Going to prison? You're still responsible for debt

A prison sentence can ruin relationships, careers and other opportunities, but it can also devastate a convict's bank account and credit score. Prison poses a unique financial situation -- a prisoner can be put away very suddenly and often for a long time. With little time and more immediate worries before a prison term begins, you may have little chance to protect your finances.

"Sometimes it is direct from the street to jail," says Dianna Eastwood, executive director of the John Howard Society of Durham Region, a nonprofit social service agency. Given limited contact with the outside world and only low prison earnings to cover the bills once imprisoned, even people who were making ends meet before going to jail can be released to find themselves in a financial nightmare.debt-and-prison

Prison is no excuse to not pay
Time in jail doesn't mean service providers and lenders will give you a break. Untended mortgages, personal loans, credit cards and fees for services such as telephone and television can wreak havoc on your credit score and increase your debt level while you're serving your sentence.

The Financial Consumer Agency of Canada (FCAC) website states
that "if you don't pay [your credit card bill] by the due date indicated
on your statement, you'll be charged interest on the entire amount you owe until you pay it in full." Additionally, you may face late fees. Your debt continues to grow, even if you're not spending.

"When you sign up for a credit card, you are entering into a legally binding contract, so it's important that you understand the terms and conditions," says Paul Northcott, communications officer for the FCAC. Those terms and conditions include paying at least the minimum payment on time, otherwise, your lenders will report negative behavior to credit bureaus, which could lead to a lower credit score.

How fast that happens "depends on the creditor," says Linda Lam, client care representative at the Credit Counselling Society of Hamilton. "Usually it's three payments or more. It really depends on the debt."

All of these late payments and rising balances will affect your credit score, which might not seem like the most pressing matter while you're incarcerated, but once you're out, you'll pay the price.

"Lenders look at these reports when they decide whether they will lend you money and how much they will charge you to borrow," says Paul Northcott. "Employers and landlords may also use credit reports to get a sense of your reliability."

What can you do to stay on top of payments?
If you are sentenced, you can take some steps to protect your finances before your incarceration begins. The first step is to give a trusted relative or lawyer power of attorney to look after your accounts. A power of attorney is legal document that you sign, giving a person authority to sign documents and handle accounts on your behalf.

"Creditors won't deal with a third party so you have to set up a power of attorney to work something out," Lam says. Someone with power of attorney can legally act on your behalf, so they can take money from your account to pay your bills, and can also speak with your creditors for you if you don't have enough cash to cover the costs.

Next, contact your creditors if you have debt, Lam says. "They'd have to call directly to the creditor and speak to someone and say, ‘This is what's happening to me in the next six months,' and see what you can work out. There should definitely be some dialogue there."

Prisoners do have the opportunity to earn some cash in prison by working in the kitchen, laundry or other facilities within the prison. However, prison earnings are meagre, and in 2013, prison wages were slashed, leading inmates to sue the federal government. The little money prisoners can earn while incarcerated is depleted by expenses involved with prison life, such as telephone calls.

Furthermore, prison wages are subject to garnishment from debt collectors, if the collectors choose to take the proper steps to make that happen.

All this means most of your daily expenses outside of jail have to be taken care of out of your regular bank accounts. That can be tough to do, unless proper arrangements are made before a jail term begins.

If your accounts are jointly owned, the other person on the account can take care of your financial business. If not, you'll need to grant a power of attorney.

See related: What to tell your creditor when you can't make payments, When and how to use joint credit successfully
Published June 3, 2016

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