Our long-time business associate and good friend Bruce Sellery was recently appointed CEO of Credit Canada Debt Solutions. We had a chat with him about the challenges that so many Canadians face around financial well-being and who they can turn to when coping with debt.
Here’s what Bruce and his team had to say:
Coping with debt can be incredibly difficult. There’s a lot of conflicting information out there about how to manage debt, where to seek help, and what kinds of debt relief services are the best for your needs.
Canada’s household debt to income is hovering around 170% and many people continue to experience volatility in their employment because of the after effects of the COVID-19 pandemic. Debt is a constant concern for many.
The simple truth is that there is no “one size fits all” solution to debt management and relief. Advice that works for one person might not be applicable to someone else. So, it’s important to understand how different solutions may impact your life. This way, you can make the most informed decision about where to seek help.
When You Should Seek Help Coping with Debt
So, when should you seek help with handling your debt? There’s no clear-cut answer or single dollar amount of debt where absolutely everyone should start seeking help. Here are some signs that might indicate you could benefit from a conversation about your debt:
- Shuffling Balances from One Credit Account to Another. In order to avoid accruing late fees and other penalties, some people use a credit card to pay their other balances. Then, they keep shuffling that balance from one card to the next as it continues to grow. If you find yourself playing this game of credit card hot potato, it may be time to seek debt help.
- Being Unable to Pay Monthly Minimums. One of the clearest warning signs that you need debt management advice or debt relief services is if you find yourself in too much debt to be able to pay your monthly minimums.
- Asking for Credit Increases. If you are asking your creditors to increase your credit limits so you can keep spending like normal, you may need to seek some help with managing your debt. Increasing your credit limit when you’re already struggling can make it harder to get out of debt. Worse yet, repeatedly applying for more credit can hurt your credit score because they are counted as hard inquiries by credit bureaus.
- Calls from Debt Collectors. Creditors will often hand over the accounts of clients who are behind on their payments to an internal collections department or a third-party collections service. If you’re getting calls from debt collectors, odds are that it’s time to start looking for debt management help!
4 Types of Debt Management and Relief Services to Consider
If you think you might benefit from help with your debt, there are several different services that you could use. Each of these debt management services are different, which might make one more valuable for you than the others.
Let’s take a quick look at the different options:
1. Banks or Credit Unions
One place that a lot of people turn to when they need help managing their debt is their local bank or credit union. They offer a wide variety of financial services to their customers. For people who need help getting out of debt, one of the most commonly sought services is a debt consolidation loan.
1A: Debt Consolidation Loans
Debt consolidation loans can help you pay off your other creditors by consolidating everything into a single monthly payment—often at a lower interest rate.
However, getting a loan with favourable terms is often a matter of having good credit. Those with a lower credit score should expect to pay higher interest rates—and may have a harder time getting approved.
This debt relief option may be best for those who have a good credit score and sizable (but not excessive) debt who want to simplify their payments by only having a single creditor to worry about.
1B: Consolidating Debt into a Mortgage
Instead of seeking a loan, some choose to leverage the equity they have in their home to consolidate their debt into their mortgage. This approach shares some of the same benefits as getting a consolidation loan, but often with a lower interest rate than an unsecured loan could provide.
However, consolidating debt into a mortgage requires refinancing and isn’t without risk. Some drawbacks of this method include:
- Potentially extending the period of time you’re in debt;
- Running out of equity in your property;
- Racking up more debt if you aren’t careful with future spending; and
When the bank proposes the new interest rate for your mortgage, you’ll have a chance to review it and see if it will increase your overall payments. Remember, an increase of 1% on a $200k+ mortgage might offset the benefits of moving a $10k balance from a higher-interest account.
2. Credit Counselling Agencies
Another common place to turn to for advice dealing with debt is a non-profit credit counselling agency. Certified credit counsellors often help people by providing basic budgeting advice.
However, in some cases, you might need more than just an improved budget. This is where a debt consolidation program (DCP) administered by a credit counselling agency can help.
A DCP is the term for a service where a non-profit credit counselling agency works with your creditors to reduce or stop interest on your outstanding debts. They then set up a payment plan where all of your unsecured debts are rolled into a single monthly payment.
The advantages of signing up for a debt consolidation program are that:
- You don’t need good credit to join one;
- You often end up paying less than you would otherwise;
- It creates a clear timeline for getting out of debt; and
- You have the support of your credit counsellor.
However, DCPs aren’t for everyone. There are a couple of drawbacks to be aware of:
- A DCP Can Hurt Your Credit Score. Being on a debt consolidation program can hurt your credit score for several years after you complete it.
- You Cannot Use Unsecured Credit Cards While on a DCP. Part of the agreement when you join a debt consolidation plan is that you will give up your unsecured credit cards. However, you can still buy and use prepaid cards.
For some, not being able to use their credit cards can be a blessing in disguise since it helps them avoid excessive spending.
3. Licensed Insolvency Trustees
A licensed insolvency trustee (LIT) is a federally-regulated professional. They typically provide advice and financial services related to government-regulated insolvency proceedings such as bankruptcies and consumer proposals.
When seeking either service, it’s important to verify that the person you’re dealing with is an LIT who is part of the Government of Canada’s Registry. Individuals who are not on that list may not provide legitimate services under Canada’s Bankruptcy and Insolvency Act (BIA).
The BIA sets rules for how LITs must act as well as how they structure their fees. Non-LITs don’t follow these rules that protect you as a consumer.
3A. Consumer Proposals
A consumer proposal is typically considered less severe than filing for bankruptcy. Here, the LIT will help draft a proposal to your creditors for them to accept a partial payment of your remaining debt in exchange for wiping out the remainder.
If accepted, all collection efforts should stop right away—along with any other penalties and interest accrual. Then, you would begin to make monthly payments until you reach the amount agreed upon in the proposal.
It’s important to note that creditors can refuse to accept a proposal. This is more common if the creditor thinks they might get more from a bankruptcy proceeding. In such cases, collection activities and interest will continue.
3B. Bankruptcy Proceedings
Bankruptcy is the measure of last resort for many people who are in dire economic straits and cannot navigate out of them on their own. This is a legal process where an LIT helps you eliminate your debt—but it has a bigger impact on your credit than a DCP.
To help ensure that your creditors can reclaim at least a portion of the money they’re owed, some of your assets might be auctioned off. There are limits to what can be sold to cover your debts (for example, you usually cannot lose your primary residence in a bankruptcy proceeding). However, these limits may vary from one province to the next. So, it’s important to consult your LIT to discuss all of the possibilities before filing for bankruptcy.
Additionally, filing for bankruptcy will result in your credit rating being dropped to the lowest possible level for at least seven years—longer if you’ve filed for bankruptcy before. This can impact your ability to qualify for certain financial services, such as loans and credit cards, in the future.
A bankruptcy on your credit report can also be a reason for an employer to not hire you in the future, although employers cannot fire you for declaring bankruptcy.
4. Money Coaching Services
Instead of filing for insolvency, joining a DCP, or trying to refinance your debt into a loan or mortgage, there’s another, less extreme option for getting (or staying) out of debt: working with a money coach.
Money coaching services (sometimes referred to as financial coaching services) help you clarify your financial goals and then create a custom-tailored plan to help you reach them. One of the potential goals they can help you meet is clearing out your debt.
For example, say you had an income of $108.5k and a debt of $55k on a line of credit, plus two mortgages equaling 94% of the value on your $315k home. A money coach would review your situation and walk you through your options.
In this example, refinancing debt into the mortgage wouldn’t be viable, since the $55k owed would put the mortgage upside-down in equity when combined with the two existing mortgages. Instead, a money coach might recommend shifting the mortgage payment into a bi-weekly arrangement that coincides with your payday. This way, you wouldn’t have as large of a capital outlay to worry about at the beginning of the month.
Then, they might help create a budget plan so you can set aside more money for paying off the line of credit—and then rolling the extra into your mortgage payments once the line of credit is paid off.
This is just a small sample of the kind of strategy a money coach could help formulate. The best part is, once the debt is cleared, a money coach could help even more by providing advice for your longer term goals—such as saving for the future and growing your wealth.
Unlike with a non-profit credit counsellor, however, there is a fee for a money coach’s services. These fees may vary from one coach to the next and are based on the specific service being requested. Money coaching services to help well-paid individuals and couples better manage cash flow and debt range between $2,750 and $5,000.
Fees for comprehensive retirement planning services may be higher due to their scope and complexity. Retirement planning services can include things like checking your retirement savings strategy, assessing your investments, verifying you have the right insurance coverage, and recommending what you need to do to retire comfortably.
Money coaching can be a great option for people who aren’t in excessive debt compared to their means or may need further financial planning services after they’ve met their goal of getting out of debt.
Where Should You Turn for Help with Debt Management or Debt Relief?
So, which of the above options is the best fit for your needs? The answer will depend on your specific situation.
If you have great credit and want to minimize the impact to your credit score, your best option might be working with your bank. Getting a loan or refinancing your mortgage can be a great way to wipe out your debt and simplify your monthly payments.
If you have a strong income-to-debt ratio but still need help planning how to deal with your debt (or just want to get more help with building your wealth afterwards), working with a money coach may be right for you.
If you have a lot of debt compared to your income, but don’t have the credit score to qualify for a favourable loan with your bank, a debt consolidation program may work for you. DCPs are a great way to clear debt when you don’t have the credit rating to get a loan.
If you are truly drowning in debt and don’t see any way to pay it off on your own, it might be time to seek a licensed insolvency trustee. In some cases, insolvency could be the best way to get collectors off of your back if all your other options fail.
Have questions about money coaching services? Reach out to Money Coaches Canada for answers! Or, if you’re curious about any of the options above and how they work, contact Credit Canada at 1.800.267.2272!