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.
This is the third part of a CMP series regarding debt solutions. Based upon discussions our team has had with mortgage professionals across Canada, there are many myths regarding how debt solutions affect Canadians’ finances and their credit profiles. We hope to clarify these myths so as a trusted adviser you are better prepared to assist your clients.
The truth on Credit Counselling and Debt Management Plans
Non-profit credit counselling agencies offer “debt management plans” (or DMPs) generally collect fees of up to $49 per month from consumer for 36 - 60 months until 100per cent of the enrolled debt is repaid. Each lender determines a “fair-share contribution” as a percentage of what is remitted by the agency. Creditors are not required to participate.
Impact on credit bureaus: Enrolled debts are reported by lenders to credit reporting agencies as R-7 or I-7. As per their purge rules, Equifax will remove a debt in a DMP three years after completion and TransUnion will remove it two years after completion.
The truth on Debt Settlement
Debt settlement firms have become active in Canada following their development in the United States. 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. Unless a “bad debt,” it is often unlikely a creditor will approve a settlement offer. Creditors can refuse to participate and still pursue legal action to collect.
Impact on credit bureaus: If successful, a debt is reported by lender as “settled” and rated as R-9 or I-9. As per Equifax’s and TransUnion’s purge rules, the debt will remain as a trade line for six years from the date that the final payment is reported as “received,” whether settled or not.
The truth on Consumer Proposals
To qualify for a consumer proposal regulated by the federal government’s Office of Superintendant of Bankruptcy (OSB), Canadians must be “insolvent.” The OSB defines insolvency as “the condition of being unable to pay one’s debts as they become due, or in the ordinary course of business or having liabilities that exceed the total value of assets.” (In simple terms a consumer proposal could be considered a court-protected form of debt settlement.)
Consumer proposals have been an alternative to bankruptcy since 1992 in Canada. A trustee, licensed by the OSB, must show the consumer’s unsecured creditors they will receive more by accepting a proposal than a bankruptcy. If creditors representing the majority of dollars owed vote to accept the proposal all other unsecured creditors are bound under the same terms regardless of their vote.
A mortgage or other secured loan cannot be “called” due to filing a proposal. Mortgages for those consumers in a proposal are most often renewed by the current lender as long as they are paid as required.
Interest stops on filing and repayment can be for a maximum of 5 years. Payments can accommodate seasonal income, commissions, etc. Sale of an exempt asset or assistance from family can be used to partially or fully fund a proposal.
Unless co-signed filing of a proposal does not affect a spouse.
Impact on credit bureaus: Debts included in a proposal are rated R-7 or I-7 and remain on credit reports for 3 years after completion per Equifax and TransUnion’s purge rules.
The truth on Bankruptcy
Since September 2009, a first bankruptcy with surplus income as defined by the OSB guidelines is not discharged for 21 months. Canadians filing bankruptcy can keep assets exempt from seizure as set by the resident province or territory. Since 2008, RRSP contributions more than 12 month prior to filing any insolvency are exempt from seizure. Many are able to keep “non-exempt” assets by paying the trustee the asset value on a payment plan. A second-time bankruptcy will not be discharged for at least 36 months.
Impact on credit bureaus: Per Equifax and TransUnion’s purge rules, first-time bankruptcy remains on credit reports for six years from the date of discharge and a second bankruptcy remains for 14 years.
The truth on Statute of limitations
Each province’s statute of limitation determines how long a lender has to take legal action to collect consumer debt. For example, in Ontario and Alberta lenders cannot obtain judgment where nothing has been paid within 24 months prior. Other provinces vary from three to six years. Note the debt remains on credit reports for six years from date of last payment or activity per Equifax and TransUnion collection purge rules.
IMPROVING CREDIT PROFILES
Our team has seen countless Canadians try to “rebuild” their credit while still dealing with past credit issues that have yet to be completely resolved. This strategy is not wise as mortgage insurers require significant re-established credit obtained after credit counselling, or a consumer proposal has been completed or bankruptcy is discharged. Options exist to assist consumers to rebuild their credit and help achieve their goals, but it’s best to take that a step at a time and “not put the cart before the horse.”
About the Writer
Eric Putnam, PFP, RQIC, is managing director of Debt Coach Canada – The Health Club For Your Wallet. Mortgage professionals across Canada can easily leverage their proven platform to further differentiate themselves by assisting clients to improve their finances. Debt Coach Canada has recently launched its’ unique Future Fund Credit Builder program in Ontario. Learn more at www.debtcoach.ca/brokers.