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In an earlier post I talked about why we get into debt and the shockingly debt driven society we live in today (see earlier post). Today, I want to discuss how to avoid the debt trap as well as what to do if you’re already in over your head.
Avoiding the Trap: Educate Yourself Fo’
You may not understand the complexities of the economy (no one actually does) but you need to know where you personally stand financially to avoid getting into trouble. That can be as simple as looking at your bank and credit cards statements each month to understand where your money is going and is a great way to start educating yourself.
If the money you are spending is greater than the money you are earning on a regular basis you’ll need to either decrease your spending or earn more. That may sound ridiculously simple but for some reason the majority of people do not have this figured out as evidenced by the $27k consumer debt the average Canadian household owes.
If you have online banking and credit card statements you can easily export those into excel each month and figure out where the vast majority of your pay cheque is going. Many people fail to do this one simple step and as a result end up blindly spending well beyond their means.
If credit card balances and creditor calls are keeping you up at night there’s a few different approaches you can take
1) Do it yourself
Again, this starts with tracking your expenses so you can determine where you can cut expenses and start earning a surplus to pay down the existing debt. You can also look into earning more by asking for a raise, taking on a weekend job or selling some of your unwanted junk via a yard sale or online.
If credit card interest payments are hitting you hard consider a debt consolidation loan. This type of loan allows you to borrow from the equity in your home (assuming you have some) typically at a lower interest rate which you can use to pay down the high interest credit card debt. If you don’t have a home to borrow against, some banks may offer lines of credit with lower rates that may be an option. Debt consolidation loans are great if you can curve your spending habits, otherwise you’ll find yourself in the exact same position you were in before, only in deeper debt.
2) Debt Management Plan
A debt management plan is offered by credit counselling services, where an agent acts on your behalf to devise a plan to pay off 100% of the debt owed. Usually an agent can negotiate a halt on additional interest charges and the creditor calls with also cease. The plan consolidates all your debt into one single monthly payment, which simplifies your finances and will alleviate some of the frustration of dealing with multiple creditor parties. This is a good option for those that want to change their ways, but may need a little breathing room and help to get there. You can check out more on credit counselling services here.
3) Consumer Proposals
A consumer proposal is administered by a licensed Bankruptcy Trustee. This is for people who cannot pay 100% of the debt and require some relief from creditors. While you may end up paying less than 100% of the amounts owed, your credit will take a huge hit making it a lot more difficult to get loans or mortgages in the future.
This is the last resort for those that have far too much debt and have no alternatives and all debt is eliminated. However, typically secured debt on items such as cars and mortgages cannot be wiped out. Any assets that you own will be seized and liquidated and your future credit will be shot.by