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When creditors come calling

by | Oct 24, 2022 | SELF-PUBLISHED

Options for relieving the personal debt burden

Since 2020, when the pandemic and associated financial damage created by government lock-downs and mandates really began to hit hard, debt problems were pushed to the back burner. Many creditors temporarily held off debt collection demands, asset seizures, wage garnishees, evictions, and foreclosures as many debtors were simply put behind the eight-ball financially through no real fault of their own. 

But with the economy returning to growth mode in 2022, that has come to an end. And for many overextended borrowers, it’s now time to pay the piper. But what happens if you are still in debtor hell, living from paycheque to paycheque, and using credit to pay your living expenses – and other bills? Fortunately, there are a number of debt-reduction tactics to implement before you throw in the towel.

What do you really owe?

The first thing to do is to calculate how big a debt hold you’ve dug for yourself. Do this by calculating how much debt you carry relative to your income every month. It’s called the debt-to-income ratio. As a rule of thumb, anything over about 40% is cause for concern. 

To get your debt under control, you need to first find out where all the money is going. Create a budget (that is, your personal income statement) that itemizes your spending and expenses. List the essentials first, like rent or mortgage, food, car payments, and utilities. Then add discretionary spending (often this is funded by credit cards and is where the real trouble is). Finally, calculate whether your current income, savings, and government benefits cover your expenses. 

Try to reduce fixed costs if you can, like mortgage or rent payments, depending on your lender or landlord. And look for ways to cut discretionary expenses like frequent takeout or ordering in meals. Online shopping sites are another budget killer. And don’t forget to look for and eliminate recurring “ghost” expenses you might have forgotten about, like automatic withdrawals or credit card charges for fitness classes.

Shrink credit card debt

For many people, credit cards are the big culprit. Try to pin down what you’ve been using your credit cards for. Curtail or eliminate using credit cards for discretionary spending (no matter how many “loyalty” points you think you’re getting). Avoid using credit card debt to pay bills. 

Pay at least the minimum monthly payment on every credit card. Pay off any card in arrears first. If you have more than one care, make more than the minimum payment to the card with the highest interest rate. A zero-interest balance transfer to a different credit card under a time-limited promotion could give you breathing room of as much as six months with no interest. 

Interest rates on lines of credit are considerably lower than for credit cards, so paying off your credit card balance with a line of credit might make sense. But, again, make sure you pay at least the scheduled minimum amount, preferably more, each month.

Another option is to take out a personal loan at a lower interest rate to pay off higher-interest credit-card loans. This is called “debt consolidation,” and your bank’s loan officer can work out a payment schedule to fit your budget. 

Managing mortgages

Mortgage debt is likely the biggest fixed expense most people have. Unfortunately, over the past couple of years of the housing market frenzy, many people have overextended themselves financially. And with inflation and interest rates climbing – and house prices falling – some may find that their mortgage exceeds the current value of their home. In addition, with variable-rate mortgages, the interest cost keeps rising as rates climb. It’s the ultimate definition of being between a rock and a hard place, financially. 

For something this important, it’s crucial to advise your lender (usually your bank) promptly if you run into financial difficulty. Lenders do not want to lose the business and will do their best to find solutions to help you manage payments. In any event, never just skip payments or let your property slip into foreclosure, as this will impact your credit score. If worse comes to worst, you may have to consider selling your property, taking a loss, and moving to more affordable accommodation.

Getting help in extremes

If you’re in dire straits, with no hope of catching up on your mortgage, credit card, personal loan, or car loan payments, you can try the “debt settlement” process (it’s also often known as debt consolidation, debt arbitration, or debt negotiation). Essentially, though, you contract with a debt settlement company to negotiate with your creditors to offer a lump sum to eliminate your debt. If your creditors agree, you must give the debt settlement company the agreed-upon lump sum, and the debt settlement company will then pay your creditors. These are private companies, so you may be charged high advance fees or ongoing monthly charges. Beware of high-pressure sales tactics and make sure your read any contracts before you sign. Better yet, have your financial advisor or lawyer vet the contracts before you do. 

Another option is the federally regulated “consumer proposal.” This is a legally binding process administered by a Licensed Insolvency Trustee who works with you on an offer to pay creditors a percentage of what you owe and typically extend the time you have to pay. The term of a proposal is limited to five years.

To determine if a consumer proposal is the right path for your debt problems, you need to set up a personal meeting with a trustee, who will evaluate your situation. If a proposal is warranted, they’ll work with you and your creditors to develop and implement it.

Declaring bankruptcy is the very last resort for getting out of debt. Because it comes with some very serious consequences, it should be avoided until every other debt-reduction option has been exhausted. You must file for bankruptcy with a licensed bankruptcy and insolvency trustee. You’ll have to disclose and transfer all your assets and surrender your credit cards. You will also be required to obtain credit counselling. Your credit score will be severely damaged, and a bankruptcy could be part of your credit file for as long as seven years. 

Debt stress can be debilitating. To avoid surprises, disappointments, and additional pressure consult with your financial advisor about debt problems before they get out of hand. They’ll be able to give you some good advice on how to get out of the debt hole, and how to avoid getting into it in the first place.

© 2023 by Robyn K. Thompson. All rights reserved. Reproduction without permission is prohibited. This article is for information only and is not intended as personal investment or financial advice.

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