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If you’re taking the plunge and are preparing to deal with your debts head on – kudos!  Tackling financial challenges is often an area many people avoid until they can’t possibly ignore it any longer.  When it comes to debt strategies here are a few to avoid:

Cashing in RRSPs:  Redeeming RRSPs may seem like a great option to get out of debt, but in reality it often just creates a different set of problems.  Funds you’ll need later (or sooner for some!) won’t be available and the added taxable income can also cause people to owe Canada Revenue Agency more than they expect.  To those aiming to hand over retirement funds to creditors because they think those funds would have to be given up in a bankruptcy, think again – RRSPs are actually exempt from seizure and remain intact.  It’s a fact you can take to the bank – nobody can force you to cash in your RRSPs.

Borrowing more:  Taking out a line of credit to pay off a credit card may seem like a sound strategy – unfortunately this can often lead to both accumulating a balance rather than being paid off.  Gaining access to more debt to pay the debt you already have is normally just a recipe for “robbing Peter to pay Paul.”  For some people, it may make sense to try to resolve the frustration of multiple payments being due at varying interest rates, by consolidating your debts into one payment.  This can be a manageable way to tidy up debts  – as long as you’re not increasing your overall balance and the terms are affordable.  Make sure you have a clear horizon for being debt free –  if you can’t see yourself paying down these debts over the next 24-36 months, then you may need to get some professional debt advice on how to get yourself back to zero.

Getting a co-signer:  Getting a consolidation loan to help clear up debts can be a good strategy if done properly (see above) – but think twice before having someone co-sign for you.  If something happens and you’re unable to pay, you’re really just giving the bank another person to collect from.  To the flip side, if you’re being asked to co-sign for someone else be very cautious, likewise if you’re considering pledging any remaining equity in your home as a means to resolving debts – you can only take on so much debt at the expense of your co-signor or assets! Keep in mind that if you co-sign for someone else, you’re not just signing up to be responsible for half of the debt.  If the other person can’t pay the debt, creditors will come to you seeking payment in full.

Engaging an unlicensed advisor:  If you’re seeking assistance with debts ALWAYS check that you are dealing with a reputable company that is qualified to deliver what they’re promising and ensure you fully understand any process you are committing to.  Government-licensed trustees are the only people able to offer you the legal protection of both consumer proposals, or bankruptcy.  Be careful when researching debt consultants, and be skeptical of non-profit branding.

Whether the debts you’re facing are large or small, just taking those first steps in endeavoring to eliminate them are key; avoid the common pitfalls, add a balanced budget and you should be well on your way to debt-free in no time!

To find out how a licensed trustee can assist you with debt solutions please contact us for a free, confidential consultation.