House PoorSuddenly bankrupt: People with great credit scores are finding themselves in crisis

John Greenwood and Melissa Leong | Financial Post  |  25/05/13

Britt Santowski never carried credit card debt. She was never late on her mortgage payments. She bought second-hand clothing, furniture and toys for her daughter. She had saved $25,000 as a down payment for her condo, $29,000 for RRSPs and $12,000 in an RESP.

In 2007, she took a financial course through a trusted friend and following its teachings, made a $190,000 investment, funding it through her home equity line of credit. She was, as she now calls it, digging her financial grave.

The investments tanked — the Alberta Securities Commission would later say that investors were misled and the investments were a sham — and around the same time, her husband lost his job. On April 19, 2011, Ms. Santowski who lives outside of Victoria, B.C., declared bankruptcy. She continued to pay her loans up until that day, withdrawing all of her savings.

“You think you’re doing the best you can and sometimes it turns out that it is not the best for you, no matter how smart you are. I am quite smart; but I screwed up and I screwed up horribly,” the 48-year-old journalist and cartoonist said. “Denial becomes huge and [you’re] hanging on to that thin thread of hope that it might work out after all. You shuffle your money around to get through the moment.”

My impression of somebody who was bankrupt was somebody who didn’t have a house, who couldn’t get a job. There is little doubt that a large percentage of Canadians simply refuse to declare bankruptcy — not because it doesn’t make financial sense but because they fear being labelled a dead beat for the rest of their lives.

Not that long ago, you could track the evolution of a prime borrower to a subprime borrower, a gradual process of getting further and further behind until finally a line was crossed. But what’s happening now is that borrowers are “skipping a step” and going straight to subprime, said Blair Mantin, a bankruptcy trustee in Vancouver.

In the industry the phenomenon is known as surprise bankruptcy and the numbers have been on the rise for at least a decade, according to credit industry officials.

As many as 70% of bankruptcy filings are made by people with strong credit scores, according to TranUnion. In other words, individual credit scores mostly provided no warning for creditors. (Two companies, TransUnion and Equifax, both subsidiaries of U.S. parents, compile and keep track of most of the credit scores in Canada

Mr. Mantin recently noticed that a surprising number of bankrupts that came into his office had perfect credit scores. They were paying all their debts, staying current on their credit cards and doing all the things they needed to do to keep their lenders happy — until they stopped, and that’s when Mr. Mantin got called in.

“It was definitely a surprise and it’s a recent phenomenon,” said Mr. Mantin, senior vice-president of E. Sands & Associates Inc.

Credit scores are supposed to be a key tool for lenders of all stripes including banks and credit card companies. It’s not the only tool — employment history and the size of the paycheque are also part of the mix — but it’s key for banks and other lenders in determining whether they will extend credit and at what rate to individual consumers. They’re also used by insurance companies, landlords and even government departments.

“Traditionally, someone who goes into bankruptcy, they missed a payment, then two payments, then three payments and then they go bankrupt,” said Tom Higgins, vice president of analytics at TransUnion. “Now, what we are seeing is people who make all the minimum payments [on their credit cards] and then all of a sudden they go bankrupt. It’s harder to predict when someone is going to go bankrupt than in the past just by looking at their credit information.”

Part of the reason is that consumers have a wider array of credit options — credit cards, leasing companies, private lenders — than ever before, and they’re able to spread out their debts and shuffle them, making a payment here then transferring the loan to a new credit supplier to avoid late penalties.

Another factor is low interest rates which enable borrowers to carry more debt than they could historically at very low cost.

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