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Debt and Your Options
It’s no secret that consumer debt is commonplace in today’s world. Nearly everyone has a credit card,
student loans, mortgage, car loan, etc., but how much is too much?
According to a study done by MNP Ltd. in December 2018, 31% of Canadians say they don’t make
enough to cover their bills and debt payments and nearly half of Canadians are within $200 of
insolvency (bankruptcy). *CTVnews.ca*
When you can’t keep up with your payments, creditors start harassing you, and monthly bills are too
much to handle, it may be time to start exploring your options.
There are a handful of common solutions to deal with personal debt.
The first two focus on paying off your debts without increasing your monthly payments.
The second two are more extreme and should be treated as a last resort as they will affect your credit
score for several years.
The first two are referred to as Debt Stacking and Debt Snowballing. They are similar where as they both
involve applying the payment of a paid off debt onto the next debt in the list until all debts are paid and
yet differ in the way they arrange the list of creditors.
Debt Stacking (aka Debt Avalanche)
In the Debt Stacking method, your debts are arranged by interest rate from highest to lowest. Your debt
with the highest interest rate is called your Target Account. You continue making the same payments
you were making before but once the Target Account is paid off, instead of banking the money saved,
you apply that payment to the next debt in your list, which then becomes the next Target Account. You continue adding the payment from the debt higher up in your list to the next one as they are paid off.
For example, you’re making minimum payments on four debts at 19%, 14%, 10% and 6%. You make
your payments as you had been until the debt at 19% is paid off. Say your monthly payment for the
account at 19% was $200. You then add that $200 onto the payment you’ve been making on the debt at
14%. When that is paid off, the payment from the first AND second bill is added to the payment on the
10% account and so on until your final bill has been paid.
This method can be difficult and requires dedication as it can take a long time to get that first debt paid
off. This method is, however, the best at minimizing the interest you will pay on you debt.
Debt Snowballing
While like Debt Stacking, Debt Snowballing involves sorting debts by balance from lowest to highest
rather than by interest rate. By doing it this way, you will have the gratification of paying off the first
account sooner which may encourage you to keep going. The total interest paid will be higher than with
Debt Stacking though.
The following two solutions are legally binding processes and administered by a Licenced Insolvency
Trustee. They both will have immediate and long-lasting affects on your credit score but can stop legal
proceedings, wage garnishees, and nagging calls from creditors.
Consumer Proposal
A Consumer Proposal is a feasible option when total debts are less than $250,000 not including
mortgage and you receive a regular income. Creditors have 45 days to vote for or against the proposal
one filed. If approved by your creditors, the proposal can take anywhere from 1-5 years to pay agreed
upon amounts but can be paid off early.
A Consumer Proposal is a formal, legally binding process in which you and your Licenced Insolvency
Trustee work together to develop a proposal to creditors offering to pay a percentage of the amount
owed, extend payment length, or both.
During the term of the proposal, the insolvent is required to make a lump sum or monthly payments to
their Trustee which is then paid out to the creditors as agreed upon in the proposal.
With a Consumer Proposal you are not required to liquidate your assets and you’ll continue to receive
your tax returns and credits and an increase in income will not increase your payments. (Secured debts
such as your mortgage are not included in the proposal and the creditors are still able to seize assets if
payments are not received).
When you file a Consumer Proposal you’ll be required to:
- Give your trustee a list of all your assets and liabilities
- Attend first meeting of creditors, if requested
- Attend two credit counselling sessions
- Let your Trustee know, in writing, of any address change, and
- Assist the Trustee in administering the proposal.
Once the terms of the proposal are fulfilled, a “Certificate of Full Performance” is issued to you and the
credit bureaus and you will be legally released from the debts included in the proposal.
Filing a Consumer Proposal will negatively affect your credit score. A note stating that you filed a
proposal remains on your credit report for the term of the proposal plus 3 or more years after. It takes
about 3 years to rebuild your credit rating once the Certificate is issued, assuming you use practice
positive credit habits.
Bankruptcy (Insolvency)
Bankruptcy should be a last resort. It is a good option if your total unsecured debt is greater than
$250,000 (but can be as low as $1000) and you do not have the regular income needed to fulfill the
payments of a Consumer Proposal. It generally lasts 9 or 21 months.
As with a Consumer Proposal, a “stay of proceedings” is issued once filed, meaning the creditors of unsecured debt must stop all legal proceedings, wage garnishees, and must no longer contact the insolvent.
Your Licenced Insolvency Trustee will file any outstanding tax returns up to the date of bankruptcy. If
money is owed to the CRA, it will be included in the bankruptcy, however, and money received (tax
returns, credits etc.) will go to the Trustee to pay creditors. You may be required to liquidate assets in order to pay your creditors.
It should be noted that not all debts are covered in bankruptcy. Secured Debts like your mortgage or car
loans which are guaranteed by a collateral, are not included. Also:
- Student loans if it has been fewer than 7 years since being a student
- Alimony and Child Support
- Fines and penalties imposed by the court,
- Debts due to fraud
While in bankruptcy, you will be required to:
- Attend meeting of creditors, if requested.
- Provide monthly proof of income to your Trustee
- Make monthly payments to Trustee if you have a surplus income
- Attend two credit counselling sessions and learn Budgeting and Money Management
You will be eligible for automatic discharge after 9 months if it is your first time filing and had no surplus
income. Upon issuing “Certificate of Discharge” those debts are erased.
Once again, your credit score will suffer when you file bankruptcy. A note will remain on your credit
report for a minimum of 6-7 years after being discharged. It will take approximately 6 years to recover
your credit score after being discharged
Drowning in debt is all too common but you do have options. There are two methods of paying off your
debt without increasing you total monthly debt payment depending on whether you have the
dedication to wait to see your first success or prefer to see results quickly.
In extreme cases, there are the legally binding processes of filing a Consumer Proposal or claiming Bankruptcy. These options will damage your credit score for years after being discharged but will clear
your unsecured debts in a condensed period for often a fraction of the original amount owed.
© All Rights Reserved
student loans, mortgage, car loan, etc., but how much is too much?
According to a study done by MNP Ltd. in December 2018, 31% of Canadians say they don’t make
enough to cover their bills and debt payments and nearly half of Canadians are within $200 of
insolvency (bankruptcy). *CTVnews.ca*
When you can’t keep up with your payments, creditors start harassing you, and monthly bills are too
much to handle, it may be time to start exploring your options.
There are a handful of common solutions to deal with personal debt.
The first two focus on paying off your debts without increasing your monthly payments.
The second two are more extreme and should be treated as a last resort as they will affect your credit
score for several years.
The first two are referred to as Debt Stacking and Debt Snowballing. They are similar where as they both
involve applying the payment of a paid off debt onto the next debt in the list until all debts are paid and
yet differ in the way they arrange the list of creditors.
Debt Stacking (aka Debt Avalanche)
In the Debt Stacking method, your debts are arranged by interest rate from highest to lowest. Your debt
with the highest interest rate is called your Target Account. You continue making the same payments
you were making before but once the Target Account is paid off, instead of banking the money saved,
you apply that payment to the next debt in your list, which then becomes the next Target Account. You continue adding the payment from the debt higher up in your list to the next one as they are paid off.
For example, you’re making minimum payments on four debts at 19%, 14%, 10% and 6%. You make
your payments as you had been until the debt at 19% is paid off. Say your monthly payment for the
account at 19% was $200. You then add that $200 onto the payment you’ve been making on the debt at
14%. When that is paid off, the payment from the first AND second bill is added to the payment on the
10% account and so on until your final bill has been paid.
This method can be difficult and requires dedication as it can take a long time to get that first debt paid
off. This method is, however, the best at minimizing the interest you will pay on you debt.
Debt Snowballing
While like Debt Stacking, Debt Snowballing involves sorting debts by balance from lowest to highest
rather than by interest rate. By doing it this way, you will have the gratification of paying off the first
account sooner which may encourage you to keep going. The total interest paid will be higher than with
Debt Stacking though.
The following two solutions are legally binding processes and administered by a Licenced Insolvency
Trustee. They both will have immediate and long-lasting affects on your credit score but can stop legal
proceedings, wage garnishees, and nagging calls from creditors.
Consumer Proposal
A Consumer Proposal is a feasible option when total debts are less than $250,000 not including
mortgage and you receive a regular income. Creditors have 45 days to vote for or against the proposal
one filed. If approved by your creditors, the proposal can take anywhere from 1-5 years to pay agreed
upon amounts but can be paid off early.
A Consumer Proposal is a formal, legally binding process in which you and your Licenced Insolvency
Trustee work together to develop a proposal to creditors offering to pay a percentage of the amount
owed, extend payment length, or both.
During the term of the proposal, the insolvent is required to make a lump sum or monthly payments to
their Trustee which is then paid out to the creditors as agreed upon in the proposal.
With a Consumer Proposal you are not required to liquidate your assets and you’ll continue to receive
your tax returns and credits and an increase in income will not increase your payments. (Secured debts
such as your mortgage are not included in the proposal and the creditors are still able to seize assets if
payments are not received).
When you file a Consumer Proposal you’ll be required to:
- Give your trustee a list of all your assets and liabilities
- Attend first meeting of creditors, if requested
- Attend two credit counselling sessions
- Let your Trustee know, in writing, of any address change, and
- Assist the Trustee in administering the proposal.
Once the terms of the proposal are fulfilled, a “Certificate of Full Performance” is issued to you and the
credit bureaus and you will be legally released from the debts included in the proposal.
Filing a Consumer Proposal will negatively affect your credit score. A note stating that you filed a
proposal remains on your credit report for the term of the proposal plus 3 or more years after. It takes
about 3 years to rebuild your credit rating once the Certificate is issued, assuming you use practice
positive credit habits.
Bankruptcy (Insolvency)
Bankruptcy should be a last resort. It is a good option if your total unsecured debt is greater than
$250,000 (but can be as low as $1000) and you do not have the regular income needed to fulfill the
payments of a Consumer Proposal. It generally lasts 9 or 21 months.
As with a Consumer Proposal, a “stay of proceedings” is issued once filed, meaning the creditors of unsecured debt must stop all legal proceedings, wage garnishees, and must no longer contact the insolvent.
Your Licenced Insolvency Trustee will file any outstanding tax returns up to the date of bankruptcy. If
money is owed to the CRA, it will be included in the bankruptcy, however, and money received (tax
returns, credits etc.) will go to the Trustee to pay creditors. You may be required to liquidate assets in order to pay your creditors.
It should be noted that not all debts are covered in bankruptcy. Secured Debts like your mortgage or car
loans which are guaranteed by a collateral, are not included. Also:
- Student loans if it has been fewer than 7 years since being a student
- Alimony and Child Support
- Fines and penalties imposed by the court,
- Debts due to fraud
While in bankruptcy, you will be required to:
- Attend meeting of creditors, if requested.
- Provide monthly proof of income to your Trustee
- Make monthly payments to Trustee if you have a surplus income
- Attend two credit counselling sessions and learn Budgeting and Money Management
You will be eligible for automatic discharge after 9 months if it is your first time filing and had no surplus
income. Upon issuing “Certificate of Discharge” those debts are erased.
Once again, your credit score will suffer when you file bankruptcy. A note will remain on your credit
report for a minimum of 6-7 years after being discharged. It will take approximately 6 years to recover
your credit score after being discharged
Drowning in debt is all too common but you do have options. There are two methods of paying off your
debt without increasing you total monthly debt payment depending on whether you have the
dedication to wait to see your first success or prefer to see results quickly.
In extreme cases, there are the legally binding processes of filing a Consumer Proposal or claiming Bankruptcy. These options will damage your credit score for years after being discharged but will clear
your unsecured debts in a condensed period for often a fraction of the original amount owed.
© All Rights Reserved
