Managing Personal Debt Caused by COVID-19

Managing Personal Debt Caused by COVID-19 | Author: Shaheen Ahmed, RSSW, BIA, Social Worker & Credit Counsellor

It took three long months to get to Phase 3 of the pandemic emergency in Ontario. And although the economy is opening up, it is far from business as usual. Employers are recalling furloughed and laid-off individuals, but not everyone is feeling the love. Indeed, many people are returning to jobs without a strong sense of security. Some are working reduced hours and others are discovering that their temporary layoff is permanent. In this environment, managing personal debt is becoming a growing problem for many households.

If you have spent the last few months scraping by on the Canada Emergency Response Benefit (CERB), then reduced or no income from a job you thought you could count on, will come as a hard blow. COVID-19 started out as a medical emergency, however, it has impacted more people economically. Here are a few tips you can use to minimize accumulating debt. 

Maximizing Income

Personal debt problems often begin with a drop in income. Predictably, the COVID-19 emergency work stoppage forced many into a sudden financial deficit they had not planned for. You might have relied on CERB as your only income source for months. Do not be disheartened if you have not made ends meet because of this. Indeed, the benefit is barely enough to cover the basics. And if you live in large and expensive cities, like Toronto and Vancouver, it might have only sufficed as rent.

Regardless, having no income during the lockdown would have left you worse-off; the government borrowed this money so you would not have to. CERB and EI are stopgap measures and hardly long-term income replacement programs. The clear solution to a core income problem is to get back on the wagon to secure sufficient income from elsewhere, as soon as possible.

First, make sure to understand your employment status so you do not lose out on termination pay if you are entitled to it. This will tide you over financially until you find another job. If your job prospects remain grim presently, then what does the part-time and temporary work situation look like for you? Will you continue to rely on CERB or EI for a few more months? If so, investigate how to earn supplemental income from side gigs on UBER, and Etsy, for example. If you have an extra room to spare, can you take on a renter, or list it on Airbnb? Both CERB and EI allow you to earn a small amount of side income without a clawback of benefits. This will help take the edge off your income shortfall.

Budgeting & Reducing Expenses

The other side of the equation for minimizing debt is to reduce expenses. Here, you have many options to consider. But before you get there, you must understand where your money is going. Creating a budget will provide this visibility. However, many people procrastinate and even avoid this task completely. After all, it comes without rewards and forces you to hold a magnifying lens at all the money going out. Perhaps you have been ignoring your mounting personal debt for a long time?

If you are in this situation, you will find it worthwhile to engage a professional for this exercise. Credit counsellors guide you step by step so you don’t get overwhelmed. They provide easy-to-use tools to help you understand your core expenses. They coach you about your income deficit with support. Furthermore, they can also counsel you on healthy financial habits to bring your discretionary spending in line.

Managing High-Interest Debt

Credit card debt is usually the largest drain on household budgets. These, along with payday loans, carry the highest interest rates in the borrowing industry. The COVID-19 emergency has pushed some creditors to extend leniency to borrowers. As a first step, contact your creditors to inquire whether they can reduce or waive some of your interest charges. You may also want to transfer balances from cards with higher interest rates to those with lower ones.

If you have multiple creditors, then consult with a credit counsellor to see if you are a good candidate for debt consolidation. Passing on the negotiations to a professional often yields better terms for you, because of the relationship they already have with major money lenders. If successful, a debt management plan would allow you to repay all debts with a single monthly payment over a term of three to five years. And the runaway interest rate charges would stop accruing.

Deferring Monthly Expenses

Spreading your expenses out over time can provide relief when cash flow is tight. The Canada Revenue Agency, local municipalities, national banks, insurance companies, car leasing agencies and utilities introduced payment deferral programs to help individuals get through the COVID-19 cash crunch earlier this year. Some of these programs may be coming to an end now that businesses are opening up. Regardless, you should still contact them to find out what payments you can put on hold.

Be sure to understand the full impact before you commit. Payment deferrals are not debt forgiveness programs. Your debt simply gets extended to a future date. Mortgage deferrals, for example, could end up costing you more in the long run. Banks will add both the mortgage and interest that you defer to your overall loan; you may not want to pay interest charges on the deferred interest.

Emergency Fund

An emergency fund allows you to pay yourself when you cannot work. Financial advisors recommend everyone save for an emergency of up to 3 months. Self-employed individuals should plan on a thicker cushion of at least 6 months. This is because, unlike employees, you do not receive paid sick days. You should hold your emergency funds in a savings account that you can easily access. Never use these funds to make a quick return on a risky investment.

If you have an emergency fund set aside, then now is exactly the time to dip into it to meet your cash flow shortfall.

Borrowing Money

Borrowing money is the very last step one should take to manage personal debt problems. And even here, you should remain cognizant of varying levels of risk. The cheapest way to borrow money from a bank is by putting up collateral as a guarantee. For most people, their homes will suffice. Banks offer some of the lowest interest loans for HELOCs (Home Equity Lines of Credit) depending on how much equity you have in your home.

Unsecured loans, i.e. those without collateral, come with higher interest rates. And the qualification criteria are also greater. Among other factors, banks will take your credit score and income security status into consideration before approving you for such loans.

Credit cards offer the convenience to defer payments by a few weeks to when the credit card bill arrives. However, carrying a credit card balance actually means that you borrow these funds from very high-interest rate lenders. Consequently, you should only consider carrying a credit card balance to cover necessary expenses when no other options exist. And in this case, only take this risk if you expect your income deficit problem to be short-lived.

Seeking Help for Personal Debt Problems

If you expect to remain in an income deficit for an extended period, or if you have been in this situation for a while, then contact a credit counsellor as soon as possible. Definitely consider seeing one if your only option at this point is a payday loan.

Personal debt problems have a serious negative consequence on marital harmony, family life and mental health. For anyone suffering silently through any of this, know that there is help. Credit counselling can be a welcome relief for most people who are worried about mounting debt. Some individuals simply require a few sessions in financial literacy.  And for others, we can arm you with a number of approaches to bring it under control.

About The Author

Shaheen Ahmed, RSSW, BIA, is a Credit Counsellor and Social Worker at Family & Credit Counselling Services of York Region with over a decade of experience in the non-profit sector. She helps individuals & families develop lifelong money management skills with financial problem-solving, credit counselling and debt management solutions. If you are concerned about mounting debt, contact us for a complimentary assessment. We counsel you on household budgets, credit scores, financial literacy and more.