Article May 8, 2020

Debt overload: helping clients recognize the warning signs

Pierre Fortin, a licensed insolvency trustee at Jean Fortin & Associés

When it comes to your clients’ finances, you are the first responder. As a CSF member, you’re often one of the only professionals who knows your clients’ financial position. You may, in some cases, even know more about it than their partner!

With a front-row seat to your clients’ finances, you can have a positive impact on their life if you spot a debt problem.

But how do you diplomatically broach the subject, especially with clients who don’t want to face the facts? I think the best way to anticipate financial difficulties—and limit the damage—is to make a diagnosis. And if you involve your clients in the process, which comprises three simple steps, they usually become aware of the problem fairly quickly.

Determine their debt load

Each year, your clients should determine their debt load by calculating their debt ratio. The percentage obtained is the debt-to-income ratio. Here’s an easy-to-use formula  I usually recommend to people:

(Mortgage/rent + taxes + heating) + (credit cards, credit line, loans)/Monthly gross family income = Debt ratio (%)

This tool has the advantage of being universal since it’s the one financial institutions use when someone applies for a loan. The ratio obtained is used to objectively evaluate how an institution will view a client who needs credit quickly. A result of 30% or lower is considered excellent, 31% to 36% is good, whereas a ratio of 40% or higher is considered to be high-risk.

However, this tool isn’t perfect because it doesn’t take into account clients’ family circumstances. A single person whose gross annual income is $100,000 has a different amount of flexibility than a family with two children whose parents each earn $50,000 a year.

By calculating their debt ratio each year, your clients will know if their debt load is increasing or whether it’s stable. A steady increase when occupancy costs haven’t changed is a sign that their discretionary spending (travel, restaurants, a fancy car, etc.) is increasing, or worse, that they have a structural deficit and have to use credit as a source of additional income.

In the first case, cutting back on spending may prevent future damage. But in the second, this needs to be accompanied by a debt reduction plan. This is a red flag that should not be ignored.

Create an actual budget, rather than a theoretical one

Creating an actual budget is probably the most difficult exercise for clients because rather than using theoretical figures, they have to use real ones. Once fixed expenses have been identified, the real challenge begins. How much do they spend on food, clothes, maintenance costs, pocket money and gifts each month and each season (in the summer, at Christmas, etc.)?

The only way to create a budget that reflects reality is to make a note of all expenses (groceries, restaurants, gas, etc.) over several months—ideally six or more. This of course takes discipline and willpower. Paying for everything with a credit card, even small purchases, makes it easier to track expenses at the end of the month.

Following through on this tedious exercise helps people to first realize how small expenses, which are often overlooked, add up.

They also sometimes realize how much they spend in major expense categories, like transportation. This one in particular they can easily do something about, especially at each renewal time if they lease a car.

With a budget, your clients will also know if they have a recurrent surplus or deficit. In the first instance, they can better plan their savings, perhaps even increase them. On the other hand, a recurrent deficit almost always means the client has debts: if at first the credit available makes up for the income shortfall each month, debt service costs very quickly become the root cause of a growing deficit. The client then becomes trapped in the spiral of debt, and a change of course is needed to prevent a debt overload.

Prepare a balance sheet

The third essential tool for evaluating your clients’ financial health is the balance sheet. As well as providing an overview of changes from one year to the next, it helps redress the debt ratio. Clients who have invested in a home, for example, will probably see their debt ratio increase in the short and medium terms due to the additional costs that come with owning a home compared to paying rent. The question is, does home ownership put a burden on their finances? For example, a client who has a debt ratio of nearly 40% (close to the acceptable limit) but has relatively liquid investments does not face the same financial risks as a client who has no or few liquid investments.


You are one of the privileged few with a front-row seat to your clients’ personal finances. Providing them with suggestions and advice about debt may be a delicate task, but with a good approach, you’ll build your credibility in their eyes and ensure their financial health in the long term.

NB, You can find various budget and debt calculators on the Web and on our website Choose one you feel comfortable working with and please feel free to contact us if you have any questions.

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