Unimor Capital Corporation

Tag: debt consolidation

  • Consumer Proposal vs Bankruptcy: The Impact on Mortgages

    Consumer Proposal vs Bankruptcy: The Impact on Mortgages

    Dealing with financial difficulties can be a daunting and overwhelming experience. In Ontario, individuals facing financial distress have several options to consider, two of which are consumer proposals and bankruptcy. These are legal processes that can help individuals manage their debts and regain financial stability. However, they have distinct differences, particularly when it comes to existing mortgages. In this article, we will delve into the disparities between consumer proposals and bankruptcy and explore what they mean for individuals with existing mortgages.

    Consumer Proposal: A Lifeline to Financial Recovery
    A consumer proposal is a formal arrangement between a debtor and their creditors, governed by the Bankruptcy and Insolvency Act (BIA) in Canada. It is an attractive option for those who are unable to meet their financial obligations but wish to avoid declaring bankruptcy. Let’s explore the key aspects of a consumer proposal and how it interacts with existing mortgages.

    1. Debt Reduction and Repayment
    A significant advantage of a consumer proposal is that it allows debtors to negotiate with their creditors to reduce the total amount of debt owed. Debtors work with a Licensed Insolvency Trustee (LIT) to create a proposal that outlines a feasible repayment plan. Creditors vote on whether to accept the proposal, and if the majority agree, it becomes legally binding.

    Regarding existing mortgages, consumer proposals typically do not directly affect secured debts like mortgages on real property. Your mortgage remains intact, and you are still responsible for making regular mortgage payments. However, by reducing your unsecured debts through the proposal, you may free up more of your income to meet your mortgage obligations.

    2. Protecting Assets
    Consumer proposals offer a significant advantage when it comes to protecting assets, including your home. In Ontario, the ‘homestead exemption’ allows individuals to keep their primary residence during bankruptcy, provided it falls within certain equity limits. However, consumer proposals do not have the same equity restrictions.

    If you have an existing mortgage on your home, a consumer proposal allows you to maintain ownership and continue making mortgage payments without the risk of losing your property. This can be especially beneficial for individuals who are committed to keeping their homes and want to find a structured way to manage their other debts.

    3. Impact on Credit Score
    While a consumer proposal has a more favorable impact on your credit score compared to bankruptcy, it will still have a negative effect. A consumer proposal remains on your credit report for 3 years after you complete it or 6 years from the date it was filed, whichever comes first. This can make obtaining new credit or refinancing your mortgage more challenging during that period.

    However, many individuals who opt for a consumer proposal are already struggling with their credit due to existing debts. Over time, as you make consistent mortgage payments and demonstrate responsible financial behavior, your credit score can gradually improve.

    4. Process Duration
    A consumer proposal typically spans over a maximum of 5 years, during which you make fixed monthly payments as outlined in the proposal. Once you successfully complete the proposal, you are considered debt-free, with the exception of any ongoing secured debts, such as your mortgage.

    Bankruptcy: A Last Resort with Significant Consequences
    Bankruptcy is a legal process that allows individuals to discharge their debts when they are unable to meet their financial obligations. It is generally considered a last resort due to its severe consequences. Let’s explore how bankruptcy differs from a consumer proposal and how it affects individuals with existing mortgages.

    1. Discharge of Debts
    In bankruptcy, most unsecured debts are discharged, meaning you are no longer legally obligated to repay them. However, this discharge does not apply to secured debts, such as mortgages. If you have an existing mortgage when you declare bankruptcy, you must continue making your mortgage payments to avoid foreclosure.

    2. Asset Liquidation
    One of the major differences between bankruptcy and a consumer proposal is the treatment of assets. In bankruptcy, a trustee may liquidate non-exempt assets to repay a portion of your debts. However, Ontario has exemptions in place to protect certain assets, including your primary residence (homestead exemption) up to a specific equity limit. If your home’s equity exceeds this limit, you may be required to sell it to satisfy your creditors. It’s crucial to consult with a bankruptcy trustee to assess your specific situation.

    3. Impact on Credit Score
    Bankruptcy has a more severe impact on your credit score compared to a consumer proposal. A first bankruptcy typically remains on your credit report for 6 years after your discharge, while a second bankruptcy can stay on your record for up to 14 years. This can make it challenging to secure new credit or refinance your mortgage during this time.

    4. Process Duration
    The duration of bankruptcy varies depending on your financial situation and whether it’s your first or subsequent bankruptcy. A first bankruptcy usually lasts for nine months, but it can be extended to 21 months if you have surplus income. Subsequent bankruptcies can last for 24 to 36 months. During this period, you must adhere to the rules set by the Office of the Superintendent of Bankruptcy (OSB) and continue making your mortgage payments.

    Existing Mortgages in Bankruptcy and Consumer Proposals
    Regardless of whether you choose a consumer proposal or bankruptcy, your existing mortgage remains a secured debt, and you are obligated to keep making regular payments. Failure to do so can lead to the lender initiating foreclosure proceedings, which may result in the sale of your home to cover the outstanding mortgage balance.

    However, there are some additional considerations regarding mortgages in these processes:

    Mortgage Arrears
    If you are already behind on your mortgage payments when you enter a consumer proposal or declare bankruptcy, it’s essential to address the mortgage arrears promptly. Both processes can provide a structured framework for managing your overall debt, which may free up funds to address your mortgage arrears.

    Refinancing & New Mortgages
    During the term of a consumer proposal, obtaining new credit, including refinancing your existing mortgage, can be challenging. Lenders may view you as a higher risk due to the proposal’s impact on your credit score. However, it’s not impossible to refinance or obtain a new mortgage after completing a consumer proposal. You may need to work with a mortgage broker who specializes in assisting individuals with credit challenges.

    In contrast, obtaining a new mortgage or refinancing during or immediately after bankruptcy can be even more challenging. Lenders typically prefer to work with borrowers who have reestablished their credit and have a stable financial history.

    Communicate with Your Lender
    Whether you choose a consumer proposal or bankruptcy, it’s crucial to maintain open communication with your mortgage lender. Inform them about your financial situation and the steps you are taking to address your debts. Some lenders may be willing to work with you to find a solution that helps you keep your home.

    What This Means for You?
    Facing financial difficulties can be overwhelming, but there are options available to help you regain control of your finances. Consumer proposals and bankruptcy are two distinct paths with different implications for individuals with existing mortgages.

    A consumer proposal offers a structured way to reduce and manage your unsecured debts while protecting your assets, including your home. Your existing mortgage remains intact, and you must continue making regular payments.

    On the other hand, bankruptcy is a more drastic step that discharges most unsecured debts but may require you to liquidate non-exempt assets if applicable. Your existing mortgage remains a secured debt, and you must continue making payments.

    Both processes have consequences for your credit score, and it may take time to rebuild your financial standing. Regardless of your choice, it’s essential to seek professional guidance from a Licensed Insolvency Trustee or Bankruptcy Trustee to navigate these complex financial decisions and ensure the best possible outcome for your unique circumstances. Additionally, maintaining open communication with your mortgage lender is key to protecting your home and working towards a more stable financial future.

  • Canada’s Climbing Debt-to-Income Ratio: What You Need to Know

    Canada’s Climbing Debt-to-Income Ratio: What You Need to Know

    Here we break down what the debt-to-income ratio means—for the nation’s financial health, and for yours. The latest headlines tell a now-familiar story: Canadian household’s debt loads have increased once again, with the debt-to-income ratio hitting 176.9% in June 2020. But what is this ratio, why is it rising, and—most importantly—do you need to worry about it?

    What is the debt-to-income ratio?

    First things first. The debt-to-income ratio is a measure of how much debt a household is carrying, relative to its disposable income—that is, the money you have available to spend or save, after taxes and other non-discretionary expenses, such as EI and CPP contributions, are made.

    A ratio of 176.9% means that, across all Canadian households, we collectively owe almost $1.77 for every dollar of disposable income we have. That’s very close to the all-time high of 178% in late 2017.

    How did we get here?

    There are two overarching reasons why we’ve ended up with our current level of collective debt.

    Debt is cheap.
    The basic laws of economics tell us that when prices fall, demand increases.  Here’s why that’s important for the debt-to-income ratio: what really matters is not the total amount borrowed, but the cost to service that debt over time—that’s the debt-service ratio.  The lower the interest rate, the cheaper it is to borrow money and service that debt, and thus the more debt a household can afford to carry.

    Over time, the debt-service ratio has remained pretty constant even as the household debt-to-income ratio has risen.  In 1980, for example, the ratio of household debt to personal disposable income was just 66%, or $0.66 owed for every dollar of disposable income.  Back then, however, the bank rate—the minimum rate of interest that the Bank of Canada charges on one-day loans to financial institutions, now superseded by the target interest rate—was 12.89%, compared to just 0.25% today.

    In practical terms, $100 borrowed for a year at 1980 rates would cost nearly 20 times as much as it would to borrow today.  This astonishing drop in interest rates accounts for why the debt-service ratio has remained relatively steady over time, fluctuating between about 12% and 15% from 1990 to the first quarter of 2020, and falling from 14.81% in the last quarter of 2019 to 14.67% in the first quarter of 2020.

    Our relationship to debt has changed.
    Over time, we’ve become more and more accepting of borrowing as a normal part of household finances. When the ability to borrow became available as a tool to “bring forward” our household spending, lots of us decided to do so. And as the cost of borrowing progressively dropped, we ramped up our debt.

    This behaviour is consistent with what financial economists call consumption smoothing, or the idea that we can maximize happiness by spreading our resources over our lifetimes to achieve the highest possible total standard of living. From this point of view, in the words of former Bank of Canada Governor Steven Poloz, “Simply put, debt is a tool that allows people to smooth out their spending throughout their life.”

    Does the debt-to-income ratio matter?

    The general consensus is that excessive levels of debt make households financially vulnerable.  Economic shocks are sudden and unpredictable changes in the variables that affect the overall economy, such as an unforeseen rise or fall in the cost of commodities, an unexpected shift in consumer spending, or a housing or stock market crash.

    At the individual level, however, you’re likely more concerned that too much household debt might mean you can’t make your mortgage, student loan or car payments if something unexpected happens—such as normal fluctuations in interest rates, or the loss of your job.  (These are personal financial shocks, compared to the economy-wide macroeconomic shocks of falling commodity or housing prices.)  Research into Canadians’ debt shows that younger people, those with household income of at least $100,000, and those with mortgages have more debt than older Canadians, non-homeowners, and those with lower incomes.

    The use of debt is also correlated with optimism about our financial futures.  People who expect their financial situation to improve over time are much more likely to have more debt: a Statistics Canada study shows that peoples’ expectations about their financial situation are strongly correlated with both their levels of indebtedness and their debt-to-income ratio.  Even the most optimistic households, however, are still subject to borrowing rules set by lenders, such as the new mortgage insurance rules for the Canadian Mortgage and Housing Corporation, which will go into effect on July 1, 2020.

    What do I need to know about the debt-to-income ratio to plan my financial life?

    Here are two ways to think about whether the debt-to-income headlines affect you.

    The average might not apply to you.
    The debt-to-income figure represents an average for all Canadian households, including those who have little or no debt—meaning it must also include some very highly indebted Canadians.  In fact, research from the Bank of Canada shows that the number of highly indebted Canadians —those with a debt-to-income greater than 350%—doubled from 2005 to 2014, from about 4% to 8% of all households.  So a rising average amount of debt may not capture individual household changes, including yours.

    Your individual circumstances matter.
    The more debt you have, the more vulnerable you are to “shocks” that can impact your ability to repay it.  At the same time, however, your age, income, appetite for debt and expectations about your financial future will all combine to impact your approach to borrowing.

    If you want to maximize your financial peace of mind and protect yourself from the risk of being unable to meet your debt obligations over time, you could minimize borrowing while prioritizing paying back any existing debt.  A personal debt management plan, which maps out how you’re going to repay what you owe over time, will allow you to see past headlines to understand debt as one tool in your financial toolbox.

     

  • Homeowners Worried About Paying Down Debt as Rates Increase

    Homeowners Worried About Paying Down Debt as Rates Increase

    Younger homeowners have never experienced a significant rise in interest rates.  Many Canadian homeowners are worried about rising interest rates and how they will impact their budget, a new CBC Research survey finds.  Thanks to years of access to cheap money, household debt has ballooned in Canada.  Now that interest rates are rising, there are mounting concerns over how people will continue to pay down mountains of debt.

    Out of 1,000 Canadian homeowners surveyed online between October 5 -11, almost three-quarters of those with debt on their home, mainly mortgages, confessed they’re worried about rate hikes.  It won’t take much for most of them to feel the pinch: 58% of respondents said an increase of more than $100 in their monthly debt payments would force them to change their spending habits to make ends meet.

    Certified financial planner Shannon Lee Simmons says many people who come to her for help are in a similar predicament.  “I see that on a daily basis from clients who make relatively normal living wages, but everything is just budgeted to the dollar,” she said.

    “If you were to ask them, ‘Can you save $100 bucks a month?’ they might fail at that.”  Simmons says part of the problem is some homeowners have never experienced a significant rise in interest rates.  If you’re 40 right now and you bought your house at 30, you’ve pretty much had a decade of relatively low rates and that’s all you’ve experienced.

    Certified financial planner Shannon Lee Simmons says homeowners need to prepare for the true cost of rising interest rates.  Indeed, a 40-year-old would have been a toddler in 1981 when Canadian banks’ prime lending rate shot up above 20%. Conversely, since 2009, it has ranged between 3.70 and 5.75%.  Banks use the prime rate as a base to set their lending rates.  Failing to budget for heftier mortgage payments could lead to even more hardships, such as homeowners digging into their savings or turning to credit cards to make ends meet.

    The CBC survey findings come at a time when the Bank of Canada has already hiked the key interest rate four times since July 2017, from .50 to 1.50%.  The key rate influences the rate that banks charge for consumer loans and mortgages.  Many homeowners likely haven’t yet felt the full effects of the rate hikes because they’re still locked into a fixed mortgage, the most common type in Canada.  When their mortgage is up for renewal, ‘they might be in for a bit of a shock,” Simmons said.  The market expects another rate hike sometime in October, and some economists predict three more rate hikes in 2019.

    Bank of Canada governor Stephen Poloz says he believes Canada’s debt risk can be managed successfully.  Meanwhile, the amount of debt Canadian households owe has been on the rise for about three decades, totalling just over $2 trillion in August.  Mortgages make up close to three quarters of that debt.  For years, the Bank of Canada has expressed concern over rising household debt levels.  In 2011, Federal Finance Minister Jim Flaherty tried to temper borrowing habits with tighter mortgage rules.  They included lowering the maximum amortization period and requiring borrowers to qualify for a five-year, fixed-rate mortgage, even if they chose a variable mortgage with a lower rate. But interest rates remained low and Canadians continued to pile on debt.

     According to credit agency TransUnion, Canadians owed an average $260,547 in mortgage debt in the second quarter of 2018 — a 4.76% jump compared to the same period in 2017.  In the CBC survey, 36% of respondents said they had no debt on their home. 42% said they owed between $50,000 and just under $400,000 when combining both a mortgage and lines of credit.  Most respondents said they are very or somewhat comfortable with their current monthly payments.  However, as the survey shows, for many, that level of comfort diminishes when faced with the prospect of higher rates.

    And the impact could be more severe than some people think: When presented with a couple mortgage scenarios, less than a quarter of respondents were able to correctly estimate the added cost of a 2% interest rate hike.  Take, for example, a $400,000 mortgage with a 20-year amortization and a fixed five-year rate of 3.3%. With just a 2% rate increase, monthly payments would go up by about $400 a month.

    Simmons says many people find making the calculations daunting, but that homeowners need to understand the true cost of rising rates.  “Everyone is aware they’re going up, I just think that people aren’t necessarily prepared for how that impacts their daily life.”  It’s important to note that even with a projected rise in interest rates in 2019, they’ll still be relatively low compared to previous decades.  The Bank of Canada raises the country’s key interest rate to keep inflation in check, but governor Stephen Poloz, said in May that the bank will make rate decisions cautiously, considering the amount of debt households are still carrying.

  • 8 Things You’re Probably Wasting Your Money On

    8 Things You’re Probably Wasting Your Money On

    Is the cash in your wallet always mysteriously disappearing? Maybe you need to get a grip on your spending habits. Here are 8 things you’re probably wasting your money on:

    1. Specialty Drinks – That latte or cappuccino habit can add up. Give up the expensive coffees for a regular coffee (a “plain” coffee is under $2) and save a few dollars every day. Better yet, brew your own at home.

    2. DVD’s & CD’s – Sure, unwrapping that great new movie or getting the latest CD from your favorite artist is exciting, but you can buy used and save lots of money. Or just rent the DVD’s or purchase select tunes you like from iTunes.

    3. Using the Washer & Dryer Daily – Tossing just a few things in the washing machine and dryer every day? You’re “washing” water, energy and money right down the drain. Save on energy by running the washing machine only when it’s full. Go for a cold-water wash, and line-dry for optimal savings.

    4. Take-Out Lunches – If you spend even $10 a day on a lunch because you don’t brown-bag it, that’s $50 a week, and $200 a month. Can’t discipline yourself to make lunch every day? Cut back a few dollars by bringing your own drink or buying a less expensive item from the menu.

    5. Clothes You Don’t Need – That second pair of jeans, that second pair of strappy sandals… we’ve all been tempted to buy just one more item that’s nearly identical to something we already have in our closets. Three words: Don’t do it!

    6. Gas – You can do something to improve your fuel economy. Slow down a bit where possible, keep the heavy stuff out of the back of your car and open the windows instead of using the A/C.

    7. Brand-Name Groceries – Your beloved brand of cheese, cereal or can of soup likely does not taste exactly the same as a less expensive version. Fair enough. But there are some things you can probably scrimp on without noticing the difference, like mustard or ketchup, sugar, vinegar, flour, salt and other basics.

    8. Convenience Store Purchases – Gum. Tabloid magazines. Bags of chips. Cookies. If you’re dropping $20 a week at your corner store, consider cutting back on the impulse purchases and planning better through the week so that you don’t need that last-minute milk jug.

  • Debt Fatigue: How Long is Too Long to Be in Debt?

    Debt Fatigue: How Long is Too Long to Be in Debt?

    Despite record levels of debt across the country, fewer Canadians than you might think are making moves to reduce the amount of money they owe. According to a new CIBC poll, 25% of Canadians say they haven’t taken any action at all to accelerate debt repayment, while only 16% have talked to a financial advisor about ways to better manage their debt. It all points to signs of debt fatigue – feeling completely overwhelmed by the amount of money you owe but continuing to spend anyway. Six months? One year? Three years? There is no set timeline for when someone reaches debt fatigue, but when you throw your hands in the air and just start spending; you can bet you’ve hit your saturation point.

    There’s some nonchalance there, we’ve had an extended period of low interest rates, and the banks and financial institutions have done a very good job at marketing. You’ll see an ad for a car: just $199 every two weeks. People think ‘hey, that’s not bad,’ without stopping to think about the long term. People may think, ‘a bagel and a coffee a day is only five bucks a day. It’s no big deal,’ but when you add it up for a whole year, that’s close to two thousand bucks. Payday loan companies make borrowing seem easy too.

    According to a poll, 60% of Canadians currently hold debt. Historically low interest rates have played a huge role in this. People have a lot more debt than they have in the past; because it’s relatively inexpensive debt, debt seems like less of an issue. Although debt repayment has been the number one priority for Canadians, according to CIBC research, less than half of Canadians are taking concrete steps to lighten the load. The latest poll found that 46% of Canadians have cut spending in order to better manage debt, 34% have implemented a household budget, and 20% have made at least one lump sum payment toward debt on top of regular payments.

    With debt having become a fact of life for so many Canadians, there are ways to tell when your money woes are growing just as fast as your interest owing.  The standard question is: ‘Are you having trouble sleeping at night?’  When it becomes an issue with people’s day to day lives, when you can’t sleep or are worrying too much, when it’s affecting relationships, then it really starts to wear mentally. When you get a credit-card statement that shows you that if you make the minimum monthly payments and it will take you 84 years to pay off the debt – that really starts to hit home.

    Seek Support & Make a Plan

    Things don’t need to reach a crisis point before you can seek help and start chipping away at debt.  For starters, talk to someone, whether it’s an independent advisor, someone at your bank branch, a credit counsellor, or friends and family.  Money doesn’t have to be a taboo subject.  Don’t be afraid to say to someone, ‘Hey I can’t afford that. If they want to go out for dinner you can say ‘why don’t we do a potluck or we’ll order in pizza’.  Everybody struggles with these issues, and you’d be surprised once you start talking about it how other people can relate to where you’re at.

    Don’t let terms like budgeting or tracking spending scare you off.  Find money-management strategies that work for you, just the way you’d integrate exercise into your routine.  If you know you’re not a morning person, it’s unlikely you’re going to commit to going for a jog every day before work.  If you don’t have the patience to write down every single purchase you make over a 30 day period, try giving yourself a weekly spending limit instead.

    If you find it too easy to use debit or credit cards, use cash.  Be clear about what it is you’re trying to accomplish. The thing most people do not do is look at what their goals are.  If you have $500 in your account, do you buy the Lululemon hoodie you really like or do you put that money toward your home renovation fund?  You have to have goals, because that allows you to make choices.  Turn to technology to keep you on track too, most banks have tools where you can receive an alert via text message, phone, or email if you’re getting close to or have surpassed your customized budget.

    By Gail Johnson – Yahoo Finance