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 and beyond. 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.
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.
So what are your options if you're struggling to make your debt payments?
You have a few legal options with Bankruptcy or a Consumer Proposal, but there are also other options.
Settlement: In this option, you would approach your creditors and negotiate to pay a lump sum that covers a chunk of your debt, and ask that 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 happens for individuals who are elderly or very ill. This typically 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, taking a really close look at your number, to understand where your money has been going and build a plan for where you want it to go to see if there is any way you can adjust your spending or supplement your income, 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.
Debt calculator (I can only recommend their debt calculator, I cannot vouch for the services they provide)
Ignoring your debt or prolonging minimum payments can lead to things like wage garnishments, a poor credit score, judgments placed against you, and annoying collection calls. 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, Earn Interest 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.