Don’t Let Debt Weigh You Down: Carrying Debt Can Be a Crushing Burden. Here Are a Few Ways to Lighten the Load.

Debt can be overwhelming. It causes all sorts of stress and keeps you awake at night. It’s a feeling that never goes away, until you do something to address your situation and work towards getting out of debt. Most people think that being in debt is self-inflicted – they created the situation by spending too much. Most times that is not the case.

Individuals get into debt for any number of reasons. The most obvious reason is a sudden job loss or layoff, which have an immediate impact on income. An illness or accident that doesn’t allow for employment by an individual or within a family can start the debt cycle to begin as well. Even when you are back to work, sometimes it’s very hard to catch up on previous bills, and with mounting interest charges it can make it difficult and take a long time to get on top of your debt.

Other life events can trigger serious debt problems such as a separation or divorce – going from one household to two households is very difficult to manage. Retiring can also trigger debt problems if you haven’t reduced monthly expenses to match your retirement income.

With over 50 per cent of Canadians living paycheque to paycheque, even a small problem can get out of hand quickly. Imagine an unexpected car repair that ends up on a credit card, but no extra money to pay it back. The interest keeps piling up, and it gets harder and harder to get ahead.

“Overwhelming debt levels affect tens of thousands of Canadians every year,” says Scott Hannah, President of the Credit Counselling Society (CCS), an award-winning, non-profit charity that offers free and confidential credit and debt counselling services for those struggling with financial issues.

“Individuals are embarrassed and find it difficult to ask for help. As a result, people wait too long before seeking help and end up with fewer options to get out of debt.

Track Your Spending And Create A Budget

Many people don’t know how much they’re spending over the course of a month, so it’s important to track your expenses to evaluate where your money is actually going. With this information, you can create a budget or a spending plan that allows you to determine, in advance, whether you will have enough money to do the things you need or would like to do.

“A budget is important, as it provides a starting place. Without this, money tends to disappear,” says Mary Castillo, CCS Credit Counsellor in Saskatoon. “Once in place, a budget gives a black and white picture of where you are financially. This can then allow you to figure out what needs to change or allows an opportunity to set goals for plans in the future.”

In general, most individuals focus solely on primary expenses like mortgage or rent payments, utility bills, insurance and groceries. However, it is very easy to lose track of where your money is going if variable expenses are not accounted for, such as eating out, haircuts and auto maintenance. According to Castillo, individuals are turning to credit to cover emergencies, which could have been avoided if they were accounted for in a budget.

Increase Income, Decrease Expenses

“If your budget is running a shortfall, try to make changes to free up cash by either cutting expenses or increasing income. For example, cut down on a cable bill or trade in a vehicle for a lower monthly payment,” says Castillo. Other viable possibilities are to bring in a roommate or rent out a room; try to increase your hours at work; or take on a part-time job.

Then turn your focus to spending habits – what expenses can you decrease? This could mean spending less on recreation, entertainment or eating out, in addition to learning how to increase your savings at the grocery store. Make sure you file taxes to receive assistance with premiums or government funds, which are based on income levels (e.g. medical premiums, child tax credits, GST refunds).

Assets And Assistance

Review your assets and determine if it makes good financial sense to sell an item, such as a second car or recreational vehicle or boat, to pay down your debt. And keep in mind, selling something now to get through a financial crisis doesn’t mean that you can’t purchase a similar item in the future. If family and friends can provide financial assistance, make sure to set up clear guidelines with them regarding repayment expectations.

Creditors And Consolidation

Contact your creditors to negotiate lower interest rates to pay debt off faster or to obtain relief to reduce your payments during a difficult time. In addition, find out if a settlement for a portion of the balance owing is an option. Depending on your circumstances, creditors may accept a written proposal to settle outstanding balances owing for a reduced amount. Could a consolidation loan be an option? Homeowners may be able to refinance and consolidate their debts into their mortgage to reduce their overall monthly debt payments.

Take The Time To Learn

Canadians are not often taught financial literacy skills as part of the mainstream educational curriculum, however we encourage individuals to take the time to learn. Read articles or blog posts, attend workshops or do an online webinar to gain money management knowledge.

“Financial literacy is a basic life skill that everyone needs, like brushing your teeth or crossing the street safely,” says Anne Arbour, CCS Financial Educator in Toronto. “Managing our money is something that we do almost every day, in one way or another. Whether it’s buying groceries, managing a credit card or saving for a house, we all need basic financial literacy skills to understand how to handle our money in the best way for ourselves.”

Debt Relief

“There isn’t just one solution to getting out of debt, however reaching out for help is the most daunting and difficult first step. From there, once the conversation has begun, a solution can be found,” says Arbour. “Across Canada, credit counselling organizations offer debt relief options, and I advise individuals looking for help to turn to an accredited not-for-profit service to ensure any advice provided is neutral. You want to make sure the counsellor or representative has nothing to gain from recommending a particular option.”

One viable option is a Debt Management Program (DMP), which is a plan that gets individuals out of debt by consolidating all outstanding unsecure debts (credit cards and unsecured loans) into one monthly payment that an individual can afford based on his/her budget. Individuals on a DMP make the monthly payment to an accredited credit counselling service and the organization then disburses the funds to various creditors each month. A key benefit of a DMP is that creditors will reduce or wave the interest charges on a person’s debts when they are on a program. Going from an average credit card interest rate of 20 per cent down to 0 per cent on a DMP can really help you to get out of debt.

The key benefit of a DMP is its flexibility. If something comes up over the course of the program, the credit counselling agency can work with the creditors to help a person manage through any challenges. Legal options do not provide this flexibility if you miss a certain number of payments, your proposal will collapse and you’re back to square one.

Another aspect is privacy. Once a DMP is complete and your credit rating is restored (usually within two years), there is no record that you ever had a problem. With legal options, your name is posted on the Superintendent of Bankruptcy website forever.

Conclusion

For Canadians living paycheque to paycheque, “it’s important to build savings into your budget while you are in debt. If all your extra money is going to pay down debt, you won’t have any funds on hand to deal with unexpected expenses. It’s inevitable that something will come up and without savings, you’ll have to use credit to cover the costs. Have a savings account in place for absolute emergencies. Putting aside $50 a month, which can be automatically transferred into a savings account can make a huge difference over time,” says Castillo.

Catherine Lopez, BC Financial Educator for Credit Counselling Society