Too Much Debt? Use This Rule To Find Out

Decoding Debt: A Guideline for Navigating Your Financial Health

Debt – a universal but complex concept – can be a necessary tool for some while becoming an overbearing burden for others. For Canadians, the ever-increasing debt levels have raised concerns about their financial health. This article aims to help you understand if you’re dealing with “Too Much Debt” and how to “Use This Rule To Find Out”.

Understanding the Dynamics of Debt

Debt is not a one-size-fits-all situation. The impact of debt varies from individual to individual, influenced by their income, lifestyle, and financial obligations at different life phases. Being mindful of your debt-to-income ratio is crucial in maintaining a healthy financial status.

Illustrative Examples: Debt Scenarios

Let’s consider a few hypothetical situations to shed light on the varying debt circumstances:

Amy: She has a $5,000 income tax liability, a $1,100 overdraft, $23,000 credit card debt, and $37,000 in vehicle loans. Despite having a monthly net income of $5,400, her monthly expenses eat up $5,150, leaving her with little room to breathe.

Bruce: With $13,500 credit card debt and a $750 overdraft, Bruce is already stretched thin. His monthly net income is $2,025, and his expenses go up to $1,900, including medical costs.

Cheryl: Her fixed pension and social assistance income amount to $890 per month, while she owes $7,500 in credit card debt and payday loans. Her monthly expenses exceed her income by $385.

Darren: Darren owes $150,000 in credit card debt and lines of credit, along with $30,000 vehicle loans and a $175,000 mortgage. Despite considerable assets, his monthly income of $6,500 is offset by $4,750 in expenses.

Each of these individuals, despite their varying circumstances, fulfills the definition of insolvency according to the Bankruptcy and Insolvency Act. They have unmanageable debts and are unable to meet their financial obligations, making them potential candidates for bankruptcy or consumer proposals.

Evaluating Your Financial Health: The 40% Rule

An easy way to gauge if you’re drowning in debt is the 40% rule. If your monthly debt expenses – including credit card payments, loans, and mortgage – amount to less than 40% of your pre-tax monthly income, you have a handle on your debt. However, if it exceeds 40%, it’s a sign that your debt is getting out of hand.

Warning Signs of Excessive Debt

Recognizing the signs of excessive debt is the first step towards a solution. Here are the red flags:


  • Using one credit source to pay off another debt.
  • Making only the minimum payment on your credit cards for more than three consecutive months.
  • Relying on credit for essential expenses like groceries without a repayment plan.
  • Borrowing money from acquaintances.
  • Resorting to payday loans or high-interest lenders.
  • Receiving collection calls or letters, leading to anxiety about answering the phone or checking your mail.
  • Being unaware of your monthly expenses or bank balance.


These indicators suggest it’s time to rethink your financial strategy and seek professional advice to manage your debts effectively.


When it comes to debt, knowledge is power. Understanding the dynamics of debt, recognizing the warning signs of excessive debt, and applying the 40% rule can guide you in maintaining good financial health. Remember, every situation is unique, and professional guidance from a Licensed Insolvency Trustee can help you navigate through your financial difficulties and steer you back towards financial stability.

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