Pandemic Financials: 4 Debt Management Pitfalls Consumers Should Avoid

Although British Columbians have thus far seen success in flattening our curve in the fight against COVID-19, our battle against money woes may be far from over. With consumer savings already low and household debt levels at an historic high, for many individuals the pandemic’s financial pinch may highlight just how close individuals have been to tipping into a financial crisis.

Prior to the pandemic the total number of BC insolvencies filed by consumers had risen more than 10% in calendar year 2019, a massive increase over 2018’s growth rate of 1.8%.

Debt experts at Sands & Associates, BC’s largest firm of Licensed Insolvency Trustees focused exclusively on debt help for individuals, have already noted that in recent discussions with individuals facing debt problems, there are some consistent patterns of people trying to deal with immediate debt issues but making decisions that can often impact consumers negatively in the long-term.

BC Licensed Insolvency Trustee Blair Mantin joined CTV News to talk about “pandemic financials” including some common debt management pitfalls that consumers should generally avoid when dealing with debt, during the COVID-19 crisis or otherwise.

Watch the clip here and read more below:

When dealing with debt, during the COVID-19 crisis or otherwise, here are 4 debt management pitfalls consumers should generally avoid:

1. Co-Signed Debt Consolidation

Consumers who are looking to simplify their debts and reduce their overall interest rates often turn to consolidation loans. Unfortunately, many people simply won’t qualify for the debt consolidation loan they require without a co-signer (or pledging an asset as collateral). Generally co-signing on debts is advisable by debt experts in very few situations as co-signed debts are not a 50/50 responsibility between the borrowers – co-signers are 100% responsible for any unpaid balance, not half.

Be very cautious about taking on a co-signed debt consolidation loan or joint line of credit to deal with your debts:

• In the event you’re unable to maintain the payments you’ve just given your credit another person to collect from (or an asset to potentially seize if you have agreed to a secured debt).
  • Some types of loans will also allow a lender to demand payment of the loan in full if there is a default by the main borrower.
• If you continue to struggle to manage your new consolidation loan (and any new debts) there is an added layer of emotional stress and pressure for you knowing that your co-signer may be impacted.

2. Paying Debt with RRSP Funds

Using RRSPs when a debt payment is due (or overdue) and you’re cash-strapped seems like an obvious solution but cashing in RRSPs to pay debt can create other financial challenges that can extend well beyond the short-term relief.

Besides depleting money earmarked for retirement which can be difficult to replace, RRSP withdrawals are taxable, often making the net proceeds of redemption substantially less than what you may anticipate:

• Any RRSP redemptions you make will be subject to withholding tax – the more you withdraw the higher the withholding tax rate is.
• The amount of your withdrawal will be included in your taxable income for the year. If your marginal tax rate is higher than the withholding tax rate, you’ll need to pay extra tax that year for funds you’ve withdrawn.

RRSPs are an asset exempt from seizure – no creditor can force you to cash them in.

Learn How Bankruptcy Protects your Assets 

3. Getting Advice from the Wrong Source

You may have several viable options to choose from when it comes to putting together a plan to get out of debt – unfortunately, getting the wrong advice can result in serious financial consequences and even legal complications.

Although lenders, lawyers and accountants may mean well, in Canada Licensed Insolvency Trustees are the only federally endorsed and regulated debt help professionals:

• There is no need for a referral to connect with a Licensed Insolvency Trustee for debt advice.
• All Licensed Insolvency Trustees offer free debt consultations where you have an opportunity to discuss your financial situation and assess your options to get out of debt.
• Under Canada’s Bankruptcy and Insolvency Act there are two legal debt solutions that can deal with virtually all types of debt, from credit cards to government debts like taxes and student loans – declaring bankruptcy or making a Consumer Proposal.
  • Legislated solutions can allow you to either have all your debts forgiven, or have your consolidated debts reduced to an amount you can afford to repay.
  • No creditor can prevent you from seeking personal bankruptcy protection if you are struggling to pay your debts.

Consolidate and Cut Debt Without Borrowing or Interest – Learn About Consumer Proposals

4. Not Having Your Own Financial Recovery Plan

Many consumers may be temporarily avoiding a debt problem by accessing emergency benefits, receiving payment deferrals, or utilizing personal savings to maintain their account balances and meet their costs of living – and many more continuing to rely on their credit to bridge the gap between their income and expenses.

It’s important to have a financial recovery plan that will get you to “debt-free” within a few years (5 at most):

• Recognize that only being able to make minimum monthly payments (or slightly more) can result in paying considerable interest charges and being in debt long-term. Avoid being stuck in a minimum payment cycle or confusing minimum payments for substantial progress.
• A credit card balance as low as $1,000 could take 10 years to pay off at an interest rate of 18%.
• A $6,000 balance carried on a store-branded card with an interest rate of 29.9% could take up to 40 years to pay off.
• Don’t dismiss the possibility of professional debt solutions. Many people delay seeking support from Licensed Insolvency Trustees because they have incorrect information about how these services and solutions work. For example:
• Formal debt restructuring does not have permanent negative impacts.
• Filing personal bankruptcy or making a Consumer Proposal do not automatically mean a loss of assets or income.
• Most people can re-establish a favourable credit rating sufficient for a new mortgage or vehicle financing within a few short years. This is often far less time (and cost) than it would take to pay off the debts as-is.

Ready to connect? Book your confidential free debt consultation with a caring BC debt expert. In as little as an hour you could be on your way towards a financial fresh start, without even leaving the comfort of your own home.