much tax they were getting nailed on for emptying an RSP or something ... And oftentimes they don't even take enough out for it to make a difference. Even setting aside the bad tax implications, taking five grand out to pay off ... you got 20 grand and you only paid off five. You still got 15 of high interest. It's not even helping you, right? So you got to be very careful who you listen to, what you read on the internet. I spend half my week dispelling myths from the internet about things. The internet is a very powerful thing and it's a very, very dangerous thing.
Jason Pereira: It is, as any doctor will attest to.
Scott Terrio: Oh yeah.
Jason Pereira: Let's talk about one of those. TFSAs. Are those protected from creditors?
Scott Terrio: No. It's cash.
Jason Pereira: Exactly.
Scott Terrio: Basically it's a tax-free savings account, and again, you're back to if you come to see me to file a bankruptcy and you've got $10,000 in your bank account, that's a non-exempt asset, right? Cash is an asset. It's liquid, it's liquid, it's available for the creditors, and it would vest in the trustee. Now we wouldn't do that. Obviously you wouldn't file the bankruptcy if you had $10,000. I would say, "Okay, well, you might want to look at a proposal here, but now you've got to pay 10 because the creditors would have got it in the bankruptcy," and you got to give the creditors more proposal because you're making them wait 60 months instead of nine or twenty one months in a bankruptcy.
Jason Pereira: But in that one, it's a tricky one because TFSAs are becoming a vehicle of preference for retirement savings for especially the lower income Canadians.
Scott Terrio: Yep. Yeah. It's a basket where other things are held in, other things are
Jason Pereira: Exactly.
Scott Terrio: Investments are in there. Yeah.
Jason Pereira: So the problem is, is that this is a probably long-term problem is that as people are gearing their retirement savings more and more towards TFSAs, they're disadvantaged in the case of financial hardship, right?
Scott Terrio: Right.
Jason Pereira: So that's not ... It's something I hope that the feds eventually one day look at is getting the same kind of protection to it.
Scott Terrio: Yeah. Yeah. Because when people are thinking long-term, they're usually not in a lot of trouble immediately, right? I mean, if you're in a position to plan your retirement 30 years from now, you're probably not struggling with credit cards.
Jason Pereira: And life happens. At some point it changes.
Scott Terrio: So when you do get into a problem, and this is the thing we see, Jason is, as you said earlier, life happens, okay? So we see a lot of divorce or separation situations. We see
Jason Pereira: Huge cause of bankruptcy.
Scott Terrio: Yeah. And job loss is obviously one of the big ones, but it doesn't take much for people who are so close to the edge and we've all seen these studies on
Jason Pereira: It doesn't matter what you make. There's a lot of people at the edge, at every level.
Scott Terrio: Exactly. And March and April of this past year is a perfect example. Because remember I said that when people call me, they're not freaking out. Well, they were freaking out in March and April because they all ... All of them lost their jobs suddenly and none of them had savings.
Jason Pereira: Yep.
Scott Terrio: And that's another thing that you've seen lots of research done on in the past few years is the Canadians are notorious for not saving. Well, this year. They've saved since that. But at that time it proved it because they couldn't handle even a month's worth of rent or anything. There was no cushion.
Jason Pereira: Well, we've seen those where they said they couldn't handle it and sure enough, it happened. And you know, the reality is, is that the government's not going to help you with that. It helped us in COVID. But as I tell everybody, when it comes to what's the secret to success when you're financial planning, spend less than you make. I mean, it may not be easy, especially in expensive cities, but if you don't have money left over every month, something is fundamentally wrong because you're right at the line and you know what? I don't care ... I've had this conversation. Yes, on the lower end of incomes, I have nothing but sympathy because it is hard. And I find that those people are actually very good at making sure that they make every last penny work.
Scott Terrio: I can't believe how some people manage to live on what they live on. It's phenomenal. Like we mentioned, resourcefulness.
Jason Pereira: They are hugely resourceful.
Scott Terrio: Try being close to poor and living in the city for 10 or 15 years. I'm amazed at what they're able to do, actually.
Jason Pereira: Yeah. People really don't give them enough credit for figuring out how to survive in that mechanism whereas I've seen plenty of people who earn just numbers that are ... salaries that 99% of people never touch in their lifetimes and they're still spending more than that.
Scott Terrio: Yeah.
Jason Pereira: And that's
Scott Terrio: Yeah. It's the phenomenon of spending up to what you make, right?
Jason Pereira: Exactly.
Scott Terrio: And I see it a lot where you get a new job, you get a promotion or you go to a different company, they give you a big chunk of extra money and you immediately move to the neighborhoods and get the car, right? And all the trappings are there.
Jason Pereira: Lifestyle creep. Your lifestyle starts to creep up with your salary. And as long as that keeps on happening, unless ... As long as your income does this and your expenses do this at the same time, you're going to be in trouble. If there isn't ... If you're not banking some of every incremental gain in your future, then you're going to end up in a position of trouble.
Scott Terrio: Yeah. And I work downtown at King and Young and you swing a cat from my office, you're hitting every bank and every office tower, and I filed some people who are making big money and the problem is if you're in the big law firm and you're partner now, and they made you a partner. Great, okay. So now you've got to move to this neighborhood. Your kids have got to go to this school. You've got to drive this car. You got to have a cottage up in Lake Joe. And it's exactly the same, even on an extreme end.
Jason Pereira: And I get ... I see that too. Like we're ... Whether it be doctors or lawyers, whatever it is, and we tell them they can't have something in their financial plan and their response is, "Well, why? Why are my friends all doing this?" And I always say, it's the old keeping up with the Jones's issue. Stop trying to do that. My response is you have no idea how close to bankruptcy those people might be.
Scott Terrio: Yeah.
Jason Pereira: Right? Stop thinking that they are in as solvent a position as you are.
Scott Terrio: Yeah. Imagine what the rest of the partners in the firm would think if they realize that you just did a proposal.
Jason Pereira: Exactly.
Scott Terrio: And I think of that as they walk out the door. I'm like, "Nobody's going to know this, but if they had any inkling," and I think it's probably more prevalent
Jason Pereira: Than people think.
Scott Terrio: Than they think. Yeah.
Jason Pereira: Yeah. I mean, it's ... I think frankly, I could also flip that conversation over and say, "Well, based on the fact that person makes about as much as you do, short of them having inherited a ton of money, I'm guessing they're in pretty bad financial position. Be grateful for the fact that you can't afford these things," because essentially if they're thinking they can, they're in a bad position.
Scott Terrio: Yeah.
Jason Pereira: So let's talk about what happens after the fact. So you do this proposal.
Scott Terrio: Yep.
Jason Pereira: Basically, what are the ... What do the results look like? You said it goes up to five years. How much am I expected to pay? Is there a limit? How's it work?
Scott Terrio: Yeah. So, okay. Again, it's all driven ... How much you pay is driven off the hypothetical bankruptcy. So if you come in, and this is typical. Somebody comes in, they don't want to hear about bankruptcy. They just want to do a proposal. That's cool. I still go through the bankruptcy thing and I tell them, "I'm only doing this hypothetically, because we have to calculate what the creditors would get."
Jason Pereira: It's a negotiation point.
Scott Terrio: Exactly. If they don't like your offer, they have to know you're going to go bankrupt, but they're still going to get whatever, okay, and that makes them understand why is there a floor. "Because on the internet, I read that it's always 20%." Well, no, it's 20% ish if you have none of the ... If your bankruptcy is going to be a basic bankruptcy, then it's 20%, depending on who your creditors are.
Jason Pereira: They're not going to accept less than they would get in bankruptcy.
Scott Terrio: Well, no, they're not going to accept less, but they're also not necessarily going to accept more if it's still not enough for them, because you have certain banks that are going to want more than others and they all behave differently. They're all independent of each other. So you have to take into account, and this is where the list of debts comes in. That's the main thing for me. I want to see out of the $60,000 you owe, how much is CRA? How much is old student loans? How much is payday loans? How much has credit cards and to whom, right? Because if you've done enough of these, you know exactly where you need to be on the offer. So we try to get the offer as low as possible, because we want to expect a counter offer depending on the creditors, and we have to leave room for that in your budget. So there is a ... Yes, there's ... it's about 20% if everything's perfect.
Jason Pereira: 20% of?
Scott Terrio: Of what is owed.
Jason Pereira: Of what is owed.
Scott Terrio: Principle.
Jason Pereira: So that is just life altering for some people.
Scott Terrio: It is, because I had someone yesterday and she told me on her two lines of credit, between the two of them, she's paying $1500 a month. Well, her proposal's going to be $400.
Jason Pereira: Yeah.
Scott Terrio: She's saving $1100 plus no interest. And there was a pause, because there's always a pause. Because I was on the phone. On Zoom it's different.
Jason Pereira: Yeah. When you feel like you're drowning and someone throws you the life preserver
Scott Terrio: I thought I lost her, and I'm like, "Are you still there?" And she's like, "Is that each?" I'm like, "No, that's total and it includes fees and everything." Now there's a penalty for this, obviously. You don't get this for nothing. So there's an R7 note on your credit record.
Jason Pereira: So one before bankruptcy. Okay.
Scott Terrio: Two.
Jason Pereira: Two, sorry.
Scott Terrio: Yeah.
Jason Pereira: Oh, nine. Sorry. That's right.
Scott Terrio: That's okay. It's okay. I know you're good at math. So you get an R7 note on your credit report and what's that mean? A seven means you've made some kind of negotiation or settlement outside the normal course of terms. It could be a credit counseling. It could be a debt consolidation loan, because any of those things are not the terms that were agreed to, including a proposal. So people go and they do debt consolidations and they go, "Okay, I'm going to go get a loan", which you said in your opening
Jason Pereira: Which is doable.
Scott Terrio: And I think if you can do that, because for some people, simplification is the most important thing. They don't want to pay six bills a month because they're going crazy.
Jason Pereira: Yeah. And it doesn't have to be ... There's debt consolidation loans, or is just you can get a home equity line of credit because you had enough equity on your home. consolidate on that. And that's not the same as a debt consolidation loan because those have other terms.
Scott Terrio: Right. And I see a lot of people who come to me with a debt consolidation loan that they got 12 months ago because they realized, "I'm not saving much." Like it's all nice, nice to have one payment, but I'm still getting killed, right. So in this woman's case, she's saving $1100 a month. Well, okay. Now she's going to have an R7 on her credit report, and the way it works is the length of the proposal itself plus the R7 can't be more than six years. So if you go the full five years in the proposal and don't pay it early, you're going to have R7 for one year. If you pay it in four years, you'll have the R7 for two. The maximum R7 length is three years.
Jason Pereira: So the credit rating. People get obsessed about this, but really that shouldn't be the focus here. We're talking about life altering reductions in cashflow that could help them set themselves up for success. How often do people get obsessed with this credit rating issue and is it what they should be focusing on?
Scott Terrio: All the time and especially under a certain age. The younger you are, the more credit obsessed you are just because
Jason Pereira: It's all about the market. [crosstalk 00:25:48]
Scott Terrio: The market has trained people in the last 10 years or 15 years, or retrained them, to obsess about credit scores. And part of the problem is, is this whole business of trying to game it, okay. And the biggest thing that I would tell my 20 year old self, now that I'm old and smart, is don't worry about your credit score constantly. I didn't anyway at that point, but the credit system is not set up for the consumer. It's for the banks.
Jason Pereira: That's very true.
Scott Terrio: This is a fundamental thing and people think I'm lying or losing my mind when I talk about this. The banks pay the credit bureaus. That's who pays them. You are not the customer. You are the product. You are what they sell to the banks. And here's another thing. Nobody knows the formula for the score. We know what goes into it. I know the five elements, I can tell you the percentages, but the formula is a mystery. And that's because they don't want you gaming it. And it gets worse. The score you see is not the score the banks see.
Jason Pereira: Not the real score.
Scott Terrio: Right. Because each bank has its own has its own set of criteria for the credit bureaus. And so your score might be 710, but the bank sees 680 and you don't know that, okay. So you have to realize that you have very little control over your credit score, but the things you can do, which we were talking about earlier, you should do, right.
Jason Pereira: Well, they're good for you, right?
Scott Terrio: Yeah.
Jason Pereira: I mean like the things that
Scott Terrio: Pay something off every month.
Jason Pereira: Exactly. The things that lead to a good credit score are the things that are just financially prudent.
Scott Terrio: Behavior. Yeah, good credit behavior, right?
Jason Pereira: Exactly. So it's not that the credit score is the goal. The credit score is the end result of your good behavior that just makes you better off.
Scott Terrio: It also ... If you're just doing the good behavior, you're not worrying.
Jason Pereira: Exactly.
Scott Terrio: Okay. So you're not constantly going on to Credit Karma and finding out your score every week. And so I have people who weekly check. I'm like, "You should look at that
Jason Pereira: Credit karma's monthly by the way.
Scott Terrio: But I'm like, "You should look at this every six months at the most," really, like if you're doing all the right things. So the internet has trained people to look at the score, but really what you should be doing is laughing at all your friends, going, "I'm over here paying something off every month and I'm shifting my debt load to a certain percentage that they want and all that stuff." And then it's autopilot, man. You don't have to do all that obsessing.
Jason Pereira: So Scott, thank you very much for taking the time to come in. It's very much appreciated.
Scott Terrio: Thank you.
Jason Pereira: Where can people find you?
Scott Terrio: We are Hoyes Michalos and Associates. So hoyes.com. Nice and simple. We have a massive website. We do a lot of media work. We do a lot of videos. We do a ton of blog posts and have been for years. I think very educational and clients comment on it and if you go on our site, you could ... You don't even have to be anywhere near filing a proposal or a bankruptcy. You could just be curious about credit cards or how this stuff works. All the stuff I just told you? There's way more in there on that stuff, so.
Jason Pereira: Fantastic. Thank you.
Scott Terrio:Thank you, Jason.
Jason Pereira: And thank you for joining us for The Wisdom Of Wealth again. Should you find yourself in financial difficulty, consider speaking to someone like Scott sooner than later, because you have nothing to lose with a conversation. And as always thank you for taking the time to help learn more about your personal financial future and make better decisions. Until next time, take care.