Many Canadians find themselves trapped in credit card debt at some point in their life. In fact, only 25% of us pay off their credit card debt each month in full. With high interest rates, unexpected expenses and easy credit, it is very easy for your credit card debt to slowly creep up on you.
Additionally, many Canadians have multiple credit cards that they carry balances on each month, which can result in hundreds of dollars in interest charges each month.
If you are dealing with credit card debt there are several options you can take, but first you must determine if you need a short term or a long term solution.
Short Term Credit Card Debt Solutions
Long Term Credit Card Debt Solutions
Living Without a Credit Card
What Are My Short Term Credit Card Debt Solutions?
If you have determined that your credit card debt is a short term issue, then you can seek a short term solution to your credit card debt.
Now you will be faced with some decisions about your credit card debt. If you are unable to make the payments you can choose to:
- Stop making payments on all of your credit cards;
- Stop making payments on all but one of your cards to maintain some access to credit;
- Use a pre-paid credit card or a Visa / Mastercard debit card.
If you stop paying on your credit card debt, your likely strategy will be to wait for the statue of limitations on debt in your province to expire.
This strategy has some risks and your debt will continue to exist even after limitation period has passed.
After you have missed a few payments you can expect to receive a reminder to make payment.
At first, the reminders will be friendly but if you miss more payments, your credit card company will become more demanding.
By stopping payments on your credit cards you will be faced with certain consequences.
What are the Consequences on not Paying my Minimum Credit Card Debt Payments?
When you stop making the minimum payments on your credit cards you will face several consequences. In addition to receiving collection calls from your credit card company, you will face other consequences, such as the loss of credit privileges, a poor impact on your credit report that lowers your credit score, and loss of credit card reward points or reward miles.
Another serious impact of not paying the minimum payments as they become due is your financial institutions’ “right of set-off.”
The right to set off is a legal clause that gives your bank or financial institution the right to seize a debtor’s deposits in their account.
If you default on your monthly minimum credit card payment, your bank can withdraw monies from your account to cover the monthly payment.
It is important that you carefully consider everything before you make the decision to stop paying on your credit card debt.
Right of Set Off Example
In order to fully understand the impact of the right to set off, we will consider the following example.
Joe debtor deals with one bank, the ABC bank, where he has one bank account. He gets his pay deposited directly into this account by his employer.
He uses this account to pay his mortgage, monthly utilities and other expenses.
Joe also has his only credit card with a $15,000 balance with ABC Bank.
Currently Joe has $1,000 in his bank account, which is enough to cover his mortgage and other expenses.
This month he has a $300 minimum payment due for his credit card. Unfortunately, Joe cannot afford this payment because he had unexpected repairs on his home that had to be completed.
Due to the right of set off law, if Joe does not make this $300 payment, his bank has the right to simply take $300 from Joe’s account.
Should the bank do so, Joe won’t be able to pay his mortgage this month.
How Can I Avoid a Right to Set Off Seizure?
If you have credit card debt and your credit card was issued by the same financial institution that you have your bank account with you might be at the risk of having monies seized from your account.
If your bank holds a right to set off clause in their credit card agreement then they have the right to take money from your account if you default on your credit card payments.
In order to avoid a right to set off seizure you should either a) close your account with the ABC bank or b) withdraw your funds from your bank account. The best course of action would be to open a new account with a different bank.
Ideally, you should then:
- Open a new bank account and deposit her funds into this account;
- Arrange to have your paycheque deposited into your new account;
- Contact your creditors to whom you were making monthly payments from your ABC bank account and update them with your new account information;
- Contact any creditors that were charging her ABC bank credit card and make alternative arrangements to pay these creditors.
Receiving Collection Calls & Other Collection Actions
Once you have missed several credit card debt payments, your credit card company will employ various collection strategies.
The collection strategies that are used by unsecured creditors can be aggressive and varied.
In order to attempt to recover their monies, creditors will attempt to collect from you, before hiring a collection agency.
For approximately 3 to 6 months after your last payment, your creditors’ in-house collection department will attempt to call you for collection.
You will also receive written notices demanding payment.
In some cases during the first six months after your last payment you will receive a letter that appears to be from a lawyer.
Receiving a collection from a lawyer at this point in the collection process is likely to be a boilerplate letter, and no actual attorney has reviewed your file or sent you a collection letter.
Sending these letters are a scare tactic used by creditors to intimidate debtors.
What Happens If My Debt Remains Unpaid For More Than Six Months?
Once your credit card debt remains unpaid for more than 6 months, your creditors have more options. Your creditors could continue to use their own collection department to demand payment from you. However, they will probably take one of the following actions:
- Hire a collection agency;
- Sue you to collect monies from you;
- Sell your outstanding account.
As your account remains unpaid for a longer period of time your creditor will take a different approach for collecting from you. Often this will involve hiring a collection agency. When your creditor hires a collection agency to collect the unpaid monies, they are taking no risk.
Collection agencies are hired on a commission basis; if the collection agency fails to collect the unpaid debt that you owe then the creditor won’t have to pay the collection agency.
If you are contacted by a collection agency you have many rights. In many cases you can stop collection calls and other collection actions from a collection agency.
Being Sued For Debt Collection
You might receive threats to be sued from your creditor or a collection agency. However, this is most likely another scare tactic as it is very rare to be sued for debt collection. In order to sue you, your creditor must go to significant expense and labour.
It is common that debtors that are sued do not end up paying any monies to their creditors. For this reason and others your creditors are unlikely to sue you.
Your creditors will only sue you if they are highly confident that they will recover enough monies from you to make it worth their effort to go to court to sue you.
When Will My Creditors Sue Me For Unpaid Credit Card Debt?
Because there are out of pocket costs involved with suing you, your creditors will only be inclined to sue you if:
- Your unpaid credit card debt balance is high;
- You own real property that the creditor can collect on;
- The limitation period for the debt has not expired.
Most creditors in Canada have a policy about the dollar amount that they must be owed before they will consider suing a debtor.
Few creditors will sue a debtor that owes less than $5,000.
However, the debt amount might be significantly higher before your creditor will even attempt to sue you.
Debtors that have real property in their name – a house, farm or other such real property – are at a much higher risk of being sued.
The reason for this is that the creditor can obtain a judgment against this real property. Obtaining a judgment will allow a creditor to get a lien against the debtor’s real property.
In order for the debtor to sell or refinance their property, they will have to resolve their unpaid debt with their creditor.
Debtors with real property are at risk of being sued even if their unresolved credit card debt is fairly low.
If the limitation period on the unpaid debt has expired then your creditors are unlikely to sue you for collection.
You can file a defence that the limitation period has expired and your creditor will lose the lawsuit.
When Do Creditors Avoid Suing A Debtor For Unpaid Credit Card Debt?
Your creditor, or a collection agency, is unlikely to sue you if:
- The unpaid credit card debt is less than $5,000 (although if you have real property your creditors might be more inclined to sue you);
- Your unpaid account is less than six months old;
- The limitation period on credit card debt has passed in the province where the debtor lives;
- The debtor has moved out of Canada;
- The creditor is unlikely to recover their monies from the debtor.
Another strategy to recover unpaid credit card debt your creditor might employ is to sell your unresolved account to a debt buyer.
A debt buyer could be a collection agency or a third party firm that purchases debt.
If a collection agency has purchased your debt they might be in a better position to sue you than if they were hired on a commission basis to collect for your original creditor.
A collection agency that has purchased your debt will collect 100% of the monies owed if you pay, rather than just their commission.
A debt buying firm has options to collect from you, such as hiring a collection agency or suing you.
The debt purchasing firm could be aggressive in its collection attempts if the limitation period is close to expiring.
Short Term Solutions to Paying Off Your Credit Card Debt
If you determine that your credit card debt is a short term problem, you can pay off your credit card debt rather than stop making payments.
Short term solutions to paying off your debt could include getting a second job, borrowing money from a relative or selling assets.
This could help you get your debt under control quickly and save you money in interest charges.
However, if you determine that your debt problem is more serious and long term in nature you might need additional help to get your debt under control. This is where a licensed insolvency trustee comes into the picture.
Long Term Credit Card Debt Solutions
A Licensed Insolvency Trustee (LIT) can provide many long term credit card debt solutions. A LIT is the only debt relief expert that provides a full range of debt relief solutions. In addition to providing bankruptcy and proposal services, a Trustee can also provide credit counselling, budgeting help and assistance with negotiating with creditors.
How Can a Trustee Help Me With My Credit Card Debt?
The services a Trustee often provides to help with credit card debt include:
A Trustee can provide you with credit counselling to assist you with getting your credit card debt under control.
Filing a Consumer Proposal
A consumer proposal is a legal agreement with your creditors to repay a portion of your debt. In order to make a legally binding proposal you must meet with a Licensed Insolvency Trustee, who will file the proposal with the debtor’s creditors.
A typical proposal will have the debtor repay 20 to 40 percent of their debt over a number of months. A proposal cannot be longer than 5 years, or 60 months, so the debtor can have a chance to see the light at the end of the tunnel.
Your creditors will vote on whether to accept or reject the proposal, although 98% or more of proposal are accepted.
The reason for this is the main rule in drafting a proposal is the creditors must receive more funds than if the debtor was to go bankrupt.
For some debtors in credit card debt – and other types of unsecured debt – filing bankruptcy is the most sensible solution. Bankruptcy is often a last resort for debtors, but it often allows a debtor to have the easiest, quickest and cheapest way to get a fresh financial start. By going bankrupt, a debtor can eliminate their unsecured credit card debt, and most if not all of their other debts. In many cases, a bankrupt is able to keep all of their assets and will be out of bankruptcy – and debt – in 9 months.
Your Trustee will help you explore all of your options.
All of the Bankruptcy Canada Trustees offer a free initial consultation so you can learn your options.
Your Trustee Might Recommend A Wait and See Approach
In some cases your Trustee might recommend doing nothing. This will happen when the debtor is judgment proof, which means they can receive protection from creditor collection actions without going bankrupt or making a proposal. Your debt might also become very hard, if not impossible, to collect on if the limitation period expires on your debt.
If you take a wait and see approach, you can always choose to take another route to getting out of debt if you were to be sued or you receive to many collection calls or demanding letters.
Living Without a Credit Card
Living without a credit card in today’s society can be very difficult. From online shopping, to booking a hotel room, to renting a car, many times you are required to have a credit card.
Even if you wanted to pay with cash many hotels, for example, require that you give a credit card number to make a reservation.
As more and more people turn to online shopping, and services such as online grocery delivery become more popular, having a credit card is even more crucial.
Fortunately, there are options for living without a traditional credit card.
Two popular options that a debtor could take advantage of are a secured, or prepaid credit card, and a debit credit card, that works like a debit card but can be used for credit card transactions.
Obtaining a prepaid credit card is virtually guaranteed, even for people with less than perfect credit, because your credit limit is determined by the amount of funds you deposit into an account in order to “secure” the card.
An unsecured credit card gives you the ability to keep funds out of your bank account, which could be subject to seizure.