Types of Debt

Bank loans represent both secured and unsecured loans that are to be repaid by the borrower with interest on or before a fixed maturity date. The loan payments may be made monthly, semi-monthly, bi-weekly or weekly, with loan maturity dates commonly ranging between one to five years. The amortization period may be one to five years for personal loans, and as long as 25 years for a residential mortgage.

Banks generally offer the lowest interest rates, and the interest rate will vary based on the borrower’s individual credit rating, credit and employment history, annual income and relationship with the bank. Common types of bank loans include:

• Mortgages, which are secured against a residence or other property
• Vehicle loans, which are secured against the vehicle
• Personal loans, which may be secured or unsecured
• Personal lines of credit, which may be secured or unsecured
• Overdraft protection, which is usually unsecured

Child support is the financial obligation of a non-custodial parent to provide financial support to cover a portion of the costs of raising his or her child. Federal Child Support Guidelines calculate the monthly payment amount you are required to pay.

Often, financial hardship arises after a separation and/or divorce. The non-custodial parent may struggle financially with child support payments and maintaining payments to creditors. Unfortunately, this is a common occurrence that leads to debt accumulation and payment arrears.

The recovery of child support arrears is administered by the Government of Alberta under the Maintenance Enforcement Program (MEP). The MEP has wide ranging powers to enforce collection of child support arrears and may initiate any one or more of the following activities:

–  File a Wage Support Deduction Notice with employers to garnishee wages

–  File a Non-Wage Deduction Notice with banks to seize funds on deposit in bank accounts

–  File a Federal Deduction Notice with the Government of Canada that attaches to income tax refunds, goods and services tax (“GST”) rebates, Employment Insurance benefits, Canada Pension and Old Age benefits and federal training allowances.

–  File registrations at Personal Property Registry to suspend driver’s licenses and restrict vehicle registration renewals

–  File registrations at the Land Titles Office to register a lien against a residence or other property

Child support arrears are not eliminated in a consumer proposal or personal bankruptcy debt restructuring plan.  The MEP will maintain collection action for on-going child support payments and in most instances for the recovery of child support arrears.

Banks or other financial institutions will request a loan be co-signed if the primary borrower has insufficient income to qualify for the loan, or has a limited credit history or poor credit rating. When you co-sign a loan, you’re promising to pay off the loan if the primary borrower isn’t able to. You also run the risk of a lower credit rating if the primary borrower is late in making the monthly loan payments.

If the primary borrower defaults in making the loan payments, the lender will pursue the co-signor for full recovery of the loan.  If the co-signor is unable to pay the loan the lender will most likely pursue legal action, which will affect the co-signor’s credit rating.

As a general rule, an individual should never co-sign a loan unless they are prepared and financially capable of repaying the loan in full.

While some individuals only use their credit cards for convenience, many rely on them to cover expenses for basic necessities—especially after an illness, job loss or emergency. This can result in high balances and interest rates. Others use several credit cards without realizing the amount of debt being accumulated, or the amount of time it will take to pay it off.

Initially, the minimum monthly credit card payment is affordable when the credit card balance is low. As the credit card balance increases, the larger and more unmanageable the monthly minimum payments become. Warning signs that it may be time to address your credit card debt include:

• Being able to make only the minimum monthly payments on your credit cards
• No change on your credit card balance every month
• Reaching or exceeding the maximum balance on your credit card(s)
• Arrears with your monthly payments
• The issuer will only accept payment in full

Most individuals have access to credit in the form of credit cards, lines of credit or overdraft protection from traditional lenders, such as banks. Access to this type of credit can be helpful when emergencies or unexpected expenses arise.  However, obtaining access to credit cards, lines of credit or overdraft protection is difficult for those with no bank account, low income, limited credit history or poor credit rating.

As a result, these individuals tend to rely on non-traditional lenders such as payday loan companies or pawn shops for cash advances and small installment loans or used car dealers for vehicle loans. These non-traditional lenders have a much higher interest rate when compared to traditional lenders.  Often individuals that use non-traditional lenders become trapped in a continuous cycle of high interest debt unable to pay off the debt to end the reccurring and on-going high interest debt cycle.

Many Canadians owe the Canada Revenue Agency (“CRA”)-federal government-for unpaid income taxes. For some, this is their largest debt. Some reasons an individual may owe the CRA for unpaid income tax include:

• Individuals who are self-employed with no income tax being deducted
• Individuals who work more than one job, with insufficient income tax being deducted by the employers
• Individuals that have redeemed RRSPs without having adequate income tax withdrawn by the RRSP administrator at the time of the RRSP redemption
• Pensioners with insufficient income tax being deducted from their pension incomes

The CRA has very broad and extensive powers to recover amounts owed for unpaid income tax. The collection remedies available to the CRA include:

1. Set-Off

The CRA may set-off amounts owed to you by the federal government such as goods and services tax (GST) rebates or income tax refunds to pay amounts that you owe to the CRA.

2. Requirement to Pay or Garnishment

A Requirement to Pay (“RTP”) or garnishment may be issued by the CRA to a third party (bank or employer) to garnishee your bank account, wages or other income such as commissions, bonuses or vacation pay.

3. Debt Certification with Federal Court of Canada

The CRA may register your income tax debt with the Federal Court of Canada to obtain a certificate of the amount you owe.  The certificate is like a judgement which makes your tax debt a public record.  The certificate enables the CRA to register your debt at Personal Property Registry, register a Writ against your home, recreational property, investment property, car or recreational vehicle.

4. Seizing and Selling Assets

Once the CRA registers your income tax debt with the Federal Court it has the power to seize and sell your assets such as your home, recreational property, investment property, car or recreational vehicle through a court enforcement officer.  The proceeds from the sale of your assets will be applied to your income tax debt.

5. Assessing a Third Party for Your Income Tax Debt

In some instances the CRA may assess a third party for your income tax debt.  The third party may be your spouse, business partner or a related corporation.

Income taxes owed to the CRA are unsecured debts, until such time that the CRA registers your income tax debt with the Federal Court of Canada and registers a writ against one or more of your assets.  The registration of the writ provides the CRA with a security interest (lien) against your assets and converts your income tax debt from unsecured to secured.

You may be surprised to learn that debts owed to the CRA are no different than any other unsecured debts, and may be included in a consumer proposal or personal bankruptcy debt restructuring plan.  But it is important that you obtain protection from the CRA before they register your income tax debt with the Federal Court of Canada and convert your unsecured income tax debt to a secured income tax debt.

A home is considered one of the most valuable possessions of all—both financially and emotionally. For many, the thought of losing their home can be extremely stressful. When a homeowner is unable to make their full monthly mortgage payment, the mortgage account falls into arrears. Since part of the monthly repayment covers the interest charges, the mortgage balance will increase, leading to more interest being charged on the loan.

To keep ownership of your home, maintaining your mortgage payments is a must. Most lenders will begin foreclosure proceedings after three mortgage payments are missed, which may result in the loss of your home.

Secured debt is a mortgage or loan that is secured by some  form of collateral (asset or property) such as your residence, car, or recreational vehicle that you pledge as security to the lender to obtain the loan. The most common forms of secured mortgages debts or loans include:

– A mortgage where a residence, cottage, or vacant land is pledged as security;

– Home equity lines of credit where a principal residence is pledged as security; and

– Vehicle loans where a motor vehicle, travel trailer, quad, snowmobile or similar property is held as collateral.

Typically, secured loans have a lower rate of interest when compared to unsecured loans as the lender holds collateral as security.

If you default on repayment, the lender—typically a financial institution—has the legal right to seize the property or asset you provided as collateral, sell it and use the money to pay back the debt. If the collateral is sold for less than you owe you will be required to pay the shortfall and the lender, in most cases, will sue you to recover the shortfall.

When considering a consumer proposal or personal bankruptcy debt restructuring plan you have two options when it comes to secured mortgages or loans. If you want to retain possession of the property or asset you pledged as collateral, usually a residence or motor vehicle, then you must:

1. continue to make the mortgage or vehicle loan payments; or
2. if you want to surrender the property or asset you pledged as collateral you stop making the mortgage or loan payments. The lender will sell the collateral and any shortfall owing becomes an unsecured debt that is included in your consumer proposal or personal bankruptcy debt restructuring plan.

A post-secondary education is a valuable investment for your future that can provide more job opportunities and help to develop your career. However, many Canadians cannot afford to pay for schooling without the assistance of a government student loan.  With fluctuations in our economy, finding or maintaining employment in an area of your study can be challenging. Other factors such as illness or injury may also make it difficult to pay down your student loan.

The Canada Revenue Agency (“CRA”) collects Canada Student Loans and may also collect Provincial Student Loans that are in arrears.  The CRA has very broad and extensive powers to recover amounts owed for unpaid student loans.  In addition to your credit rating being negatively affected or your student loan being assigned to a collection agency or your becoming ineligible for further student loans, the CRA may pursue the following collection activity:

1. Set-Off

The CRA may set-off amounts owed to you by the federal government such as goods and services rebates or income tax refunds to pay amounts that you owe for a Student Loan.

2. Requirement to Pay or Garnishment

A Requirement to Pay (“RTP”) or garnishment may be issued by the CRA to a third party (bank or employer) to garnishee your bank account, wages or other income such as commissions, bonuses or vacation pay.

3. Debt Certification with Federal Court of Canada

The CRA may register your Student Loan debt with the Federal Court of Canada to obtain a certificate of the amount you owe.  The certificate is like a judgement which makes your student loan debt a public record.  The certificate enables the CRA to register your debt at Personal Property Registry, register a Writ against your residence, recreational property, investment property, car or recreational vehicle.

4. Seizing and Selling Assets

Once the CRA registers your Student Loan debt with the Federal Court it has the power to seize and sell your assets such as your home, recreational property, investment property, car or recreational vehicle through a court enforcement officer.  The proceeds from the sale of your assets will be applied to your Canada Student Loan debt.

If it has been more than seven (7) years since you last attended a post secondary institution your student loan will be included in a consumer proposal or personal bankruptcy debt restructuring plan.

If it has been more than five (5) years and less than seven (7) years since you last attended a post secondary institution the Court will determine whether your student loan will be released in a consumer proposal or personal bankruptcy debt restructuring plan.

If it has been less than five (5) years since you last attended a post secondary institution your student loan will survive a consumer proposal or personal bankruptcy debt restructuring plan.

Unsecured debt is a debt or loan that is not secured by any form of collateral (asset or property) such as your residence, a car, or recreational vehicle. The most common forms of unsecured debts or loans include:

–  Money, services or goods that you have received through a credit card, line of credit or bank overdraft;

–  Services you have received in the form of power, gas and water, cable and internet, cellular telephone and medical and dental services; and

Unsecured debts or loans present a higher risk for lenders and service providers as they hold no collateral as security for the money, services or goods you received.  Because the lender or service provider holds no collateral as security, the debt is unsecured. Unsecured debts generally have a higher interest rate when compared to a secured mortgage or loan.

If you default in your payments the lender or service provider has no collateral to seize from you to recover the amount you owe. The service provider or lender will have to sue you to recover the money they’re owed.

Typically, all unsecured debts are included in a consumer proposal or personal bankruptcy debt restructuring plan.

Vehicle loans are a secured debt most often financed under a Lease Agreement or a Conditional Sales Contract.  When a default in the payments occur the lender will pursue collection for the arrears.

When a default occurs and the vehicle loan is financed under a Lease Agreement the lender will seize and sell the vehicle and apply the sale proceeds to the amount you owe.  If there is a shortfall, the lender will sue you for the balance that remains owing.

When a default occurs and the vehicle is financed under a Conditional Sales Contract the lender may only pursue one of the two following options, often referred to as “seize or sue“ to recover the amount you owe:

1.   The lender may seize and sell the vehicle and apply the sale proceeds to the amount you owe.  If there is a shortfall, the lender is unable to sue you for the balance that remains owing; or
2.   The lender may sue you for the loan balance that remains owing to obtain judgment.  With a judgment the lender can garnishee your wages, seize your bank account or file a lien against your residence.  However, the lender is prohibited from seizing the vehicle after a judgment has been granted by the Court.