Whether it’s your home, your car, your furniture or even your winning personality, we’ve all got assets. Most of us also have some debts. Quite often when people fall into financial trouble they first consider using what assets they have as a way to get out of debt. Unfortunately this may not be the best solution – read on to find out why:
We made a good investment with our home, why not use the equity in it? While using the equity you may have accumulated in your home to secure a loan to consolidate your debt may be an option for some, it should be done with caution. You’ll want to make sure the repayment terms are affordable, and also that whatever circumstances caused the debt are resolved. You’ll only have so much equity to borrow against before you’re just breaking even. It’s also a good idea to bear in mind that if the housing market experiences a downturn, or interest rates increase, those payments can become unmanageable.
I’m not using my RRSPs for anything else, shouldn’t I pay my debt with them? Habitually withdrawing from RRSPs to fill the income and expense gap is usually a sign of a larger issue. If irregular income, or constantly being short for living costs is causing you to make withdrawals to meet debt obligations, seek help from a licensed debt restructuring professional. RRSPs are meant to be funds strategically set aside for retirement. If you withdraw large portions, or even just continually deplete them, while you may not miss them right now, come retirement you could be facing hardship.
Isn’t this what my emergency funds are for? Just like with RRSPs, relying on savings to meet your day-to-day living expenses is a sign that something’s not working with your budget. Sit down and look at the numbers: Are you being realistic with your expense estimates? Have you forgotten to account for irregular expenses? Is your income fluctuating too much? Unless it really is a one-time unplanned for emergency, it’s generally best to leave the money in the bank and work on re-balancing your ongoing costs.
I’m in good health so I don’t really need my life insurance policy, right? Life insurance policies can be complicated things. Depending on the type of policy you have, there may be options to borrow against the cash surrender value that accumulates on your policy, or you may be able to withdraw that value outright. Be sure that you won’t inadvertently cancel the policy, leaving nothing for your loved ones, whom you probably got the policy for in the first place.
I think I’m headed towards bankruptcy, so I may as well… Think a bankruptcy or consumer proposal will mean giving up all your assets? Think again! Provincial exemptions allow people to retain the majority of their assets, if not all of them – even things like RRSPs and home equity. If you do happen to have some assets above and beyond the exemptions it still doesn’t automatically equal a loss of those assets – there are options within a bankruptcy or consumer proposal that allow you to retain those assets. We will assist you in explaining those processes in detail.
Before you rush off to your local realtor’s office or hurry to start redeeming your RRSPs make sure you’ve got all the facts at hand. You’ve worked hard to earn your possessions and there are provisions in place to help you protect them. Knowing is not owing!
To find out more about debt options available to you, please contact us for a free, confidential consultation.