What To Do If You've Defaulted On Your Debt

As a Licensed Insolvency Trustee, we’re trained and licensed to provide advice to individuals who are struggling with their debt. Our advice will vary depending on each individual’s situation, but here is some general advice on what to do if you’re in default:

1. Figure out what went wrong

There are many reasons a person might miss a debt payment or two. A banking error, forgetfulness, a short-term timing issue, etc. are often easy to fix, whereas other issues like job loss or general overextension of credit may be more difficult to manage, but the reason will provide important context for figuring out what to do next.

The important part is that you get to the root of the problem. For example, if you regularly have automatic payments rejected due to insufficient funds just before your payday, you might be tempted to conclude that timing is the issue. However, the reason you regularly have no funds left just before payday is more likely to be an overall financial budget issue.

Getting to the real issue may require stepping back and looking at what has happened with your finances over time rather than what happened immediately prior to the default. For example, if you missed a payment because you had an unexpected car repair deplete your funds, your problem likely isn’t the car repair, it’s the lack of an emergency fund to cover unexpected expenses.

2. Come up with a plan

Once you’ve determined the true reason for the default, the fix might be obvious. For example, if you simply forgot to pay, you could set reminders for yourself, or set the bill up to be paid by automatic withdrawal.

If the issue is more serious or complex, it might be difficult to come up with a plan. You may need time to investigate potential financing options, find a job, or get advice from a professional such as a Licensed Insolvency Trustee. In this case, it’s not important that you have it all figured out right away, just that you have a plan: a series of steps you’re going to take to get it figured out.

3. Contact your lender

The worst thing to do in this situation is hide from it. Your lender won’t be happy about the default, but if they’re an institutional lender like a bank or a credit card company, they probably won’t be dramatic about it either. They might not even notice right away, but that doesn’t mean you should wait until they contact you. A proactive approach will be appreciated, and it is very likely that they will be forgiving and open to various ways to cure the default if you deal with it right away.

Don’t wait until you have the money to pay them, or have all the answers. Contact them and acknowledge the issue and tell them what you’re doing about it. If you don’t have an immediate fix, ask for more time or reduced payments for the time being. If they aren’t willing to grant you any grace, at least you will know what you’re dealing with and can plan accordingly.

4. Fix the issue

You know what went wrong and you have a plan – now implement it. This may look like:

• Make up the missed payments
• Set up those payment reminders!
• Negotiate a payment holiday for a period of time while you find a new job
• Cut expenses and/or budget more carefully
• Allow the lender to seize a secured asset you can no longer afford
• Debt consolidation, which may include a Consumer Proposal
• Make an assignment in bankruptcy

5. Deal with the consequences

If you were able to make up the payment within less than 30 days, there may be no consequences from the missed payment. If not, you may have to do some cleanup to deal with the fallout from the default, such as:

• Rehabilitating your credit score: If the default was reported to the credit agencies, chances are your credit rating took a hit. It will take time and consistency to get your rating back up.
• Pay (or negotiate) any fee increases: some lenders charge a fee for defaults, or automatically bump up your interest rate. If you can, get them to reduce or eliminate these extra fees. If not, you may need to adjust your payments to manage the increased costs.
• If you had to release a vehicle or home to a secured lender as a result of the default, you’ll have to figure out a new, affordable, mode of transportation or place to live.
• Complete your payment plan, Consumer Proposal or bankruptcy: make sure you follow through with your commitments, whatever those may be, so that you can move on and focus on improving your financial situation going forward.
• Prepare a new, solid financial plan: recognize that what got you in this position can get you here again if you don’t make changes. Budgeting, keeping a close eye on your finances, having a sufficient emergency fund, and earning a steady income are building blocks for financial stability. If you didn’t have these in place before, you should work on these.
• Focus on the future: there are a million reasons people end up having problems with debt; whether you are completely at fault or a dealt an unusually challenging hand, there is no point in beating yourself up or playing a victim. Once you’ve cleaned up the situation, focus on what you can do to provide a sustainable future for you and your family.

Before or during taking the above steps, you should seriously consider speaking to a professional, as they can help you:

• Understand the negative credit score consequences of various actions. It may seem obvious that bankruptcy has negative implications on your credit score, but did you know that changing to a new credit card provider can negatively impact your score? Or did you know that a seemingly friendly voluntary settlement with a creditor can be reported as a default? Or that an OPD settlement impacts your credit rating almost as severely as a bankruptcy?

• Ensure that a step that you think will help won’t put you in a worse financial situation. For example, many consolidation loans stretch payments out over a longer period of time, so even with a lower annual interest rate you’re paying more over time. And if you don’t cancel a card after transferring the balance elsewhere, you are statistically likely to use it again and end up with more debt than you started with.

• Avoid unanticipated consequences in case you end up defaulting on your debt. For example, you must know that if you default on a Home Equity Line of Credit, the bank could foreclose on your house, whereas a credit card lender can’t easily come after your assets.

Here is a list of professionals you may need to speak with, depending on your situation:

• A not-for-profit credit counsellor to give advice about budgeting and credit
• A mortgage broker to find you a lower interest rate on a secured loan
• A credit score expert to advise on the right steps to maintain or improve your credit score
• A Licensed Insolvency Trustee to determine if you’re eligible for a Consumer Proposal or bankruptcy and explain the benefits and consequences of those options. They can also be a good resource for information about budgeting and other debt re-payment options.

It's important that you do your homework before contacting a professional to help you with your debt. Unfortunately, not everyone advertising their services is properly trained or sufficiently knowledgeable to help you, and some charge unnecessary or hidden fees. In particular, we recommend that you read this alert issued by the Government of Canada before you contact anyone who is not a Licensed Insolvency Trustee: https://www.canada.ca/en/financial-consumer-agency/services/debt/debt-help/alert-debt-credit-repair.html

The above professionals will almost always offer you a free initial consultation and/or free advice, so there should be no financial risk to reaching out for assistance. On the other hand, if you don’t get to work paying down your debt it’ll cost you, because you’ll end up paying more interest over time.

Charla Smith & Company Ltd. is a Calgary-based Licensed Insolvency Trustee, serving the southern Alberta region. We regularly provide advice to individuals who've defaulted on their debt. If you would like advice on your options, contact us for a free, no-commitment consultation.

Disclaimer: This publication provides general information and should be seen as broad guidance only. The information contained herein cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon this information without obtaining specific professional advice relating to your particular circumstances. Charla Smith & Company Ltd. does not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.