Debt is a scary word for many and one that also brings shame and embarrassment. But the truth is that a lot of Canadians are carrying debts well into the tens of thousands. Equifax Canada released an article in November 2021 outlining that Canadian consumer debt has climbed to over $2 trillion, with the average consumer debt, not including mortgages, sitting at around $20,000, most of these consumers being under the age of 35. This means that if you do have debt, you are not alone. These past two years have been hard on many households, who ended up having to use credit to supplement their incomes. Everyone has a different story and what is important now is to focus on the solutions.

It is important to note that there are different kinds of debts and so they are treated differently.

Unsecured debt is regular consumer spending like credit cards, personal lines of credit, payday loans, and debts that are not government debt or secured debt.

Government debt is, as the name suggests, money owed to the government, for things like taxes, student loans, and overpayments.

A secured debt is money that is owed on an asset or is tied to collateral which can be collected when payment is overdue. These types of debts include things like mortgages, car loans and equipment.

This article will cover the different solutions available for unsecured debt.

The Solutions fall into different categories as outlined below:

Things You can do on your own

  • Settlement: In this option, you would approach your creditors and agree to pay a lump sum that covers a chunk of your debt, and the creditors would forgive the rest. In most cases for this to work, you would have had to be behind on the debts, and you would likely need to offer at least 50%. This does affect your credit score, but if you are already in default on the debts then it would be an improvement and the debt falls off 6 years from the date the debt is settled.

  • Debt Forgiveness: This is extremely rare, but not impossible. Usually, it’s clients who are elderly or very ill. This usually works if the client was otherwise okay with payments, either on their own or through some type of repayment plan, but due to a drastic life change cannot pay anymore, they would need to write a letter often accompanied by a doctor’s notes or supporting evidence of their situation to say that they need debt forgiveness. If it's a small balance left over in comparison to what the total debt was then a creditor is more likely to say yes.

  • Budget: As the name suggests, you would be working on your budget to see if there is any way you can adjust your spending or supplement your income, to manage to pay off your debts on your own. There are budget guides out there, as well as tools to help you calculate how much you would need to pay each month to bring down your debts. I will link below

Budget Planner

Debt calculator (I can only recommend their debt calculator, I cannot vouch for the services they provide)

  • Sell Assets: This is also pretty straightforward. You would be taking inventory of things around your home that you don't need and can either sell or return. Things like a treadmill, an older vehicle, pet accessories, extra toasters, microwaves, instruments, and luxury items like designer handbags or shoes (these can also be sold to specialty thrift shops). Sometimes selling your assets may only pay down a portion of the debt, other times it could help you get the lump sum you need to negotiate a settlement.

Bank/ Consolidation Options

  • Bank Loan/ Consolidation loan: This is where the bank gives a lump sum of money to cover the debt. To qualify for a consolidation loan you must have good credit, steady work for a minimum of 3 months and your total debt service ratio must not be over 44%. The typical amount for a consolidation loan is anywhere from 5000 up to 50,000 and though it varies, the average interest rate for a consolidation loan is 10%

  • HELOC: Home Equity line of credit or HELOC for short is a line of credit that uses your home as collateral. The interest rate on a HELOC tends to be lower than other types of loans and often falls below 5%. This is because it is secured against your home. In most cases, to qualify for a home equity line of credit, you would need to have paid off at least 80% of your home value.

  • Personal LOC: This is a flexible loan option, whereby you are given access to a certain amount of money, from which you withdraw as needed as long as you repay the monthly payment amount, and you have room on the line of credit to borrow from. These are hard to come by since they are essentially open loans. Banks tend to offer these to clients who have demonstrated solid repayment habits and who have maintained great credit scores. Lines of credit can be excellent tools for helping to pay down higher-interest debts like credit cards or payday loans because they tend to have lower interest rates than consolidation loans. Also, any portion of your line of credit that is used can be accessed again once you pay back that portion. Despite the great features of a line of credit, it can also tie you into a revolving door of debt, and create a false sense of financial health, because you may be able to pay down your credit card balances every month by using money from your line of credit, but the debt has not disappeared, it has only been prolonged.

  • Reverse Mortgage: This is a loan that is secured by the equity in your home, and is geared towards older adults, typically 55 and up, who have paid off or nearly paid off their original mortgage. A reverse mortgage lender will give the borrower a sum equal to about 50% of the equity in their home, while the borrower gets to remain in the home without paying any monthly payments. The advantage of this for older adults is that they can get access to cash to supplement their income, pay for large medical expenses, home repairs or to pay down debts. The income received from the reverse mortgage is also tax-free. The downside is that even though there aren't any monthly fees, the loan does gather interest and you are trading in equity in your home for a loan. A reverse mortgage usually gets paid off when the owner moves, sells the home or passes away. If the home was willed to family members then they will be responsible for repaying the reverse mortgage loan. To learn more, visit the link below;

    CHIP Reverse Mortgage

Insolvency: Bankruptcy + Consumer Proposal

  • Bankruptcy: This is a legal process that can reduce the amount you owe on your debts. How much you pay and whether you qualify will depend on your income and your assets. The bankruptcy payments will last either 9 or 21 months, during which time you must report your monthly income. After 9 or 21 months, you will get discharged/ released from the debts you had. This has the worst impact on your credit and also puts a mark on your public record. It is, however, a good option for people who have been struggling to pay and can't seem to find a way out. Contrary to popular belief, you don't always forgo all your assets or lose your house, it will depend on how much equity is in those assets and what province you are in. This option can also get rid of government debts and judgements.

  • Consumer Proposal: This is also a legal process but it involves you paying either a lump sum or monthly payments, but would only require you to pay back a fraction of the debt owed. The amount you repay will also depend on your income and assets. A consumer proposal will also show up on your public record but does not have the same effect as a bankruptcy. You may also include government debts and judgements in a consumer proposal. The average payback time is 5 years. Only a licensed insolvency trustee can file a bankruptcy or consumer proposal on your behalf, and they would be the one to tell you the specific amounts you would be required to pay back.

Find a Trustee

Debt Repayment Program

  • A debt repayment program is a way of consolidating your unsecured debt payments into one monthly payment. This is not to be confused with a consolidation loan that a bank would offer. A debt repayment program does not pay out a lump sum for you. You would work with a credit counselling agency to get your interest rates reduced, and your principal balances frozen, then you would pay one monthly payment to the credit counselling agency, which then distributes that money to your different creditors. The typical repayment term is about 4.5 years. It is not a consumer proposal, but it does impact your credit score. The full repayment program disappears from your credit port about 2 years after you finish your payments. It will not impact your public record. Some debt repayment organizations can also help you negotiate a settlement, which will sometimes clear off your credit report sooner. The link below will help you find an organization near you:

Find a Credit Counsellor

Worse Case Scenarios

Ignoring your debt or prolonging minimum payments can lead to things like wage garnishments, poor credit score, judgments placed against you, annoying collection calls, forced sale of assets, liens, denial of loans or credit options like a vehicle lease or store credit cards, sometimes even phone plans. It is always better to know your options, then you can decide on the one that is right for you.

Questions to Ask Yourself to help with choosing an option

  • If I make a repayment arrangement on my own, will I be able to stick to it?

  • If I got rid of the interest rates, would I be able to pay off my debts?

  • Is my income or situation fairly stationary and so I'll never be able to pay off all of the debt I owe?

  • Do I have any family or friends that might be able to help?

  • Can I stick to a budget?

  • Is this debt causing me immense amounts of stress and anxiety?

  • If your bank gave you a loan, would you be able to manage the payments and still afford to live comfortably?

  • Do you need to maintain a good credit rating?

  • Do you need to maintain a blemish-free public record, e.g. for immigration purposes or for getting into law enforcement?

  • Do I have any large assets I can liquidate to pay down my debts, like a home, a boat, motorcycles or an RV?

  • Am I willing to borrow against my home?

How KOHO can help

  • Using a prepaid card is a great way to control your spending because you can only spend what you have.

  • KOHO has a range of tools that can help with staying on budget and up to date with savings goals like our RoundUp feature, Vault, Goals, 1.2% Savings Interest Rate and Budget Insights.

  • For people who have low credit scores, it can be challenging to obtain a regular credit card and sometimes even a secured card comes with too many hurdles. KOHO offers an easy online application process and does not require a down payment as a secured card would.

  • Your KOHO card isn't just a prepaid card, you also have access to many banking features like maintaining a savings and spending account, bill payments and e-transfers.

  • KOHO also offers a credit-building feature to help improve credit scores.

  • If you are a premium member or you have purchased one of the bundles, you get access to Financial Coaching.

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