Scott Terrio’s Twitter feed (@CooperTrustee) reads like a financial horror story. Terrio, an insolvency expert at Cooper & Co. in Toronto, uses the 140-character medium to share the multitude of ways seemingly well-off Canadians end up buried in debt and turning to debt consolidation, consumer proposals, and even bankruptcy.
Canada’s record household debt levels have been a cause for concern for years, but Terrio sees a new problem on the horizon. Canadian seniors are the demographic increasing debt at the fastest rate.
Take Dorothy, an 81-year-old widow who owns a home with a 1st mortgage from a secondary lender. She refinanced a couple of years ago to do house repairs ($18,000), assist her son with divorce legal fees ($37,000), and to help her grandson with tuition ($8,500).
When her partner died she was no longer able to make the mortgage payments. A friend from church referred her to a mortgage broker.
The broker suggested a reverse mortgage, which would let her stay in her house without the monthly mortgage payment. But the money from the reverse mortgage wasn’t enough to pay out the 1st mortgage after fees and penalties. She needed a private 2nd mortgage at 12 per cent to pay the balance.
Dorothy co-signed a $26,000 car loan for her nephew and co-signed with her son for funeral expenses ($12,000) for her partner. Her son stopped paying, so Dorothy was pursued (100 per cent).
She then ran into tax trouble by not having tax on her OAS & CPP deducted for the first few years. She owes $21,000 in tax, much of it penalties and interest.
This scenario is becoming more common among seniors today.
“Many are in a unique quandary. They’re asset-rich, but cash-poor. Cash flow is tight. Pensions are fixed, and many have underestimated retirement costs,” said Terrio.
So what do they do? Many seniors cash out assets to make ends meet. Others raid their home equity and take out lines of credit. All have financial consequences.
We asked Terrio to share the top financial traps seniors fall into and how to avoid them:
1.) Tax problems
Most seniors were used to being paid by their employers in after-tax dollars. At pension time, many don’t have taxes deducted to offset their Old Age Security and Canada Pension Plan income and therefore end up spending taxable pension income.