Imagine how it would feel to be debt free. Debt free means no stress over debt repayment. Debt free means not worrying when the phone rings or being afraid to open the mail. Debt free means control.
Try not to focus on the past and how things got out of control. Try to focus on the future, to reduce and eliminate these debts for good.
Step 1: Build a comprehensive plan is to stop and review your current situation.
This involves two things:
- Make a list of your debts and the amounts owing, and
- Make a monthly summary of your income and how you spend it (aka a budget).
Step 2: Review your budget to make sure that it is realistic.
Does it include all of your expenses? Break it into groups – shelter, vehicle, food and living, and other. Are there items that need to be cut or added? Use your old bank and credit card statements. This is not easy and may take several attempts, but stick at it. Once you are satisfied with the budget, consider how much is left over for you to pay your debts? This is going to help decide what kind of plan is best to become debt free.
Step 3: Do something drastic – take your credit cards, put them in a pail of water, stick the pail in the freezer.
You need to try to live with you use of credit cards. They are so easy to use and so hard to pay back, not to mention that you likely are incurring significant interest costs per month. Waiting for the block of ice to thaw will help protect against impulse spending.
Step 4: Consider your options to eliminate your debts.
The options include:
- Budgeting – You stick to a tight budget, do not use any more credit, live within your means and pay off the debt through monthly payments. Having a budget, cash flow statement, pay check planner, or any other name you want for it is essential in all options going forward.
- Consolidation – this involves the first option of budgeting, but in this case you obtain a loan to put all your debts into one loan and therefore only one place to pay and at lower interest rates than those on credit cards. Key note is to keep the credit cards on ice or cancel them so they do not creep back up again – this is a common issue that happens if you did not set the realistic cash flow plan after a consolidation.
- Assets – Liquidate assets to pay off your debts. This requires careful consideration and planning. If you liquidate assets, you need to create a plan to build them back up again and keep living debt free. There can be income tax consequences if it is investments. A key note to understand is that with Canadian savings at record lows, the government is trying to protect retirement savings. For example, the bankruptcy rules protect individuals’ retirement savings plans with the exception of contributions in the 12 months before bankruptcy.
- Debt Management Plan – In Ontario, residents have an option to voluntarily work out a payment plan through a member agency of Ontario Association of Credit Counselling Services. In Kitchener Waterloo, we have Mosaic Counselling and Family Services. For example, if you had $48,000 in credit cards and loans, they could try to work out a plan to have you pay back 100% of the debts over a period of 5 years (60 months). Therefore, the debt payment would be $800 per month. In these plans you are able to pay back all of the debts, just reduce the burden of interest.
- Consumer Proposal – A consumer proposal is a legal settlement through federal law. A consumer proposal is where someone is not able to pay 100% of their debts back but has the ability to make a monthly payment. A consumer proposal can only be filed through a trustee in bankruptcy. Key notes on a consumer proposal is a that it protects assets and allows for partial repayment plan to the creditors that is an amount that would be considered to be greater than if a bankruptcy was filed.
- Bankruptcy – Personal bankruptcy is a last resort option. Only if all the other options do not work is a personal bankruptcy appropriate. In Waterloo region, we have seen mass layoffs, plants closings, and overtime hours cut off. With decrease income and rising costs, the pressures of carrying debts has put people too far behind. Sometime personal bankruptcy is the right option for giving an individual a fresh financial start.
In closing, debt reduction takes careful consideration and discipline. Sit down and really look at your situation, set your goals, and then evaluate your options. Be realistic and consider the future, both short-term and long-term. If you want to sit down with me for a full review of your situation, please call me at 519-747-0660 or send be an online e-mail. There is no cost in meeting with me and we will openly talk about your situation and evaluate the options so that you can find the right solution for you. At Hoyes Michalos I have focused my efforts on helping the people from Kitchener Waterloo deal with their debts.