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Cash Or Credit?

Cash or Credit? That is the question. And given that Canadians have some of the highest levels of household debt in the world… it’s an important one.

CanadianHomeFind found an article online (in January 2013) about credit information and the myths surrounding the stability of Canadian household debt. It said:

“A September 2012 Harris/Decima survey asked Canadians how confident they were about being able to raise $2,000 within a month if an unexpected need arose. Some 92 per cent said they’d have to consider borrowing to come up with some of the cash, and only 45 per cent said they’d never faced a debt problem. The poll results come as Canadian debt-to-income ratios sit at a record 152 per cent and officials issue warnings to start paying down debt before interest rates rise. But those survey findings suggest consumers have been unmoved by warnings and that the resulting financial burden could sink some households.” [CBC News]

I don’t know about you, but most people in my circle of friends and family have more debt than they are comfortable with at any given time… The aforementioned survey is still relevant with respect to overall household debt in 2015. As well, the Bank of Canada has recently dropped its interest rates to make borrowing more feasible, and indeed more attractive, to young or first-time homebuyers. All of us are feeling the economic pressure, not just home sellers. If interest rates do eventually go up, many people who are currently struggling to hang on will risk “going under”. The average household is financially struggling to maintain what they already have. And while banks and credit card companies are/were handing out the credit, Canadians were taking all they could get. Now the financial picture has changed, but for many people, the grip of household debt remains.

Debt management companies are popping up everywhere. Overstretched homeowners are being forced to sell at a loss or go bankrupt, and small businesses are closing their doors every day. Is debt settlement the way of the future? Once a person reaches their breaking point, what are the options, and where can they go for help?

Non-profit credit counseling agencies offer debt management plans and counselling for those of us who do not wish to claim bankruptcy. They generally collect fees of up to $49 per month from consumers for 36 to 60 months until 100% of the enrolled debt is repaid. Although each creditor does not receive the full amount owed, they do allow each lender to determine a “fair-share contribution” as a percentage of what is remitted by the agency. Keep in mind that creditors are not required to participate- this is simply an available repayment option.

As a rule, all enrolled debts are reported by lenders to credit reporting agencies as R-7 or I-7 on a person or business credit report. The reporting agency (such as Equifax) will remove a debt in a DMP three years after completion, and Transunion will remove it two years after completion. This is still a shorter time period than that of a bankruptcy claim, which can take up to 7 years to leave one’s record.

Debt settlement firms cropped up in large numbers in the United States after their economic crisis. They have now become popular in Canada as well. Alberta and Manitoba passed legislation pertaining to debt settlement firms after the U.S. Federal Trade Commission passed regulations in 2010 that banned upfront fees to protect consumers. Most creditors will approve a settlement offer of some sort, stating that some degree of repayment is better than none; however, as I said earlier, creditors can refuse to participate and instead pursue legal action to collect outstanding debts.

In Canada, consumer proposals have been an alternative to bankruptcy since 1992. In this case, a licensed trustee must prove that the consumer’s unsecured creditors will actually receive more by accepting a proposal than if the client were to declare bankruptcy. If the creditor representing the largest debt owed votes to accept the proposal, all other unsecured creditors are bound under the same terms, regardless of their opinion or vote. Moreover, a debt settlement is not just cause to “call” a mortgage or other secured loans. Mortgages are usually left undisturbed or even renewed by the current lender as long as they have been and continue to be paid as required.

One of the best features of this process is that interest charges stop on the date of filing. A repayment plan or process can be established for a (maximum) 5 year term. The payments are designed to assist in all aspects of the working industry, such as seasonal income, commissions, etc. The sale of an exempt asset or financial assistance from family members can also be used to partially or fully pay off a proposal. A proposal does not affect a spouse unless a co-signing file has been created.

For more on buying, check out the Canadian Home Find Buyer’s Guide … and save yourself thousands in costly mistakes!

Categories: Knowledge Library,Legal & Financial