It can take a long time to realize that your slowly-accumulating debts have become a problem too big to handle alone. Many people struggle for months and even years to get out of debt before seeking the help of a professional. Sadly, sometimes people learn too late that the steps they’ve been taking to solve the problem have actually made it worse!
Blair Mantin, a Licensed Insolvency Trustee and Vice-President of Sands & Associates joined Global News to share five things people often do when they find themselves in debt that actually make their debt problem worse.
Watch the video clip here, and read more below:
What NOT to Do | 5 Ways to Make a Debt Problem Worse
People who feel they are approaching a bankruptcy filing often seek to protect what assets they have, which sometimes leads them to transferring an asset to a family member or selling the asset cheaply. 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!)
- Thinking of withdrawing RRSPs to pay off your debt? Those are safe too!
If you find yourself deep in debt, it’s already too late to try to move your assets around. Most actions will end up making the problem worse and will not achieve the intended goal.
Using Credit to Pay Debt
Going further into debt to pay the debt you already have (such as paying a credit card with another one) is just postponing the inevitable day of reckoning.
- Eventually interest charges and minimum payment balances will catch up to you and there will be no further room available to move money around.
- Avoid starting the cycle of payday loans – period! The interest rates and fees are so high that many people find themselves with multiple pay day loans outstanding at the same time.
- Traditional debt consolidation loans can be a viable solution for some people, but they are often difficult to qualify for without a great credit rating or big asset to pledge as collateral.
If you have the ability to pay off some of your debt, but cannot afford the full amounts owing, consider a Consumer Proposal as a debt consolidation alternative.
Bringing in More Borrowers
Cosigning a debt with another person means that both parties are equally responsible for repaying the whole debt, regardless of what it was used for. This is not “50/50” liability, where the debt would be split. Rather, it’s “100/100” liability meaning that each person on the account could be held liable up to the full amount owing.
- Taking on a debt with a cosigner when you’re already struggling financially often just introduces another layer of stress and emotional responsibility.
- Many clients tell us that bringing in a cosigner actually ‘enlarges the problem’ because now they are also worried about letting down the cosigner.
- Some types of debts have an “acceleration clause”, allowing the bank to demand immediate payment for the full balance if the borrower breaks any part of the agreement (like missing payments).
- As Licensed Insolvency Trustees we’re often asked – when is it wise to cosign a debt for someone else? Our answer: ALMOST NEVER!
If you’re considering being the co-signer for another person, understand you could be letting someone else ruin your credit rating if that person defaults on payments.
Ignoring your Debt
It’s easy to become so discouraged with mounting debts that you start avoiding them. Unfortunately, your creditors won’t ignore you back.
- Dodging creditor calls or not opening your mail means that you won’t know if collection action is being escalated.
- If a court action pursued against you is successful, the creditor can then start to seize assets or wages or both; which can very quickly impact your ability to meet your monthly expenses.
- If a creditor takes you to court they can actually request that the court order a warrant for your arrest in the event you don’t appear.
- Government creditors (like Canada Revenue Agency) can take extreme actions such as wage garnishment or a bank account seizure very quickly, giving you little time to react.
The stress of debt can be overwhelming for you and your loved ones. Many people experience depression and anxiety as a result of their financial pressures.
- Don’t give up – you are not alone!
- Seek a reputable professional to get a plan that will help you deal with your debt and get the relief you need.
- Licensed Insolvency Trustees help thousands of people through their financial challenges every year. Best of all, it’s absolutely free to get their advice!
Each year more than 120,000 individuals in Canada take formal steps to restructure their debts in either a bankruptcy or Consumer Proposal proceeding and become debt free.
Few Canadians fully understand their obligations, rights and remedies when it comes to consumer and business debt. Always find out the facts before taking actions that could have unintended consequences!