The good intentions of others can sometimes lead to receiving bad advice. And, when it comes to money matters and dealing with debt, there can be many pitfalls that often catch consumers unaware. In Canada Licensed Insolvency Trustees are the only professionals fully qualified and endorsed by law to help consumers with debt. Every day we connect with individuals who are looking for expertise and guidance in how to better manage their debt and overall financial affairs.
Read on to learn about some common pieces of advice you may want to think twice before taking in managing your debt, and the unintended consequences and red flags of which you may not be aware.
Debt Management – or Debt Mistake?
No two situations are exactly alike, but if you’re getting advice to pursue any of the following tactics, you may want to pause and get a second opinion before pursuing further action – especially if you’re already struggling to pay off your debt.
Solving Debt with Refinancing
It’s not always a mistake to use borrowing as a solution to deal with debt, but be careful to take a close look at the details and consider all of your options before turning to a consolidation loan or other debt refinancing. This common advice can be risky especially in situations where:
- Financing relies on a co-signer or an asset as a guarantee of security:
- When you co-sign a debt, you are agreeing to handle 100% of the debt in the event the other person does not pay, not a 50/50 split responsibility as people may assume.
- Co-signing debts or simply borrowing from family or friends also puts personal relationships at risk; your intention to repay may be there, but not the financial ability.
- Monthly consolidation payments are nearly unaffordable:
- Even with ‘best’ interest rates and terms, borrowing to consolidate all your debts can be expensive. Make sure you can truly and consistently afford the monthly payments needed.
- Divide your non-mortgage debts by 60 – does this number look affordable? If not, you may benefit more from non-borrowing consolidation with a Consumer Proposal.
- Borrowing will be done with a high interest rate:
- Qualifying for an affordable consolidation loan with a mainstream lender is often difficult unless you have high income compared to your debt-load. Sub-prime lenders might be willing to lend you money, but interest rates and other less desirable terms can come at a very steep price.
- Considering payday or instalment loans? Just don’t!
Cashing In on Assets
Although it may seem like a reasonable strategy to pay down debt, debt management actions that rely on you selling your assets can often aggravate a debt problem rather than avoid one. Here are two common examples:
- Depleting RRSPs in attempt to protect them from creditors or withdrawing RRSPs to try to manage a short-term debt problem.
- Cashing in RRSPs is almost never advisable by Licensed Insolvency Trustees, and unfortunately many people do this without understanding all the rules, including that:
- BC residents are entitled to protection on many different assets, including a comprehensive exemption allowance for RRSPs – meaning they are protected from creditors.
- The tax payable on RRSP withdrawals often leaves you with far less in net proceeds than is otherwise helpful.
- Involving family members through transferring assets, preferential payments or otherwise.
- In addition to creating a shared debt obligation from co-signing, other actions may have unintentional legal consequences for family who end up involved with your debts.
- Be careful about who you pay (especially family) if you find yourself in a situation where you’re unsure about your ability to pay all your debts in full.
An Emphasis on Your Credit Score
When it comes right down to it, being debt-free is just about always better for your finances than a high credit score – and sometimes getting out of debt can mean a temporary impact to your credit. Although many people place a misunderstood importance on credit scores, the reality is that they are simply one of several variables that a lender will look at when setting terms for borrowing.
- Your credit score is largely driven by how profitable of a customer you have been for lenders over time – credit scores were originally designed as an internal measure that banks could use to determine which customers contributed most to their bottom line.
- 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 aren’t necessarily good for your finances.
- A credit score alone is not a correct rating of your financial health and cannot be relied on to gauge your daily finances. What’s more, focusing too much on your credit rating can negatively affect your personal cash-flow as you may be paying high interest costs in servicing debts – your credit score looks great as you never miss a payment, but you may be forgoing any savings for the future.
Getting Debt Advice & Help
It’s important to take guidance and expertise from the right place in all things. When it comes to managing financial affairs, including debt strategies, our advice is to be discerning:
- Sometimes friends and family don’t give the best advice. It’s unintentional, but they may simply not have all the facts, despite an enthusiasm for a particular financial area or strategy.
- Great personal referrals are one thing to consider when you’re looking to engage professional services but remember that no two situations are exactly alike.
- You should still do your due diligence before making any commitments and expect whatever services you engage to be tailored to your unique needs and circumstances.
If a recommendation is coming from a professional, be sure it is truly the right one. Even amongst the pros, not all professionals within a financial sector will have the exact ability and resources for each specific part of money management. Whether insurance, investments or debt, there is often a lot more complexity than people realize.
Also be careful when doing research online – while we have more information available on virtually every topic than ever before, there is also a lot of misinformation too!
Licensed Insolvency Trustees
Debt can end up a major personal challenge and Canada has only one government-regulated and empowered debt help professional that provide an unmatched resource should you need guidance – Licensed Insolvency Trustees.
A Licensed Insolvency Trustee can help break down the complexities and law of ever-changing statutes and precedents that relate to debt so you can clearly understand your rights and options. It’s essential that you make fully informed decisions about your situation.
Some areas of debt we can help you with include (but are not necessarily limited to):
- Understanding all your legal rights and remedies when it comes to debt.
- Exploring whether a debt is collectable, and what you can do when you can’t pay a debt.
- Providing free impartial advice; services for debt solutions to manage virtually all types of debt.
Debt Advisor Red Flags to Watch Out For
A “buyer beware” caution should be used if you engage the debt management services of a non-Licensed Insolvency Trustee. Be sure to fully understand the service you’re considering, check for relevant consumer alerts, and find out more about the advisor’s standing in Canada. Be cautious and check-in with your gut feeling if you meet an advisor who:
- Has unclear (or a lack of) credentials or licensing, or who is not licensed in BC.
- Doesn’t take time to listen to you and understand your situation.
- Doesn’t make space to let you ask questions and fully understand the answers.
- Engages in any high-pressure or even aggressive sales tactics.
- Has a confusing fee structure, or charges fees to negotiate with your creditors that do not meet the Debt Collection and Repayment Regulation.
- Generally seems too good to be true, with promises such as “instant credit repair” “guaranteed debt reduction” or “government programs”.
Don’t hesitate to get a second opinion from a Licensed Insolvency Trustee at any point. We often work with people who found a self-directed approach or a credit counselling debt management program not enough to meet their needs, or who were given incorrect information about how debt could be handled.
Free Non-Judgmental Debt Advice
Debt can impact us far beyond our finances. Like the “trust your gut” advice of watching out for red-flag debt services, you should also pay attention to how you feel about your financial affairs. Many people get caught up in a sense of “debt normalcy” and “everyone has debt” and disregard how much stress their financial affairs may be placing on them.
If you’re struggling with debt know that you are not alone, and you have help and resources available to you. Sands & Associates Licensed Insolvency Trustees work with residents across BC and our streamlined services allow you to connect from virtually anywhere.
Get help with debt and explore all your options for becoming debt-free. Book your free confidential debt consultation with a friendly Sands & Associates debt expert today.