Managing Debt During COVID-19 – and Planning for the Future

Even before the COVID-19 pandemic hit, many BC consumers were in precarious financial situations, leading to recent increases in personal bankruptcy and Consumer Proposal filings. As recently as February 2020, province-wide filings for bankruptcies and proposals had increased more than 10%, compared to the previous 12-month period. The impact of COVID-19 is causing many insolvency professionals to predict that volumes will spike significantly once short-term emergency relief funds and payment deferrals have been exhausted.

BC Licensed Insolvency Trustee and Senior Vice-President of Sands & Associates Blair Mantin joined Breakfast Television Vancouver to discuss the impacts that COVID-19 has been having on household debt figures across the province and some of the measures in place to offer debt relief to consumers. Watch the clip here and read more below:

Blair also joined Global News to talk about tips and resources to help BC consumers cope with their debts, mitigate the debt-stress they may be feeling, and plan for their financial recovery. Watch the clip here and read more below:

What You Can do to Manage Debt Now – and Plan for the Future

When it comes to debts, be cautious – and prioritize the essentials

If you’re one of the thousands of British Columbians whose income has been reduced it’s important to take steps to minimize as much as possible the financial impact of a period where your income may be significantly lower than anticipated. Consider the following best practices:

• Identify and prioritize your most essential expenses:
  • Try to use your available credit sparingly, especially if you are borrowing to bridge the gap between income and living expenses.
    • Avoid using credit to pay for anything other than your most essential expenditures (i.e. food, shelter, medication, etc.) that cannot be covered by cash.
    • Be as ruthless as possible in identifying ‘non-essential’ expenses. Now is the time to take a fine-toothed comb to your credit statements and cut out any subscriptions, recurring payments, etc. that may not be providing value.
• If you do need to borrow, be careful who you borrow from:
  • Avoid starting a cycle of high-risk borrowing such as payday loans where the costs and fees can necessitate a second loan to pay off the first, etc.
  • Though it may provide short term relief, it is never advisable to pay one creditor with funds advanced from another creditor (i.e. taking a cash advance from one card to make a minimum payment on another).
    • This practice of “financial Tetris” or “robbing Peter to Pay Paul” can have high transaction costs, increase your stress level to try to keep everything paid, and will almost always reach a point where there are just no more funds left to borrow.
• Take advantage of creditor payment deferrals where available:
  • It’s important to connect with your lenders before you miss any payments.
  • Even if your specific lender does not have a published update, reach out and see what resources are offered. Be sure to fully understand any terms of deferral or borrowing.
    • Credit Cards: Many financial institutions are offering a 3 to 6-month deferral period on payments.
      • Some banks are charging a reduced interest rate on payments that are being deferred, in some cases by way of a refund applied on future statements.
      • A skipped payment under deferral should not impact your credit score.
    • Mortgages: Much like credit card payment deferrals, many mortgage lenders are offering deferrals for mortgage holders who will struggle to make upcoming mortgage payments.
  • If you’re still able to make some payments on all your debts, pay your highest interest debts first since they will cost you the most the longer the debt is carried.

Understand that creditors have little recourse if you miss payments during this crisis

For many people, the fear of not knowing what will happen if payments are missed greatly compounds the stress of being in debt. Even if you feel there isn’t much action you can take right now, being aware of what creditors can and can’t do in the event you’re unable to make your payments can help. It’s important for consumers to be aware that Federal and Provincial governments have taken steps to help protect consumers in the short term:

• Canada Revenue Agency (CRA) collection activities have been significantly curtailed:
  • Debts owing to government creditors such as CRA normally can be collected on by means such as a bank account freeze or wage garnishment without the court’s permission.
  • At this time however, CRA has publicly stated that they have suspended collection activities on new debts until further notice. Collections staff will also be addressing pre-existing situations on a case-by-case basis in attempt to prevent further financial hardship for consumers.
• Non-CRA creditors have few means of implementing extreme collection activities at present due to court closures:
  • Under normal circumstances, if you’re unable to make your debt payments, unpaid creditors may take any or all of the following actions:
    • Charge you a fee
    • Report defaulted payments to credit bureaus
    • Increase your interest rate
    • Send your account to a collection agency
    • Seize payments from your bank account
    • Seize your bank account
    • Garnish your wages
    • Take control of an asset
  • Most creditors will need to apply to provincial court to take the most drastic of these actions against you – and with courts currently closed due to the pandemic, these measures are unavailable for now.
• BC’s Limitation Act normally sets a 2-year statute of limitations on debts that essentially gives a creditor you owe money to a 2-year timeframe to bring legal action against you.
  • As of March 26, 2020, the BC Solicitor General issued a Ministerial Order suspending limitation periods until the state of emergency declared on March 18, 2020 is cancelled or expired.
  • As a result, the limitation period is now 2-years from the date you last made a payment or acknowledged the debt in writing plus the duration of the state of emergency. This means creditors are less likely to increase their collection activities and threats for payment due to a looming statute of limitations period expiring.

Learn more about BC’s Statute of Limitations on Debt

Take steps to protect yourself and minimize your debt stress

While many severe collection actions from creditors may be out of reach for now, there are some additional measures you can take to protect yourself. It’s also important not to make hasty moves or take drastic actions without fully understanding your rights and remedies as a consumer:

• Change your bank account to a neutral financial institution:
  • Banks and other lenders have the “right of offset” allowing them to recover money you owe them for outstanding debts by seizing money you hold in your account with them (or an affiliated bank).
  • Banking with a neutral bank will safeguard the money you have in your account from this type of collection activity.
• Request communication in writing only:
  • BC consumers have the right to request that their creditors contact them in writing only.
  • This request can effectively stop you from receiving never-ending collection calls in the event you’re unable to make your bill payments.
• Getting the right advice and making clear-headed decisions is critical:
  • If you need money to live and provide for necessities, there may be no other option than to liquidate some assets or even consider tapping RRSP funds if there is no alternative.
  • If you are concerned about missing debt payments and are considering cashing in assets or RRSP funds to pay creditors – STOP – get advice first about what assets are Federally or Provincially protected from creditors. RRSPs for example are at the top of this list.
• Be vigilant about scams:
  • No matter how distasteful it may be, there are individuals who are preying on unsuspecting Canadians, making outbound calls to gather personal information under the guise of ‘assisting you to apply for Government COVID-19 relief benefits’.
  • Similar COVID-19 related email phishing scams are also arising.
  • As always, never give out any personal information over the phone or via email unless you are exceptionally certain with whom you are dealing.

Plan for your debt-free future – now

The ongoing pandemic has many people feeling like they are in financial limbo – while you may not be ready to take action on your debts quite yet, consider taking advantage of this time to get prepared for your future financial recovery. Now is an opportunity to get organized and start thinking about how you will move forward.

• Get in paperwork-shape
  • Start and update a list of all your debts, account numbers and monthly payments.
  • Compile and sort documentation for any assets that you have such as life insurance policies, vehicles, or investments.
  • Organize your tax returns and catch up any outstanding CRA filings – especially if you have any balances owing to CRA.
• Do the “rule of 60” math
  • Divide your total non-mortgage debts by 60 – does the number look like a monthly payment you could afford in order to pay your debts off in 5 years?
  • If that 5-year figure barely fits your budget (or doesn’t fit at all) then you can likely assume you will need a solution that will cut your debt.

Know that you are not alone – BC Licensed Insolvency Trustees are here to offer you resources and support. The legal debt solutions available through Federal legislation can allow you to consolidate and cut virtually all your debts (even government debts like taxes and student loans) without interest and additional fees, or have debts fully forgiven – while ensuring you are protected from your creditors. Licensed Insolvency Trustees are the only debt help professional endorsed and authorized by the Canadian government to assist consumers.

Get debt help from the comfort of home and access Consumer Proposal and bankruptcy services online – simply connect with a Sands & Associates representative. Book your confidential free debt consultation today.