Navigating mounting debt with a limited income, especially when relying on social assistance or other fixed government benefits, is overwhelming. The stress of unemployment, coupled with debt, can seem insurmountable, particularly when average credit card interest rates are high and debt can grow substantially even without new purchases. However, unemployment or being on social assistance doesn’t mean you’re out of options for managing your credit card debt and other financial obligations. Many creditors and government programs offer solutions to help you find a path to financial stability.
Consequences of unmanaged debt
Dealing with debt is never fun, even under the most ideal circumstances. It can be tempting to bury your head in the sand or pretend the credit card bill didn’t arrive. As tempting as it is, don’t. There are some severe consequences for ignoring debt.
- Wage garnishment
- Court
- Constant calls and/or letters asking for payment
- Damage to credit score
- Repossession of assets (house, car, etc.)
Understanding your unique situation and protections
One of the most crucial aspects for individuals on social assistance, pensions, or other government benefits is understanding the protections your income may have from creditors. In many cases, credit card companies and debt collectors cannot garnish your social assistance payments, government pensions (like Canada Pension Plan (CPP), Guaranteed Income Supplement (GIS), Old Age Security (OAS), and support payments. This provides a significant advantage and leverage in any debt negotiations you undertake.
However, these protections are not absolute. Here are some key exceptions where your benefits might be vulnerable:
Income tax arrears: The Canada Revenue Agency (CRA) has extensive powers to collect outstanding taxes, including garnishing government benefits like OAS and CPP.
Government overpayments: If you received an overpayment of benefits, the program is typically within its rights to deduct that amount from future payments until the overpayment is repaid.
Maintenance or support arrears: Programs like the Provincial Maintenance Enforcement Program can seize benefits to cover child and spousal support arrears.
Non-registered retirement savings: RRSPs, LIRAs, RDSPs, DPSPs, and RRIFs are all protected from creditors. However, non-registered investments, TFSAs, and RESPs are not. It’s important to be aware that the funds in a registered account are protected, but any payments from them are not.
Bank set-off rights: If you owe money to the same bank or credit union where your government benefits are deposited, that institution may have the right to “set off” your outstanding debt against the funds in your account. This means they can withhold part of your deposits as payment. To prevent this, it’s often recommended to open a new bank account at a different bank where you don’t owe any money.
Proactive steps to take when struggling with debt
When facing financial hardship, taking proactive steps can significantly alleviate stress and prevent your debt from spiralling.
Contact your lenders
Don’t ignore the problem. Reach out to all your lenders – credit card companies, mortgage lenders, and student loan providers – to inform them of your situation. They may offer options to temporarily pause or reduce your payments. Government student loan repayments can now be easily self-adjusted by logging into your My Service Canada Account (MSCA). Be sure to understand the full picture of what deferral means for each of your creditors before moving forward. For example, many, but not all, creditors won’t report a missed payment to credit bureaus while you’re participating in a deferral option. If they do, the deferral may not be worth the impact on your credit.
Review your budget and cut expenses
Take a critical look at all your debts and expenses. Prioritize essential costs and urgently minimize non-essential spending like dining out, streaming services, and subscriptions. Learning to budget carefully for essentials like groceries can also help.
Explore income-generating options
While searching for full-time employment, consider temporary or part-time roles, freelancing, or selling unwanted items to bring in some cash.
Formal debt relief solutions
Several formal debt relief options are available, each with unique advantages and considerations for those on social assistance or fixed incomes:
Credit card hardship programs
A simple call can go a long way. Many credit card companies offer hardship programs to help those struggling financially. Each company’s program is different, but most involve a combination of lowering interest rates, waiving fees, or deferring payments for a while. The good news is, unlike other options, these are programs set up directly with the creditor. Since they are the ones that report to credit bureaus, this often means less chance of credit damage.
Debt Management Programs
Offered by credit counselling agencies, such as Consolidated Credit Canada, Debt Management Programs (DMP) consolidate your credit card payments into a single monthly payment and often involve negotiations for lower interest rates or waived fees. While they can make payments more manageable and offer tailored advice, DMPs still require regular payments and do not reduce the total debt owed or provide legal protection from creditors.
Debt Settlement
Debt settlement is another option where you can work directly with your creditor to negotiate a debt relief plan. There’s a significant difference between a hardship program and a settlement. Taking part in a hardship program means still, eventually, paying back all the money borrowed, whereas with a settlement, you don’t. Often, a settlement means reducing your balance by 30 – 50%. This reduction comes with some catches. In the case of a debt settlement, the creditor will likely require you to close the account after paying off the debt. It also usually means a hit to your credit score. The balance remaining typically needs to be paid off as a lump sum. This can be tricky for someone to pull together, especially someone with a low income. On a positive note, living on a low income makes it more likely that the creditor will negotiate with you.
It’s good to note that if you don’t feel up to negotiating yourself, there are companies that specialize in debt settlement. However, scammers have been known to disguise themselves as a debt settlement company, so do your diligence to research the company you want to work with.
Consumer Proposal
A Consumer Proposal is one of two legally binding debt relief programs administered by a Licensed Insolvency Trustee (LIT). The other being a bankruptcy. Consumer Proposals can drastically reduce your debt, up to 80%. You typically get to keep most of your assets, and any collection calls or legal actions will stop. This is a good option for those on social assistance because the payments are usually very low. However, your credit score will take a hit for at least 6 years.
Bankruptcy
Bankruptcy is considered a reset button for finances as it eliminates virtually all unsecured debt. However, this fresh start comes at a cost. Depending on the laws in your province, you could be required to sell your home and other assets to pay creditors. Your credit score will take a significant hit for up to 7 years. All these consequences are why bankruptcy is considered a last resort.
Wrap up
Navigating debt relief options can be complex, especially with unique income sources like social assistance or pensions. It is highly recommended to speak with a Credit Counsellor or a debt relief expert, such as a Licensed Insolvency Trustee. They offer free, confidential consultations to assess your unique financial situation, discuss all available options, and help you determine the best path forward to regain control of your finances and build a stable future.
