“Debt problems” is a general concept about which we all have some level of knowledge and understanding. However, the specific causes, implications and means of resolution can be different for everyone. Here are some of the warning signs that you should be taking action to deal with your debts problems: losing sleep at night, being afraid to open the mail, arguing with your spouse and children about money related issues, not sure how you are going to pay for something, or feeling stress just thinking about money in general. If this sounds like you, consider these three questions:
1. HOW BAD ARE YOUR DEBT PROBLEMS? This question could range from collectors calling, to rising debt level year after year, being turned down by a bank, a reduction in your income, to hitting your max limits with no more debt available. First, I want you to take a few minutes to think about your debts. Start by focusing on your current living requirements. Review your necessary monthly cash inflows and your monthly cash outflows (excluding your debt payments). Here is a link to a budget excel spreadsheet that may help you itemize your ideas . How much excess or left over cash is there per month? This is going to help you address how drastic of a change you may need. If the amount of expenses without debt payments exceeds your income, then expenses have to decrease and/or income has to increase, before you can even consider dealing with your debts. For the other cases, determine how much excess cash there is available each month after paying for your living expenses. This amount will become available for dealing with your debts.
2. WHAT ARE YOUR OPTIONS? The options you have to deal with debts are:
- Budget – After you work out the cash flow statement discussed above, pay off your debts through monthly payments now that you have a balanced budget.
- Bank Consolidation – Sit down with your bank to see if they can approve you for a consolidation loan. You then make one monthly payment at a more reasonable interest rate to hopefully pay off your debts over the next several years. The key is to ensure that you can handle the loan payment without incurring future debts. Cut up any credit cards so they do not get used and create future debt problems again.
- Debt Management Plan – A Debt Management Plan is 100% repayment of your unsecured debts over a maximum 5 year period at a reduced interest rate. The plans are handled by a not-for-profit credit counselling agency. The one we have in Kitchener-Waterloo is Mosaic Counselling + Family Services. Assuming it fits your budget, these plans are effective at paying down your debts in one monthly payment with limited or no additional interest to be paid on the debts.
- Consumer Proposal – A Consumer Proposal is a legal settlement of your unsecured debts in one monthly payment for up to 5 years. The proposal protects your assets and offers the creditors more than they would get in bankruptcy.
- Personal Bankruptcy – Bankruptcy is a last resort to receive a legal discharge, or release, from the obligation to repay your debts. The cost depends on your assets and monthly income. For a first time bankrupt, the process lasts either 9 or 21 months. This also depends on your income level.
3. ARE YOU COMMITTED TO CHANGE TO BECOME DEBT FREE: You don’t want a band aid for the problem, you want a solution. It’s important to consider the past to understand the reasons for your problems. However, it’s more important to focus on the future and what you are able to control. If that means making changes to your finances, you have to be committed to that change. It is very easy to continue the same old patterns of behaviour, but it is unreasonable to expect your debt problems to go away if you simply maintain the status quo. Being debt free is something we should all work towards. Debt free is more than an idea; it is a way of life. 30 years ago, you had to pay cash or write a check for groceries and you went into the bank to withdraw your money for the week as there were no bank machines. Even though times have changed, the concept still works today. Which option will work for you the best depends on your specific situation. Everyone’s situation is different. Send me an e-mail or call me at 519-747-0660 and we can discuss your specific situation so that you can start to gain control of the debt problem you are experiencing and start a plan to deal with your debts.