Whether or not there’s a formal recession, Canadians know full well that their approach to debt, which has left them feeling vulnerable in the current economic environment, will have to change in the coming months.

“We’re noticing that a lot more people are taking the situation a lot more seriously,” says Elena Jara, education co-ordinator with national credit-counselling organization Credit Canada in Toronto. “They’re realizing that the crisis [in the U.S.] also belongs to us.”

Patricia Lovett-Reid, senior vice president with TD Waterhouse Canada Inc. in Toronto, expects a paradigm shift in how Canadians view debt in the coming year. In fact, she predicts, the days of the “buy now, pay later” mentality may finally be coming to an end: “The old-fashioned [idea of] putting money away and saving will come back into vogue.”

Thanks to low interest rates and easy access to debt, Canadians have been dangerously comfortable in taking on higher debt loads in the past several years. In fact, the household debt/income ratio has increased to 137% as of June 30, 2008, from 110% at yearend 1999, according to Statistics Canada. “That’s huge,” Lovett-Reid says. Further, the Bank of Canada’s December 2008 Financial System Review indicates that the debt/asset ratio is 17.8%. “It’s out of control,” Lovett-Reid says.

Credit Canada expects to see a spike in client calls this February as consumers seek help to manage their debt loads, which tend to bust at the seams — even at the best of times — after the holidays. “Once the bills come in,” Jara says, “reality hits.”

In fact, there’s evidence that Canadians are already battening down the hatches.

Spending has been going down slowly but surely throughout the past year, Lovett-Reid says. Demand for housing has also dropped, which points to lower demand for credit. The result: a personal savings rate of about 4% in September 2008. Although it’s nothing near the Wealthy Barber’s 10% ideal, it’s still 0.5% more than people saved a year ago, Lovett-Reid says: “[Canadians] are holding onto their money.”

Fear about a potential recession has indeed created a belt-tightening culture, especially in Ontario, says Daniel Collison, a certified financial planner, trust and estate practitioner, and regional director with Investors Group Inc. in Markham, Ont. But, he says, there’s a dichotomy in our current economic situation that might confuse clients: the uncertain economy clashes with our historically low interest rates. This creates a mixed message for consumers.

As dire as the situation may be, however, it has led to one significant positive outcome: it has created a catalyst for planners to revisit their clients’ financial situations and focus on the liabilities side of the balance sheet. “It gets people thinking again,” Collison says, “because they’ve become very lazy in focusing on the cost of debt.”

Lovett-Reid adds that advisors need to recognize that anxiety concerning the economic crisis might mean that clients are no longer making investments their priority but are intent on addressing debt more aggressively. Reconstructing a client’s debt portfolio — while not highly profitable over the short term for commission-based advisors — will help cement the client/advisor relationship. “[And] once that debt is retired,” she says, “they’ll be back to being the investing client but with more disposable income.”

Collison recommends advi-sors add another category to the typical good debt (anything that builds wealth over the long run)/bad debt (unpaid consumer debt) paradigm: best debt. This category refers to debt that is tax-deductible. Advisors can recommend strategies to their clients, he suggests, wherein clients can convert their non-tax-deductible debt into tax-deductible debt.

If a client has a $20,000 loan on a car, for instance, and $20,000 in assets, it might make sense to cash in the assets to pay the loan, then borrow back $20,000 to invest. “It’s fairly simple,” Collison says of such a debt swap, “but it has to be done impeccably.”

Collison points out that advisors also need to make sure that what’s being sold doesn’t have tax implications. Not only is this strategy unlikely to make sense with a registered investment, but it might also be inappropriate for securities. Advisors need to find out whether such a strategy would create a capital loss or a gain.

Advisors should also try to steer clients gently away from the psychological impulse to throw every last penny toward their mortgages, he says. It’s a habit that has carried over from the 1980s and early 1990s, when mortgages carried double-digit interest rates. But having some cash flow in reserve is critical when there is so much uncertainty in the air.

@page_break@“You can build up the equity outside the mortgage from which you can periodically take lump sums and pay down the mortgage,” Collison says. For instance, RRSP refunds become extra padding in the bank if interest rates spike or something calamitous, such as a job loss, occurs.

In some areas of Canada, debt anxiety isn’t an issue. An advisor in Alberta describes the mood in that province as generally positive. Although there is some concern about when investment returns will bounce back — some clients might be putting off their retirement, for instance — job losses, cash flow and onerous debt loads are not on the radar.

The story is similar in Newfound-land and Labrador, which is seeing unprecedented strength in its economy. “We’ve been relatively insulated — at least, for now,” says Joe Riche, a CFP with Riche Investments in St. John’s. “There’s a general sense of well-being here that we haven’t seem for some time.”

People are obviously concerned about their depreciating investments, and the real estate market in St. John’s is cooling from last year’s 22%-25% annual appreciation. That said, very few of Riche’s clients have borrowed against their homes’ equity, he adds. Individuals who see financial planners, he says, are those who are more proactive about money in general. So, it might not speak to the mood of the population as a whole, he admits: “Not many people come to me because of debt issues.”

For now, Riche’s only advice for those clients who might need credit is to lock in a rate now rather than wait: “There may soon be a credit crunch.”

Those who do need help are often beyond the scope of most advisors. Collison says that there are situations in which a potential client is told to seek credit counselling rather than go forward with a traditional financial plan.

This delicate situation will probably only increase over the coming months as more Canadians find themselves squeezed by debt obligations. There’s very little an advisor can do when debt reaches proportions at which it’s no longer balanced against assets — and the client has done little to rectify the situation. “Can you work with someone who has a drinking problem?” asks Collison. “Not until the client owns up to the fact that he or she has a drinking problem. It’s very much the same for those who can’t get out of debt.”

Credit Canada counsels clients from all walks of life, but lately Jara has noticed more shell-shocked individuals who thought they were immune to such concerns — until they’ve found themselves in their own personal credit crisis, thanks to a job loss, reduced hours of work or obligations to help other family members. “Everyone’s been hit,” she says, “in one way or another.” IE