There is much to know about debt when you are contemplating personal bankruptcy in Toronto, Barrie, Hamilton, Oshawa or elsewhere in Southern Ontario. A licensed insolvency trustee at Harris & Partners Inc. is available to discuss any concerns you may have about the debts you are facing.
What is Debt?
Debt is any amount of money or other assets that are borrowed (e.g., a loan). Debt makes large purchases possible that would otherwise not be affordable. In nearly all circumstances, debt costs the debtor interest in addition to principal repayment.
Debtor and Creditor
A debtor is one who owes money. A debtor can be an individual consumer who incurs debt for personal, family or household purposes or a business. When debt is in the form of a loan from a financial institution, then the debtor is called a borrower.
A creditor is an individual or company who is owed money, usually at a predetermined interest rate. A creditor does not have to accept less than the agreed amount. The debtor must pay the creditor even if there was no actual agreement but the creditor loaned money, performed services or a product to the debtor.
Unsecured and Secured Debt
Unsecured debt is a loan advanced without any security provided (e.g., credit card balance, utility bills and other types of loans or credit). Unsecured debt is a higher risk to the lender and so the lender will require a higher interest rate in return.
Secured debt is debt backed or secured by collateral (e.g., a mortgage is secured by a house, a car loan is secured by the car). If you default on repayment, the lender can seize the asset, sell it and use the proceeds to pay back the debt. Because securing debt reduces risks for the lender, the loan terms (e.g., the interest rate, loan time period) are more attractive for the consumer than with unsecured debt.
Interest is the compensation to the lender from a borrower for the use of assets, such as cash consumer goods, or large assets (e.g., home, vehicle).
The interest rate is calculated as a percentage of the principal that is charged an annual basis. Higher rates will apply to a borrower who is considered high risk in defaulting on the loan and vice-versa.
Two calculations for the interest rate are available. A simple interest rate is the principal amount borrowed multiplied by the annual interest rate multiplied by the number of years the loan is outstanding. A compound interest rate additionally takes into account accrued interest from the previous months. There is not much difference between the two calculations for short periods, but the disparity between them increases over time.
A fixed or variable interest rate can apply to debt. A fixed interest rate (such as applicable to credit card debt) remains fixed for the entire term. A variable rate fluctuates according to changes in a benchmark interest or index, such as the Bank of Canada interest rate.
Tax Deductibility of Interest
Interest paid on personal debt is not deductible from income tax but interest paid on money used to generate investment or business income may be tax deductible if it meets criteria set out by Canada Revenue Agency. For example, mortgage interest for personal use is not deductible but if some of that mortgage applies to a home business, then a portion of interest may be tax deductible.
To speak with a licensed insolvency trustee about debt in Toronto, Barrie, Hamilton, Oshawa or elsewhere in Southern Ontario, contact Harris & Partners Inc. today at 1-800-268-8093.