People often think that debt problems generally stem from poor budgeting or a tendency to overspend. The reality is that some of the most frequent leading factors that cause people to file a personal bankruptcy or consumer proposal are actually job loss or reduced income, separation or divorce, and illness, injury or health-related problems.
Job loss or reduced income
Very few Canadians are financially prepared to face a job loss, or a reduction in their regular income. Even if you are eligible to receive EI benefits, the waiting period can often mean turning to credit to meet regular household expenses in the interim. Many people will also redeem RRSPs or sell assets to keep financially afloat if their income becomes insufficient to meet their household demands.
Quick Tip: You do not have to be working in order to file a bankruptcy or a consumer proposal. You are also entitled to a provincial exemption on most assets, including RRSPs.
Separation or divorce
It’s no surprise that a couple accustomed to two sets of income to run a household can easily become overburdened once the incoming funds are cut in half but the costs remain the same, as happens when one member of the couple moves out unexpectedly. Expenses to set up a new household and legal costs to finalize a separation/divorce or child custody order can also accumulate quickly. Stay-at-home parents are additionally often faced with a new set of challenges if they must attempt to re-enter the work-force.
Quick Tip: Co-signing a debt for your spouse can have unintended consequences. If the other party doesn’t pay, the creditor can demand full payment from you. Consider carefully before taking on joint debt!
Illness, injury or health-related problems
Whether the health problems result in time away from work or an increase in expenses due to out-of-pocket medical costs, unless there are sufficient savings to cover unexpected health issues, many people will wind up relying on credit. Disability insurance often pays out just a portion of a person’s regular income, leaving an income gap as well.
Quick Tip: The added stress of debt can escalate quickly and aggravate underlying health problems. Seek professional guidance from a licensed Trustee sooner rather than later.
Tax debt and student loans
Money owing to Canada Revenue Agency (CRA) can easily snowball into an unmanageable amount when unexpected reassessments or multiple outstanding return filings occur, often due to accounting errors or a lack of knowledge about proper filing and remittance requirements. Because CRA is a powerful creditor and can garnishee your wages very quickly, tax debts are often urgent in nature. Similar to income tax debts, monies owing for student loans can cause financial hardship as well. Students in particular often overestimate their ability to repay student loans and underestimate the difficulties they may face entering their chosen field of work, leading to student loans being carried for long periods of time.
Quick Tip: A bankruptcy or consumer proposal are the ONLY methods CRA or Student Loans will accept to reduce or eliminate debts in full.
Many people surveyed over recent years have stated that general financial mismanagement and overextended credit have been a contributing cause to their financial problems. The term “financial mismanagement” is broad and often encompasses events that many people experience, such unexpected expenses as major home repair, a family member’s illness; or a life-altering event such as divorce. Money problems can and do happen to just about everyone!
For more information about your debt options, please contact us for a free, confidential evaluation of your situation.