Being in heavy debt can lead to huge financial problems for any Canadian borrower, yourself included. While a bit of consumer debt isn’t the end of the world, a lot of it can cause you to spend all your savings trying to get rid of it, or even worse consequences, such as debt collections, bankruptcies, and wage garnishment. Potential lenders will then see your unhealthy debt history, decide that you’re a risky borrower, and deny your applications for new credit.
If you’re currently in a similar situation, you might think that your only option is to apply for another loan, such as a debt consolidation loan, then add it to the stack of other unpaid ones you already have. Another loan could make your debt even worse, it could be time to consider some alternatives.
How Consumer Debt Gets Out of Hand
Before we move on to our debt management alternatives, let’s discuss the idea of consumer debt and how easily it can get out of hand when you’re not careful with your money.
For the majority of Canadian borrowers, consumer debt stems from credit cards, some of the easiest credit products to obtain. While debt can come from different sources, most adults have at least one credit card active as we speak. Not only are credit cards relatively easy to be approved for, they are even easier to use, especially with the introduction of “tap” technology, where you don’t even have to enter a PIN. At first glance, it would appear that younger generations, being carefree, are more prone to racking up credit card debt. Then again, older consumers, with far more regular expenses to handle, are just as susceptible.
Want to know what the average credit score in Canada by age is? Find out here.
Other sources of bad debt include, but aren’t limited to:
- Mounting penalties and interest fees following a string of unpaid credit card debt
- High-interest rates in general
- Unpredicted or emergency expenses
- Loss of employment or reduced income
- Debt from mortgages, car loans, and other larger loan amounts
- Consumer proposals, bankruptcies, and other delinquencies caused by the original debts (keeping reading for more information)
With the rising cost of homes all over Canada, mortgage debt can also be a huge problem. Not to mention the expensive nature of any car, which many people need just to get their daily activities done. Since many of these debts are necessary enough, it’s almost inevitable that you’ll also experience such financial issues at some point.
Check out this infographic for even more information on how to finally tackle your debt.
Debt Solutions That Don’t Involve Loans
If you’re currently in an unmanageable debt situation, you fear that you might be soon, or you’d just like some pointers so you can avoid such events, don’t worry. While it’s good to stay ahead of these kinds of problems, there are plenty of ways to manage your debt that don’t involve applying for a loan, bad credit or otherwise. Some of these solutions include, but certainly, aren’t restricted to:
Credit Counselling: Your Debt is Manageable But Might Not Be Soon
While it’s not a direct way of eliminating your debt, going to credit counselling is a perfect first step, especially if your own debt problems are simply caused by lack of financial know-how. Credit counselors can provide extensive knowledge about every type of debt situation, as well as any debt management tips you need. They can even contact lenders and collection agencies on your behalf to negotiate a more reasonable payment schedule or even get your debt reduced (common with debt settlements and debt management programs, which we’ll discuss further below).
Things to ask about when undergoing credit counselling:
- Money management tips and skill-building
- Budgeting courses
- Debt repayment plans and negotiation procedures
- Other lessons about financial and credit-related issues
- While some credit counselling organizations are non-profit, others do charge a fee for their services. A basic consultation should be free, however, so make sure to ask the counselor if their help costs anything.
Want some information about credit counselling in your province? Check out this page.
Credit Card Balance Transfers: Your Debt is Large But Still Manageable
If your debt does stem from unpaid credit card bills, this might be the right solution. You can apply for a balance transfer credit card (for more information, click here), usually through a different credit card company than the one you’re currently with. Most card users do this when they’re unsatisfied with the interest rate that they’re already paying with their present card. So, they’ll have their outstanding balance transferred to their new card, which ideally has an introductory rate of 0%, making the overall payments slightly more affordable.
What to watch out for with credit card balance transfers:
- These cards are meant to be a quick solution, so they’re not recommended for an enormous amount of debt.
- Their interest rates, while lower at first, may only last for a limited time. Often, interest rates rise again after 6-12 months.
- That new interest rate could end up being higher than your original rate.
- Make sure to either cancel the card once your outstanding balance is fully paid or force yourself not to use it unless it’s absolutely necessary.
- There may be hidden fees or other unexpected costs associated with the card. Remember, credit card companies are businesses trying to make money. They don’t really want to help you if it means they can profit from you in some way!
Look here to learn how to increase your credit score without increasing your credit card debt.
Debt Settlements: Your Debt is Becoming Unmanageable
Let’s say you’re starting to get deep in debt and your lender has sold or is considering selling your account to a collection agency, which is common when your payments are more than 90 days overdue. As we said, a debt settlement involves the help of a credit counselor. In this case, they’ll contact your lenders or collection agencies in an attempt to have your debt reduced. If accepted, the lenders/agencies will settle the bill for less than you actually owe. They’ll often agree to it, as a more beneficial alternative to you declaring bankruptcy, after which they would receive nothing.
What to watch out for during a debt settlement:
- These settlements are for consumers who have $10,000 or more worth of debt but who haven’t yet resorted to filing for a consumer proposal or bankruptcy.
- If your debt is large enough or the terms of the settlement are unfavorable in some other way, the lender or collection agency may not choose to accept your settlement.
- Depending on the policies of the credit reporting agency you’re looking at (TransUnion or Equifax), a record of your debt settlement will be listed on your credit report and may stay there for several years.
- During that time, your credit score and credit rating will be damaged.
Wondering how to negotiate a debt settlement on your own? Find out here.
Debt Management Programs: Your Debt is Hard to Manage, But Not Too Severe
Your credit counselor can also offer a debt management program to your lenders. Similar to a debt settlement, the counselor would negotiate a reasonable way for you to pay your debts. Only instead of settling for less than you owe, you’ll probably still have to pay your full outstanding balance. The good thing about these programs, however, is that you’ll be offered a payment plan, which will help you consolidate the debt over time through more affordable payments at a lower interest rate.
What to watch out for during a debt management program:
- Again, if the terms of the program are unacceptable to the lender or collection agency, they may not accept it.
- Similar to a debt settlement, a record of your DMP will linger on your credit report.
- Not all types of debt qualify for consolidation through a DMP. For example, while credit card and retail debts are eligible, mortgage debt is usually not.
- The credit accounts associated with the program will be frozen and unusable throughout the payment period.
- You’ll still be making payments, meaning you’ll still be in debt. If you don’t make all your payments properly, that debt could get even worse than it was before.
Consumer Proposals: Your Debt is Severe and Only Manageable By Installments
Filing a consumer proposal is one of the most drastic steps you can take toward debt elimination. In fact, you should only consider these next two steps (read about bankruptcies below) if your debt level is nearly impossible to deal with and you’re facing legal consequences as a result.
Similar to a debt settlement, you’ll need to hire outside help to get the consumer proposal process started. Only, in this case, you’ll be working with a licensed insolvency trustee, an Officer of the Court who’s tasked with drawing up a legally binding debt repayment proposal between a borrower and lenders. A consumer proposal, while not quite as extreme as a bankruptcy, is one of these agreements. If it’s accepted, you’ll be eligible for a reduced balance and interest rate, and a “stay of proceedings” will occur, meaning your lenders must cease their attempts to collect your debt.
What to watch out for when filing a consumer proposal:
- Similar to a debt management program, you’ll pay your reduced debt via monthly installments, which will be based on your average income. However, in this case, you’ll make payments through the trustee, who will facilitate the process so your lender is treated fairly.
- You’ll have to attend mandatory credit counselling courses.
- Once again, be very careful not to miss any payment dates, as doing so will result in further debt and even worse legal consequences.
- Also similar to a DMP or debt settlement, your lenders have the option to accept or refuse the proposal. Typically, they have 60 days to make their decision.
- Your outstanding debt balance must total out at $250,000 or less in order to be acceptable. This does not include your primary mortgage.
- A credit rating of R7 will be placed on all credit accounts linked to the proposal.
- Only after 3 years following your completion of the proposal will the record of the action be removed from your credit report.
- All your payments must be completed within 5 years of the proposal’s acceptance.
Ever wonder what the true cost of borrowing is? This infographic is for you.
Personal Bankruptcies: Your Debt is Completely Unmanageable
When your back is against the wall and no type of loan would do you any good, your only choice might be to file for personal bankruptcy. Again, you’ll need to work with an insolvency trustee, who will come up with an agreement that frees you from your debt through a stay of proceedings. In this case, however, that debt will be completely eliminated and any payments you need to make (explained below), will be given directly to the court where your bankruptcy was filed.
Want to know how secured debt is treated during bankruptcy? Click here for the answer.
Things to watch out for when you’re filing for bankruptcy:
- If you have assets, such as a home, car or other valuable property, you will likely have to surrender them as partial payment of your debt. At the very least, a certain amount of equity will be drained from those assets.
- Generally, a bankruptcy filing costs a minimum of $1,800, which you can pay off at once or through increments of $200, divided over 9 months.
- Mandatory steps also involve taking credit counselling and providing statements of your regular household income, including child tax benefits and child support, along with any other payments you receive on a recurring basis.
- While you can retain most of your regular income, you may have to make surplus income payments if your household income is over a certain monthly limit.
- Any outstanding tax returns must be filed. The money you owe will be included in the bankruptcy and reimbursed to the Canada Revenue Agency.
- Your credit score will drop badly and your bankruptcy will remain on your credit report for 7 years (per filing) following its completion, making it virtually impossible for you to be approved for new credit products during that time.
- Every province has a slightly different bankruptcy process, so make sure to ask your insolvency trustee exactly how much yours will cost you, what types of assets and debts are included, etc.
Contact Us For Debt Relief
If you’re currently dealing with debt and aren’t sure what option is best for you, we can help you find the solution that’s right for your unique situation. Don’t hesitate to contact us today for more information.
