Warning signs you need to pay down debt

When you experience the following warning signs, you know debt is becoming a problem for you:

  • You are at your credit limit
  • You are turned down for borrowing
  • You need to use credit to pay your monthly bills
  • Your debt payments are over 30% of your income 
  • You can only make minimum payments on your credit cards or line of credit
  • Your wasting a lot of money each month on interest to service your debt
  • Your debt payments eat up all your pay cheque and you have no money left over for savings
  • You’re afraid to open the mail, or answer the phone 
  • You fight a lot about money with your partner
  • You’re stressed and regularly thinking about your finances

Benefits of getting out of debt

  • Improve your quality of life. Financial wellness is intrinsically linked to one’s overall well-being.  We can’t feel comfortable and satisfy our most basic needs without some level of financial security.   Research has shown that financial worries can strongly affect both our mental and physical health.
  • Save money on interest, spend more on things you love.  Carrying debt means paying interest and everyone has better things to spend their money on than pay the banks interest.   
  • Paying down debt is a great investment. It provides a guaranteed after tax return in interest savings and improves your net worth. Saving 20% interest after tax on your credit card balance is a fantastic investment.
  • Start saying "Yes".  Yes to fun events, Yes to those extra wants from your family, Yes to living the life you want to live.
  • Gain financial security.  When you have to give your money to debt repayment and interest, this is money that you no longer can save and invest to meet your #1 most essential financial requirement and that is to save for your retirement.  
  • Protect and improve your credit score.  Carrying less debt will most certainly improve your credit score which in turn will afford you lower interest rates and more ability to borrow in the future when you need it.
  • Improve your sleep.  Don’t underestimate the benefit of not being beholden to your creditors.  There is freedom in owning what you have and not having your pay cheque spoken for before you even get it.

Common beliefs about money that stop you from getting out of debt.

“It ain’t what you don’t know that gets you in trouble, it’s what you know for sure that just isn’t so.”
-  Mark Twain

  • Carrying a credit card balance is normal and okay.
  • Bank gave me the credit so I must be able to afford it.
  • I am doing fine because I always make my minimum payment.
  • I’m not broke cause I still have room in my credit limit.
  • I don’t need help, I’m an adult so I should automatically know how to manage money.
  • It’s normal to buy a new vehicle every few years and always have a large vehicle loan payment.
  • Budgeting is hard and means cutting out all the fun in my life.
  • My friends are buying it, I work hard, so I should be able to buy it too.
  • I’ll pay my debt off when I make more, I can’t afford it right now.
  • It’s hopeless, I can never get out of debt.
  • Spending will make me feel better.
  • If I don’t own expensive things, then people will think I am a loser.

Get out of debt playbook

I'm buried in debt, now what?

Figuring out how to dig out of debt is not a mystery, but it can be a puzzle. To solve the puzzle you just need the missing pieces of information. Solving your get out of debt puzzle will feel great and result in a complete and satisfying conclusion.

If you are committed to tackling your debt and regaining control of your finances, here is your get out of debt playbook:

1. Don’t panic but do have resolve

Facing up to your debt and considering options to deal with your debt can be very stressful and your situation may seem helpless.  It is important that you not panic and make poor financial decisions.  It is also very important that you not ignore the problem and be like an ostrich with your head in the sand.  Debt problems will grow bigger on their own if left unattended so the sooner you face up to your debts and have a strategy to deal with them, the easier and less painful it will be.  

It takes a long time to get into deep debt and it will often take a long time to get out of debt, so you need the resolve to see it through.

Don’t go it alone.  We know it can be embarrassing but it is very important to make smart decisions so you should talk it over with someone you trust that will be supportive and not critical.  It is also a good idea to get professional help.  You are not dumb or incompetent to ask for expert advice.  It is actually a very smart move that will help ensure success to achieve your goal.

2. Stop the bleeding

Make sure you pay your bills on time to avoid late fees and penalties and make all minimum payments on your credit so that your credit score does not get worse and the creditors don’t increase your interest rate.

3. Stop digging

If you are in a debt hole you need to stop digging.  Stop incurring any new debt, pay with cash, debit or cheque.

4. Take stock of your debt

Make a list of amounts owed, interest rate and payment amount.

5. Make a spending record

Take the time to list out all your monthly spending amounts.  Be as detailed and accurate as possible.  Separate the spending into 2 categories: fixed and unavoidable spending like rent or variable discretionary spending like entertainment.

6. Mind the gap

The gap is the difference between your monthly net income and your monthly spending.  Hopefully it is a large positive amount.  This is what you can plan to direct towards debt repayment and hopefully increase the gap by reducing your discretionary spending. If it is a negative amount then you know you need to make some serious changes. 

7. Sell your stuff

You probably have acquired things that have value but you are no longer using. It is surprisingly easy these days to turn your unwanted stuff into cash on sites like EBAY or a garage sale. Every little bit helps and it does feel great to declutter. 

8. Get a side hustle

For some it may be easier to find extra income than it is to cut their spending.  These days there are so many opportunities to earn some extra cash in your free time, often from the comfort of your home. Consider what activities you like and have an interest in, and then think how you can turn these activities into a paying gig. I was surprised to learn how much money you can make with very little investment in activities like house sitting, dog walking, uber driving etc.  

9. Consider a consolidation loan

A consolidation loan is new borrowing where you consolidate most or all of your debts into one large debt.  This debt could be amortized over a longer term and may have a much lower interest rate than say your credit cards, so that your one payment on the consolidation loan would be less than the combined payments on all your individual debts.

So, for example, if you had three credit cards that totalled $20,000, your monthly payments on these cards would be at least $600 per month at a rate of 19.9%.  If you consolidated them into a 5-year loan at say 5%, your monthly payment would only be $377 per month and your interest costs savings would be significant.  Instead of revolving debt like credit cards, a consolidation loan is a term loan and will be totally paid off after 5 years.

The big problem with consolidation loans is that they are increasingly difficult to get approved for.  The banks are not fond of these loans as they are higher risk and less profit for them due to the lower interest rate.  You will have a better chance of being approved for a consolidation loan if you have a low debt to income ration (less than 35%) and equity in a home that you can offer as security.

The other problem with consolidation loans is behavioural in that they encourage increased borrowing.  Once you have a consolidation loan, your other debts are paid off and you are free to charge them up again with a potential result of even deeper debt.

If used responsibly, consolidation loans can be a great tool to lower your interest expense and improve your cash flow by reducing your payment amount.

10. Repayment strategies

When you have multiple debts to pay and only so much money each month for debt repayment, how do you decide who to pay?

The first key point is to make sure you pay at least the minimum monthly payment.  You do not want your credit score to be lowered and give the banks an excuse to charge you late fees and higher interest rates.

After you make your minimum monthly payments, what should you pay next?

Snowball Method – rack up quick wins

We prefer the snowball method of debt repayment.  With this method, all funds leftover after you have made the minimum monthly payments get paid to the debt with the smallest balance.  This will achieve the fastest way to get one of your debts paid off in full and it provides great motivation to see your progress and keep you committed to making debt repayments.  As each debt gets paid off, you keep attacking the one with the lowest balance.

Avalanche Method

The avalanche method is a good way to save you the most money in reduced interest charges.  With this method, after paying the minimum monthly payment on all your debts, you direct all funds left over to the debt with the highest interest rate.  In this way, the highest interest rate debt gets paid off first.  This method will save the most interest costs but may not give you the same motivational boost as the snowball method.

Whichever debt repayment strategy you choose, the important thing is to stick with it and chip away at your debt each month until you hit your goal.  It will take a while so don’t get discouraged.

11. Train your Brain – change your mindset

In helping thousands of people go from deep debt to living debt free, the one key change we see them make is that they change their mindset.  It’s clear that the money mindset that got you into debt, won’t get you out of it.

Many people suffer from false money beliefs – they have established recurring and self-defeating ideas about money and debt.  They think it’s okay to have all their pay cheque go to debt repayment.  They believe they will be stuck paying back debt for the rest of their life.  They think they have debt because they don’t make enough money or they believe the reasons for debt are solely due to events that happen to them, not because of the choices they have made.

Paying off debt is actually simple math.  Your finances either balance or they don’t.  To repay debt you need to spend less than you bring in.  The math will give you instant answers and direction as to what needs to be done.

The bigger challenge is that when you change your lifestyle to fit your budget, it often brings about strong emotions.  You may feel fear, loss, embarrassment, and guilt from the resulting bargain you make in your lifestyle.  Change is hard because, in today’s society, people are often defined by their spending and possessions.  Social media tends to magnify the comparisons to others and creates feelings of entitlement.  When you do come to accept the changes you need to make to your spending, you may feel sad and  feel like you are being left behind by your cohort and it can erode your feelings of self esteem and self worth.

To fight through these emotions, it is important that you recognize that you are not your debt.  Debt problems can happen to anyone and are not an indication of one’s character or success in life.  Don’t let debt affect the important things in life like your health and relationships with loved ones.

12. Legal options

Sometimes the debt problems are so severe you cannot solve them on your own.  If you have a lot of debt and no realistic plan to be able to pay off the debt on your own, over a reasonable time frame, then it is definitely time to contact a Licensed Insolvency Trustee (Trustee) and learn about your legal options.

A Trustee is a debt specialist, licensed by the Federal Government, that can advise you on all the possible options to solve your debt problems and give you access to legal ways to reset your debt and give you a fresh start.  The Federal Government has created these legal remedies to give debtor’s a second chance and a way out from an impossible financial situation so they can move forward with their life.  Debt does not have to be a life sentence.  

The two legal ways to reset your debt are:

  1. Consumer Proposal – This is where your debts are consolidated and reset to a lower total amount that you can afford and the interest rate on these debts is reset to zero.  The debtor is put on a payment plan that is workable for their budget and makes one affordable payment for a set period of time to a maximum of 5 years.  Once the agreed upon amount is paid by the debtor, the remaining balance of the debts gets reset to zero.
  2. Bankruptcy – Filing bankruptcy is a process where the debtor works with the Trustee to complete several duties over a period of usually 9 months.  Any assets the debtor owns that are not exempted by law will be sold and monies received will be paid to the bankruptcy estate for the creditors.   At the end of the process if the debtor has completed their duties then the debtor is discharged from bankruptcy and all unsecured debt of the debtor is reset to zero.


Bankruptcy is not the worst thing that can happen!

Utilizing a legal remedy to solve your debt problems is not the end of the world. While it is something to avoid if possible, for some people, it is definitely the best option.

Society has created these legal tools to be used for a reason, because leaving someone with an unmanageable debt load with no way out can greatly affect their life. When someone seeks the legal protection under the law so they can get a fresh start, they are taking responsibility for their finances and have decided doing better next time is the best way for them to bounce back. In a typical year, 150,000 Canadians may file a Consumer Proposal or Bankruptcy to reset their debts.

In our opinion, the worst thing that can happen is if someone needlessly struggles for years and years in a financial mess that is hopeless for them to resolve. Excessive debt levels costs you much more than just your paycheque. Debt worries cause stress, health problems, destroys relationships and sometimes even cause people to take their life. Allowing debt to stop you from living your best life is a tragedy and totally unnecessary. We have witnessed thousands of people that have gone from deep despair to realizing that bankruptcy isn’t the end, i.e. It’s the beginning of a better chapter.

The smart take away here is that if you do not have a reasonable plan to resolve your debt on your own, then don’t delay, it is better to utilize the legal remedies afforded to you, as those that do, will do better in the future than those that don’t.

The two things we hear most often from my clients after resetting their debt with me is :

  1. "I feel so relieved to have this settled”
  2. “I wish I had done this sooner”

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