The 5 Ways You Can Deal With Debt: Pros and Cons

Retirement Income Planning, Calgary

The average Canadian family spends 170% of what they make and many owe more than 4 times their household annual income.

Dealing with debt is a challenge. It is stressful, frightening, and causes shame. 

Misconceptions about debt:

1.) I can just declare bankruptcy. It’s not as easy as you think to declare bankruptcy. You have to qualify and you have to pay for it. You will also have to meet a list of criteria before you can discharge a bankruptcy, like counseling. Not all debts can be included in a bankruptcy. (Examples: Alimony, spousal/child support, student loans of less than 7 years, court fines)

2.) My house and personal property are safe. That will depend on a few factors. The first being the legislation in your province. It is difficult to try to hide assets and money just before declaring bankruptcy. Your home is safe.

3.) People in debt are just poor money managers. This isn’t always true. Many Canadians are good with their money and still have unmanageable debt. Sometimes it can be one big unexpected circumstance that puts a family in dire circumstances. Like a car breakdown, unemployment or health issues.

4.) My investments are safe. Investments in insurance contracts may have guarantees but only if they are held for a certain period of time. You can’t transfer your investments to insurance contracts and then declare bankruptcy. 

5.) Bankruptcy means I can’t borrow money again. This isn’t true. You will not get the best rates, but you will be able to and you should start rebuilding your credit immediately.

Understanding your options will help you in knowing which way you should go. Bankruptcy should be a last resort, but it isn’t a situation that you cannot recover from.

The Debt Snowball

I’ll give you the low down here, but if you want more reading check out Dave Ramsey’s page here.

Let’s say you have many debts at various interest rates. You would list the debts from highest to lowest interest rate and then work to pay off the debt with the highest interest rate first. You would just make the minimum required payment on the other debts until the highest interest rate one is paid off. You would then take the payment from that debt and put all of that money towards the debt with the next highest interest. Continue this until all the debts are paid off.

Pros:

    It’s a great plan if you are managing your debt by paying minimum payments but are not making headway in eliminating principal.

    You will pay off your debts in a timely manner

Cons:

   Doesn’t help if you are not able to manage the process and stick with it.

    You will still pay more interest than you should

    It requires a lot of self-motivation and behavior modification on your part

 

Debt Consolidation:

Pros:

    This is where you can take all your small, unsecured debts and bring them together into one big loan. It is helpful when you can reduce the interest you're paying and reduce the amount of your payment each month. There will be a fixed term of usually 5 years to repay the loan. This is appropriate for someone who is making their payments each month, but cash flow is tight.

Cons:

    Lenders are hesitant to offer credit to someone who isn’t demonstrating good debt management skills. Remember, they are taking on a risk with you. Some lenders do not offer great rates on debt consolidation because of the added risk to them.

    If combining multiple debts in this way to lower monthly payments you will be extending the life of the debt and are therefore paying more interest over the long term.

    You are also at risk of falling back into your old habits. With your new found freedom, the temptation exists to begin borrowing and start the process all over again.

Process:

Talk with your Advisor or Lending Specialists. We deal with a few different lenders who can help with putting together a consolidation. Right now the going rates are in the range of 5.7%, depending on creditworthiness.

Consumer Proposal:

This is a situation where you are not able to make payments any longer and are falling behind further each month. It’s a more serious situation and you are near default. Creditors are now calling or sending letters on a regular basis.

Pros:

    With the help of a Trustee, you can present a proposal to your lenders with an agreement to pay them off for a reduced amount, usually pennies on the dollar. At this point, lenders are settling to get something back rather than nothing.

Cons:

    The lenders have to agree to the terms. You will be limited in your purchasing decisions for the duration of the term. There will be a hit to your credit rating for 3 years.

"There is ONLY one way to ensure that you can deal with debt for good and that is to take responsibility for it and pay back what you borrowed." It's been our experience that people who look for shortcuts keep repeating the same behavior.

The Process:

You will still need the services of a Bankruptcy Trustee. Here’s a link to the Superintendent of Bankruptcy Canada.

Bankruptcy:

Pros:

    It does relieve you of the responsibility of paying back the debt. It gives you an immediate freedom from the weight you have been carrying.  It's usually better than bankruptcy, which should be your last resort. Even then, it needs to be a cautious consideration.

Cons:

    It will still cost you some money. You can only process a bankruptcy through an approved Trustee and they will have fees.

    The Trustee acts in the best interest of the creditor, trying to recover as much of their losses as possible.

    There will be an immediate and lasting negative impact on your credit score for 6-7  years. You will have a difficult time borrowing for a long time.

 You will have to deal with the effects of shame and guilt for a long time.

Process:

You will still need the services of a Bankruptcy Trustee. Here’s a link to the Superintendent of Bankruptcy Canada.

Cash Flow Planning

There is a 5th option many people do not know much about. It is Cash Flow Planning. This is where we create a strategy to eliminate debt.  We build a spending plan so that every dollar has a purpose and we don't have to wonder where the money went.  

Pros

    Save Thousands in interest costs.

    Create a spending plan to help with behaviour changes. Having an ongoing financial professional that specializes in Cash Flow Planning will be the difference between failure or success when it comes to your money.

Cons

    You need to be a homeowner with some available equity in your house.

    You need to be making a decent family income.

    There will be an upfront fee. 

It is a good idea to seek out the services of a Cash Flow Specialists to see what your options are. Don’t assume which one of the above options is best for your without seeking advice, as the consequences can be far-reaching. The easiest way out isn’t always the right way out.

Most financial problems have far less to do with math than they do with behavior.

The most important consideration in dealing with debt is to deal with your debt. Sticking your head in the sand and hoping that your debt problems go away isn’t a solution - it will just make matters worse. You need to decide which option is going to be best for you and get yourself on the road to recovery sooner.

 

To book a 15-minute call with us to discuss your personal situation please follow this LINK to our calendar. If you prefer to send an email, please send it to info@langfordfinancial.ca

Let's Grow Your Cash Flow! We will create a Cash Flow Plan to find out where your money is going and redirect it to what matters most so that you can enjoy more of your money now and save for the future.  Click here to Book Your $149 Assessment


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