Dealing With a Debt Problem? Here’s What to Avoid (and What to Do Instead)

Dealing with unmanageable debt can become a long-term problem for many individuals and, as Licensed Insolvency Trustees, sadly we often work with people who have realized too late that the steps they’ve been taking to try to fix their debt problems have made actually made the situation worse.

By taking the wrong actions, you may end up further in debt than when you started, and certainly feeling more debt-stressed as a result. Read on to learn what debt experts say consumers should avoid when it comes to dealing with personal debt – and what actions you should take to solve a debt problem.

1. Don’t Take on More Debt to Pay Debt 

Taking out more debt to pay the debt you already have often sets people on a rapid course to debt problems. Sometimes it’s not obvious that your debt load is increasing each month, but situations where you use credit to make your debt payments (such as taking from a line of credit to pay a credit card bill) often result in debt balances increasing steadily over time due to the high interest costs.

Consolidation loans can sometimes be a good option to reduce the costs of interest charges and simplify multiple debt payments, but for many consumers the problem here is they won’t qualify for consolidation financing at favourable interest rates and terms, making the loan payments unaffordable, or the terms risky.

Be sure to explore all your options together with a Licensed Insolvency Trustee before taking out a consolidation loan or other refinancing. Common consequences to refinancing often include:

• Loans that require you to bring in a co-signer or asset as a guarantee / security:
  • When you co-sign a debt, you are agreeing to be responsible for 100% of the debt in the event the other person does not pay – it’s not a 50/50 responsibility as people may assume.
    • For co-borrowers there can be serious consequences, and many people could not afford to take on additional debt payments in the event their co-borrowers cannot make their payments.
  • Similarly, pledging an asset against a new loan gives the creditor more recourse to recover their money in the event you have difficulty making your payments.
• Unaffordable payments:
  • Even with ‘best’ interest rates, consolidating all your eligible debts can be expensive.
  • Make sure you can truly and consistently afford the monthly payments and that you don’t continue to use credit cards.
• High-interest debts:
  • Qualifying for an affordable consolidation loan with a mainstream lender is often difficult unless you have a high income compared to your debt-load. Sub-prime lenders might be willing to lend, but interest rates and other terms can come at a very steep price.
  • Considering payday or instalment loans? This is extremely expensive financing that often starts a vicious cycle of borrowing and re-borrowing that should be avoided.

Learn More About Co-Signing Debts

If you can afford to make a monthly payment, you may be more successful with a non-borrowing consolidation solution. Typically, a Consumer Proposal offers the best consolidation option without borrowing – and Consumer Proposals nearly always have lower monthly payments compared to other consolidation solutions. You can also keep your assets and take your interest rate to zero.

2. Never Prioritize a Credit Score Over Your Personal (and Financial) Wellbeing

A lot of people place importance on credit scores without really understanding what they are – simply one of several variables that a lender will look at when setting terms for borrowing. The result is that what can be good for your cash-flow and budget can be ‘bad’ for your credit score; and, what’s good for the bank and credit score may not necessarily be good for your finances.

• People with zero debt and substantial savings in the bank may have a lower credit score than someone juggling many debts on a maxxed-out budget while only making minimum payments.
• Don’t look to your credit rating nor ability to take on new credit as a measure of good financial health. Credit scores don’t accurately reflect your ability to easily pay off your debt.
• Professionally speaking, a credit score alone is not an accurate rating of your financial health and cannot be relied on to gauge your daily finances.
• Focusing too much on your credit rating can negatively impact your personal cash-flow.

When it comes right down to it, being debt-free is almost always better for you than chasing a high credit score – and sometimes the best solution for you to get out of debt and start fresh can mean a temporary impact to your credit rating.

The key fact to remember is that credit scores are always changing, and after your debt is paid off, with the right actions it can take just a year or two to reestablish a ‘positive’ credit score. 

Bad Credit? Here’s What You Can Do

Minimum Monthly Payments Won’t Get You Out of Debt

It’s important to have a realistic plan to get your debts cleared, and ideally you would aim to have your non-mortgage debts paid off within five years at the most. Without a budget and a balanced, sustainable repayment plan you’re unlikely to get results paying down your debt. We encourage you to take note of the following:

• Making only minimum monthly payments will not get you to debt-free anytime soon – period.
• Planning to spend a large share of your budget on debt payments isn’t going to be sustainable beyond the very short-term (and even then, it might not be possible!).
• Budgets that leave no room for savings aren’t setting you up for success. You need to be able to accumulate an emergency fund at minimum; without that, you’re almost certain to rely on credit again.

Only making minimum monthly payments (or close to) on your debt is a top sign of a debt problem, and for good reason, as this will have you trapped in debt repayments long-term, and at a high cost. At an 18% interest rate, even a $1,000 credit card balance could take 10 years to pay off if you only make the minimum monthly payments – and the interest paid would be close to $800!

• Don’t make the mistake of letting a smaller credit card debt sit or dismissing it as “no big deal”.
• If you’re paying as much as you can towards your debts and that amount is hovering close to the minimum payment amount, talk with a Licensed Insolvency Trustee about options to pay off your debt.

3. Think Twice Before Withdrawing RRSPs to Pay Debt

Withdrawing RRSPs to pay debt might seem like a great way to use cash you’re not planning to spend soon, but taking out RRSPs to pay your debts down often creates a new set of problems, short and long-term:

• RRSP withdrawals are taxable, causing many people to owe Canada Revenue Agency more than they expected, leaving you much less in pocket than you planned.
  • It’s not uncommon to end up owing Canada Revenue Agency for income tax balances because of these withdrawals too!
• It’s difficult to replace savings you’ll need for retirement. Don’t make a problem for “future you” by compromising your retirement to deal with a current debt problem that has other solutions.

If you’re concerned about withdrawing an RRSP before a creditor can get hold of it, don’t be. RRSPs are exempt from seizure (i.e., protected) and no creditor can force you to cash them in.

• Many assets are exempt from seizure and it’s well-worth your time to book a free, confidential consultation to talk with a Licensed Insolvency Trustee to better understand your situation and all your options before making moves to utilize an asset in attempt to solve your debt problem.

4. Avoid Paying Off Family Debt First

If you find yourself in a situation where not all your debts will be paid in full you need to be very careful about who you pay, especially where related parties are concerned. Although it’s more emotionally difficult to ‘let down’ family than a bank, paying back family debt in priority to your other debts can be viewed as preferential treatment and may lead to serious consequences in the future.

Similarly, people who are dealing with a debt problem often seek to protect assets they have, which sometimes leads them to transfer an asset to a family member or sell the asset cheaply to a related person. This is an unnecessary battening of the hatches that can create trouble for you and the other person.

• By selling an asset at undervalue, you may be giving your creditors recourse to seek payment from the other party.
• Provincial laws actually provide you with automatic protection for many assets (even an allowance for home equity!)

If you find yourself deep in debt, it’s already too late to try to move your assets around. Most actions of this nature will end up making the problem worse and will not achieve the intended goal.

What Assets Can I Keep if I Declare Bankruptcy? Learn More

Learn the Warning Signs of a Debt Problem 

Don’t assume that because you haven’t missed any payments or continue to maintain a high credit score all is well; things like bouncing payments, collections and garnishments are not the only signs of a debt problem that’s reached an urgent state.

It can be difficult to recognize indicators that debt may be getting out of control; take a closer look at your situation if you notice warning signs of a debt problem such as:

• Debt payments are taking up a significant amount of your monthly income.
• You find yourself in a borrow-repay-borrow cycle, even just to meet your regular costs of living.
• You’re often saying things like “next month I’ll catch up” (but don’t).
• You have considered or been turned down for a traditional debt consolidation loan.
• Constantly thinking about your debt or worry/anxiety/fear/stress about your debt is a regular occurrence.
• Your financial situation is damaging your self-esteem, causing you to withdraw from daily activities, family/friends, or putting your life on hold.
• You downplay the situation to yourself, or your spouse/partner/impacted family members.
• You don’t have a debt repayment plan, or the one you do have requires you to be paying down your (non-mortgage) debt for more than five years.
• You’re only able to make slightly more than (or not even) minimum monthly credit card payments.

Signs of a Debt Problem You Shouldn’t Ignore – Learn More

5. Don’t Ignore a Debt Problem or Wait for Crisis to Act

Dealing with debt-stress can be incredibly overwhelming, and although it can be tempting to try to shut out the issue, one of the worst things you can do is to try to wait out or ignore a debt problem. Whether you’re just beginning to feel worried, or the situation has already escalated, the problem is likely to get worse. Action will be needed and it’s important to take the right steps.

The best thing to do is talk with a Licensed Insolvency Trustee to learn about solutions and get a plan to pay off your debt for good. A Licensed Insolvency Trustee can break down the complexities of debt so that you can understand all your options and make a fully informed decisions about your situation.

• There is no requirement to be ‘delinquent’ on your debts to access our debt help services.
• Many people who seek assistance from Licensed Insolvency Trustees have an ‘ideal’ credit rating but realize that they are facing a looming debt problem.
  • Research has shown that up to 70% of individuals who file bankruptcy have never missed a payment and may have strong credit ratings.

Understand Where to Get Qualified Debt Help – Avoid Unlicensed Advisors

If you’re looking for debt advice always speak with a Licensed Insolvency Trustee. While programs offered through debt consultants or credit counsellors may resemble benefits of Licensed Insolvency Trustee resources (such as Consumer Proposals), they are in fact very different and do not offer the same protection and legal standing.

Debt can be a major challenge and you need to know where to safely get guidance should you find yourself in need of debt help or advice. Licensed Insolvency Trustees are the only professionals that the government empowers and endorses to help consumers with debt. Some areas we can assist you with include:

• Explaining your legal rights and remedies when it comes to debt, providing free, impartial advice and knowledge about all your debt options.
• Whether a debt is collectable, and what to do when you can’t pay a debt.
• Solutions like Consumer Proposals or bankruptcy that can manage virtually all types of debts.

Licensed Insolvency Trustees also work with people who may not have a debt problem, but rather want to find a better way to pay down their debt. There are many events and circumstances beyond our control that can create a situation where you are worried about debt.

• Sands & Associates helps consumers across BC, and you can access our full suite of services in person at a local office near you, and over the phone or online – whatever is most comfortable and convenient for you.
• There is no cost or referral needed to connect with a qualified Licensed Insolvency Trustee.

You are not alone – and Licensed Insolvency Trustees are not here to judge you or the circumstances that may have brought you to us. We offer solutions and support so you can move forward with your life, free from the burden of debt and its overwhelming stress.

Debt is a Problem Like Virtually Any Other in That it Does Have Solutions

When faced with problem debt it can seem as though there’s no way out and many people feel hopeless or helpless. The truth is that you do have solutions, and there is a light at the end of the tunnel. Debt doesn’t have to last forever…it could take less than an hour to get a personalized plan to pay off debt for good.

Get confidential debt advice or work together on a debt-free plan with a local expert who cares. Book your free, non-judgmental consultation today.