How Can Canadians Better Manage their Debt
The level of consumer debt in Canada has been on the rise for the last 30 years. Households now owe more than $2 trillion collectively. While some people like to talk about “good debt” versus “bad debt”, the most important measures are total debt or the debt-to-income ratio. When you take on too much debt, it can be hard to get out from under the burden.
Types of Consumer Debt
Consumer debt comes in many forms. The most common types include mortgages and credit card debt. However, unsecured lines of credit, overdue bills, payday loans, student loans, child support, alimony, secured loans and Canada Revenue Agency debts (such as income taxes) are also considered debt. Clearly it can add up quickly.
What are the Risks of High Debt Levels?
Owing money can be an incredibly stressful situation. When you can only make minimum payments or find yourself missing payments all together, it will take years to get rid of the debt and can end up costing you even more money all together. If you are delinquent, then credits will likely hit you with late fees and may even raise your interest rates. When you’re focused on paying down your debt, you’ll have less income available for other expenditures.
As your debt burden and delinquency rates increase, you’ll also see your credit score fall. Your credit score is an indicator of how likely you are to repay debt. In addition to future lenders, your employer, landlord or insurance company may want to know your credit score. Once your credit score has been affected by high debt levels, delinquencies or defaults, it will take a long time to build it up again.
Does Canada Have Debt Forgiveness?
The short answer to the above question is no, Canada does not have debt forgiveness. However, you could work with a Licensed Insolvency Trustee or non-profit credit counseling service to learn how to lower or erase your debt. These debt relief services are available in every province in Canada.
Can All Debt Be Reduced?
Each type of debt has specific characteristics that indicate whether it can be included in debt reduction programs or not. Here are a few examples of types of debt that have special provisions:
Child Support and Alimony:
No matter your financial situation, these debts have to be paid.
Many lenders will require you to sell off an asset in order to pay off a loan. If you don’t do that then the asset can be repossessed. If you fail to pay your mortgage, you may face foreclosure.
In general, student loans won’t be erased with bankruptcy during the seven years following your education. During this period, they usually can’t be included in proposals to manage debt. You could possibly lower this period to five years, if you can show that you’re working in your field of education and you’ve done everything possible to repay your loans.
Solutions to Your Debt Problems
There are multiple ways to get out of debt. Here are the seven main solutions.
1 Make a Budget
All households should have a budget which clearly lays out income sources and expenses. Loan repayments should be included in the expenses. After taking stock of your financial situation, you can then identify areas where you can cut costs and divert this money to paying off your loans.
2 Consolidate Debt
If you can get a credit card or personal loan with a lower interest rate, then you could move all of your debt over to that card or loan. While you still would have the same amount of debt, your interest payments may become more manageable.
3 Call Creditors
It’s also worth calling the companies you owe money to and see if they can lower your interest rate. If you’ve been making your minimum payment consistently, then they may be willing to work with you. If you’ve already missed payments or maxed out your cards, then you’re probably out of luck. You’ll have to be persistent with this method as most creditors are trained to say no. Speaking with a supervisor may help you get the lower rate you need.
4 Consumer Proposal
To file a consumer proposal, you’ll need to hire an insolvency trustee who will work with creditors to reduce how much you have to pay back.
5 Debt Management Plan
With this method, you’ll hire a credit counselor to contact your creditors to negotiate lower interest rates or lower total debt levels.
6 Debt Settlement
You need a credit counselor for this scenario as well. The counselor will negotiate a lump sum payment that is less than the total amount you owe, and the rest of your debt will be forgiven.
If all else fails, there’s bankruptcy. In bankruptcy, all of your unsecured debt will be erased. While this may sound like a tempting and easy way out, there are some significant drawbacks to this approach. Your credit score will be impacted negatively, and it can take years to strengthen it. Also, you’ll probably have to hand over some of your assets.
If you decide to pursue a plan to manage your debt, be sure to ask a lot of questions so you know what you’re getting yourself into. First, you’ll have to figure out how to qualify for different debt relief programs. Then ask how much each plan will cost and what the different fees cover. You should also ask which types of debt will be included in the plan. Lastly, you may be entitled to some income tax relief, so be sure to ask how taxes will be affected.
How to Get Started Managing Your Debt
If possible, try to pay down your debt yourself. However, if you are still crippled by your payments even after setting a budget and cutting out unnecessary spending, then reach out for assistance. Start with your creditors and then work with a credit counselor. It’s not easy and it will take time but reducing your debt load is worth it.