When is it time to seek professional help with consumer debt?

January 15, 2020

TORONTO – January 9, 2020 – New stats released today confirm that the number of Canadians becoming insolvent continues to rise. The number of Canadians who filed for insolvency for the 12-month period ending November 2019 was up 8.9 per cent compared to the same 12-month period of the previous year, providing more evidence of the mounting strain on many households. The Office of the Superintendent of Bankruptcy (OSB) said for the 12-month period ending November 2019, about 135.983 Canadians became insolvent.

The Canadian Association of Insolvency and Restructuring Professionals (CAIRP), the country’s national association of insolvency and restructuring professionals, expects that the number of insolvencies will continue to increase into 2020.

“The OSB stats show just the tip of the iceberg when it comes to the number of people struggling with debt in the country,” says André Bolduc, an executive board member of CAIRP and Licensed Insolvency Trustee.

“Most people wait until they have reached their breaking point before seeking help. By that point, it’s much harder to dig your way out,” explains Bolduc. “If more people sought out professional advice when they first noticed the signs, recovering from their debt would be much easier.” He adds that there is no cost for consumers to review their financial situation and options with a Licensed Insolvency Trustee.

Bolduc says Canadians should be on the lookout for several warning signs that may indicate it’s time to seek out debt help.

7 signs it’s time to seek professional debt help

Exceeding the 20/10 rule

If your consumer debt is far exceeding 20 per cent of your annual income after taxes (not including mortgage or rent payments), and/or your monthly debt payments are more than 10 per cent of your monthly after-tax income, it may be time to seek out professional advice on how to deal with your debt. For example, if your debt payments exceed 36 per cent of your income, it could be a sign of trouble.

“A large amount of your income should not be going towards simply servicing your debts. Doing so will mean you likely won’t have enough cash left over to cover basic living expenses or an emergency expense like a car repair.”

Using credit to pay for living expenses

When it becomes a struggle to pay for even basic living expenses, to the point where credit is being used to cover them, Bolduc says this could signal of bigger financial problems.

Credits cards are maxed out

Be cautious of maxing out one or more credit cards. Generally speaking, using more than 70 per cent of your available credit could be a warning sign that you are struggling to manage your debts.

Making only minimum payments

When only the minimum payments are being met on debts, and the balances are not going down over time, this should be a sign.

“Falling into the minimum payment trap can mean taking decades to pay off the full balance, and you will end up paying far, far more than the original amount of debt you took on. For example $10,000 in credit card debt, if you only pay the minimum payments, could take you nearly 30 years to pay off at 15% interest. Not to mention it would cost you about $12,000 in interest payments.”

Paying off credit with more credit

“If you find yourself paying off one credit card with another, it’s clear you do not have enough cash to even pay your minimum payments on your debts, and that is concerning.”

Bolduc says while consolidating debts is one thing, regularly using one form of credit to cover the payments on another is not a sustainable strategy for paying down debts.

Default rates have been triggered

If minimum payments have been missed on a credit card, this can trigger higher default rates. This results in paying even more in interest payments on debts you already can’t pay off.Creditors are calling

“If you’re receiving harassing calls from creditors to collect payments, this is a sure sign that professional help may be required to get those calls, and your debt, under control.”

Unfortunately, regardless of the signs, Bolduc says the stigma surrounding bankruptcy keeps many from seeking out professional help.

“It’s important to recognize when you aren’t making any meaningful progress to pay down your debts,” says Bolduc. “If you’ve noticed that the payments you’re making aren’t changing your debt balance, or the interest payments are causing your debt to grow even further, there is no shame in seeking out the help of a debt professional.”

As the holiday bills begin to arrive, these financial tips can help Canadians get ahead of their debt in the New Year.

How to tackle holiday bills and snowballing debt

Face holiday bills head-on

Especially after the holidays, it can be easier to ignore incoming bills rather than face them head-on. Bolduc advises Canadians sit down and look over all bills as they arrive, to get a complete picture of how much debt is owed.

“It might be tempting to just avoid opening the bills once they arrive, but that is a mistake. It won’t make the problem go away. Instead, keep track of what is owed and what the due dates are. You can avoid late payment fees and minimize interest charges by making payments on time.”

Pay down the principal

If credits cards have an outstanding balance, stop using them for any additional expenses to avoid growing those debts even more – at least until they are fully paid off. Next, be aware of what you are being charged in interest. One way to stay motivated to pay down the principal, not just make minimum payments, is to calculate the interest charges on that debt.

Bolduc recommends focusing on paying down the principal on credit that has the highest interest rates first.

Consolidate various debts

Rather than trying to pay off multiple forms of credit in several payments at various interest rates, consider consolidating the debt with a personal loan or a low-rate credit card balance transfer offer. Not only will this help simplify your payment structure, but if you are able to consolidate on a lower-rate credit option, you will be able to start chipping away at the principal without worrying about snowballing high interest charges.

Earmark your tax return or holiday bonus

If you usually receive a tax return once you’ve filed your taxes, consider filing when it opens in January and reserving that cash to put a lump sum towards your holiday bills. Or, if you received a holiday bonus and haven’t spent it yet, use that to pay off some of your debts.

Resolve to create a financial plan for 2020

Consider making a New Year’s resolution to creating a budget and stick to it. Start by opening a new savings account and putting some cash aside, specifically for emergency savings.

“Set up automatic withdrawals from your chequing account to the new savings account, so you can slowly start to accumulate a cushion for emergencies. The general rule is to save at least three months salary.”

Your budget should also include a plan for the next holiday season, to avoid overspending. Use last year’s spending as a baseline and start putting a little aside each month into a holiday savings account. If you spend $1000 last holiday season, that would work out to about $83 a month.

Seek help from debt experts

Those in need of debt expertise often wait too long before reaching out for help. However, for those that take action early, there are more options to restructure their debt.

“Asking for professional help is the first step. This will allow you to resolve your financial troubles sooner and will make the process of getting out of debt less stressful,” adds Bolduc.

Licensed insolvency trustees are the only debt professionals that can offer a full range of debt relief options and guarantee legal protection from creditors.

“Some may be surprised to learn that Licensed Insolvency Trustees often help individuals and businesses avoid bankruptcy. They can provide advice about all of the debt relief options – including proposals – and they take a customized approach to determine which option is most suitable,” says Bolduc.