More than one million of Canadians lost their jobs in March, so that means many people are likely looking for a deferral on payments with creditors.
With so many facing cash-flow problems – some for the first time – the federal government has encouraged banks to allow Canadians to defer payments and banks have agreed to work with customers to grant deferrals on an individual basis.
But what does that really mean? What does the application process look like and how do you go about negotiating a deferral if you’re fortunate enough to speak with live person on the phone?
A deferral is when payments are paused for an agreed period of time only to resume later when you are in a better financial position.
“It’s a band-aid solution to help get people through the current crisis, but interest still accrues and the principle doesn’t go away,” says Victor Fong, president of Fong and Partners Inc., a licensed insolvency firm in Toronto. “It’s a step in the right direction – but it’s a deferral, not a forgiveness.”
How to apply for a deferral
You can apply for a payment deferral through your online banking portal, but the terms can vary depending on the bank. For example, TD is offering a deferral on your minimum payment for three months while interest accrues or they are offering a credit on 50 per cent of your credit card interest for three months. Meanwhile, Bank of Montreal (BMO) is simply asking for your name, contact info and what you want to defer and they’re promising to call you in four business days to discuss it.
While every bank is tackling deferral differently, there are some details they all require for a deferral to be granted.
“Your account is good standing,” says Fong. “Not currently past due, no bankruptcies, delinquencies or charge-offs, you haven’t previously received a payment deferral for COVID-19 and your account has been open for more than four months. You fill out your name, account number and hit submit – that’s it.”
Sometimes all you get is an automatic yes or no. Other times – as is the case with BMO – you actually get to talk to a bank representative. If you managed to get a live person on the phone to negotiate a deferral, you should keep several things mind.
Negotiating for a deferral
Before you even get on the phone, it’s important to prioritize your expenses and see what you can still pay and what you can defer. Once you’ve figured that out, be proactive.
“Don’t just say, ‘I can’t pay so I’m not going to pay it’ because now you’re late, now they’re calling you because you didn’t pay and that’s not good,” says Doug Hoyes, licensed insolvency trustee and co-founder of Hoyes Michalos & Associates.
Instead, get on the phone, fill out the form, email your creditors and be patient. Then, once you speak with someone (even if you have to wake up every morning to wait on hold for hours) tell them what kind of deal you want.
“It could be, ‘This month I can only give you $20,’ or ‘This month I can’t give you anything, but next month, I can maybe restart my payments.’ Whatever it is, do not promise something you can’t do,” says Hoyes.
“You are the boss,” he adds. “I know it doesn’t feel like that, but remember if you don’t make the payment this month, there’s nothing they can do to you in the short term. You still have some control.”
Of course, Hoyes cautions that you still need to be reasonable and your proposed deal needs to be a win-win. Even though most banks are setting three-month deferrals on credit cards and six months on mortgages, he says that it is better to defer payments one month at a time and call the bank back every few weeks to re-evaluate your financial situation.
Whatever agreement you make, get it in writing because you don’t want your deferral recorded as something else – damaging your credit score.
“Equifax and TransUnion are run by human beings, they’re going to make mistakes. You want to make sure you get something in writing in case they log it as forgiveness or skipping a payment, rather than a deferral,” says Fong.
The calm before the storm
According to the federal government’s 2019 Financial Capability Survey, 73.2 per cent of Canadians had some sort of personal debt and 31 per cent already had too much. And that’s before the pandemic. Yes, we’re all in this together, as half a million Canadians requested a deferral on their mortgage alone as of April 3 but all these deferrals will increase Canada’s debt even more.
“Many people will use debt to survive during this period and even if there is no new borrowing, if you defer payments for a few months the principal doesn’t go down, and interest goes up, so that increases debt levels,” says Hoyes.
But we’ll worry about that when things go back to normal. For now Hoyes recommends prioritizing your health and basic needs.