Money management: What to do when COVID-19 debt payment deferrals are over

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You remember last year when credit card companies and other financial institutions offered payment deferrals for people who needed the help? Well, those payments are coming due.

Beth works in real estate, and deferred both her credit card and mortgage payments for six months last year, after the COVID-19 pandemic hit. “I did both because my income is so unpredictable,” she says. “I ended up keeping up with credit card payments no problem, but the mortgage deferral helped tremendously.” (We’ve changed her name to protect her privacy.)

But deferrals aren’t free money: The interest she would normally have been paying as part of each mortgage payment was added to her principal, meaning she now owes more in total than she did before the deferral. “I’m about 10,000 dollars more [in debt] than I would have been, but that’s OK. The help was there when I needed it.”

While the overall economic outlook for Canada appears positive, not everyone is benefitting. So what can you do if you can’t yet afford to start making those debt repayments again?

It may not be as rough a transition as you think. Because deferred payments are rolled into your credit card, loan or mortgage balance, repayment is less of a shock to your cash flow than having to pay back the deferrals in a lump sum, says Shannon Lee Simmons, a Certified Financial Planner and owner of The New School of Finance. On the not-great side, however, “It’s upsetting that you’re paying interest on the interest.”

Stacy Yanchuk Oleksy of the Credit Counselling Society says while there aren’t concrete numbers as yet about personal bankruptcies resulting from COVID-19 financial instability, many Canadians are on the edge of a bankruptcy cliff. (This seems to be supported by reports in late 2020 of personal insolvency filings over 12 months increasing by 8.9%.)

For people who are looking at their debt and panicking about what to do, Oleksy says the first thing to do is breathe. “What I would also recommend is separating emotion from fact. You know, money and emotions are very tied together and self-worth is tied to money. So people will feel embarrassed or they’ll feel stupid, or worse, they feel ashamed, and that prevents them from seeking help.”

Get a handle on how much you owe, where, and when it’s due

Once you’ve got a handle on this, the next step is write down the facts about your deferral payments. Oleksy suggests answering these questions:

Who do they owe/where did they get their payment deferrals?
How much did they defer?
What are the details in the contract?
Is the interest tacked on at the end of the deferral period or was it added in from the beginning?
Are the payments interest-only right now, or am I required to repay interest and a portion of the principal?

Look at all of your repayment options

Now you’re in a position to answer the most important question: “Can I actually pay this back and still have a manageable budget—or can I really not afford this?”

If the answer is that you cannot afford to begin your repayments right now, Oleksy suggests meeting with a nonprofit credit counseling agency in your area, which provides their services at no charge to the consumer. “The credit counsellor can look at all the finances, the income, assets and liabilities, the monthly expenses and all the debts, and actually lay out some options,” she says.

Counsellors can also coach you to communicate with their creditors—how to ask for a lower interest rate, or an extension on the deferral.

If those approaches aren’t feasible, the counsellor can advise on whether you are a good candidate for debt consolidation or the consumer proposal process; or they can connect you with a bankruptcy trustee in the community.

What to do if you aren’t earning employment income

But what if you don’t have employment income and are still receiving pandemic benefits—do those options still apply?

If you’re receiving Canada Recovery Benefit payments (CRB), that does not count as income for the purposes of a consumer proposal or bankruptcy, explains Doug Hoyes, finance author and co-founder of Hoyes, Michalos & Associates Inc. “The purpose of a bankruptcy or consumer proposal is creditor protection,” he says. “If I have a lot of debt, but no assets and no income, I’m ‘creditor proof’—my creditors can’t get anything from me, because I have nothing, so I don’t need to file a bankruptcy or consumer proposal to get creditor protection.”

Here are three options Hoyes suggests if you have a lot of debt and are receiving CRB:

Do nothing until you are back to work. Because you have no wages to garnish, there is no urgency.
Declare bankruptcy now because your income is low, and the cost of bankruptcy is based on your surplus income. If you think you will continue to be out of work for many months, bankruptcy is possibly an inexpensive option.
File a consumer proposal now, while your income is low, because creditors may be more amenable to a lower proposal given your currently lower income. That means you can propose to pay back an amount lower than what is owed based on your assets, your income and what you can afford to pay back. That doesn’t mean that the creditor has to accept, but they generally prefer to get back some of what they’re owed versus not getting anything at all. When you are back to work and your income increases, you can accelerate the payments and pay off the proposal faster.

Light at the end of the tunnel

Beth has no regrets about opting to defer her credit card and mortgage payments. Even though money is going to be a little tight for the next few months as she repays the deferrals, she sees the light at the end of the tunnel. “Help is there if needed and there’s nothing wrong with using it,” she says. “I’m a survivor.”

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