Are you feeling stressed, anxious or uncertain right now? If you suffered a financial setback in the last few months, it’s understandable to be concerned about what’s ahead. What happens if you can’t make a car payment or pay next month’s rent? What should you do if collection agencies start calling or your employer warns of future layoffs? Finding the best solution to a potential money problem isn’t always simple. It helps to have a plan. Nancy Snedden, BDO Licensed Insolvency Trustee, recently joined us to discuss why a plan should address your existing affordability and debt challenges, but also help you prepare for potential challenges in the months ahead.
What happens when dealing with pandemic debt challenges
Hi, and thanks for joining us. This is the BDO Financial Wellness podcast, and I’m your host Tera Beljo. We’re calling this podcast our What Happens When episode because let’s face it, millions of Canadians are reaching a fork in the road. Payment deferrals are being phased out. Government assistance is shifting and the provinces are opening up. But what does that mean for you?
It’s tough to navigate financial waters that seem to be constantly shifting. So we’re going to explore seven common what if and what happens when financial scenarios with BDO Licensed Insolvency Trustee, Nancy Snedden, and get Nancy’s insight and expert advice on how we can move forward. Nancy is a Licensed Insolvency Trustee with BDO Debt Solutions, and she leads the BDO team in Atlantic Canada. Her team of debt professionals, along with BDO teams in communities across Canada, help Canadians find the best solutions to their debt problems.
Welcome, Nancy. Let’s get started.
As you know, beginning March 30th, the government of Canada suspended repayments of Canada Student Loans. Many provinces did the same with provincial student loans. As of the date of this podcast recording, those federal payment deferrals will end on September 30th. It’s understandable that the end of this deferral period will cause concern and even hardship for many Canadian households. So what advice do you have for someone who simply cannot keep up with their student loan payments?
Well, I think first of all, Tera, I’d like to say, you’re not alone. If that’s your situation, it’s certainly not unusual at all for people right up into their thirties and forties to still be experiencing hardship with repaying their student loan debt. I think there’s a few programs that the government has on a regular basis. One of which is the repayment assistance plan. So depending on your income, you may not be required to make payments if you exceed your income by 20 per cent and you may not have to make payments at all. So that program is something for them to look into, and they should certainly look on the government website and national student loan site to see if that’s something that they should be applying for.
But it comes back down to as well, to looking at your income and expenses and needs versus wants, and making sure that you’re really scrutinizing your budget. If you’ve already done that and you’re still experiencing financial difficulty, there are other debt solution options that you may want to consider. But keep in mind, in order to qualify to have your student loans discharged in something like a consumer proposal or bankruptcy, they do need to be at least seven years old. But certainly, if that’s the case, or if dealing with your other debt would allow you to be able to make your student loan payments (if they’re under seven years old) that may still be an option as well.
So other than what you’ve just mentioned, are there other debt relief options available for those who have been out of school for less than seven years?
So you could still look at a consumer proposal or bankruptcy if you have other debt. It’s just that your student loans would not get discharged as part of the consumer proposal or bankruptcy. But freeing up that money by having your other debt taken care of may allow you to be able to afford the student loan debt. The other option, of course, would be to contact student loans and see if you can negotiate a payment with them. They’re normally pretty fixed on a 15-year repayment, but there could be an interest or relief program, for example, that you could qualify for. You have to apply every six months for that, but that could give you some relief as well.
Arguably, the biggest challenge for Canadian parents over the last few months has been juggling childcare and homeschooling, which we just discussed before we got started, with work from home responsibilities and financial obligations. It’s a lot. So for these parents, the start of the school year is just weeks away. And even some provinces that are moving forward with full-time in-school learning, the uncertainty of what lies ahead can be very emotional and financially stressful. What can parents do to prepare their finances and their family for a far from normal school year?
So I think it may be hard to look at things from two perspectives, but I think you need to plan for both. So I think you need to plan for what is your budget going to look like if you do get your kids back to school, but then you also need to look at what is your budget going to look like if your kids are not in school. So for example, if they go back to school, there’s a second wave, the schools shut down, they’re back home again; or if there’s, God forbid, an outbreak in their school to where they do need to pull their kids back even for a short period of time. Because you’re going to want to be able to plan for both outcomes. So really look at your budget and make sure you’re planning for both.
Obviously, in these times, people are struggling. They don’t always have the extra money to put into emergency savings, but hopefully, you can look at your budget and find a way to do that. Or you have been doing that, so you have that emergency savings to rely on. And of course, if you are carrying debt, you’re going to want to focus on how to pay down that debt and put a real plan in place for that as well. So that’s not only one less stress in your life, but eventually, it will free up money because you won’t have those debt repayments.
So what steps should parents take if their only option is to reduce their income and put their financial stability in jeopardy? So if one parent, for example, has to take a leave of absence or quit their job to stay home with the children, for the number of reasons that you just brought up, what would you say to them?
So I think you do still need to go back to your budget, for sure. If you’re not going to be able to meet your monthly commitments based on a single income, then you may need to look at some other options. So it may be reducing your housing costs. For example, if you’re a renter looking for a different household that you can rent that’s going to be a lower cost; or look for other things in your budget that you may be able to reduce. Because you need to remember, this is going to be an emergency or crisis-type budget, not your regular budgeting that you would do. If you’re carrying debt load, and that is part of the reason why you’re struggling on one income, which by the way, we see all the time. So whether it’s illness, job loss or marital breakdown, one of the leading causes of insolvency is going from two incomes to one income. So you’re going to want to speak to a professional to see your options.
Not that you may have to file a proposal or have to file a bankruptcy, but it always relieves stress to know what your options are. Talk to a professional, like a Licensed Insolvency Trustee. They can show you what those options look like so that you’re making informed decisions about what your next steps might look like.
Thanks, Nancy. I’d like to pivot at this point to talk about a couple of specific financial hardships that people may be experiencing now. The challenge of keeping up with auto loan payments and monthly rent payments.
So let’s start with auto loans. I think you’d agree that for many, many households, having a vehicle is an absolute necessity, especially in some places throughout Canada, like Toronto, if they live outside in the suburbs, getting into where they work. For those that are struggling financially, what happens when they can no longer make their auto loan payments? Are there steps they can take to avoid defaulting on their loan and having their vehicle repossessed?
It certainly is an issue for many Canadians, Tera. In the first quarter of this year, auto loan delinquencies were up by almost 17 percent. That’s not an insignificant amount by any means at all. If you’re unable to make your payments, some lenders have been making deferrals for people, given the situation that we’re in. So the first step is going to be contacting your lender to see what options will be available for you. A lot of lenders out there, they don’t want to repossess your vehicle. They would like to do the best they can to try to work with you. You’re not going to know unless you make the call. So don’t let the fear of what the answer might be, stop you from making the call to them, to see what the options might be. In many cases, they may be able to rework your loan. So they extend it out so that they can reduce your monthly payment.
In many cases, they may agree to a reduced interest rate so that you can make your payment more affordable. And you may also be able to look at the option of getting a different vehicle that’s a lower cost. So if that’s something that you’re looking to do, you have the option of having someone else take over your existing loan or lease so that you can get something more affordable. You also would have the option that, if you were going to get a cheaper vehicle, the existing vehicle could go back to the lender. And then you’re looking at how can you manage the shortfall, and if not, maybe looking at a consumer proposal or bankruptcy to help deal with any shortfall that might exist.
Those are some really great options. So now let’s talk about renters. This is a large demographic, almost four and a half million renter households are in Canada. We’ve heard a lot over the last few months about the financial challenges renters are facing across the country, especially those who are having trouble finding work or who have lost an income. With rent deferral opportunities disappearing, what should someone do when they have reached the point where they can’t make their monthly rent payment?
So I guess there’s a couple of options depending on what your current living situation might be, and certainly these are not going to work for everyone. But depending on where you’re living, you may be able to look at the possibility of a roommate to help cover your monthly costs.
But looking at renters, 40 per cent of renter households spend over 30 per cent of their income on rent, which is a high percentage. And when your income is reduced, of course, it’s going to be an even higher percentage of what your household income is. The median household income for renters is just over $41,000. If that’s a family income and you’re living in a high-cost city like Toronto, for example, that is going to make things much less affordable.
So you’re going to want to look at okay, if roommates aren’t an option, should you be looking at another location that is a lower rent option. Or maybe you really want to stay in your neighbourhood and there aren’t a lot of other lower-cost options. I think you want to reach out to your landlord and see what, if any, deferrals they can continue to make for you, or a reduction and a catch-up period when you know, you’re going to be back to work, for example. Communication is always key when you’re in these circumstances. You don’t know unless you ask. And I think that’s what’s going to be most important. You’re going to want to make sure you understand the laws in your province. They’re different in every single province. There’s landlord/tenancy regulations in every province, so you’re going to want to make sure you understand what your options are in dealing with your landlord on these things as well.
So we’re hearing a lot in the news about tougher days ahead for Canadians who have lost income due to COVID-19. The end of some types of government assistance and fewer opportunities for payment deferrals will likely mean a growing number of households will be unable to keep up with bill and debt payments. So what’s your advice for someone who’s receiving calls from creditors or collection agencies, demanding payments?
So I think the first step is going to be, familiarize yourself with what they can and can’t do. Many collection agencies use scare tactics, and they say they’re going to do things that, really, regulations prevent them from doing. It’s meant to scare the person into acting and making a payment. And in many cases, people aren’t not paying their bills because they’re just choosing not to. People are not paying their bills in most cases because they can’t afford to do so. So the scare tactics just cause added stress and pressure. So again, they’re provincially regulated, so you’re going to want to do some research and find out what can and can’t be done.
If a collection agency is making threats or they’re contacting you at work or they’re contacting family members, these are things that in most cases, in most provinces, they are not allowed to do. You’re going to want to report that to the proper government agency and possibly the Better Business Bureau. The more complaints that come in, the more that can be done to stop these collection agencies from using these tactics. If you are worried about action that a collection agency may take against you and you are struggling to repay your debt, you may want to speak to a Licensed Insolvency Trustee to find out what your options are to deal with those collection agencies as well.
So when someone receives a call from a creditor or collection agency, what should they ask or what should they make note of?
I think they’re going to always want to know who they’re collecting on behalf of. They’re going to want to know the amount that the creditor has said they owe because in some cases you’re going to want to check that against your records to see is it outlandish compared to what you thought you would have owed that creditor. Ask their name and their contact information and the company that they are representing, meaning the company that they work for. You’re never going to want to give out any personal information to these people. Do some research yourself to make sure that the collection agency is a legitimate agency and it’s not some sort of phishing scam. And then you can also do some research with the lender that sold the account to see if there’s an arrangement you can make with them instead of speaking with the collection agency.
Thank you for that. We had a great discussion at our last podcast about what people can do to prepare for the end of CERB or the Canadian Emergency Response Benefit. Millions of Canadians who lost income due to COVID-19 counted on CERB to help them cover costs over the last few months. But unfortunately, even as the economy opens up around the country, there’s still a very real concern that more Canadians will be laid off or will face reduced hours. So what can people do now to prepare for a job loss or possibly a temporary layoff?
So I think you’re going to want to, again, assess your budget and make sure that you’re planning for the future. So even though you have the income today, maybe for some of the little extras – like going out for dinner or planning a vacation or the things that you may have done in the past – if you’re worried about a job loss, you’re going to want to make sure that you operate today as if that was the case tomorrow. So reducing your expenses where you can so that you can put that money away into an emergency fund to help you if and when you get a temporary layoff or being a job loss situation.
You’re also going to want to look at things you have available to you today that you may be afraid of losing in the near future. So for example, medical and dental benefits: Do you need new glasses? Do you need a trip to the dentist? You want to make sure that you’re looking after yourself and your family and getting that stuff taken care of while the benefits are available to you.
And of course, first and foremost, practice with how you can live with less with your entire family. So that means having active conversations with your spouse, having active conversations with your kids. Depending on the age, you can talk to your kids about your finances and why you may be reducing your budget. Or if they’re too young, you can still get them involved in the reduction of the budget by involving them in the grocery planning or the meal planning or explaining to them what you’re doing when you’re looking through the flyers and how you’re making your meal plans. They don’t need to know the nitty-gritty, but they can certainly be part of the process because when you have buy-in from everybody, it’s easier to get that plan put in place.
And it also teaches them something that they can take into their lives as they get older, so that makes a lot of sense. Finally, let’s talk about those who continue to have secure full-time work and steady income during this crisis. Are there steps they can take to help safeguard their finances or prepare for a worst-case scenario or another wave?
So I think if you’re still securely employed and you’re not anticipating that you’ll have any reduction in your hours or lose your job, and you think that you’re in a secure place, that is absolutely fabulous. And the hope for the future is that that would continue. But of course, you’re always going to want to plan for what could happen. So whether that’s an emergency expense or loss in income for whatever reason, you always need to plan with that in mind.
So you would still want to look at your budget and see where there are ways where you can increase your savings. For many people, we know that 50 per cent of Canadians are living paycheck to paycheck, 54 per cent are $200 away from being insolvent. So for many Canadian households, even though they are securely employed, savings is not an option all the time or significant savings for an emergency fund is not an option all the time.
So then you’re going to want to look at well, what are your obligations and how can you take care of that to make room for an emergency budget. That may mean dealing with your debt. You may have debt that’s a significant portion of your income. So if your debt-to-income ratio is between 20 and 40 per cent, and certainly if it’s over 40 per cent, you’re going to want to talk to a professional to see what strategies you can put in place to pay down your debt, to free up money for that emergency budget.
So maybe a strategy that you can do on your own. There’s an avalanche plan and there’s a snowball plan for debt repayment. With the avalanche plan, you’re looking at your highest-interest debt, and you’re paying that off first. So any extra money that you do have, you’re putting it towards that debt to pay it down, then moving onto the next highest interest.
The snowball method is where you want that gratification of seeing that you’ve accomplished paying something off. So you’ll look at your smallest debt and put what you can on that to get it paid off first, then move on to the next.
If those strategies are not available to you, because you don’t have the additional income to make more than the minimum payment, you are going to want to talk to a Licensed Insolvency Trustee about potentially looking at a consumer proposal where instead of having to pay off your entire debt, if 50 per cent of your creditors agree, you will be able to pay off a fraction of your debt. A Licensed Insolvency Trustee will be able to go through your complete financial situation and put together a proposal that’s unique to you and is something that’s going to be affordable to you and that you and your creditors can agree on.
Thank you so much, Nancy. It is always a pleasure.
I’d like to thank Nancy Snedden, BDO Licensed Insolvency Trustee for taking the time to share her insight and expert advice. And thank you for listening to this episode of the BDO Financial Wellness podcast. For more debt management resources, tools, and advice, visit our website, debtsolutions.bdo.ca. And for more podcasts and videos, visit our YouTube channel, BDO Debt Solutions Canada. And remember, we are here so that you don’t have to face debt alone.
Call 1-855-BDO-Debt or fill out the form below. We’ll assess your finances and explore all debt-relief options available to you.
Fields marked with an asterisk (*) are required.
A BDO debt professional will contact you within one business day to schedule your free initial consultation.