Many consumers have debt repayment factored into their monthly budget as a standard expense and consider debt payments part of their regular financial affairs. But, according to some Licensed Insolvency Trustees, there are signs that often indicate a better plan is needed to properly deal with personal debt. If you’re waiting for a sign to financially focus and tackle your debt for good – this is it! Read on to learn more.
Are Your Debt Payments Actually Hiding a Debt Problem?
One common issue with debt is that its challenges often start long before the obvious signs of a debt problem appear. For example, it’s easier to recognize that your debt has become a problem if you are completely missing payments, or a creditor is garnishing your wages. Unfortunately many of us wind up operating on financial ‘autopilot’ and don’t give debt repayment the consideration and planning needed to avoid being stuck in debt long-term. Start by considering how you’re currently managing your debt payments:
- Making Just the Minimum Payment on Credit Cards
The high interest charges that can accumulate on a credit card balance is what makes credit card debt both risky and costly. If you don’t have cash on hand to pay your entire credit card bill, be aware that:
- Even a small balance can take years to pay off only making minimum monthly payments (or just slightly more than).
- With a 24% interest rate (a mid-level rate for many credit cards) your debt doubles every 3 years:
- A $6,000 debt could take 40+ years to pay off making only minimum monthly payments.
- Only paying interest and service charges on your credit card debt will likely have you exceeding your credit limit before long.
- Making Payments But Still Using your Credit Card
If you want to pay off your credit card debt with a self-directed approach you MUST be able to stop using your cards AND pay more than the minimum monthly payments every month. Continuing to make purchases on credit cards that you’re trying to pay off is a cycle that usually gets people nowhere other than further in debt.
Take stock of why you’re continuing to use your credit card (or line of credit, overdraft, etc.) to help identify budget imbalances as well as other issues. For example:
- Relying on your credit card or overdraft for regular costs of living can be a more serious warning sign that your debt problem may soon come to a head.
- If you’re turning to family, friends or payday and instalment loan lenders these can also be signs that your debt situation is shifting to a serious state.
Learn more about avoiding the “Minimum Payment Trap” and tips for using credit cards.
- Making Debt Payments Late
Many people think if they’re not missing payments altogether, it’s not a problem to occasionally pay a bill late. Unfortunately the reality is that overdue payments can have costs that really add up, such as:
- Late penalty fees (even if your payment is made just a day or two past the payment due date).
- An increase to your interest rate (you can be penalized with a significantly higher rate going forward).
- Notations on your credit history reports which impact your credit score (although if you are struggling to make payments on time, this may actually be the least worrisome impact).
If you’re making payments late, consider why: Is it a case of disorganization, difficulty juggling multiple debts? Or are your total required payments more than you can afford to pay each month?
- When you consider your household income and expenses ‘on paper’, does it seem like a high percentage of your monthly household income goes to debt payments?
- Does your household budget leave no room for savings?
- At minimum you need to be able to budget for some emergency savings – this can make a crucial difference in dealing with an unplanned situation. Too often people find themselves facing added stress because of a lack of financial resources.
As well as payment habits, be mindful of any unhelpful coping habits you may also have in dealing with debt, these are not uncommon and may include substance abuse, negative self-talk, or even indulging in further spending.
Are You Avoiding the Financial Anxiety of Addressing Debt?
Although it might seem easier to simply make payments and avoid confronting a complete picture of your financial situation, avoidant type of behaviours often become a constant nagging source of financial anxiety, and even prolong problem debt. Consider:
- Not Knowing How Much Debt You Owe
It can be cause for concern if you don’t know your approximate balances (or even the identities of all your creditors to which you owe money). To keep in control of debt and get it paid off efficiently you always need to know where you stand.
- As well as being unsure of account balances, ignoring unopened statements or other creditor communications can be more serious signs that your finances are heading for trouble.
- Never leave yourself exposed to unpleasant surprises – especially if you’ve already fallen into troublesome payment habits or debt collection.
At minimum spend some time taking inventory by creating a list of all your debts including:
- The creditor owed, the account name and number
- Your balance owing and interest rate
- Your monthly payment requirements
Hiding from your financial affairs or shielding your spouse or partner from the reality of your household’s finances often compounds whatever issue is going on. It may seem difficult, but being proactive and taking charge is always your best course of action. If you need help don’t hesitate to connect with a Licensed Insolvency Trustee.
Coping with Financial Stress
Debt-stress can seriously impact many areas of our lives and general wellbeing. You are not alone – it’s important to know you have resources available to help you when you recognize these challenges.
As Licensed Insolvency Trustees we often hear people say that they wish they hadn’t waited so long to seek professional advice and support to deal with their debt. It’s never “too late” to reach out to a Licensed Insolvency Trustee and gain professional insights into managing your debt, or undertaking a legal debt solution. Connect with a BC Licensed Insolvency Trustee.
Another often avoided area of ‘financial housekeeping’ that can signal a need for closer attention to money matters:
- Unfiled Tax Returns
Whether you owe a tax debt or not it’s important to keep on top of your income tax filings. Procrastinating on filing one years’ return can easily turn into more and before you know it this ‘routine’ task seems insurmountable.
- Delaying filing because you know you owe money to Canada Revenue Agency (“CRA”) is not a helpful or recommended strategy.
- The longer you wait, the larger your balance can grow due to accruing interest and penalties that will be charged by CRA. What’s more, CRA often employs serious methods to prompt people to file their necessary returns, including bank account freezes, wage and asset seizures, and more.
- Keep up with your filing requirements even if you know you won’t owe taxes. It’s virtually always in your best interest to do so, be it a refund or other potential credits, or ensuring you have a way to prove your income by having an up-to-date tax return.
Learn about the Types of Canada Revenue Agency Debt That Can be Forgiven
Are you Dealing with High-Risk Debts?
As well as knowing how much debt you have, it’s also important to consider who you owe. While virtually any type of debt has the potential to turn into a problem (like credit cards, however common credit they may be), some types of creditors can be considered riskier than others.
- Owing “High-Risk” Creditors
Government Debt: Whether an unpaid balance for income taxes, business GST, payroll, even past MSP premiums – an outstanding government debt is one you want to address quickly.
- The government has powerful collection actions at their disposal and unlike many other types of creditors it can begin collections virtually overnight. You may not learn of a pending action until it is already in place, including wage garnishment, a bank account freeze, liens placed on your property, etc.
Payday Loans / Instalment Loans: These are usually considered ‘last resort’ debts, used in situations of urgency. Because the borrowing fees and interest charges are extremely high, people run a major risk of kicking off a borrowing cycle that is impossible to break.
- Payday and instalment lender financing often leads to people carrying multiple payday loan types of debt – very quickly.
Making haphazard payments alone generally won’t be enough to get out of debt in a reasonable amount of time. If you have a plan worked out on paper: Are you on track? Could you afford to get ahead faster by making higher payments?
What’s the Best Way to Get Out of Debt?
To avoid long-term debt and its heavy expense both financially and to your wellbeing, you’ll need to consider a proper debt repayment plan. To move forward you need to start with understanding where you’re at now:
- Your Current Debt Repayment Plan is Longer Than 5 Years
Revisit your list of debts and try doing the “Rule of 60 Math”: Add up then divide your total non-mortgage debts by 60 – is the number a monthly payment you can afford in order to pay off your debts in the next 5 years?
- If that monthly amount seems unlikely or would create a financial strain you may want to consider exploring a more formal approach to debt management.
- Professional solutions offered by Licensed Insolvency Trustees such as a Consumer Proposal can consolidate and cut your debt without borrowing. These unique plans often give consumers the lowest possible monthly payment while ensuring their debts are resolved in 5 years or less.
A Licensed Insolvency Trustee can be your best resource in putting together a debt repayment plan that truly works for you. With a free and confidential consultation in less than an hour we can help you assess your situation, review all your options and work out a solution that will allow you to get out of debt and on your way to meet your financial goals, whatever they may be.
- Whether you recognize any of the signs discussed, have a different problem debt, or just want to ask some questions – Licensed Insolvency Trustees are the sole debt professionals endorsed, authorized and empowered by the government to help you.
You deserve the opportunity to make informed decisions about your situation and your best way forward – we’re here to help you do just that.
Your debt-free future could be closer than you thought possible! Book your free confidential debt consultation with a non-judgmental BC debt help expert today – virtual and in-person support available.