You should not rely on this booklet for legal advice. It provides general information only.
What to do when you are in debt (September 2009)
Getting out of debt options
Tips for avoiding more debt
Credit repair companies
Loan brokers and other sources of money
Liability for jointly held credit cards
Bankruptcy
Immediate effects of bankruptcy
Future effects of bankruptcy
You have a debt problem when you:
- often pay bills after their due date;
- bounce cheques regularly;
- use an advance from one credit card to pay the minimum amount on another card;
- receive calls from a collection agency;
- often ask friends or family for loans;
- use your credit card to pay for day-to-day expenses;
- have your utilities cut off for non-payment;
Remember these trouble signs. If one or more of them apply to you, it's time to stop and reorganize your finances and take action.
The first thing you should do is to gather together all your information: income, expenses, and debts. Know exactly what you're up against.
Getting out of debt options:
- Contact the Credit Counselling Society at www.nomoredebts.org/. They will review your financial situation and suggest options for you, free of charge. They may be able to organize a creditor-approved debt repayment program.
- Contact your creditors and make payment arrangements. Make sure you don’t miss any payments. If you do miss a payment, contact them to explain the situation. Your creditors will likely be more understanding if you work with them to resolve your debts.
- Consider a debt consolidation loan. Interest rates set at a bank are considerably less than those of a credit card. You may need a co-signer or other security, or both.
Tips for avoiding more debt
- Don’t apply for any more credit. If you want to stop receiving offers from credit card companies, contact the Canadian Marketing Association at www.the-cma.org and ask them to add your name to the Do Not Mail/Do Not Call/Do not Fax list. Once you’re on the list you should not receive any solicitation for about three years.
- Contact your credit card company and ask for a No Pad account (a credit card that does not allow you to go over your limit.)
- Contact your credit card company and ask them to lower your credit limit. This will limit the amount of spending you can make in a monthly period.
- Secured cards can be a way to rebuild your credit. With a secured card, you put a deposit down on the card (usually a minimum of $500) that is held in a term deposit for typically two years. You can use the credit card as long as you make your payments. However, if you miss a payment, the credit card company will cancel your card and use your deposit to pay your credit card bill.
Credit repair companies
Beware of companies or individuals who offer to repair your credit for a fee (often as high as $1500). Despite their promises to clean up or fix your credit record, negative information in your record that is accurate cannot be erased. There are no loopholes in the law. The only way to repair bad credit is by responsible credit use.
Federal law allows such information to be reported in your file for six years from the date of your last activity. Credit repair firms often challenge all negative items in a credit report, and if the credit reporting agency cannot verify the information within a reasonable period of time, the information is removed, but this may be a temporary measure. If the information is later verified, it will be placed back in your file
Check your credit report on a regular basis to ensure it’s accurate. If there are mistakes you can’t resolve, contact your provincial or territorial consumer affairs office for help.
To learn more about your credit file and credit score, visit Understanding Your Credit Report and Credit Score produced by the Financial Consumer Agency of Canada (FCAC) at www.fcac-acfc.gc.ca.
Loan brokers and other sources of money
Beware also of loan brokers who often advertise in the classified sections of newspapers and on television. Loan brokers can charge fees in addition to interest. These fees must be less than 60 percent of the loan as allowed under the Criminal Code.
You may also encounter various unconventional businesses that offer to help you with your debts. These include: storefront loan offices, cheque cashing services, and the like. These options are generally more expensive than other alternatives. Most likely, you will be charged a high interest rate and/or high fees. You would most likely be better off with a loan or line of credit.
Liability for jointly held credit cards
In general, cardholder agreements stipulate that each authorized user of a card is jointly and equally liable for the debts incurred on the card. This means the creditor can claim the full balance on the account from any of the holders, regardless of how little or how much each individual actually charged on the card.
That liability continues until one of the parties to the agreement terminates the agreement. Responsibility for the debts of another cardholder may well continue until that cardholder’s card is physically recovered and returned to the financial institution.
Bankruptcy
Bankruptcy should be your last alternative if you cannot pay your debts over a specific period of time. Bankruptcy is a serious step with many consequences. Under provincial law, when you declare bankruptcy, your property minus any exemptions is given to a trustee, who then sells it to pay off your creditors. With certain exceptions, you are no longer responsible for any debts you have accumulated. A first bankruptcy is on your credit report six years from the discharge, but the discharge itself can take between 9– 21 months. Judgements, such as court-ordered repayments can be renewed every year for up to 10 years by the person who received the judgement.
Immediate effects of bankruptcy
- Certain debts are erased entirely: credit card, medical and utility bills, etc.
- Other debts remain: child support, maintenance payments, etc.
- Student loans less than seven years old are not discharged in bankruptcy.
- You must give up assets that are not exempt under provincial or territorial law. You may be able to keep your car if you can prove you need it for work, or if it has a net value of $5,000 or less. However, if you owe child support, you can only keep your car if it has a net value of $2,000 or less.
- To declare bankruptcy, you must pay a fee to the administrator who handles the bankruptcy. Your first appointment with a trustee is free so that you can get your questions answered and decide if bankruptcy is the right choice for you.
Future effects of bankruptcy
- Any future credit you obtain may be more expensive.
- You may have trouble getting bonded, a requirement for certain jobs, and can lose your professional designation.
- Your bankruptcy remains on your credit file for a number of years.
- Bankruptcy may result in negative consequences in other areas of your life including the attitudes of your family, friends and community. You will have difficulty operating a small business or sponsoring someone coming to Canada.
For more information, go to Industry Canada's Office of the Superintendent of Bankruptcy Canada website at www.osb-bsf.ic.gc.ca, or contact the nearest Office of the Superintendent of Bankruptcy Canada or your provincial consumer affairs agency (in the Government listings of your telephone directory).
Many thanks to the Credit Counselling Society for reviewing this document.