Credit Card Debt & Bankruptcy
What Can I Do if I Cannot Pay My Credit Card Debt?
Most Canadians carry a balance on their credit cards each month; in fact, 75% of us do not pay off our credit card debt in full monthly.
Most of us carrying a balance on a credit card also carry a balance on another card(s).
Carrying a balance on your credit cards can result in thousands of dollars of interest charges each month.
Over time credit card debt can build up to the point that it is unmanageable.
Even if you can afford the minimum payment on your credit card debt each month carrying a balance can cause serious consequences.
Options for Short Term Credit Card Debt Relief
If you are having temporary financial difficulty and are unable to make payments on your credit card debt you will have several options but you must decide on how you would like to proceed.
Some of the decisions you could make include:
- Stop making payments on all of your credit cards;
- Stop making payments on all but one of your credit cards to preserve some credit;
- Obtain a secured, or prepaid, credit card;
- Do nothing.
What Will Happen if I stop Making the Minimum Monthly Payments on my Credit Card Debt?
If you stop making the minimum payments on your credit card debt you will face several consequences:
- Your creditor – the credit card company – will make collection calls and other attempts to collect the monies owed;
- You will have a negative impact on your credit report and will see your credit score drop;
- Will lose your reward points and any other perks and loyalty points of your card;
- You might face consequences from the “right of set off”.
What is the “Right of set off”?
The right of set off occurs when you carry two or more accounts through the same financial institution and default on the minimum payment on one of the loans.
In this situation the financial institution would be in a position to exercise the right of set off by removing money from your bank account.
For example, Joe Debtor has a credit card with XYZ bank and his bank account with the same bank.
Joe always makes the minimum payments on his credit card but one month he has unexpected car repairs to pay for and cannot afford the $300 minimum payment this month.
If Joe does not make the payment on his credit card but has enough money in his bank account, the XYZ bank will have the right, under the right of set off, to remove $300 from his XYZ bank account to cover the minimum payment on his credit card.
The only way to avoid the right of set off situation – and keep your money safe – is to close your bank account with XYZ bank and open a new account.
You will have to open a bank account with a separate financial institution from the financial institution which issued you your credit card.
If you decide to close your bank account with the financial institution that provided your credit card you will have to:
- Withdraw the money from your old bank account and deposit the funds into a new account at the different financal institution;
- Contact your employer and arrange to have your pay deposited into your new bank account;
- Contact your creditors to arrange new Pre-Authorized Debit payments from your new bank account.
Changing bank accounts can be complicated, but it is highly recommended by all Licensed Insolvency Trustees if you will be going bankrupt or are at risk of a “Right of set off” situation taking place.
How Do Credit Card Companies Collect From Debtors?
If you have credit card debt that you stop paying on the bank, credit union or other financial institution that provided your credit card will start collection attempts.
The tactics they will use will depend on how late your payments become.
During the first few months that your credit card debt is unpaid your credit card company will likely call you several times from their in-house collection department.
You will likely also receive written requests for payment from your unsecured creditor (the credit card company).
After about 6 months, the collection attempts will get more insistent and demanding.
You might receive a letter demanding payment from a lawyer.
Chances are this is only a mass produced letter and there is no actual lawyer attached to your case this early in the collection process.
These generic letters are used because they are very effective at generating payments from debtors.
After 6 months or so of no payments then your credit card company will take more drastic collection attempts.
For example, your credit card company might:
- Hire a collection agency to collect on your account;
- Sell your unpaid credit card account to a 3rd party debt buyer;
- Initiate a lawsuit against you.
Can I Negotiate With My Creditors?
If your unpaid credit card debt has reached 6 months of age or older your creditor might accept a lump sum payment with you.
You will have to negotiate with your credit card company, and there is no guarantee they will accept your negotiations, although it is possible to reach an agreement with your credit card company.
The older your debt is the more likely you can negotiate with your creditor.
What if I Do Nothing About My Credit Card Debt?
Doing nothing about your credit card debt can be an effective strategy for certain people.
For example, you might be judgement proof, which means your creditors will have a very hard time collecting from you.
You will face occasional collection calls, collection letters and might be threatened with a lawsuit but eventually your debt will reach the statute of limitations.
Options For Dealing With Long Term Credit Card Debt Problems
If your money problems are longer lasting and you have been trapped in the credit card debt cycle for several years or more, it is important for you to seek professional assistance.
Working with a Licensed Insolvency Trustee, or another debt relief professional, can help you learn the root cause of your money problems, learn budgeting skills and help you learn how to get out of debt – and more importantly – how to stay out of debt.
A debt relief firm can provide assistance with:
A Debt management plan provided by a credit counselling company allows you to repay your debt interest free over a 5 year period.
You will make sixty monthly installments to the credit counsellors on top of a fee to the firm for their services.
The fee charged by a credit counselling agency for their services generally equates to 15% of your monthly payment.
Filing a Consumer Proposal
A consumer proposal is a legal agreement between you and your creditors.
The consumer debtor will meet with a Licensed Insolvency Trustee (LIT) who will formulate a proposal to offer to your creditors.
All your unsecured debt must be included in your consumer proposal; you cannot choose to only make a proposal to your credit card company.
The major benefit of a consumer proosal is you will typically repay only 30 to 40 percent of your outstanding debt over a period of time up to 60 months (5 years).
Personal bankruptcy should only be viewed as a last resort option for dealing with your debt, although it offers powerful protections and debt relief.
Only debtors with low income and few assets will generally seek filing bankruptcy as a way to get out of debt because they will have to surrender their non-exempt assets.
In exchange for surrendering your non-exempt assets (most bankrupts have no assets that are not protected by the bankruptcy exemptions) all of your eligible unsecured debt will be discharged.
Debts such as alimony, child support, court ordered fines and other certain debts will not be discharged but your Trustee will make sure that you understand exactly how bankruptcy will work for you.
How to Live Without a Credit Card in the Modern World
In today’s modern world a credit card is almost a necessity. Booking a hotel room, renting a car, or shopping online usually requires a credit card.
Even if you plan to pay cash for your hotel room or rental car, you often need a credit card to secure the reservation.
Fortunately, there is a solution!
In Ontario, a consumer can get a prepaid credit card that acts just like a traditional credit card. These prepaid, or “secured” credit cards, give you access to all the benefits of a traditional credit card.
However, since you have to deposit money into an account to use the card.
As your “credit” limit will be limited to the amount available in the account you can never get into debt using a secured credit card.
A secured credit card is great for bankrupts and individuals who have recently been discharged from bankruptcy.
A secured credit card is easily obtained with a deposit with the credit card company and can help a recently discharged bankrupt rebuild their credit.
Another benefit of a secured credit card is that you do not need a bank account in order to get a secured credit card.
This can be beneficial for people who don’t want funds with a traditional financial institution because they might face a wage garnishment or other judgment against you.
How Does a Secured Credit Card Differ From An Unsecured Credit Card?
There are two types of credit cards in Ontario – Secured and unsecured credit cards.
In most cases a secured (prepaid) and traditional unsecured credit card are essentially the same.
Both types of cards offer access to credit, the ability to shop online and book a hotel room or rental car and the ability to access more credit as you pay down your balance.
The difference between the two types of credit cards is that a secured credit card must be “secured” with funds in an account with the company that offered you the secured card.
The funds that secure the card will act as your credit limit so you will never be able to spend more than you have securing your new credit card.