But what do you do when one credit card is maxed out, and you struggle to make your credit card payments on that card? Or what if an alternative credit card company offers you a credit card with a lower interest rate? Should you pay your credit card debt with a different credit card? That’s what we are exploring today – when paying a credit card with a different credit card is a good idea and when it’s not.

Can you pay off one credit card bill with another credit card?

Settling one credit card bill with another isn’t an option, as credit card companies won’t accept another credit card as a form of payment. Accepted payment methods usually include cheque payments, electronic bank transfers, or money orders.

However, there are workarounds including:

• balance transfers, or

• using cash advances.

How to pay off a credit card with another credit card

Although you can’t directly pay one credit card with another credit card, here are some options to transfer balances and the pros and cons of each.

Balance transfer

One method to pay off a credit card with another involves leveraging multiple credit card issuers. Applying for a new credit card that offers balance transfers allows you to move balances from one credit card to another.

Depending on the card, you may qualify for a lower or zero introductory interest rate, which will help you save money on interest charges, at least during the promotional period. Switching from a high-interest credit card to a low-interest card can reduce your interest charges in the long run.

Cash advance

Another option to pay off your credit card debt is to take out a cash advance on one card, place those funds in your bank account, and then make your regular monthly payment on your second credit card bill. Be aware that cash advances have no grace period. You will pay interest charges on the card you took the advance on beginning immediately.

Using a cash advance on one card to pay off another is not paying down credit card debt. You are simply transferring balances between cards.

Pros and cons of paying a credit card with another credit card

So, is it worth paying off a credit card with another credit card?

The main benefits of paying a credit card bill with another card are avoiding late payment charges and lowering your interest rate.

There are certainly some risks with using a credit card to pay off another credit card, including:

Multiple payments

It’s crucial to understand billing cycles if you are going to be juggling multiple credit cards. Having more than one credit card means you may have multiple monthly payments with different due dates. Juggling many payments can lead to missed payments, resulting in higher interest costs and a hit to your credit score.

More credit card debt

Having more credit cards means having a higher overall credit limit. While the available credit on a balance transfer card may be tempting, resist the urge to put additional purchases on your new card and focus on repaying your remaining balances first.

When dealing with credit card debt, taking on additional debt is not always the best idea, as it can perpetuate the cycle of borrowing and may not effectively resolve the root issue.

No credit card rewards or points

You won’t earn points or receive cash-back rewards when using balance transfers to pay off balances on another credit card. Credit card balance transfers are a payment, not a credit card purchase, so do not earn rewards. Cash advances also do not earn reward points.

Balance transfer fees

Some credit cards will charge a balance transfer fee, and most will charge a fee for a cash advance. This fee could cost you between 3% and 5% when you transfer your debt from one credit card to another. Some balance transfer offers may also come with an annual fee, so check the terms and conditions.

Higher interest charges

Unless you have a promotional interest rate, you may pay more in interest charges in the long run.

The primary benefit of a balance transfer credit card is the introductory APR offer. Promotional periods typically limit the interest-free periods. If the outstanding balance from the transferred debt isn’t settled completely before the intro 0% offer ends, the remaining balance will incur the card’s standard annual percentage rate, which might be even higher than the interest rate of the card you’re transferring from.

The interest rate for a cash advance usually averages around 24%, significantly higher than the average APR.

If you are not paying down your balances, you will continue to pay more interest as credit cards are a high-cost borrowing option.

No grace period

There is no grace period with a balance transfer or cash advance unless you have a 0% interest offer. Interest charges begin the day you make the transfer or advance.

Credit score impact

Every new credit card application is a hard inquiry by lenders or credit card companies on your credit report, which can lower your credit score.

Credit utilization is the ratio of your outstanding balance on a credit card to your credit limit, expressed as a percentage. A higher ratio can negatively impact your credit score. Obtaining a new card with a higher credit limit can lower your utilization rate, but only if you don’t increase your spending.

Alternative ways to pay off a credit card

Paying off one credit card with another may seem convenient, but it’s not always wise. Even using the best balance transfer strategies may not be the best approach to paying down your credit card debt.

There are alternative methods and smarter strategies beyond making the minimum payment and paying one credit card off with a different credit card.

Debt consolidation

Combining balances onto a single balance transfer credit card combines multiple credit card bills into a single monthly payment with a potentially lower interest rate, making it easier to manage.

You will need a good credit score and stable income to qualify for a debt consolidation loan. There are debt consolidation loans for people with bad credit. However, these types of loans carry a very high interest rate.

Using a line of credit

Another option is a line of credit, which offers a lower interest rate than credit cards. If you are a homeowner, you may qualify for a low rate through a home equity line of credit.

Personal loan

Additionally, personal loans provide the flexibility of spreading out payments with installment plans and fixed payments, often at lower interest rates than credit cards.

If you have bad credit, we do not recommend using a payday loan or high-interest fast cash installment loan to make credit card payments. Consider the annual interest rate of the new loan and ensure that it is less than the annual percentage rate on your credit card.

Emergency fund

Building an emergency savings account can provide a financial safety net, allowing you to cover unexpected expenses without resorting to high-interest credit card debt.

What if you can’t pay your credit card debt?

Using one credit card to pay off balances on another may seem like a quick fix for credit card debt, but unless you’re paying off your entire balance, all you may be doing is moving debt around.

If you are struggling to pay off credit card debt, consider exploring your options for credit card debt relief. This may include seeking assistance from a licensed insolvency trustee and considering options like a consumer proposal, bankruptcy, or a debt settlement plan.

Contact us for a free, no-obligation consultation if you need help with your credit card debt.

The post Should You Pay Credit Card Debt with Another Credit Card? appeared first on Hoyes, Michalos & Associates Inc..

Understanding the mortgage renewal process

The mortgage renewal process in Canada typically involves renegotiating the terms of your mortgage loan with your current lender during renewal time. Homeowners often seize this opportunity to secure a more favourable interest rate. However, since your mortgage term may range from a few months to five years, multiple renewals occur during the lifetime of a mortgage, and the process doesn’t always go smoothly.

There is a possibility that your mortgage renewal will be denied because of missed mortgage payments, a poor credit score, changes in your financial situation or the market, or because you’ve taken on too much new credit.

Why was my mortgage renewal denied?

The ability to renew your mortgage is not guaranteed, as a lender reassesses your credit as a borrower at the time of renewal. Common reasons why your mortgage renewal was denied might include:

1. Missed mortgage payments: Consistently missing payments or having a problematic payment history can lead to denial. If you have a mortgage in arrears at the time of renewal, there is a high likelihood that your renewal will be denied.
2. Bad credit score: Lenders often examine your credit report, and a poor credit score may result in a denied renewal. If you have never missed a payment, they may overlook a slightly lower credit rating.
3. Drop in income: During the renewal process, lenders may assess your income. If you have experienced a recent job loss or a decrease in earnings, your mortgage lender may feel you will struggle to meet your monthly mortgage payments, potentially leading to a denial by the lender.
4. Negative market conditions: A decline in home prices can cause traditional lenders to tighten credit policies. If your home equity and loan-to-value ratio falls, you may move from a low-ratio mortgage to a high-ratio mortgage requiring mortgage insurance or a denial by your current lender.
5. Too much debt: Excessive credit card debt, car loan payments and other new loan expenses can lead to a higher debt service ratio. If your DSR exceeds 40%, your lender may feel you don’t have the money to make your future mortgage payments.
6. Higher interest rates: Renewing a mortgage when interest rates rise can lead to unaffordable monthly payments, which may contribute to denial.
7. Failing stress test with a new lender: Refinancing with a new lender will involve a stress test. If interest rates are higher, a new test can negatively influence the renewal outcome.

What to do if your mortgage renewal is denied

If your current lender does not approve your mortgage renewal due to bad credit or other reasons we discussed, here are some steps to take to deal with a denied mortgage renewal:

• Talk with your current lender: Find out why your mortgage renewal was denied. Ask them what the minimum changes they might expect to improve your odds of a renewal.
• Extend your amortization. If the reason was affordability due to higher interest rates or loss of income, ask if you can change your mortgage amortization period to make your monthly payments more affordable. Remember that a longer amortization means your payments will go down, but it will take longer to pay off your home.
• Improve your credit score. Lower credit scores need to be addressed long before your mortgage renewal date. Take steps to address any missed payments and improve credit utilization on your credit report.
• Consider a different lender: If institutional lenders have denied your renewal, you may want to explore options with a B lender and see if you can refinance with a new mortgage lender. B lenders are smaller specialized monoline lenders, credit unions, trust companies and mortgage investment companies. Be aware that changing lenders means refinancing, requiring a stress test.
• Consult with a mortgage broker: Mortgage brokers can play a pivotal role in securing alternative lenders and better rates. Even if your mortgage renewal was approved, talking with a mortgage broker can help you achieve lower mortgage rates.
• Consider a private mortgage lender: If the B lender has denied you, you may want to consider a private lender for your mortgage renewal application. Keep in mind they may not be licensed, and it can come with higher risk and higher interest rates.
• Get a cosigner: Bringing in a cosigner may improve your chances of approval if your guarantor has a good credit score.
• Clean up other debt: If you’ve taken on a lot of new credit cards or other unsecured debt since your last mortgage renewal, clearing bad debt may help your odds at renewal time.
• Downsize or sell your home: If you’re a homeowner and all financial institutions have denied your mortgage renewal, it may be time to walk away from your mortgage.

Where to find professional help with mortgage renewal

Seeking professional assistance is crucial when navigating mortgage renewal challenges.

What can a mortgage broker do?

Consult with mortgage brokers to access better rates and mortgage terms and to help find alternative lenders. Contact them early so they can work with you to improve your chances of approval and find a mortgage at the best mortgage rate possible for your situation.

How can a Licensed Insolvency Trustee help with your mortgage?

If you can no longer afford your mortgage or your mortgage may be denied due to too much other debt, consider contacting a Licensed Insolvency Trustee.

Even with a bankruptcy or consumer proposal, there are options to keep your home and make your mortgage repayment easier. If you have filed a consumer proposal, your mortgage renewal should go smoothly if you have made your mortgage payments in full and on time.

Understanding the details of the mortgage renewal process, being proactive in addressing potential issues, and seeking professional guidance if you are concerned about your mortgage being denied is essential.

If debts like credit cards, payday loans or lines of credit affect your ability to afford your mortgage payments or may affect your mortgage renewal, book a free consultation with a local Licensed Insolvency Trustee for advice and mortgage debt relief.

The post What to Do If Your Mortgage Renewal is Denied in Canada appeared first on Hoyes, Michalos & Associates Inc..

According to the Canadian government, more than 898,000 businesses were approved for CEBA loans. Most will be able to repay their loans, some will not. What happens if you can’t repay your CEBA loan?

Loan Repayment and Forgiveness Terms

Under the program, CEBA loans are interest free until January 18, 2024 and no principal repayment is required before January 18, 2024.

Here is how CEBA loan forgiveness works:

NOTE: This is our summary of the rules.  Please see the government of Canada CEBA loan information for full and current details.

If the loan is in good standing and the balance excluding any potential forgiveness amount is repaid by January 18, 2024, up to 33% is forgiven. The exact percentage of forgiveness depends on when you received the loan and how much you received. Applicants who received only the initial $40,000 CEBA loan are eligible for 25% forgiveness while those who received a further $20,000 expansion loan may receive 50% forgiveness on amounts borrowed above $40,000.

For loans outstanding past January 18, 2024, the interest rate is 5% per year. Only interest payments are required until maturity, with full principal due in a balloon payment on January 18, 2024.

The key to CEBA loan forgiveness is that your CEBA loan must be in good standing. If you cannot repay the required 75% of the principal balance under your CEBA loan by January 18, 2024:

• you lose any forgiveness eligibility.
• you must start paying interest at 5% on any amount remaining until the loan is repaid.
• the balance outstanding converts to a 3-year loan due January 18, 2025.

If you are unable to pay back your CEBA loan within this three-year period contact your lender to discuss options. If you are unable to make arrangements or may default on payment, consider talking with a Licensed Insolvency Trustee for options available if you are unable to repay your CEBA loan. Licensed Insolvency Trustees are professionals who are licensed by the Government of Canada to assist individuals and businesses who are facing financial difficulties.

Should You Refinance Your CEBA Loan?

Canada’s major banks have indicated their willingness to consider refinancing the CEBA loans for small businesses.  On Thursday, September 14^th, 2023 Ottawa adjusted repayment deadlines, with partial forgiveness available for loans repaid by January 18, 2024. A new deadline allows partial forgiveness for loans in the process of refinancing by March 28, 2024. Refinancing options include larger loans at 5% interest or smaller loans at higher rates.

Several banks, including Bank of Montreal, National Bank, and Royal Bank of Canada, are offering refinancing assistance, while others are evaluating requests individually. Some alternative lenders are also promoting CEBA refinancing as well.

There are several advantages to refinancing, including the following:

Preservation of Loan Forgiveness Eligibility: If you opt for another loan to settle your CEBA loan by January 18, 2024, you can retain your eligibility for loan forgiveness.

Extended Prepayment Period: With a personal loan, you’ll benefit from a longer prepayment period, resulting in smaller monthly payments.

Credit Score Protection: Refinancing allows you to avoid defaulting on the loan, safeguarding your credit score.

Keep in mind that you will end up paying a higher interest rate compared to your CEBA loan and you will need to apply with your lender to see if you qualify.  If you are denied a refinance with your bank, you may have better luck with an alternative lender although these types of loans typically charge extremely high rates.

You will need to consider your ability to maintain monthly payments on your new loan, including interest. If you cannot repay this loan your creditor will pursue collection options. If repayment is a concern, you may want to consider discussion options like a consumer proposal.

Can CEBA Loans be included in a bankruptcy or consumer proposal?

Many small businesses utilized their CEBA loan to fund operating expenses during a period when sales were slow. If sales picked up, they may be able to repay the loan as required. However, not all small businesses survived the closures during the pandemic or have been able to recover enough to repay their CEBA loan.

Here is what happens if you can’t repay your CEBA loan:

If your business was incorporated and you close the business, there is no need to file for personal insolvency as the debt is owed by the corporation. You are not personally liable for the CEBA loan of a corporation. See further details below.

If your business was a sole proprietorship or partnership, you are personally liable for repayment. If you cannot repay your CEBA loan (or other small business debts), any CEBA loan can be included in a personal bankruptcy or consumer proposal. CEBA loans are not secured. They are considered an unsecured debt and hence can be discharged in an insolvency proceeding under the Bankruptcy and Insolvency Act in Canada.

You may also have tax debts in addition to a CEBA Loan if your business is struggling. It is possible to make a financial arrangement through a consumer proposal with the Canada Revenue Agency to deal with unpaid taxes and with your financial institution for your CEBA Loan.

Remember, even if you can’t repay your CEBA Loan by January 18, 2024 you still have two additional years to repay the loan, with interest. If you think you might default and are struggling with small business debts, your best option is to talk with a Licensed Insolvency Trustee to explore different options for resolving your debt including a CEBA Loan. It’s important to note that each option has its own set of pros and cons, and it’s important to speak to an LIT to understand which one is the best for your situation.

Your LIT will talk with you about the viability of your business. Do you want, and can you afford to continue to operate? Do you have other business debts? Will eliminating these debts make your small business viable going forward? Your Licensed Insolvency Trustee can also explain the implications of filing insolvency on your ability to restart your business, including its ability to obtain credit.

CEBA Loans to a corporation that is no longer operating

As noted above, if you obtained the CEBA loan as an individual or a sole proprietor, you are personally liable for the loan.

If the borrower was a corporation, the corporation is liable for the loan.  If the corporation is no longer operating, and has no assets, if the corporation does not repay the loan, CRA can pursue the corporation (but not the owners because CEBA loans were not personally guaranteed). 

We suggest that you consult your corporate tax accountant and/or your corporate lawyer to review your options.  If the corporation is no longer operating, one possible approach (after consulting your accountant and lawyer) is as follows:

First, file the final corporate tax returns (T2 corporate tax return and final HST return). Check “Yes” to the box on the final corporate tax return that says, “Is this the final return up to dissolution?”  When the return is filed, CRA will send a message back saying:

The request to close your corporation income tax account has been sent.  In order to complete this request, send the articles of dissolution using the Submit Documents service within 7 business days.

NOTE: As per CRA guidance, a corporation cannot be dissolved if it has outstanding debts (such as a CEBA Loan), so you can’t submit articles of dissolution.  However, you can upload a letter to CRA that says, “The corporation has ceased operations and has no assets, so this is the final tax return.”  While this is not an official dissolution, it will explain to CRA why the corporation is no longer filing tax returns.

Second, close the corporation’s bank account since if the corporation has ceased operations, there is no point in incurring monthly bank service charges.

Finally, resign as a director since if the corporation is no longer operating, there is no point in you serving as a director.

CRA will likely contact the corporation for payment, but you can advise that the final tax return was filed, and eventually, CRA will presumably write off the CEBA loan and discontinue collection activities.

The post What Happens If You Can’t Pay Your CEBA Loan? appeared first on Hoyes, Michalos & Associates Inc..

The end result is that it’s even harder today to make ends meet. For many Canadians living paycheque to paycheque means more credit card debt, not less. And too many households are a week or two away from resorting to payday loans and high-cost installment loans.

So how do you control your debt when your budget is stretched? Read on for some personal finance tips that can help you deal with debt when you can barely manage to keep up with living costs.

Avoid going deeper into debt

One of the most common concerns I hear when talking with people on our helpline is “I’m not even living paycheque to paycheque, I’m going deeper in debt every pay period.” If this sounds like you, you are not alone. This is the most common path to bankruptcy for most of my clients.

While I know it’s hard, if you are struggling to balance your expenses with your income, my number one piece of advice is to put away your credit cards and live on cash (or cash equivalent like your debit card).

This is especially true if you owe money on your credit cards. Most credit card companies charge interest daily if you carry a monthly balance. In other words, if you don’t pay your balance in full each month you lose the grace period for new purchases. So if you have credit card debt, stop using your cards until they are paid off.

Using credit to pay bills is a temporary money fix. Eventually, your credit cards will be maxed out and you will be tempted to turn to high-cost payday lenders. This creates a cycle of debt that is hard to stop.

Be prepared for unexpected expenses

Living paycheque to paycheque is even more stressful when you lack financial control to deal with unexpected expenses that arise.

The first financial goal I recommend to most of my clients is to set aside a small emergency fund of $500 to $1,000 in a separate bank account. This is not money you turn to when you run short at the end of the month. Try not to use this money to pay for everyday costs like groceries and gas. It’s money meant for surprise costs like a car repair, medical bill or visit to the vet. The objective is to have a small amount set aside so you don’t turn to your credit cards or other debt to pay for emergencies.

Pay your bills as you get paid (it’s easier than budgeting)

I’m not a fan of formal budgeting because I know it’s not sustainable for most people. What I generally recommend to anyone starting fresh with money management is to pay your bills as frequently as you get paid.

The general idea is to pay a portion of your next month’s bills and set aside enough money for future bills, every payday before you spend any other money. What is left after doing this is money you can spend on extras, put towards debt payments or savings. You are using your paycheque cycle as a budgeting tool.

There are many benefits to this approach to budgeting:

• you don’t need to keep track of anything or use any spreadsheets
• it prioritizes necessary bill payments over wants helping you avoid overspending
• you won’t have any late payments which can harm your credit score.

So here’s how this works.

If your cell phone bill, for example, is $120 a month and you are paid weekly, every week set up a bill payment for $30 to your cell phone provider. This way, if the bill comes in you don’t need to scramble to find $120 in an empty chequing account.

For bills, you can’t pay periodically, like your rent, you can use separate holding accounts to accomplish the same thing. Let’s say your rent is $1,800 a month and you are paid weekly. Simply set up an automatic payment to transfer $450 each week into your ‘rent account’. When your rent is due, use this money to pay your landlord.

The key here is to know what bills you have coming in over the next 30 days, and what money you might need to set aside for future bills like your car insurance, Christmas gifts etc. You carve money out of each and every pay to cover these costs.

Any money left over the day after allocating to your bills is yours to spend as you wish. As long as you don’t spend more than this using credit cards, you have a balanced budget and stop living paycheque to paycheque.

Protect yourself from income loss

Losing a job, or income loss is the most common cause of the primary causes of insolvency in Canada.

As many people found during the pandemic, no job is secure. That means you should always be prepared for the possibility that your income will drop. As the saying goes, hope for the best but plan for the worst. Here are some tips to help you be prepared:

1. Keep an up-to-date resume (and on your home computer not your work computer).
2. Update your skills to improve your employability, both with your current employer and for a possible future employer.
3. Know where you might find your next job. You don’t have to be thinking about quitting your job but it’s always a good idea to know what else is out there in case your company lets you go unexpectedly. This can also help you negotiate for more money come raise time.
4. Network with people in your industry or with people who work in an area you might want to move to.
5. Take pride in what you do. It doesn’t matter what your skill set is, an employer is most likely to retain or hire someone with a positive attitude, and who is willing to learn and improve.

Other things you can do to ensure you have a steady, or better monthly income include getting a side gig to earn extra money if this makes sense for your lifestyle. I’m not suggesting everyone get a second job or another part-time job. I’m talking about looking at ways to use what skills or hobbies you have to create a side hustle that can help you generate a little extra cash.

And don’t be afraid to reinvent yourself. If there is not a lot of job security or room for growth in your current job, take a chance on yourself. Go back to school, build a new skill set, or start your own business.

If you want to learn more about my thoughts on employment, you can hear more on our Podcast Debt Free in 30.

Change your money habits

I’m not here to tell you where to spend your money but there is value in reviewing your spending habits if you are constantly running short of cash before payday.

Look over where you are spending money and ask yourself is this a need or a want. If it’s a want, that’s fine, but weigh that want against putting that same amount of money towards your debt. It’s your choice, your priorities, just make sure you are making a conscious choice each time.

Second, look at how you pay for items. If you are using debt to buy non-necessities, this should definitely stop. As I mentioned before, if your debt is increasing, you may be better off leaving your credit cards at home and paying by debit instead to control the bleeding.

Paying down debt

OK, so what about the debt you already have. I hear from families who were financially devastated by the lockdowns and business closures during the pandemic. Many were forced to take on debt because they couldn’t work. Now they are back at work and it’s time to pay it all back, yet their income isn’t necessarily high enough to pay the bills and pay down that debt.

How do you deal with current outstanding balances when money is tight?

Pay more than the minimum payment

One of the most important facts to learn about credit card debt is that the monthly minimum payment is designed to keep you in debt. It’s enough to cover the interest charges for the month and typically only 1% – 2% of what you actually owe. So if you only pay off 1% of what you owe each month – guess what – it will take 100 months to pay off your balance. And that’s assuming your spending habits don’t cause you to use your card for more purchases each month.

As I mentioned above, if you carry a balance and put new charges on your credit card be aware that you are paying interest on those purchases from the date of purchase.

So begin by paying more than the minimum where you can.

This can be easier if you make a small micropayment towards debt every time you get paid. There is no rule that says you can only make one payment on revolving credit like credit cards or lines of credit every month. You may even be able to pay your car loan in small micro installments if the payments have not been automated already.

Use the debt avalanche method

There are two common approaches to debt reduction: the debt snowball method and the debt avalanche method.

The debt snowball method is where you pay off balances in order from the smallest to the largest. The main, and in my opinion only benefit, of this method is the psychological motivation you get in knocking some debts off your list.

A debt avalanche is a system of debt repayment where you break down your monthly debts by total owed and their interest rates. The loan with the highest interest rate becomes the priority for repayment.

Begin by making a list of all your debts including student loans, payday loans, credit card debt, bank loans, installment loans and any other personal financing. Every debt must be paid on time, with at least the minimum payment. Money that is not budgeted for necessities (or left over each pay when you use my ‘pay your bills as you go’ method) is used to pay down debt.

Imagine you have three loans and $250 available after expenses:

• $500 owed on a credit card with a 20% annual interest rate
• $625 due for monthly car payments at a 6% interest rate
• $2500 on a line of credit with an 8% interest rate

The monthly car payment would need to be met, and budgeted for, as this amount is the minimum. Imagine, the minimum payments on the credit card and line of credit were $50 each. Out of your $250 available, $50 would be put towards the line of credit and $200 on the credit card, since it holds the highest interest rate.

If you didn’t add any new debt to the credit card, you could pay it off in full in two and a half months. The full $250 would then go towards the line of credit. After the line of credit is paid, any extra income can be added to the car loan to pay it off faster or put towards savings or other financial goals.

Benefits of dealing with a high-interest debt first

One of the main advantages of the debt avalanche system is it reduces the amount of interest you’ll pay while paying down debt. And focusing on clearing the most expensive debt will lessen the time it takes you to get out of debt.

I know that debt is emotional and stressful, and most Canadians don’t fully realize how interest rates add to their overall burden. Paying off your debt with the highest interest will give you more financial control and eventually increase the amount of disposable income you have for other things.

Savings vs. paying off debt

As I said earlier, I believe an important priority when financial planning is to have a small emergency fund. After that, your goal should be to reduce revolving high-cost consumer credit.

Once your credit cards and other high-interest debt is paid off, the most common question I get is should I pay down my mortgage or car loan or should I start saving money.

The truth is it’s up to you and should be based on your income stability and future financial goals.

If your employment is at risk you might want to build a larger rainy day fund in a separate savings account to cover maybe three months of necessary expenses. These monthly expenses include rent or mortgage payments, groceries, basic utilities, and car loan payments.

But it’s just as reasonable to start setting aside money for a down-payment to buy a house, to put money in an RRSP or TFSA as long as your high-interest debt is paid off. It all depends on your financial priorities.

Other options for high-interest debt

If the monthly payments for your debts are far beyond your means to pay every month, there are other options to get out of debt. Using a debt calculator can help you explore the options that are right for you.

There is no shame in seeking help to get your finances under control. Speaking with a qualified Licensed Insolvency Trustee will provide you with options for debt relief but here is a brief summary of potential debt solutions that can help you become debt free.

Debt consolidation loan

A debt consolidation loan is a way to combine multiple monthly debt payments in one and potentially lower the interest rate you are charged on your total loan balances.

To be approved for debt consolidation loans, you’ll need to meet these requirements:

• a sufficient and reliable source of monthly income to support the payments
• a good credit score
• collateral or a co-signer is sometimes required

The advantages of consolidating debt into a single new loan are easier to manage payments, a potentially lower interest rate than on your current debts, and you will have a known end date when all your debts get paid off at the same time.

The major disadvantage of this system is the total amount of your debt stays the same. All outstanding loans are simply transferred under one umbrella, and if you have poor credit, the interest rate on this singular loan will likely be high. Also, if you opt for a long amortization to lower your monthly payment, you will be in debt for longer and pay more total interest over time.

Consumer proposal

A consumer proposal is a popular option for dealing with large and problem debt. Consumer proposals include non-secured debt, such as credit card debt, lines of credit, payday loans, and some student loans. By working with a Licensed Insolvency Trustee, you can negotiate up to a 70% debt reduction. This is an alternative to filing personal bankruptcy and will stop creditors from contacting you.

Repayment amounts are determined based on what is realistic for you to pay and what the debtor expects to receive. Settlements are often drastically less than previous minimum payments, carry zero interest and you will be free from debt within five years.

Bankruptcy

If personal debt has reached the point where you have no hope of repaying, and you cannot afford a consumer proposal, your next alternative is to consider bankruptcy.

Personal bankruptcy is legally binding and clears your debts to give you a fresh start. There are stipulations and requirements that must be met, including making required monthly payments, reporting your income and attending two counselling sessions, but calls from creditors will stop and your debts will be wiped clean when your bankruptcy is complete. If this is your first time filing bankruptcy, and your income is below the government threshold limit, you can be eligible for an automatic and full discharge in as little as nine months.

Professional financial help is available

Perhaps, the debt avalanche system sounds like a way for you to pay off high-interest-rate loans and save for emergencies on your own. Or, maybe it’s time to learn more about loan consolidation. If debt payments are a reason you are living paycheque to paycheque, reach out for professional financial advice.

The Licensed Insolvency Trustees at Hoyes Michalos are here to help you. We’ll ask some questions about your finances and unique situation and help you decide which debt solution will work for you. If you don’t need to file a bankruptcy or proposal, we’ll tell you that too and provide some insight into how to go about other options.

Call us today at 1-866-747-0660 or book online for a no-obligation chat.

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Why can’t I get a debt consolidation loan?

A debt consolidation loan is a new loan you use to pay off existing debt obligations.

Lenders are in the business of managing risk. They are willing to grant new credit to people they think can afford the loan payments. To assess your loan application they will review your credit history and ask for information about your current income, assets and debt load.

If you have been declined for a consolidation loan, the first step is to ask your lender why your application was refused. Knowing the reasons can help you determine what to do next. 

Here are the top 5 reasons you may have been turned down for a debt consolidation loan and what you can do in each case.

Bad credit score

If you have a low credit score due to missed payments, high credit utilization or accounts in collection, your lender may deny your application based on your credit report. In most cases, a consolidation loan will require a credit score in the mid-600 range, although some lenders are willing to offer bad credit consolidation loans even if your score falls below 600.

If your problem is poor credit, learn about what factors impact your credit score to see if you can reasonably improve your credit rating before applying again.

There are lenders who offer consolidation loans with no credit check, however, beware these are generally predatory loans that come with extremely high-interest rates. We do

No collateral

The most accessible consolidation loan to get is a loan secured by assets you own. Common examples of a secured loan could be a home equity loan or a second mortgage. Collateral can include equity in your home, a car, stocks or other property that you own outright. However, if you stop making payments, a secured lender can seize and sell these assets to recover some of what you owe.

If you don’t have any assets to offer as security for a debt consolidation loan, you may not qualify for enough money to pay off existing debts.

You can consider applying for an unsecured consolidation loan if you have no collateral. However, consolidating with an unsecured loan is much more expensive. Interest rates on unsecured consolidation loans vary but can be anywhere from 39% to 59%. Going this route is highly unlikely to help you pay off debt.

Too much debt

The concept of a consolidation loan is that you are asking one lender to take on debts you owe to more than one party. If you have a lot of debt, a lender may worry about your ability to repay that amount of money. High credit card debt may indicate that your lifestyle is outpacing your income, and a lender may worry about you obtaining even more credit down the road.

If you have been denied because of too much debt, the solution is to look at ways you can cut unnecessary spending and budget some additional debt repayment. If you can reduce some of your balances, you may be considered an acceptable candidate for a low-interest debt consolidation loan in the future.  However, be sure to wait at least six months between applications, as repeat hard inquiries will lower your credit score.

Not enough income

The flip side of affordability is your monthly income. You are likely to be turned down by a traditional lender if your debt-to-income ratio exceeds 43%. From their perspective, the higher your debt payments relative to your income, the higher the chance you will default.

Asking a friend or family member to co-sign your application can improve your chances of being approved even with low credit. However, if you don’t qualify because the lender is worried about your income level you may be putting your cosigner’s finances at risk.

Tight credit market

One factor that you can’t adjust is how willing financial institutions are to lend money at any point in time. During periods of economic downturns or rising interest rates, most lenders tighten their lending practices even for mortgage refinancing and home equity lines of credit (HELOC). Even borrowers with a moderate credit risk profile and equity in their home may find they cannot borrow enough to pay off credit cards and other debts because banks are just not willing to lend.

Options if your debt consolidation application is denied

Rather than getting upset about being denied a debt consolidation loan, you may want to think of this as a blessing or opportunity. In your case, the disadvantages of a debt consolidation loan may outweigh the advantages. Based on your financial situation, you may not qualify for a loan large enough to deal with all your debts. The average interest rate on any consolidation loan may be too high, and you may not be able to afford the monthly payments long-term.

If your objective is to get out of debt, consider these alternative debt relief solutions.

Debt Management Plan

A debt management plan is a consolidation program through a non-profit credit counselling agency. You do not need to have a good credit score to qualify, and these repayment programs are interest-free. 

Most types of consumer credit can be included, including credit cards and outstanding bills and some payday loans, although tax debts and student loans are not eligible. Also, all lenders must agree to participate. Any single lender can choose to opt out.

However, you will still need to be able to afford to repay your loan in full plus 10% to cover fees to the credit counselling agency. If you take the maximum repayment period allowed of five years, your monthly payment will be your total debts plus 10% divided by 60 months.

Consumer Proposal

Another consolidation option is to consider a consumer proposal payment plan. A proposal also consolidates multiple debts but it also allows you to make an offer to repay less than the full outstanding debt owing. There is no interest and no additional fees beyond the settlement agreement you reach with your creditors.

A consumer proposal has the advantage of offering debt settlement versus debt consolidation. You can negotiate terms, and settlement offers of 20% to 30% of the debt owing are not unusual. Your payment schedule can be weekly, monthly or whatever works with your budget as long as you repay your offered settlement amount within five years.

If you have several unsecured debts, a consumer proposal can bind all your creditors to the same agreement as long as the majority of creditors (by dollar value) agree.

Next steps

If you don’t qualify for a debt consolidation loan, are making only minimum payments or risking late payments on your existing debts and your lender isn’t giving you a roadmap out of debt, it’s time to talk with a Licensed Insolvency Trustee about a better debt solution.  We can help you deal with credit card debt, payday loans, problem car loan debt even student loans and tax debt.

Contact us for a free consultation to explore options that can reduce your monthly payments and help you become debt-free.

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What debt help options can your bank provide?

Your bank’s goal is two-fold. First, they want to ensure that you don’t default on your current loans. After all, they want to be repaid. Second, the longer you owe them money, the more they make in interest. Keep this in mind when evaluating the potential solutions your banker may recommend.

To help you manage your debt, your banker may suggest any of the following options:

Bank account overdraft

If you don’t have a lot of debt, the bank might offer you an overdraft if you don’t already have one or increase the one you have. Overdraft protection can help if you periodically run short of funds but are otherwise on top of your debts.

Access to overdraft funding can be helpful if your income fluctuates from month-to-month. However, using an overdraft is not a good idea if you constantly miss payments or as a cushion for income loss. You will be required to pay a usage fee (either monthly or a charge for every time you go into overdraft), and you will pay ongoing interest on any overdraft balance. Interest rates are usually around 21%, not much different from a credit card’s interest rate.

Credit card balance transfer

Another thing the bank could do to help is to offer a balance transfer credit card. These cards may have a zero-interest rate for a specific period or may have a lower rate than your current credit card. The idea is you transfer your existing debt to the new credit card, and because you pay less interest, more of your monthly payment goes towards reducing your outstanding balance. As a result, you get out of debt sooner.

Access to zero, or low-interest credit cards, will depend on your credit score and amount of debt, and it’s only a good solution if you don’t owe a lot. Most balance transfer credit cards have time limits until they become regular credit cards with standard credit card rates. If you can pay off all or most of the balance before the grace period expires, using a balance transfer card to get out of debt can work. Otherwise, you are only getting temporary debt relief.

Getting a consolidation loan

One of the most common ways for banks to help you pay off your debt is to offer you a consolidation loan.

Consolidating your debts in one loan means that you borrow enough money to pay off all your existing debts and then owe money to a single lender, in this case, your bank. But while this sounds great if you’re struggling with debt, obtaining a consolidation loan is not that easy.

Some of the reasons people are refused a consolidation loan by their bank include the following:

• You have no security for a debt consolidation loan. Many banks ask for collateral when you apply for this type of loan, especially if you have difficulty managing the payments. If you don’t have anything to offer as collateral, you’re highly unlikely to get accepted.
• You have problems with your credit report. If late debt payments have hurt your credit score or you have any debts in collection, your bank might not be willing to offer you a consolidation loan.
• You have too much debt. Most banks in Canada allow you to borrow up to 40% of your gross annual income. If your debts exceed that percentage, you might not qualify or may only be able to be approved for a smaller loan that will not cover everything you owe to creditors.

Before asking your bank for a consolidation loan, you should run some numbers.

Start by preparing a simple monthly budget. You need to list your incoming cash flow and outgoing expenses, including any other debt payments like your rent, student loan, mortgage, or car loan. What’s left is how much you can afford to repay each month.

Next, list all your debts and which ones can be consolidated. You may not be able to transfer certain loans like a car loan or lease with another financial institution. Similarly, we do not recommend consolidating government student loans.

When evaluating whether a bank consolidation loan will help you get out of debt, ask yourself these questions:

1. Will the amount the bank offers to consolidate deal with all my debt?
2. Are my new monthly payments affordable? Will they fit my budget without using more debt?
3. Will this solve my cash flow problem without relying on credit cards for emergencies?
4. Is my income stable with a low risk of losing my job or falling ill?
5. Am I willing to risk these assets if I’m offering collateral and can’t meet my monthly payments?

If your answers to any of these questions are no, then getting a bank consolidation loan to refinance your debts may not be the right solution to help you get out of debt.

Refinancing your mortgage

If you are a homeowner, you may consider talking with your bank about consolidating your debts into your mortgage. Refinancing your mortgage is only possible if you have enough equity in your home and have the income to support higher mortgage payments. Your current bank or mortgage lender can help you use your home equity to get out of debt in two ways:

1. Replace your existing mortgage with a new larger mortgage.
2. Add a second mortgage secured against your home value.

There are multiple factors that the bank will consider before approving you for a remortgage, including your credit score, the value of your home, and how much you want to borrow. As with all lending applications, your bank will ask you to substantiate your income, and they will follow any internal lending policies. Most banks won’t finance beyond 80% of your home’s net equity or if you have a debt-to-income ratio beyond 40%.

When deciding whether remortgaging to deal with debt is a good option for you, it’s important to consider:

• Is the interest rate on your new mortgage lower than the blended rate on all the debts (including your current mortgage) you are refinancing?
• Can I afford the monthly payments?
• What penalties will I have to pay to break my existing mortgage, and what other fees and legal costs will I have to pay?
• Will refinancing old debts into a larger mortgage improve my finances enough that I won’t need to use credit cards for day-to-day living costs?

Again, if you answered no, the risks of taking on a higher mortgage to consolidate debt through your bank, or any mortgage lender for that matter, might be too high.

Tips on how to ask your bank for debt help

I recommend talking with an advisor in person. You may not want to pick up the phone to call your bank and discuss your inability to pay their bills because you are embarrassed or upset. If you have an existing contact at your bank, begin there. If not, most banks have a page on their website where you can apply online, book a meeting, or get contact numbers.

Applying for a consolidation loan online may seem less stressful but dealing with debt is serious. Speaking with an expert about what kinds of solutions you need before applying is the way to go.

But before picking up the phone to discuss your options with your bank, here are some tips that will help you during the negotiation.

• Gather your information. Before calling, have some things at hand, including your account numbers, balances, your income, monthly spending, and details about the payments you make to others.
• Practice your story. Your bank will want some information about what has happened, why you can’t pay your bills or why you are asking for a consolidation loan. Whether it’s because you were ill or laid off, sum up the story in one or two sentences. Knowing what you will say ahead of time is helpful as this will keep you on track during what is sure to be a stressful meeting.
• Remain calm. It’s easy to lose your temper when talking about sensitive financial issues with your bank. Losing your cool will get you nowhere, so try to stay calm no matter the conversation’s outcome.
• Take notes. Write down the name of the person you’re talking to and take quick notes of everything discussed. This will help you feel in control of the situation and give you details to refer to if there’s ever a misunderstanding about what was discussed.
• Be prepared to provide more information. Your bank may ask for proof of income or ask for a home appraisal if you are refinancing through your mortgage. Working with your bank to restructure your debts won’t happen overnight and may take a few steps or stages.
• Ask to get it in writing. If you reach an agreement with your bank, ask to have their decision in writing. This way, you’ll be able to look at the terms and conditions and make your decision with a clear head. If they deny your application, ask (politely) the reasons why to give you something to work to correct if that’s possible.

Options when your bank refuses to help

Even though banks are generally sympathetic towards customers who fall on hard times and try to help them, there are situations where your bank will refuse to help. This may be because you owe too much money and don’t have any collateral or equity for a consolidation loan or remortgage, or simply because your credit profile does not meet their minimum lending standards.

If your bank refuses to help, you still have some options.

You can look to other lenders for help. Talking to private lenders with lower application requirements than traditional banks is a possible solution, but make sure the interest rate and other terms and conditions you are offered will help you get back on track. Unsecured consolidation loans and private mortgages usually have very high interest rates and late payment penalties. One example, and something to avoid, is high-cost installment loans for poor credit that carry interest rates of 29%, 39% and even up to 59%. These high-interest rate loans may seem to help because they lower your monthly or weekly payment, but in my experience, they often do nothing but push your debt problem down the road.

If you have a staggering amount of debt, your better solution is to talk with a Licensed Insolvency Trustee. LITs are trained and certified to help you explore all your debt reduction alternatives. Those options include repaying your debts in full through a debt management plan or, if you can’t afford to pay back all your debts, making a settlement offer to your creditors through a consumer proposal.

Most importantly, take your time to decide what’s best for you. If you are having trouble managing your debt payments, reach out to our team at Hoyes Michalos. We are happy to review your financial situation and help you develop a plan to become debt free.

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The answer is something we review with every client as part of the consultation process. To help you decide which debt solution may make more sense for you, I’m going to walk you through the types of questions and information we would address as part of an initial debt assessment.

The difference between debt management and bankruptcy

A debt management plan (DMP) is available through a credit counselling agency. The credit counsellor’s role is to review your budget and help you create a repayment plan to pay back your debt. They will arrange for you to make monthly payments to the credit counselling agency, instead of your creditors, until the debt is paid in full. A credit counsellor may be able to negotiate future interest reduction, but they cannot lower the principal amount you have to repay.

Bankruptcy is a legal process that wipes out almost all your debt, with some exceptions, so that you get a fresh start. Bankruptcies are filed through a Licensed Insolvency Trustee whose role is to explain your debt relief alternatives, including a debt management plan or consumer proposal. If you choose to file an insolvency proceeding, your LIT will administer the bankruptcy process.

In the middle of these two options is a consumer proposal. Like a debt management plan, a consumer proposal allows you to make payments over time (up to five years), but, like bankruptcy, a consumer proposal is a debt settlement option that can reduce the principal amount you have to repay.

Now that we understand the broad differences in how these debt relief alternatives work let’s review what facts from your situation could help you determine which option is best for you.

Can you afford to repay your debts in full?

It’s always better to pay off your debt in full if you can reasonably afford to do so. If you owe a small amount of debt and need help balancing your budget or structuring your payments, then a debt management plan is a good option.

If, however, you are barely keeping up with your minimum payments and are looking at years to repay your credit card debt, or are trapped in a payday loan cycle, then you may need more relief.

You must be insolvent to be eligible to file bankruptcy. You are insolvent when you cannot repay your debts as they come due.

If you need debt forgiveness, a bankruptcy or consumer proposal is better than a debt management plan.

In making this decision, you need to ensure you can maintain the monthly payment for the duration of the program. It is not uncommon for us to have someone contact our office after entering into a debt management plan, only to find out they can no longer afford the payments. The result is wasted time and money for the debtor.

Do you need creditor protection?

Filing bankruptcy provides a legal stay of proceedings, something a debt management plan can’t do. This legal stay means that your unsecured creditors are prohibited from pursuing you any further to collect.

The benefits of this automatic stay mean that:

• all collection calls stop
• wage garnishments stop
• court proceedings, lawsuits and legal actions cease as well.

A bankruptcy forces all unsecured creditors to stop collection activity. With a debt management plan, creditors can agree to stop calling and participate in the program, but that agreement is voluntary. A debt management plan can’t guarantee protection from legal action, but a bankruptcy can.

Do you have debts that can’t be included in a debt management plan?

A debt management plan is generally suited to credit card debts, unsecured bank loans and unpaid bills like outstanding utility accounts that have not yet been sold to a debt collector.

A debt management plan cannot deal with:

• tax debts
• student loan debt
• some payday lenders will not participate
• complicated legal debts

Bankruptcy can eliminate all unsecured debt with a few exceptions. Since the Bankruptcy & Insolvency Act is federal legislation, it does bind the federal government, which means that tax debts can be included. Canada (and provincial) student loans can be discharged by bankruptcy if you have been out of school for seven years.

Neither bankruptcy nor a debt management plan can eliminate your obligation to pay alimony or child support, legal fines or debts due to fraud.

Secured debts, like your mortgage or a car loan, are also excluded from both a bankruptcy and debt management program. Neither option can prevent a secured creditor from taking possession of assets used as collateral for a loan if you are behind on your payments.

Do you have too much debt for a debt management plan to work?

Theoretically, you can consolidate as much debt with a debt management plan as you can afford to repay.

Remember, a debt management plan requires that you repay 100% of what you owe, plus 10% in DMP fees.  The larger your debts, the higher your payment with a debt management plan.

The cost of bankruptcy is not based on how much you owe. Bankruptcy cost is based on how much you make and any non-exempt assets that must be sold to benefit your creditors. Bankruptcy is almost always less costly than a debt management plan, but the cost-benefit is even greater the more you owe.

Your credit score impact is not a deciding factor

Both a debt management plan and bankruptcy are reported to the credit bureaus. Both will hurt your credit report at the start. Bankruptcy is coded as an R9, which is considered worse than a debt management plan at an R7. However, a consumer proposal is also coded as an R7, the same as a debt management plan.

The credit impact of a debt management plan versus bankruptcy should not be a deciding factor.

When choosing between a bankruptcy and a DMP, financial facts are the most important criteria:

• Can you afford the payments?
• Do you need creditor protection?
• Will you be able to eliminate your debts through a DMP?

The key is to eliminate your debt so that you can rebuild.

Whether you should file bankruptcy to erase debt or enter into a debt management plan to repay debt is dependant on your unique situation. Informed decisions have the best outcomes. Book a free consultation with a Licensed Insolvency Trustee for debt advice to help you choose.

The post Bankruptcy or Debt Management Plan. How Do You Decide? appeared first on Hoyes, Michalos & Associates Inc..

You can tell your credit card provider, “sorry, I don’t have any money to pay my bill,” but if you are unable or refuse to pay, that does have consequences – both short-term and long-term. In this blog, I’ll explain the consequences of unpaid debt. In addition, I’ll propose some options to consider when you can’t repay credit card debt.

What happens if you can’t pay your credit card debt in Canada?

The reality is creditors expect regular recurring payments and will pursue all options to collect when you are unable to pay when you owe money. Ignoring the bills means you risk phone calls from a debt collector, lowering your credit score, and other potential impacts.

Read Transcript

Many people struggle with credit card bills but somehow manage to make their minimum monthly payments. They won’t get out of debt that way, but they are not risking further legal action as long as they maintain the minimum payment. But when you stop paying your credit card bills, or carry your balance over your allowed limit, then you are in default. What happens then?

Default occurs when you are unable to fulfill an obligation on a loan, and in the case of a credit card, that means you are not making the minimum monthly payment.

If you are unable or refuse to make payments and the debt hasn’t been paid according to the terms of your cardholder agreement, the consequences can include:

• Late payment fees
• Damage to your credit rating
• Higher interest rates
• Collection calls
• Cancellation of your credit card
• Loss of rewards points
• Lawsuits
• Wage garnishment
• Seizure of your bank account

The longer the outstanding debts remain unpaid, the more severe the actions your creditor will take to collect.

Accounts in collection

If you miss a payment or two, you can expect a politely worded letter or email from your credit card provider reminding you to make a payment. The hit to your credit score from a single missed payment will likely be temporary, assuming you catch up and have no other payment issues.

However, if you are several payments behind, your credit card company will likely send your account to a third party debt collector. Every issuer has different internal debt collection periods, but you can expect a collection agency to become involved when you are beyond 90 to 120 days late.

If your debt is large enough, your account may also be turned over to a lawyer for collection.

If you do not pay your bill, you can eventually expect more aggressive techniques to collect on the unpaid account.

Seizing money from your bank account

Most major financial institutions in Canada have the concept of a right of offset written into their credit card agreements. That means they can use money that you’ve deposited with them in a bank account to pay off an outstanding debt you might owe. This only applies if the credit card debt is owed to the same institution where you bank.

For example, let’s say you have a TD Bank Visa and you have a chequing account at TD. In this case, TD can legally seize money from your bank account, up to the full amount owing on your credit card, including interest and penalties.

They can do so without:

• Getting your consent
• First letting you know
• Leaving money in your account if the amount owed is greater or equal to the money in your account.

However, Capital One MasterCard can’t automatically seize money from your TD bank account. To do so, Capital One would need a court order.

Lawsuits and legal action

Credit card companies can sue you to collect on outstanding charges. However, lawsuits are expensive and time-consuming, so suing for non-payment is only likely to happen if you owe several thousands of dollars. In addition, the relevant statute of limitation period on the debt must not have expired. The debt does not go away, but the threat of a lawsuit is off the table, no matter what the collection agency says.

If you are being sued for credit card debt, you will receive a Statement of Claim. Suppose you ignore this notice or lose in court. In that case, your credit card provider may be granted a Judgment Order confirming that you owe the debt.  This order gives the credit card company, or their collection agent, the ability to pursue harsher means to collect money like garnishing your wages or freezing your bank account.

Garnishment orders

Once they have a legal court order, any credit card company can get a garnishment order. They can ask your bank to seize money from your bank accounts and direct those monies to them for payment. With a wage garnishment, a portion of your pay is deducted until the debt is paid in full. The only way to stop a wage garnishment or unfreeze a bank account is to pay the debt or file a consumer proposal or file a bankruptcy.

What happens when your credit card company sends the debt to a collection agency?

Most companies will pursue collection using their in-house collection department for a few months. However, after several months they will write off your account as uncollectible and hire a collection agency to pursue payment. The collection agency may get paid a commission or may buy the debt for pennies on the dollar.

Before a debt collector can contact you, they must send a private letter by mail or email outlining how much you owe, who the original creditor was, and the name and contact information of the collection agency and collector demanding payment.

Once this letter is sent, you can expect calls to begin.

Debt collectors often use aggressive tactics to get you to honour your payments, like calling you repeatedly, contacting your relatives, and calling at inconvenient hours.

It is important to know your rights and understand what a collection agency can and can’t do. For example:

• Collection agents can’t call past 9PM on weekdays or 5PM on weekends and on statutory holidays.
• In Ontario, once you speak with a collection agent, they can only contact you up to 3 times a week to request payment.
• Collection agents can call your employer or family but only to confirm your contact information, or in the case of your employer, to enforce a wage garnishment.
• Collection agents can sue you for outstanding credit card debts but are unlikely to do so for small debts.
• Collection agents can usually accept settlement arrangements (but always get any agreement in writing before you pay).

Unless you have committed fraud, you can’t be sent to jail for unpaid credit card debt.

Always ensure you are talking with a legitimate collection agency which is why you should request written documentation before providing any personal financial information, negotiating any terms, or making any payments.

Once your account is sent to collection, this information is reported to the credit bureau. Accounts marked as ‘in collection’ have a very negative impact on your credit score and this notification will remain for 6 years.

How long can a debt collector chase you for old credit card bills?

The statute of limitations for debts in Canada varies by province, from 2 years to a maximum of 6 years. For example, in Ontario, this means that you cannot be sued in the courts for an unpaid unsecured debt 2 years after the date of last activity, which is usually your last payment date or last date you charged something on your card.

It’s important to understand that a debt collector can continue to call to collect on an old debt, even one that has been removed from your credit report. While they can no longer pursue you in the Canadian courts, they can continue to demand payment as the debt never goes away unless it is paid, or you file a bankruptcy or consumer proposal.

What happens to your debts after you leave the country?

If you have lived or worked in Canada and applied for credit here, you may owe money on your credit cards. What happens if you leave Canada without paying your credit card debt?

First, unpaid debt owing to a Canadian company is reported to the Canadian credit bureaus only. For example, missed payments on your Canadian cards are not reported to US credit reporting agencies.

Second, the debt will remain owing and could cause problems if you have assets in Canada or if you intend to return in the future.

If you own property or have a bank account in Canada, your creditor can still sue you if the limitation period has not expired, however, they are only likely to do so if the debt is large. If you are not available to defend the lawsuit, a Canadian judge may render a verdict in favour of the credit card company which can lead to a court order to seize any property you have in Canada and maintain their right to pursue you for the debt if you return to Canada.

Credit card companies rarely pursue debtors in other countries, as this involves foreign courts and engaging lawyers who can act in those countries, however, it can happen if the amount you owe is significant.

If you are planning on returning to Canada, unpaid debts can impact your ability to gain new credit when you return. Filing a bankruptcy while living abroad can be done but has extra consideration.

How does unpaid credit card debt affect your credit score?

There is no doubt that late payments are very harmful to your credit rating. While Equifax and TransUnion have different calculations, payment history makes up 35% of your overall credit score. How much late or missed payments impact your credit score depends on several factors, including:

• How large the payment or outstanding debt is
• How long the payment is overdue
• How many late payments you have
• What your current credit score is

If you have a credit score over 800, one late payment can drop your score 30 points or more. If you have a low credit score, an additional late payment will have a smaller impact but it will take you a very long time to recover from a recurring credit history of missed payments and accounts in collection.

If your payment is less than 30 days late

If your payment is less than a month late, there’s no reason to panic. You will be charged interest and a late fee by your credit card issuer, but your credit score should not be affected. Most companies do not report missed payments to the credit bureau until they are 30 days late.

If your payment is more than 30 days late

At 30 days late, your credit card issuer will report your missed payment to the major credit bureaus. Consequently, your creditor will add a note to your credit report indicating your payment is late. This note may have the number code R2, meaning you have a revolving line (credit card) that is 1 month late, or it may simply say 30 days past due. Negative information like a late payment will remain on your credit report for up to 6 years.

If your payment is more than 4 months late

As you continue to miss credit card payments, these will be added to your credit report. Your account will be marked as R3 for 2 months late, R4 for 3 months late etc., up to R5.

Your creditor has the right to close your account, which means you no longer have access to this credit card to make purchases. Closed accounts on your report will also increase your utilization rate, which will lower your credit score.

If you miss a payment by more than 120 days, your creditor may label your account as a charge-off. A charge-off means your creditor has written off the account as a bad debt. At this time, your account will be marked as an R9. Accounts in collection or in charge-off severely harm your score and are an indication to future lenders that you may not be a good credit risk.

If you have accounts this far in arrears, you may find it difficult to obtain new credit.

At this stage, your creditor may also transfer or sell the debt to a collection agency.

If you make several late payments

Credit scores are a mathematical calculation based on the amount and mix of credit you carry and how you maintain payments. So, it’s not surprising that the more late payments you make on more accounts, the worse your credit score will be.

However, the real issue is that if you are behind on your credit card payments, you are experiencing severe debt problems. The consequences go beyond your credit score. Eventually, your credit will be cancelled, and you will find it difficult to borrow from anyone other than perhaps payday lenders. Getting a payday loan will only worsen your financial problems.

If you can’t pay your credit card debts, it may be best to consider other options to eliminate your credit card debt.

Options to consider if you can’t pay credit card debt

According to the Canadian Bankers Association, 30% of Canadians carry balances on their credit cards from month to month. If you are significantly behind on your payments and can’t afford to pay off credit card debt on your own, you still have options.

It’s entirely possible to do nothing, and there are times when you can ignore the calls and not make any payments. Consider waiting it out if:

• you are creditor proof which means you have no assets to be seized and no wages that can be garnished
• the debt is beyond the limitations period barring lawsuits
• you don’t care about your credit score, or the debt is close to the time during which it will fall off your credit report (6 years from your date of last activity)

While you can consider a consolidation loan to consolidate credit cards into a new lower-interest loan, avoid high-interest consolidation loans, which often carry a higher rate than your credit cards, even though the monthly payments might be lower.

OK, now that we know what strategies to avoid, here are some options to consider when you fall behind on your card payments.

Make repayment arrangements

Depending on your financial health, you can negotiate payment terms with your credit card company or their debt collector. In addition to arranging monthly payments, ask for a reduced interest rate and waiver of penalties on overdue accounts to help make repayment easier.

This option is only likely to work if you are only a few months behind and have sufficient income to repay your debts in full. Before making any payments, get all agreements in writing. Understand the statute of limitations for your province, which prohibits anyone from suing you to collect. Knowing your debt is too old to sue to collect may give you some bargaining power.

Negotiate a debt settlement

If the debt is old and outside the limitations period, offer a settlement amount. Depending on the amount and how old, a good place to start is 20 cents on the dollar.

Three things to consider before making a debt settlement offer:

1. Make sure you can afford the offer. It’s essential to complete these payments. Otherwise, you will find yourself facing the entire debt again.
2. Be aware that making a settlement payment will update the last payment date resetting the clock for both the limitation period and the 6-year period before the account is removed from your credit report.
3. Make sure that all your debts that need to be settled are settled, as only dealing with one or a few of them might only be a band aid solution.

Ultimately, you may need help from experts to clear your credit card debt.

Repay through a debt management plan (DMP)

A DMP is a repayment arrangement through a credit counselling agency. The credit counsellor may be able to stop or reduce the future interest charges, which means your balances won’t continue to grow. However, you must commit to repay the entire balance owing at the time you sign up. A credit counsellor cannot negotiate a debt settlement for you.

If you need help making a settlement offer, consider talking with a Licensed Insolvency Trustee.

Consider a consumer proposal

If you struggle to repay a lot of credit card debt or have other unsecured debt, a consumer proposal can provide needed debt relief.

Governed under the Bankruptcy & Insolvency Act, a consumer proposal provides several benefits:

• A consumer proposal stops various forms of creditor actions, including collection calls and wage garnishments.
• It allows you to repay back less than the amount you owe.
• In addition to eliminating your credit card debt, it can help you deal with monies owed to other creditors, including CRA, payday loans and certain student loans.
• Most proposals are completed in 3 to 5 years (maximum).  Lump sum settlements are also possible.
• It gives you the power to negotiate payment terms you can afford.
• A consumer proposal is binding on all creditors.

Lastly, consider filing bankruptcy

If you can’t make a viable consumer proposal and you are not creditor-proof, bankruptcy may be an option.

Need help choosing between these debt relief options? Give us a call to book a free, confidential consultation where we will discuss your situation and set you up on the path of becoming debt-free.

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What happens if you stop paying your mortgage?

Most homeowners who took advantage of the deferrals provided during the pandemic have been able to maintain their payments post deferral. However, the cost of this payment holiday means that your future mortgage payments are now higher. If someone in your household is out of work or your income is reduced, making those increased payments may be a problem. Or you may have taken on other loans and credit during the pandemic, and the combined effect has put you behind on your mortgage.

A missed payment isn’t hard to catch up on; however, multiple arrears will risk your ability to keep your home. Your mortgage agreement will define what happens when you are behind on your monthly payments. In most cases, mortgage lenders consider you to be in arrears if you have missed payments for three months or more.

Lenders have multiple options to deal with homeowners who fail to make payments, and these can include a power of sale or foreclosure.

If you also owe condominium fees or realty taxes, the lender may pay them directly to the municipality and then add the amounts to the principal balance.

Your best course of action is to control the situation before your lender enforces their right to foreclose or force a sale.

Months behind on your mortgage, what should you do?

If you are behind on your payments but believe you can catch up, you should speak with your mortgage lender about offering you some payment forbearance a little longer.

If your mortgage lender has denied any further mortgage deferrals, you have three options:

• Refinance with another mortgage lender
• Sell your home yourself and get out from under high mortgage payments
• Consider a consumer proposal to restructure your finances

Your first step may be to talk with another mortgage professional about refinancing with a new mortgage. However, if you don’t meet the income eligibility guidelines or have a bad credit score, getting a new mortgage may be difficult. Even if you have equity in your home and a good credit rating, without enough income to make monthly payments, remortgaging or refinancing may not be possible. Keep in mind that dealing with a high-risk mortgage lender will result in higher interest rates.

What you should not do is continue to borrow more consumer debt to keep afloat. Avoid using your credit cards or taking on a high-interest installment loan to make mortgage payments unless you know your situation is short term. Building up more bad credit will damage your credit score and make balancing your budget that much more difficult.

The question you need to answer is: Why can’t I afford my mortgage payment?

If you own more home than you can afford, you may have to consider the hard choice to sell your home and downsize or rent. You can sell your home if you are behind on mortgage payments as long as your mortgage lender has not already completed any power of sale or foreclosure process. Choosing to sell is something you want to control, rather than letting the lender decide for you.

If you are late with your mortgage payments because of other debt, like credit cards or a car loan, an alternative may be to talk with a Licensed Insolvency Trustee. A trustee can provide you with solutions to eliminate unsecured debt, so you have enough room in your budget to keep up with your mortgage payments.

What can a Licensed Insolvency Trustee do to help with a mortgage in arrears?

If you feel you can afford your home but can’t repay your other debts, it may be time to look at debt relief options like a consumer proposal. It is possible to get out of debt without losing your home.

First, it’s essential to understand that a consumer proposal does not deal with secured debt. You are not required to cancel your mortgage, and you can keep your home if you are making your monthly payments. Lenders cannot foreclose on your home or revoke your mortgage because you filed a consumer proposal or bankruptcy.

A consumer proposal can be a proactive measure to eliminate other problem debt you may have and improve your cash flow so you can catch up and maintain your future mortgage payments. A consumer proposal is a debt repayment plan that allows you to keep assets like your home. With this option, you  make a deal with your unsecured creditors to repay a portion of what you owe. The amount you pay depends on your income and what assets you may own, including any equity in your home.

Because bankruptcy and home equity laws vary by province, it is important to speak to a Licensed Insolvency Trustee where you live. The trustee’s role in a consumer proposal is to help you develop an offer that you can afford and that your creditors are likely to accept. A Licensed Insolvency Trustee will review your budget, ask you to obtain a valuation on your home and any other assets you have, and from there help you determine how much to offer.

The trustee will also help you assess whether you can financially afford to catch up on your mortgage arrears if your other debts are eliminated. If not, they can help you decide whether it makes more sense to sell.

What if your home is worth less than your mortgage?

The housing market in Canada, especially in cities like Toronto, has remained strong despite the pandemic. Most Canadians have seen a rather dramatic rise in their home’s equity from price appreciation. As I noted above, you can use this appreciation to make a proposal to creditors to eliminate unsecured debt and get you back on a firmer financial footing.

But what happens if your home is worth less than your mortgage? If your home has negative equity, you can walk away from your mortgage. If you or your lender sell your mortgaged property for less than the balance due on the mortgage, the lender can pursue you to collect any shortfall. However, this shortfall can be eliminated through a consumer proposal, along with other debts.

Getting debt advice

If your mortgage is in arrears, it can help talk with a Licensed Insolvency Trustee. This is especially true if:

• You have significant other unsecured debt like credit card debt, bank loans, payday loans and even tax debts that are making it hard to pay your mortgage, or
• You owe more than your home is worth.

By all means, speak with a mortgage broker, but if either of the above scenarios sounds like your current financial situation, consider booking a free consultation with a Licensed Insolvency Trustee for debt advice as well.

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To answer that question, I will explain more from our annual profile of an insolvent debtor. This study shows what types of debt causes severe financial problems for someone so young. The issues vary from situation to situation and are more complex than most expect.

The average 20-year-old with problem debt

In 2020, more than 1 in 6 (17%) bankruptcies and consumer proposals involved people aged 18 to 29. More people file bankruptcy in their 20s than file while in their 50s or 60s.  This is despite the fact that younger debtors have had less time to develop a credit profile and borrow money.

On average, bankruptcy filers in their 20s owe almost $42,000 in consumer debt (non-mortgage debt). You might think that’s mostly student loans, but you would be wrong.

Here’s what the average person in their 20s who files a bankruptcy or consumer proposal owes:

The unfortunate truth is that gaining access to a lot of credit very young is easy. However, young debtors typically have a low credit score. This means the types of credit they can acquire, outside of student loans, often carry high interest rates. Unfortunately, what seems like a good decision at the time, can have long term negative consequences.

Payday loans

Almost half (48%) of our clients aged 18 to 29 carry at least one payday loan. They are the most likely among all age groups to turn to a payday lender when facing a cash flow crisis.

Payday lenders have aggressively marketed to young borrowers in recent years. Advertisements target Millennials and Gen Zs with images of a carefree lifestyle and the freedom to buy what they think they need. Fintech companies capitalize on a young borrower’s propensity to use online payment and borrowing options.

The problem is that many young people turn to payday loans to cover basic living expenses, like rent, groceries or a car loan payment. It’s a short-term fix that often leads to a second or third payday loan. On average, debtors aged 18-29 end up owing $4,939 in payday loan debt to almost four different payday lenders.

Payday loans create a debt trap that can be stopped with a bankruptcy or consumer proposal. Payday lenders are unsecured creditors, which means payday loan debt is dischargeable by filing bankruptcy. A bankruptcy or consumer proposal can stop collection actions for unpaid payday loans.

Student loans

Almost 2 in 5 (38%) debtors in their 20s have student debt. The financial burden of paying for their education is magnified by the need to pay for food, housing, transportation, and other living costs.

The challenge for a young debtor with student debt is that bankruptcy law does not discharge government student loans until you have been out of school for seven years. This is particularly burdensome for a person who did not complete their post-secondary education but is still saddled with student loan repayment.

Private student debt (a student credit card or line of credit) can be discharged with no waiting period.

Accounts in collection

Younger debtors tend to have smaller dollar accounts and accounts that have been sent to a collection agency. Having accounts in collection does not mean you need to file bankruptcy.

• If your debts are older than the limitation period (two years in Ontario), a court will not grant a judgement to allow a creditor to collect on that debt (if they know the age of the debt).
• If you have several accounts in collection, along with other unsecured debts, bankruptcy protection through a stay of proceedings can stop collection calls and a wage garnishment.

Car loan shortfalls

Another problem facing young millennials and Gen-Z borrowers is finding an affordable car loan. A car loan payment is a significant contributor to consumer insolvencies among those aged 18-29. Our most recent study shows that 42% of debtors 18 to 29 had financed or leased a vehicle at the time of filing. Of those who do, one-third were underwater; they owed more on their car loan than the vehicle was worth. These percentages somewhat understate the magnitude of the problem since some borrowers return their vehicle to the lender before their bankruptcy filing.

What begins as a simple auto loan (the average car loan debt was $17,284 in 2020) morphs into a financial problem. Without good credit, young drivers turn to vehicle lenders who specialize in high-cost, low credit auto lending. If they get into an accident and need a vehicle replacement or level up as the car ages, many end up rolling over the balance of their original car loan into the new loan. The result is higher loan payments and a larger loan-to-asset shortfall.

One-third of all financed or leased vehicles among young debtors had negative equity, a higher shortfall percentage than any other age group.

A shortfall on a vehicle loan can be discharged through a bankruptcy or consumer proposal if the debtor chooses to surrender the vehicle or the vehicle is repossessed by the lender.

Should you file bankruptcy in your 20s?

If you are carrying significant debt in your 20s, filing bankruptcy or making a settlement proposal with your creditors can act as a reset.

First, the downsides:

• Declaring insolvency will not eliminate your student debt if your end of study date is less than seven years ago.
• A bankruptcy stays on your credit report for seven years from completion.
• A consumer proposal is removed no later than three years after completion.

However, living with the burden of several thousand dollars in consumer credit for the long-term is not a great option. Our study clearly shows that, among those struggling with debt repayment, total debt increases over time as you continue to live off more and more credit.

Here are some common myths and concerns that may be influencing your decision:

• Bankruptcy will not generally affect your job prospects. Unless you are in a profession that requires disclosure that you have filed bankruptcy, a future employer does not need to know you filed.
• While you must make a monthly payment based on your income, you do not pay a Licensed Insolvency Trustee a separate or upfront fee. Trustees are paid by government tariff (a set schedule) out of the bankruptcy funds before distributing any money to your creditors.
• You will be eligible to obtain credit again. The sooner you eliminate problem debt, the sooner you can begin rebuilding a better credit history.
• Filing bankruptcy now does not mean that you will no longer be able to buy a better car or get a home mortgage. In fact, filing insolvency now can ensure you are more financially able to manage those payments in your 30s.

Bankruptcy is not your only option to deal with problem debt. In fact, seven in ten filers in their 20s choose a consumer proposal over bankruptcy to eliminate debt.

Bankruptcy is a solution to help you turn your situation around. As Licensed Insolvency Trustees, we have the knowledge and experience to help you decide if filing bankruptcy is the right option and can help you through the bankruptcy process. If you would like to discuss your financial situation, contact us to book a free consultation.

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