How Do I Get Out of Debt? Expert Tips, Do’s and Don’ts

Whether you consider your debt a minor nuisance, a major category in your personal budget, or a growing headache, most Canadian consumers aim to shrink their debts as fast as possible. Unfortunately, the ins and outs of debt management can be more complicated than they appear, and many people unknowingly try to get out of debt using strategies that can be unsuccessful or counter-intuitive, keeping themselves in debt longer, or even making their debt problem worse.

If you’ve decided to take aim at your debt, we’re here to help! By sharing our expertise and professional insights we hope to support you on your journey to becoming debt-free. Looking for best practice tips on how to get out of debt? Do’s and don’ts from seasoned debt management professionals? Read on to learn about common pitfalls to avoid and get professional pointers on debt solutions to try instead to achieve that goal of zero debt.

Don’t Put Your Assets at Risk

Thinking about cashing in an RRSP? How about refinancing your mortgage to consolidate debt? If you are in a position where you have assets available to you it might seem like an obvious strategy to use whatever you have at your disposal to pay off your debt – but we caution against this move without first seeking input from a Licensed Insolvency Trustee. Here’s why:

• Using an asset to guarantee a debt gives creditors much more recourse to collect from you in the event you’re no longer able to maintain your payments.
• Disposing of an asset may have unexpected costs, meaning you’ll often end up with less in your pocket than you planned for.
• Retirement funds and other savings can be difficult to replace before you need them again.
• Financial emergencies and life events can and do happen, and with savings or other assets gone you may leave yourself with few remaining resources to cope, aside from taking on more debt.

If you’re feeling pressured to cash in or pledge an asset to pay debts always talk with a Licensed Insolvency Trustee first to understand your rights and remedies. For example many people are unaware that Provincial and Federal laws across Canada give shelter to many assets (including RRSPs and home equity allowances), effectively protecting them from creditors even if you choose to file bankruptcy.

Debt Help Tip: Being in debt can feel frustrating and overwhelming, but your debt-free future IS possible. Whether it’s big or small, a spark of hope can go a long way.

• Let yourself feel some optimism of how life will be without that monthly credit card payment, or how secure you will feel knowing you have savings in the bank.
• If you need some inspiration, start here and take it from someone who’s been there.

Don’t Enlarge the Debt Problem by Legally Involving Others

While getting emotional support is always a great idea, many Licensed Insolvency Trustees would agree that officially involving a family member or friend in a debt management strategy, such as accepting a personal loan or as a co-signer, has potential to backfire and should generally be avoided.

• Co-signing debt together gives your creditor the ability to demand the other person pay the whole debt (sometimes all at once) if you miss a payment or falter on another borrowing condition.
  • Your co-signer could be subject to the same potential for legal action as you if something happens and you can’t keep up payments.
• Owing money to family and friends can be a major source of emotional distress and can seriously strain your important relationships.

Legal responsibility for debt and what is considered ‘shared’ debt between couples and families is often misunderstood; a Licensed Insolvency Trustee can help you determine whether a debt is payable, and what you can do about it. Many married couples for example, operate under the mistaken assumption that all debts owed by one spouse are made joint by virtue of marriage and therefore must be paid by both spouses. This is not the case and this simple misunderstanding can lead to couples making poor financial decisions by using the assets of one spouse to pay debts of the other spouse where there may have been no legal requirement to do so.

Struggling with debt and financial stress can feel isolating – know that you are not alone. Support and resources are available to you, please reach out – we’re here to help.

Don’t Rely on Unaffordable Debt Consolidation

Under the right circumstances consolidating debt can be a successful strategy to getting creditors paid off with a simple, combined monthly payment. In addition, consolidation loans can be especially appealing to people hoping to improve their credit rating simultaneously. Whether through a balance transfer, bank or other financial institution, there are key considerations to be aware of and you should always read consolidation terms and conditions carefully to avoid being caught unaware.

• Best-interest-rate consolidation loans can be difficult to qualify for unless you have a favourable ratio of debt-to-income, an asset to use as collateral, or a co-signer to back you. We often meet with individuals who had approached their bank to consolidate debts and were surprised to learn that they did not qualify, notwithstanding many years of strong payment history.
• Sub-prime rates can make monthly debt consolidation payments too high to keep up with long-term, and they’re sometimes unaffordable from the get-go.
• Consolidation programs though credit counsellors usually mean you don’t have to pay ongoing interest, but be aware that there may be unregulated fees that will need to be paid out of your pocket.
• Because they are an informal process (not a legal one), non-profit and for-profit credit counsellors are limited in the types of debts they can assist you in consolidating. Government debt, for example, can never be consolidated as part of a credit counseling debt management plan.

Whether you opt for a credit counselling consolidation program, a loan from a bank, or some other solution – the bottom line is that if the payments are too high for you to realistically manage or the terms don’t fit your circumstances, it may be a temporary band-aid solution at best.

In many cases using debt to pay debt just doesn’t work. You may be more successful using a solution that will both consolidate your debt and cut it down to what you can afford to pay. If you can afford even a modest monthly payment on your debt, a legal consolidation with a Consumer Proposal may be a better option since there is no borrowing required and the payments are typically much lower than other consolidation options.

Debt Help Tip: Have you used a financial calculator to help you map out payments or compare debt strategies? Here are a couple we like:

• Financial Goal Calculator: You can use this Government of Canada calculator to try out different scenarios showing you how long it will take to pay off debts at their current interest rates. You can also use this calculator to plan your savings goals.
• Debt Options Calculator: Sands & Associates’ free online debt calculator will show you a breakdown illustrating four different options for paying off debt over a three-year period. You can compare payments for consolidation loans, Consumer Proposals and more.

Don’t Prioritize Your Credit Score

Many people worry about the impact their debt is having on their credit rating, and what further impacts various debt management options might have on their ability to borrow money in the future. Our professional advice matches that of many debt help experts – “your credit score doesn’t really matter, and often doesn’t help you”.

• Most people can’t afford to be in debt long-term, and if you must choose, being debt-free should always come before a high credit score.
• A temporary hit to your credit rating could save you thousands of dollars in interest charges and get you out of debt years, even decades sooner.
• Because your credit rating is merely a snapshot in time and your credit report is always being updated, your score can change in a relatively short period and it’s virtually impossible to permanently “ruin” your credit history.
  • Even personal bankruptcy, which many people fear as being the most severe credit rating consequence, will only be reflected on your credit history for 6 years – and what’s more, you can still apply for new credit at any point.

A focus on a credit score is often a barrier for people trapped in a payment cycle. They make all their monthly payments but don’t see progress paying off their debt, and although they might recognize they’re stuck, they’re too paralyzed by their credit score to consider restructuring solutions that can help.

It can be difficult to accept at first blush, but please know that your credit score is not an accurate gauge as to your financial affairs or measure of personal responsibility – nor should you let it keep you up at night.

Debt Help Tip: Sometimes a little knowledge can go a long way. In Canada you can access services and support from qualified, government-approved professionals – Licensed Insolvency Trustees.

• You can get advice about your debts, professional insights into your rights and remedies, and help comparing all your debt management options – all at no cost.
• Licensed Insolvency Trustees offer confidential debt assessments, no referral is needed to connect.

Got an hour? It could take less time than that to get a plan to be debt-free. Connect with a BC debt expert today – book your free, non-judgmental debt consultation here.