As the COVID-19 pandemic continues, some people are wondering if they need to pay off debt. Many major credit grantors have offered payment deferrals to their customers as a way of dealing with the loss or reduction of income due to COVID-19. However, the 6-month deferral period has come or is coming to an end, while CERB is ending, too. Now, people are wondering what will happen when it comes to their debt.
New Government Benefits
Although CERB ended in early October, changes to Employment Insurance (EI) and new recovery benefits have been announced by the Government of Canada. They include the Canada Recovery Benefit (CRB), the Canada Recovery Caregiver Benefit (CRCB) and the Canada Recovery Sickness Benefit (CRSB). The first step for anyone who was receiving CERB and/or EI is to find out whether or not they are eligible to receive any of these newly introduced benefits and government income supports. Once you have an idea of how much income you can expect to receive over the coming months, you can start to put together a plan on how to best deal with your debt.
Payment Deferrals
According to a recent survey, about one-in-10 Canadians used payment deferrals due to the COVID-19 pandemic. This includes deferring payments on their car(s), mortgage, rent, lines of credit, and credit cards. According to the FCAC, the cumulative number of payment deferrals approved by regulated entities as of September 4, 2020 were:
| Mortgages | 771,764 |
| Loans | 128,542 |
| Credit Cards | 618,281 |
| Auto Financing | 307,343 |
The Canadian Bankers Association reported 720,000 households are currently deferring payments on over $180 billion worth of mortgages. The rental market will also be affected, as most renters will likely be unable to make the necessary back payments once eviction bans are lifted.
Once Payment Deferrals Expire
Most payment deferrals were slated for a maximum of six months. (Remember, the payments were deferred not cancelled.) A deferral agreement does NOT cancel, erase, or eliminate the amount owed on your debt. In some cases, it could even increase the amount owed.
As interest continues to accumulate over the deferral period, many consumers have reached and surpassed their credit limits, resulting in their interest rates going up. That means once the payment deferral period ends, their monthly payment amount may be higher.
Obtaining a payment deferral means that the payments will resume once the deferral period is over, and you will need to make the payments that had been deferred. In some cases, some creditors may expect you to make higher monthly payments once the deferral period is over, or they may ask for a lump sum that accounts for all the missed payments.
It’s important to understand your options and their associated fees before you make any decision regarding your monthly payments, especially when it comes to your mortgage. You need to look at the pros and cons of each option before making a decision.
Does the Statute of Limitations Impact My Debt?
Some of our Counsellors have recently been getting questions around whether or not consumers have to pay back their debt given the Statute of Limitations. First, let’s be clear: The Statute of Limitations only applies if you are being sued by a creditor, and the term for the Statute of Limitations varies from province to province.
For example, in Ontario the term for the Statute of Limitations is two years. That means after two years of no activity on your account with a creditor, including payments, a debt collector is unable to sue you in court for the money owed. But that doesn’t mean you’re home free. You still owe the money, and the lender can continue to try to collect their money using their collection processes, including phone calls and letters. Check out our blog on What Can Debt Collection Agencies Actually Do in Canada to learn more.
It’s important to note that if the debt is secured, such as a car loan, mortgage or a cosigned loan, the lender will go after their security if you aren’t making the payments. That means they will try to recover the car, the home, or they will go after the cosigner on the loan for missed payments.
Credit Reports and Debt
Although a lender may not be able to sue you for the unpaid balance after the term of the Statute of Limitations expires, your credit rating will be impacted and your credit score will take a definite hit.
Your credit report lists any outstanding accounts, as well as any delinquencies in payments. If your credit report contains this kind of negative information, it can limit your ability to obtain future credit, rent an apartment or even get a job. While debts may be purged from your credit report after 6 to 7 years from the last payment or default date, that doesn’t mean you magically don’t owe these debts anymore. Even after debts disappear from your credit report, you still owe them.
So, let’s say you owed money to Bank A and you never paid them the money you owed in full. Six to seven years later that debt may no longer appear on your credit report, but if you were to try to obtain another loan or a line of credit from Bank A, they would have a record of the unpaid debt. In that case, they would likely decline your application.
Our Best Advice if You Have Debt
You cannot not pay your debts and protect your credit rating. It’s best to look at ways to deal with your outstanding debts. For example, see if you’re eligible for the new benefits being offered by the government, establish a realistic budget, and talk to your creditors about a feasible repayment plan.
And if all of this sounds just too overwhelming, give us a call at 1.800.267.2272 to arrange a free telephone appointment with one of our certified Credit Counsellors. At Credit Canada, we help separate fact from fiction, and clarify legitimate information from misinformation. We’re always here to help, and all of our counselling is free.
