November 22, 2021
Misconceptions about debt are common. We look at some of the most prevalent debt myths and separate fact from fiction here.
This is part the second part of our advice on most common debt myths. In the first part, we looked at a variety of myths, such as: could you go to jail for debt? Is there a way to stop wage garnishment? And does declaring bankruptcy mean losing everything?
We’re back now to explore some of the other most common debt myths and correct the misconceptions many have about them.
Many people believe that filing either a consumer proposal or bankruptcy means that your credit score and rating will be destroyed forever.
In reality, it’s more than possible to repair your credit after filing for either of these.
Completing either the proposal or bankruptcy process is the first step to rebuilding your credit, of course, but a lot depends on what you do once you emerge from the insolvency process. Here are some ways to improve credit after completing a consumer proposal or bankruptcy.
A secured credit card operates much like a normal credit card, but with one key difference. A secured credit card requires a deposit, which then becomes your credit limit.
If you deposit $500, then that is also your credit limit. If you fail to pay your bills on time, then the card will be cancelled, and your deposit will be taken from you. Showing you can use a secured credit card responsibly will help improve your credit score and rating.
Paying off debt on time and in full is the real key to improving a credit score and rating. Timely bill payments show lenders and creditors that you can manage your financial obligations and be trusted with credit.
Payment history is a significant factor in determining your credit score. By consistently paying your bills on time and in full, you can positively impact your credit score over time.
Some people with a mortgage worry that declaring bankruptcy or filing a consumer proposal will not allow them to renew their mortgage. They worry they’ll be forced to sell or lose their house.
That’s not how it really works. The Bankruptcy and Insolvency Act prevents lenders from withdrawing mortgage facilities from existing borrowers who are bankrupt or file a consumer proposal.
Renewing a mortgage after a consumer proposal or bankruptcy follows the same process as any other normal mortgage renewal. Remember, mortgage lenders want your business and will sometimes work with you so you can afford to continue paying them.
Some uncommon rules apply to student loan debt compared to other forms of debt. There’s however a misconception that these can never be included in a consumer proposal.
This is true if the debt is under seven years old. If you have been out of school for seven years, it can be included in a consumer proposal.
There is some trickiness around the dates for this that should be noted.
For example, if the last date you attended school was April 7, you must count seven years from the last day of the month in which you were in school, because typically the government counts the whole month that you last attended school.
Therefore, if you plan to file a consumer proposal, you should do so on May 1, seven years from when you were last in school.
If it has not yet been seven years since you last attended school, you should look into government assistance to help you pay your student loan debt. Each province and territory has programs to help people afford these loans.
There’s a common myth that tax debt gets treated differently from other forms of debt, but that’s not the case.
A consumer proposal can help you lower your unsecured debt, meaning debt not backed by an asset like a car or home. Tax debt is considered unsecured debt and therefore can be included in a consumer proposal.
The Canada Revenue Agency (CRA) is treated just like any other creditor when you file a consumer proposal. The same goes with Revenu Québec for Quebec residents.
When you file a consumer proposal, your creditors all get a vote on whether or not to accept the terms of the proposal. If you have tax debt you wish to include in the proposal, the CRA and Revenu Québec will also get to vote on whether the proposal should be accepted. Your creditors each receive one vote for every dollar you owe them.
The CRA and Revenu Québec votes are equal to the votes of any of your other creditors; unless you owe over 50% of your debt to the CRA or Revenu Québec, they cannot simply veto the proposal on their own.
If most of your creditors vote to accept your proposal and the CRA and Revenu Québec don't, they still have to abide by the terms of the proposal.
Licensed Insolvency Trustees (LITs) do not work for your creditors, they work to ensure that everyone is treated fairly in any debt matters but are ethically obligated to act in your best interest as the debtor.
LITs are regulated by the federal government through the Office of the Superintendent of Bankruptcy and must adhere to strict ethical and professional standards.
It’s their job to ensure that you receive the protection you’re entitled to under the Bankruptcy and Insolvency Act.
In short, an LIT can be seen as a mediator between you and your creditors. They help you find a solution to financial troubles and a pathway to becoming debt-free, while also ensuring your creditors receive a fair settlement under the law.
An LIT has done their job when everyone walks away believing the outcome is fair.
Many worry that their debt is simply too much and cannot be fixed, but that’s never the case. If debt is causing you stress and anxiety, a Licensed Insolvency Trustee can help you find a way forward. Our Trustees offer free, confidential consultations to assess your financial situation and recommend the best solutions.
As previously explained, our Licensed Insolvency Trustees provide judgement-free support and always act in your best interest. By carefully examining all available options, they will explain how each one impacts your situation, helping you choose the debt relief solution that suits you best.
November 22, 2021
Misconceptions about debt are common. We look at some of the most prevalent debt myths and separate fact from fiction here.
