905-812-9211 john@ndlc.ca

Financial Education

Upgrade your knowledge of credit principles, debt resolution, credit ratings-reports and other issues affecting most people. Your unique discovery process allows you to make better decisions, helps breaks old habits and avoids unnecessary penalties.

You’ll be smarter, more confident and better informed about the less discussed aspects of money management; as you’ve likely heard, knowledge is power.

Everything You Need To Know About Debt

Unsecured Debts:

Unsecured debts are not secured by tangible goods. Examples:

  • Credit card balances
  • Lines of credit (if unsecured)
  • Personal loans (if unsecured)
  • Arrears of income taxes and municipal house taxes
  • Unpaid utility bills
  • Retail store accounts
  • Insurance premiums past due
  • Medical bills
  • Business debts
  • Collections or re-possessions
  • Payday loans

Secured debts:

Debt secured by tangible goods or collateral. Examples:

  • Mortgages
  • Car loans
  • Tax or government debt
  • Home Equity Line of Credit
  • Lawsuits

What is a Credit Score?

It is a judgment on how you’ve handled your financial obligations in the past.  

Most credit-reporting agencies use a scale from 300-900. The higher your score, the less risk for the lender.

 

What Determines My Credit Score?

Factors that affect your credit score:

  • Your payment history: Late payments, bankruptcies, collections, and judgments make up 35% of your credit score
  • Current debts: Outstanding balances are compared to your credit limits on an ongoing basis. For example, if your balance is 80% of your credit limit, you lose points. Worth 30% of your credit score.
  • How long your accounts have been opened and established. Worth 15% of your credit score.
  • How many times new credit has been applied for: Each time a new credit card or loan is applied for, a note is made on your file as to the nature of those inquiries. Worth 10% of your score.
  • Type of credit: credit cards, bank loans, credit lines, etc. 10% of your score.
  • Collections items or financial (court) judgements registered against you affect your credit score negatively.

 

 

 

You can review your personal credit history, free, once a year. Contact:

1-800-465-7166

905 525-0262 or Toll-free: 1-800-663-9980 (except Quebec)

In Quebec: 514-335-0374 or Toll free: 1-877-713-3393

 

Credit History Report Ratings

R1 Pays (or paid) within 30 days of payment due date or not more than 1 payment past due
R2 Pays (or paid) in more than 30 days from payment due date, but not more than 60 days, or not more than 2 payments past due
R3 Pays (or paid in > than 60 days from payment due date, but not more than 90 days, or not more than 3 payments past due
R4 Pays (or paid in > than 90 days from payment due date, but not more than 120 days, or not more than 4 payments past due
R5 Account is at least 120 days overdue, but is not yet rated 9
R6 Rating does not exist
R7 Making regular payments through a special arrangement to settle debts
R8 Re-possession (voluntary or involuntary return of goods)
R9 Bad debt; placed in collections; moved without giving new address; bankruptcy

Credit Agency Historical Report

How long does information stay on my credit report?

By law, negative information can only be kept on your credit report for a certain length of time. For most items, the maximum is 6 or 7 years. The exact amount of time varies by category and by province or territory. Positive information, such as accounts that you paid on time, may be kept longer. Equifax Canada and TransUnion Canada keep your information for different lengths of time, up to the maximum time limits allowed by provincial laws.

Type of information​

How long agencies keep information​

Date when agencies start counting​​

Credit transactions

  • Negative information about accounts such as credit cards, lines of credit and loans
  • Also called “trades” or “trade lines” by credit reporting agencies

6 years

  • Equifax counts from date of last activity (for example, a payment you made)
  • TransUnion counts from date of first delinquency—the date you first defaulted on the account (for example, by making a late payment) without returning to good standing

Secured loans

  • Loans backed by an asset, such as a mortgage, a car lease or loan

6 years

  • Equifax counts from date of filing
  • TransUnion counts from date of first delinquency

Banking items

  • Negative information, including:
  • Chequing and savings accounts closed “for cause” due to money owing or fraud committed by the account holder
  • Bad cheques (also called non-sufficient funds or NSF)

6 years

  • Equifax counts from date of transaction or default
  • TransUnion counts from date of write-off or date closed, whichever is sooner

Inquiries

  • Recorded when lenders and others access your credit report

For more information on “hard” and “soft” inquiries, see the section called “Hard hits” versus “soft hits”

Equifax: 3 years

TransUnion: 6 years

  • Counted from date inquiry is made

Judgments

  • Legal judgments against you and other information in public records

6 years

TransUnion: 7 years in Ontario, Quebec, New Brunswick and Newfoundland and Labrador; 10 years in P.E.I

  • Counted from date of filing

Collections

  • Debts sent to collection agencies

6 years

  • Equifax counts from date the debt is assigned to a collection agency
  • TransUnion counts from date of first delinquency (when the account became delinquent with the original lender, not when it was sent to a collection agency)

Registered items

  • Items registered in public records, such as a lien against your property

Equifax: 6 years

TransUnion: 5 years

  • Counted from date of filing

Bankruptcy

  • Legal procedure used as a last resort if you are unable to repay your debts

6 years

TransUnion only: 7 years in Ontario, Quebec, New Brunswick, Newfoundland and Labrador, and P.E.I

  • Counted from date of discharge.
  • If not discharged:
    • Equifax keeps for maximum of 7 years from filing date
    • TransUnion: no time limit

Multiple bankruptcies

  • Legal procedure used as a last resort if you are unable to repay your debts

14 years

  • Counted from date of discharge for each bankruptcy

Consumer proposals

  • Formal procedure to repay your debts, arranged by licensed insolvency trustee (also known as bankruptcy trustee) or other authorized agent

3 years

  • Equifax counts from date paid.
  • TransUnion counts from date satisfied or 6 years from filing date, whichever is sooner
  • If not paid or satisfied, maximum is 6 years from filing date

Orderly payment of debts (OPD)

  • Also known as a debt consolidation order
  • Formal procedure to repay your debts, arranged through a court
  • Only available in Alberta, Saskatchewan and Nova Scotia

Equifax: 3 years

TransUnion: OPD itself is not reported

  • Equifax counts from date paid.
  • If not paid, counts for a maximum of 6 years from filing date
  • TransUnion: individual accounts included in DMP stay on file for 2 years from date DMP is satisfied or 6 years from date of first delinquency, whichever is sooner

Debt management program (DMP) with credit counselling agency

  • Program to help you repay your debtsNote: credit counselling by itself (without DMP) is not noted on your credit report

Equifax: 3 years

TransUnion: DMP itself is not reported

  • Equifax counts from date paid
  • TransUnion: individual accounts included in OPD stay on file for 2 years from date OPD is satisfied or 6 years from date of first delinquency, whichever is sooner

Remarks

  • Statements you can add to your credit report, including:
  • Consumer statements
  • Fraud alerts
  • Identity verification alerts

6 years

  • Counts from date reported to agency

14 of the Most Common Money Myths

Having a great job and-or earning a large income will strengthen my credit score.

Reality:

Primary factors affecting your credit score are your payment history and credit behavior.

Money available to me on credit lines or credit cards is my money to spend any way I see fit.

Reality:

Credit cards are a claim on your future earnings and, often, the interest rate can be as high as 19.9% – or higher. They must be used wisely since whatever amount borrowed must be repaid along with the applicable interest.

Borrowing from your line of credit to partially pay down your credit card makes sense because it has a lower interest rate.

However, if your credit card spending remains steady and considerable, your line of credit will be maxed out in no time. This practice gives you a false sense of security, leading you to accumulate more and more debt. Then what?

It’s better to pay a sizable chunk of your credit card balance when possible, rather than the small minimum payment due each month.

Reality:

Not true. Skipping your card’s minimum payment is among the primary factors associated with lowering your credit score. 35% of your credit rating is determined by late payments, collections, judgments, and bankruptcies.

Credit cards with cash back bonuses or points are better than those without.

Reality:

These features are sales gimmicks to motivate you to spend more. They make it sound like you’ll be getting free money. Don’t fall for it. $10,000 in spending with a 2% cash back bonus equates to $200.

Meanwhile, they’re still collecting the 19.9% in interest off your increased spending, which totals $199 in interest a year for every $1,000 you carry as a balance.

You’ve got a $14k credit card limit and your $11,800 balance is fine because you’re making the minimum or regular payments.

Reality:

At the point your balance exceeds 80% ($11,200) of your credit limit, you lose credit score points.

When declaring bankruptcy, once you fulfill the terms of the bankruptcy, usually 9 to 18 months, you can return to your old way of life.

Reality:

A record of your bankruptcy remains on your credit report for 6 years. And anytime you apply for a credit card or a loan, your credit report will be reviewed by a potential lender.

You’ve co-signed a loan from the bank for a friend who can’t be located. They’re still responsible for half the debt, right?

Reality:

No, you’re responsible for the entire loan. In this type of contract, both parties are “jointly and severally liable” for the loan’s repayment. Jointly = both of you; severally = one of you if, for some reason, the other person cannot pay back.

You’re in a bit of temporary credit crunch and some credit card offers come in the mail. Their low interest rates and apparent ease of acceptance appeals to you: should you respond?

Reality:

Try to avoid these offers. No finance company is going to extend credit to you, no questions asked. All legitimate creditors want to know if you meet their criteria for credit approval. By agreeing, a credit check will be done. If there’s too many of these within a fairly short time, your credit score will be negatively affected.

I never borrow money and always pay cash for everything I buy. Having no debt means I have good credit.

Reality:

If you haven’t paid for anything using credit, you don’t have a credit rating at all. As lenders base their decision on your credit rating, you will have difficulty borrowing money.

If I had a debt that was sent to a collection agency or a bad debt write-off and it was paid off, it won’t show up on my credit rating anymore.

Reality:

Even though you paid the debt off, your credit report will still show a bad debt write-off and debt-gone-to-collection. Both items will remain on your credit record as a R9 notation for 6 years after either debt was paid off.

Having declared bankruptcy 5 years ago, you’ve paid off your credit card fairly faithfully so you should be able to obtain a small loan, right?

Reality:

The main thing lenders look for is a re-established credit rating. That’s at least 2 items (credit cards, loans or lines of credit) of $2,000-or greater-for a period of 2 years.

You’ve completed the payments according to the terms of your Consumer Proposal and are anxious to get a credit card to resume the life you’re used to.

Reality:

Upon completion of this 4 to 5 year process, your credit rating will be too low for an unsecured credit to be issued. Instead, you have to put up $1000 of your own money for a secured (by your $1000 collateral) credit card.

Through using your credit card and paying your balance off each month, you can rebuild your credit rating. After 2 or 3 years, you may be issued an unsecured card.

Despite a family income of totaling 7k-10k monthly, your budget is stretched to the limit every 30 days: what’s the problem?

Reality:

Life is full of surprises. An expensive home repair or health setback can strain your finances to the max, leading to embarrassing defaults. It’s vital to have an untouchable emergency fund representing 3-6 months worth of your income.

If you’re in substantial debt as well, payments must be made because loans secured by tangible goods (car) or property (cottage, house) may be at risk.

You’ve succeeded in negotiating a reduced balance on your credit cards and medical bills. Now, you’re set on getting a better deal on your car loan.

Reality:

Credit cards, medical, personal loans are unsecured loans and creditors will usually accept a lower payment to settle the account as they may conclude it’s better to receive a lower amount than nothing at all.

A car loan or mortgage is a secured loan because it’s secured by tangible goods that can be repossessed or foreclosed upon. However, while you’re reducing the balance, your credit rating will be severely damaged and could take years to repair.

Debt Consolidation

A bank, credit union or finance company:

  • Adds up your outstanding unsecured debt into a consolidated loan and assigns you a single monthly payment. If credit card debt is part of that amount, they can request that those accounts are closed.
  • A fixed interest rate is applied to the total and is based on total amount owed, your credit score, net worth, monthly income, etc. If one of these conditions isn’t satisfactory, a co-signer will be required.
  • Term length: 2-5 years
  • Your credit score improves in most cases due to having lower balances on your credit cards
  • Remains on your credit report for 3 – 6 years as an R7

Types of Unsecured Debt Eligible:

  • Debts unsecured by tangible (real-life) goods.
  • Credit card balances
  • Lines of credit (if unsecured)
  • Personal loans (if unsecured)
  • Arrears of income taxes and municipal house taxes
  • Unpaid utility bills
  • Retail store accounts
  • Insurance premiums past due
  • Medical bills
  • Business debts
  • Collections or re-possessions
  • Payday loans

Are there any alternatives to taking out a Debt Consolidation loan?

Obtaining a loan of this type, size and length only addresses your existing debt, and not the spending habits that created your problem in the first place.  Months after obtaining the loan, you may be racking up debt on credit cards again and just digging yourself into a deeper hole.

Depending on your situation, types of debt and amount owed, there may be another way to go, namely my Debt Eliminator program.

Debt Settlement – to Pay off Debt

Of all debt relief options, this is the least desirable. Debt settlement companies approach each of your creditors and try to negotiate reduced payments. However, many irregularities in their customer policies motivated the Ontario government to enact new legislation in July 2015.

Complicating matters is that law firms have merged with debt settlement firms and many of them claim to be exempt from the new laws. This means that people will have to pay law firm fees to hire these debt settlement firms.

Just 10% of settlement proposals that banks receive are actually accepted (according to a letter from the Canadian Bankers’ Association submitted to the Ontario Ministry of Consumer Services).

Notable new Ontario laws:

  •  Imposed a strict limit on how much a debt settlement company can charge consumers trying to settle debts, and capped the amount at 15%
  • Banned the collection of fees before a debtor began paying a creditor
  • Debt settlement providers are prohibited from charging fees until a debtor begins making payments to creditors, other than a one-time fee of no more than $50 where the debt is repaid in installments
  • Debtors now have a 10-day cooling off period during which the debt settlement services contract can be canceled, without a reason
  • All debt providers must now obtain a government license; however, there are still many debt settlement companies operating without a license

Source: http://www.sse.gov.on.ca/mcs/en/Pages/debt_settlement1.aspx

Frequently Asked Questions:

What If I called up my creditors myself and tried to work out a deal?

Many of your creditors will have hardship policies and many will not. You will first have to explain why you fell behind on your payments. To follow this course, you would also need to:

  • Prove you have a workable budget that you’re prepared to follow
  • Have good knowledge of debt settlement policies and options
  • Have good negotiation skills, mathematical ability and some debt repayment strategies in mind, and
  • Be able to separate yourself from the emotional aspects of your situation

You then have to make the monthly payment without fail. However, it’s important to have a plan that balances debt repayment, spending on necessary things and promotes savings.

What about applying for a credit card with a 0% balance transfer and lower interest rate?

Transferring your credit card debt to one with even a 1% interest rate will save some interest dollars, short-term; however, that does nothing to address your spending habits, overall budget and ability to save. In contrast, my Debt Eliminator program:

  • Allows you to pay off your debts in orderly fashion, while improving your credit score
  • Organizes your budget and
  • Implements a savings plan that grows

Is there a better way to go other than the Debt Settlement route?

The decision to take that route may have been due to no known alternatives. If you are a homeowner, have a job and have some cashflow, I will likely be able to help you.

Consumer Proposal

It’s a legal process filed under your provincial or state’s Bankruptcy and Insolvency Act. A Consumer Proposal is arranged and administered by a bankruptcy trustee who negotiates with your creditors to repay a portion of what you owe.

That amount is largely based upon your income and what you own. As with debt consolidation, you pay a single amount monthly.

To be accepted and legally binding, the majority of your creditors must agree to the trustees’ proposal. Once they do, you repay the agreed upon amount over a maximum of 5 years. The trustee retains 20% of all future payments as fees for organizing, filing, and overseeing your Consumer Proposal.

A Consumer Proposal can be a suitable route, if:

  • You owe less than $250,000 (not including your mortgage) and cannot pay your debts in full
  • Have a lot of credit card debt and cannot pay the cards’ minimums
  • Owe other amounts not secured by property or other collateral
  • You aren’t able to get approved for a debt consolidation loan

How will your credit report be affected

When you make payments on a Consumer Proposal, an R7 demerit note “Making regular payments through a special arrangement to settle debts” remains on your credit report for 3-6 years. Getting additional credit during this time may be difficult.

And it is not private: a Consumer Proposal is a permanent public record, included in a searchable database

Disadvantages

  • It must be approved by the Court
  • Creditors can reject the Consumer Proposal. If they do, you may have to offer them additional funds; otherwise, your proposal will not proceed
  • If you miss more than 2 payments, you may need to file for bankruptcy
  • Student loans can’t be included if they are less than 7 years old
  • Secured, tangible goods debts (car, boat loans) aren’t included
  • Some assets, such as your home, vehicles, or investments, may have to be sold
  • The permanent record of your insolvency can put certain professional licenses at risk and may also affect future employment opportunities

Frequently Asked Questions

Describe a typical Consumer Proposal process?

If someone owes $50,000 a trustee may offer creditors $20,000. The debtor will then have to pay off that $20,000 on a monthly basis, about $450/monthly over 3 years, 8 months. Missing payments may lead to a bankruptcy proceeding.

Can credit cards be used during the time the Consumer Proposal is being paid down?

Unfortunately, no, as this type of debt relief places a note on your credit report that you are in the midst of a Consumer Proposal. Credit card companies routinely check your credit report upon any new application and they will see that note.

What happens after a Consumer Proposal is paid off?

After obtaining the debt discharge papers from the trustee, you must send them to the 2 credit agencies, Equifax and Trans Union, who will then update your credit reports.

After that, a secured credit card can be obtained by pledging $1000 as collateral to receive a credit card with a $500 credit limit. Over the next 2 years, providing you are paying off your balance in full each month, your credit rating will be re-built. After those 2 years, your $1000 is returned to you and an unsecured credit card will then be issued.

What would your advice be for anyone coming out of a Consumer Proposal?

At the point your Consumer Proposal is discharged, there will be a temptation to return to your free-spending ways. Needless to say, it’s of tremendous importance to be very careful in your use of money.

However, existing habits are hard to break without outside assistance. Best, the first thing to do: Seek out a money coach to help set up a budgetary framework. You’ll keep debt in check, develop new personal goals, build savings and develop new habits.

Bankruptcy

When all efforts to reduce debt levels and payments have failed, filing for bankruptcy may be necessary. In Ontario, a bankruptcy is a legal process filed through a federally licensed Ontario bankruptcy trustee. In doing so, you:

  • Receive immediate protection from your creditors
  • Stop wage garnishments and other legal action, and
  • Begin the process of eliminating these debts

A December 1, 2015 update of Ontario bankruptcy exemptions (what you are allowed to keep) include:

  • All necessary clothing
  • One vehicle worth up to $6,600 (car, truck, etc.)
  • $13,150 worth of household furnishings and appliances
  • $11,300 worth of tools of the trade (equipment that you use to earn a living)
  • Certain types of life insurance
  • All RRSP, RRIF and SPSP (Deferred Profit Sharing Plan) savings except contributions made in the 12 months before your bankruptcy

Bankruptcy:

  • First instance remains on your credit report for 6 years (Equifax) or 7 years (TransUnion) after you are discharged
  • Is a public record and could affect future employment
  •  In some cases, the individual will have to sell or surrender assets due to re-possession
  • A note appears on your credit report, negatively affecting your credit

 

Not eligible:

  •  Student loans less than 10 years old.
  • Child and spousal support
  • Fines and most court-ordered restitution payments
  • Court-awarded damages for sexual assault or intentionally inflicting bodily harm
  • Debts that arose as a result of fraud or theft

Frequently Asked Questions

Will I lose my house?

Whether or not you lose your home depends on its value, and the amount owing on your mortgage. Most people that declare bankruptcy in Ontario and own a house have a mortgage on it.

Your principal residence is exempt from seizure IF the equity in your home does not exceed $10,000.  If the equity does exceed this amount, your primary residence is subject to seizure and sale. (Source: The Ontario Execution Act)

In this case, you can include the equity you have in your home into the bankruptcy payments and keep your home. For example, if you have $22,000 of equity in your home, you can pay this $22,000 back in additional payments to your creditors and keep your home.

Doing so extends the period of time you are in bankruptcy but, generally, it is well worth it to keep your home. I can provide you with more specific details, if required. Please give me a call at 905-812-9211 if you would like clarification.

Will I lose my car?

You are allowed to keep one vehicle worth less than $6,600. If your car is worth more than that and you want to keep it, you must pay the difference between its value and the $6,600.00. To find out the approximate present value of your vehicle, check with Canadian Black Book.

If your vehicle is leased or has a loan registered against it, the loan amount is subtracted from the value of the car to determine its net value.

What would (be) your advice be for anyone being discharged from a bankruptcy?

Having been freed of your debt is only the first step in your financial rebirth. For the next 6 years, there will be a note on your credit report of your bankruptcy, so credit will be hard to come by.

To live within your means requires a much different mindset, based on:

  • Discovery process of either new or overlooked life goals and dreams
  • A flexible budget that pays your bills in timely fashion
  • Mindful practices that re-shape your habits of thought and spending
  • A savings account organized to grow monthly, and adopting
  • An attitude of  hope and expectation of a new life you never thought possible

I can help you get there. Please refer to my Debt Eliminator Program for assistance.