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Knowing Your Debts and Planning for Payments Post-Relief Efforts

June 11, 2020
5 mins
A man and woman look very upset and overwhelmed while speaking with someone about a document

The COVID-19 pandemic has changed many Canadians’ way of life. Unfortunately, some have lost their jobs or are working on reduced hours and, in turn, have had to rely on government support or their savings to help make ends meet.

According to the federal government’s 2019 Canadian Financial Capability Survey, 64% of Canadians have an emergency fund to cover expenses for three months. However, that means 36% don’t have as much saved. That will make it difficult when the time comes to pay bills over the next few months.

Managing debt

Several financial institutions have allowed customers in need to defer payments on mortgages, credit card balances, and loans for up to six months. On top of this, there are many other payments due in the near future, and you should be planning for when those financial relief measures end.

If you’re a homeowner, your property taxes may already be past due, depending on where you live. In Toronto, for example, the 60-day grace period has already expired. The second installment was due on June 1, and the third one must be paid by July 2.

While the aid measure temporarily helped cash-strapped taxpayers, if it were to continue, there would be consequences. In a press briefing last month, Toronto Mayor John Tory warned that the city might need to raise property taxes by up to 47% to keep city services running. The alternative would be to make major cuts since Ontario law states that municipalities aren’t allowed to run budget deficits.

Property tax deadlines have also been pushed back in these Canadian cities:

  • Montreal: July 2 instead of June 1
  • Calgary: September 30 instead of June 30
  • Vancouver: September 30 instead of July 3

For those who owe taxes to the federal government, your tax bill isn’t due until September 1.

Keeping track of which bills are nearing and how much is due is essential. Relief efforts may have increased the amount you owe on your mortgage or your interest payments. Planning for the deadline can help avoid further financial hardships.

Insolvency: bankruptcy vs. consumer proposal

Unfortunately, some Canadians will likely have trouble keeping afloat and may need to file for bankruptcy. To file, you must be insolvent. That means you’re unable to pay your bills because you don’t have the money to pay them when they’re due or your debts are greater than your assets. You must also have at least $1,000 in debt.

As a result of your bankruptcy, you’ll have to give up some of your assets but will be allowed to hold onto others. The assets you’re allowed to keep usually include clothing, personal items, furniture, tools required to perform your work, a vehicle (not exceeding a specific value), and funds contributed to an RRSP before the past 12 months.

The other insolvency option is a consumer proposal. In bankruptcy, you must give up certain assets to eliminate your debt. On the other hand, a consumer proposal is an agreement that allows you to keep your assets and reduce the amount you owe creditors. You must have less than $250,000 in debt, excluding a mortgage. In a consumer proposal, you will reach a settlement with your creditors to pay back a certain amount over time.

When you file for bankruptcy, you need to make payments to your creditors. The more money you earn, the higher your payments will be. A first-time bankruptcy can last as little as nine months and up to 21 months.

With a consumer proposal, your payments remain the same no matter how much you earn. Your payments can be spread over a period of up to five years, making it more affordable.

When you’re in bankruptcy, you need to create a monthly budget and provide your trustee with your pay stubs. You may need to make additional payments if your salary increases. With a consumer proposal, the payments remain the same, even if you begin earning a higher salary. However, you need to attend two credit counselling sessions with either option.

Once you’re out of bankruptcy, you’ll receive a discharge. This means you won’t be liable for any additional payments and will be protected from your creditors. However, you will receive an R9 credit rating (R1 is the best) that may be on your report from seven to 14 years.

When your consumer proposal is completed, you’ll no longer have to pay off your debts included in the proposal. However, you’ll be assigned an R7 credit rating. This will remain on your report for three years after the proposal is completed or six years after the proposal was filed, whichever comes first.

Once you’re out of bankruptcy or have completed your consumer proposal, it will take a while to rebuild your credit. Bankruptcy or a consumer proposal should be a last resort.

How COVID-19 is changing financial habits

The pandemic has affected many Canadians’ finances and highlighted the importance of having an emergency fund. Without one, it will be harder to make ends meet if you lose your job—even it’s only temporary.

Homeowners without an emergency fund may want to consider refinancing their mortgage if they’re worried about a potential job loss. Those with high-risk investments may want to review the balance of their portfolio and consider buying bonds or GICs to help deal with future market volatility.

Your next steps

In these extraordinary times, you should plan to pay your lenders in order of most importance if you’re facing financial difficulties and inquire about options that may be available to you. For high-interest debt, like credit cards, try to make at least the minimum payments. In the event you’re unable to pay your bills regularly, reach out to family or friends for help to avoid bankruptcy or a consumer proposal.

And if you happen to be lucky enough to be employed and don’t have an emergency fund, it’s time to start saving and preparing for the unexpected.

Craig Sebastiano

Craig Sebastiano is an award-winning writer and editor with more than a decade of experience in journalism, marketing, and communications. He’s written about a number of financial topics, including investing, real estate, robo-advisors, mortgages, credit cards, pensions, taxes, insurance, RRSPs, and TFSAs. Craig’s work has appeared in MoneySense, Morningstar, Benefits Canada, Advisor’s Edge, Job Postings, and Ryerson University Magazine. He has completed the Canadian Securities Course and is an avid do-it-yourself investor.

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