Navigating the complex world of debt relief can be challenging without a clear understanding of the key terms and concepts involved. Whether you’re facing financial difficulties, exploring debt management options, or simply seeking to improve your financial literacy, our glossary provides definitions of essential terms related to debt and financial management. From basic concepts like ‘interest rates’ to more advanced topics such as ‘debt consolidation’ and ‘bankruptcy’, this debt relief glossary aims to empower you with the knowledge you need to make informed decisions about your financial future. Here’s a comprehensive glossary of key terms related to debt relief:
A
Accrued Interest
Interest that has been earned on a debt but not yet paid. In Canada, interest rates on unpaid debts can vary by province and type of debt.
Amortization
The process of gradually paying off a debt over time through regular payments, which cover both principal and interest. In Canada, this often refers to mortgages over a set period, typically up to 25 or 30 years.
B
Bankruptcy
A legal proceeding involving a person or business that is unable to repay outstanding debts. The process begins with a petition filed by the debtor or on behalf of creditors. All of the debtor’s assets are measured and evaluated, and the assets may be used to repay a portion of outstanding debt.
Budget
A financial plan that outlines expected income and expenses over a specific period, helping individuals manage their money and avoid accumulating more debt.
C
Canada Revenue Agency (CRA)
The federal agency responsible for tax collection and administration in Canada. The CRA has significant powers to collect unpaid taxes, including garnishing wages or freezing bank accounts.
Consolidation Loan
A loan used to pay off multiple debts. This simplifies payments and can sometimes result in lower interest rates.
Consumer Proposal
A legally binding agreement filed with a Licensed Insolvency Trustee (LIT) in Canada. It allows individuals to negotiate with creditors to repay a portion of their debts over a maximum period of five years.
Credit Counselling
A service offered by non-profit organizations or agencies in Canada that helps individuals manage their debt and improve their financial situation. Credit counsellors provide guidance on budgeting, debt repayment strategies, and may negotiate with creditors to reduce interest rates or create manageable payment plans. They can also assist with debt management programs (DMPs) to consolidate multiple debts into a single, affordable monthly payment. These services aim to help individuals avoid bankruptcy and regain control of their finances.
Creditor
A creditor is an individual, financial institution, or organization in Canada that lends money or extends credit to another party with the expectation of being repaid. Creditors can include banks, credit card companies, mortgage lenders, and other entities that provide loans or services on credit. If the borrower fails to meet the repayment terms, the creditor has the right to take legal action or use other methods to recover the owed amount, such as garnishing wages or repossessing assets.
D
Debt Consolidation
Combining multiple debts into a single debt, often with a lower monthly payment and interest rate.
Debt Management Plan (DMP)
A structured repayment plan set up by a credit counselling agency to help individuals pay off their debts.
Debt Settlement
Negotiating with creditors to pay a lump sum that is less than the full amount owed to resolve the debt.
Default
Failure to meet the legal obligations (or conditions) of a loan, e.g., not making the required payments.
Discharge
A discharge is the legal release of a debtor from the obligation to repay most of their unsecured debts. Once a bankruptcy discharge is granted, the debtor is no longer legally required to pay the discharged debts, and creditors cannot take any further action to collect them. The discharge can be automatic after a set period, typically nine months, but may be delayed or conditional based on the debtor’s conduct and financial situation. Certain debts, like student loans (under specific conditions), child support, and fines, are not discharged and must still be repaid.
Dividend
In the context of Canadian bankruptcy and insolvency, a dividend refers to the payment made to creditors from the funds available in a bankruptcy or consumer proposal. After the assets of the debtor are liquidated or payments are made under a consumer proposal, the proceeds are distributed to creditors in proportion to the amount they are owed. The Licensed Insolvency Trustee manages this distribution process, ensuring that secured creditors are paid first, followed by unsecured creditors, based on the rules set out in the Bankruptcy and Insolvency Act (BIA).
E
Equity
The difference between the value of an asset and the amount of debt owed on it. For example, home equity is the market value of a homeowner’s interest in their real property minus the outstanding balance of the mortgage.
Exempt Assets
Exempt assets are certain types of property that a debtor is allowed to keep even after declaring bankruptcy. These exemptions vary by province and territory but typically include items such as basic household furnishings, clothing, tools of trade, a portion of home equity, and in some cases, a vehicle up to a certain value. The purpose of exempt assets is to allow the bankrupt individual to maintain a basic standard of living and the ability to earn a livelihood while they go through the bankruptcy process. The specific exemptions and their limits are determined by provincial and territorial laws.
F
Foreclosure
The legal process by which a lender takes control of a property used as collateral for a loan after the borrower fails to make loan payments.
G
Garnishment
A court order directing that money or property of a third party (usually wages paid by an employer) be seized to satisfy a debt owed by a debtor.
Guarantor
A guarantor is an individual or entity in Canada who agrees to take responsibility for repaying a debt if the primary borrower fails to do so. By signing a guarantee agreement, the guarantor provides additional security to the lender, making it more likely that the loan or credit will be approved. If the borrower defaults on the debt, the guarantor is legally obligated to pay the outstanding balance, including any interest and fees.
I
Insolvency
A financial state where an individual or organization can no longer meet their debt obligations with their available assets.
Interest Rate
The percentage of a loan charged as interest to the borrower, typically expressed as an annual percentage of the loan outstanding.
L
Licensed Insolvency Trustee (LIT)
A professional licensed by the Office of the Superintendent of Bankruptcy Canada to administer bankruptcies and proposals, providing advice and managing the legal processes involved. They are the only professionals in Canada legally able to file all forms of debt relief.
Line of Credit
A flexible loan from a Canadian financial institution that allows the borrower to draw up to a certain limit and only pay interest on the amount borrowed.
M
Means Test
In Canada, a means test is part of the bankruptcy process that determines if you have surplus income, which may require higher payments to creditors during your bankruptcy.
Mortgage Stress Test
A financial test implemented by Canadian regulators to ensure that homebuyers can afford their mortgage payments even if interest rates rise.
N
Non-Dischargeable Debt
Debts that cannot be eliminated through bankruptcy, such as certain taxes, student loans, alimony, and child support.
O
Office of the Superintendent of Bankruptcy (OSB)
The Canadian government agency that oversees the insolvency process, including the regulation of Licensed Insolvency Trustees.
P
Pension Plan
In Canada, pensions are protected in bankruptcy, meaning they generally cannot be seized by creditors.
R
Receiver
A receiver is a person or entity appointed by a court or a creditor to take control of and manage the assets of a company or individual that is in financial distress or default. The receiver’s primary role is to protect and preserve the assets, manage them effectively, and attempt to repay the creditors. Receivership is typically used in corporate insolvency cases where a company cannot meet its financial obligations. The receiver operates with the authority to sell assets, settle debts, and ensure that the company’s operations continue, if possible, while working to maximize recovery for creditors.
Refinancing
Replacing an existing debt obligation with a new one under different terms, usually to reduce interest rates or monthly payments.
Repossession
In Canada, if you default on a secured loan, such as a car loan, the lender has the right to repossess the asset used as collateral.
S
Secured Debt
A debt backed or secured by collateral to reduce the risk associated with lending. If the borrower defaults, the lender can seize the collateral.
Statute of Limitations on Debt
In Canada, the statute of limitations for creditors to sue for unpaid debt varies by province, typically ranging from two to six years.
Stay of Proceedings
A stay of proceedings is a legal order that temporarily halts all legal actions and collection efforts against a debtor who has filed for bankruptcy or a consumer proposal in Canada. Issued by the court or a Licensed Insolvency Trustee, the stay of proceedings prevents creditors from pursuing lawsuits, garnishing wages, or taking any other actions to collect debts while the bankruptcy or proposal process is underway. This protection provides the debtor with a reprieve to reorganize their financial situation or liquidate assets under court supervision, ensuring that the legal and administrative processes can proceed without interference from creditors.
Surplus Income
Income above a certain threshold that the bankrupt individual must pay towards their debts as part of their bankruptcy process.
T
Tax Debt
Unpaid taxes owed to the Canada Revenue Agency (CRA). Tax debt can be included in bankruptcy or a consumer proposal, but the CRA has strong collection powers.
U
Underwater Mortgage
In Canada, this refers to a situation where the outstanding mortgage balance exceeds the current value of the home.
Unsecured Debt
Debt that is not backed by collateral. Examples include credit card debt, medical bills, and personal loans.
W
Wage Garnishment
A court order in Canada that allows a creditor to collect a portion of your wages directly from your employer to repay a debt.
Understanding these terms can help you to navigate the complex landscape of debt relief and make informed decisions about managing your finances. For personalized advice and services, book a free consultation with one of our experienced Licensed Insolvency Trustees at Spergel.