Life is full of surprises.
Some are good and some are more alarming.
Financial problems can creep on you when you least expect it, making a manageable situation grow disproportionately out of control.
Most Canadian households will experience debt at least once in their lifestyle.
Sometimes, it is unavoidable, such as student loan debt, which affects most graduates at the beginning of their professional life.
Sometimes, an unexpected event makes it hard for people to make payments on time.
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Regardless of the reason, debt is always a challenge.
But it is crucial to understand how to get your debt under control before it can take over your life.
When you are going through a rough patch, managing debt becomes all the more important to avoid further issues.
Our experts share their tips on how to manage debt during tough times to rebuild financial stability.
Debt management means planning
In essence, managing debt is all about planning your finances.
A financial plan can help to understand your debt and keep track of payment vs. other expenses.
The first mistake of many households who experience overwhelming debt for the first time is to fail to monitor additional living costs.
There is nothing to gain in repaying your debt if it means that you can’t make other payments on time, which, in the long term, generates new debt.
Therefore, debt management requires strategic thinking so that you can give yourself the financial room you need to fulfill your financial obligations.
If you are new to planning, the first step is to design a debt reduction plan that will serve as a navigation map.
A debt reduction plan will include the following elements:
- How much money you owe.
- How much you can afford to pay at any time.
- How much you can negotiate with your creditors.
- How much you can save by avoiding unnecessary expenses.
- How long you give yourself to become debt-free (based on the previous elements).
How much can you repay?
Once you can visualize the debt and your objectives, you can consider the best approach to paying off your creditors.
Most debt management strategies focus on your ability to repay the debt in many ways.
These are dividing into the following categories:
- Liquidity available to you at the time.
- Interest risk for the totality of your debt.
- Ratio of debt to other expenses.
Liquidity refers to the available cash and assets you have, and that can be used to pay off your creditors.
Liquidity can also be part of a restructuring strategy, such as selling an asset assigned to a secured loan, such as a vehicle, to negotiate the purchase of a cheaper asset.
If you don’t have sufficient liquidity to cover your debt, a licensed insolvency trustee can help assess the situation and determine the best solution to achieve debt freedom.
Similarly, if you have liquidity that you wish to retain, the trustee is also the first contact to turn to for advice.
The interest risk is key to prioritizing debt repayment.
It is the interest rate associated with each debt and how it affects the amount you have to repay.
It could be more cost-effective to pay off the smaller or most recent debt if it has the highest interest rate.
Using interest rates as part of your debt reduction calculation can save a lot of money in the long term.
A trustee or a credit counsellor can help to clarify the situation if you are unsure how to proceed.
The ratio of debt compared to other expenses enables you to reduce additional costs relative to the debt.
It’s a helpful method to free up money that can be repurposed to reduce your debt.
For instance, you can identify areas where you could save up money, such as switching energy providers or insurance companies.
However, we’ve found that for many of our clients going through a tough time, these cost-saving switches are not enough to make the debt manageable.
When you rely on credit cards for essential living expenses, for example, the debt you accumulate is unavoidable.
A trustee can recommend finance restructuring strategies to manage a non-preventable debt.
If you have a balance on multiple credit cards, you could ask your bank to transfer all the balances onto a single credit card account with a reduced interest rate.
The process can make the debt more manageable.
I have tried, but I can’t pay off my debt
Debt reduction strategies come in a variety of forms.
When strategic restructuring and smart cost-saving calculations can’t help with repayments, a licensed insolvency trustee can offer relief from your debt and stress.
A trustee can help clients obtain debt forgiveness for debts they can’t afford to pay off in full.
For individuals who can’t make payments on time and have no assets to settle the debt, personal bankruptcy can provide a fresh financial start they need.
On the other hand, a consumer proposal can let you pay off a portion against forgiveness of 100% of the debt.
Trustees can negotiate up to 80% debt reduction with your creditors, which can help you bounce back after a tough time.
Both personal bankruptcy and the consumer proposal are legally binding processes that stop all creditors’ actions.
If you are going through a tough time, you don’t have to worry about wage garnishment or being taken to court.
Alternatively, credit counselling debt management plans can be negotiated with your creditors to waive interest.
With this solution, you typically are expected to pay off the full debt.
However, the interest rate reduction can make repayment more manageable.
Beware, however: Not every creditor is willing to negotiate with a credit counsellor.
The process is not legally binding, which means that 100% of creditors need to agree for the repayment schedule to go through.
We appreciate that life can be unpredictable.
As a result, you might find it hard to manage debt during tough times.
Don’t hesitate to reach out to a licensed insolvency trustee to find the best way out of debt.