Dealing with debt

Bank of Canada governor Mark Carney is sounding the alarm on personal debt in Canada.

Global News offers some tips on recognizing debt danger signals, and what to do if you’re buried.

Debt danger

If you’re starting to get buried in debt, you need to recognize the signs. You may have a debt problem if:

– You use your credit cards out of necessity rather than convenience

– You need to borrow money in order to pay monthly bills

– You are only able to pay interest on your debts rather than paying back total debt

– You receive pressure or threats from creditors because of your inability to pay back your loans

– If your utilities are being cut off because of your inability to pay

Admitting you have a problem is the first step. But once you realize you have a problem, what can you do about it?

First, look at all of your loans and figure out which ones are most likely to offer assistance. For example, institutions offering student loans will often be more willing to assist in times of hardship.

It might be easier to these types of loans into temporary deferment while you work on paying off other debts.

Next, contact your creditors, explain that you’re having trouble making payments, and try to work out a new repayment schedule. Many creditors are willing to do this.

Digging out of debt

Obviously, you’re going to want to stretch your money as far as you can. Work out a new budget, and prioritize items you need, and items you want but can live without.

Making a budget and sticking to it can be difficult, which is where credit counselling can help. A counsellor will look at your expenses and debts, and help you work out a budget and repayment plan that will work for you.

Debt consolidation loan

You can apply for a bank consolidation loan, which combines all your debts into one loan paid off by the bank, and in return, you make one monthly payment to the bank.

Some banks and financial institutions will offer lower rates than others, and this option will protect you from creditor harassment.

For those living in Alberta, Saskatchewan, Manitoba, Nova Scotia or PEI, you have the option to apply for a consolidation order. If it is accepted, the court will take payments directly from you and distribute them to your creditors.

The repayments will be scheduled over three years, and creditors cannot harass you.

A similar option for Quebec residents is the Lacombe Law, or voluntary deposit scheme. You make a minimum payment to the court based on your income and dependents.

This can typically be arranged at a local courthouse.

According to the Bankruptcy and Insolvency act, you have the option of making a consumer proposal, which consolidates and reorganizes your debt repayment schedule and can also reduce your total debt load.

You need a trustee or administrator to file the proposal, similar to the way a bankruptcy filing would be made. The proposal is accepted if it is more beneficial to your creditors than if you went bankrupt.

If none of the options available to you help your debt problem, bankruptcy is a last resort.

You are mostly relieved of your debts, but your assets (except basic assets like furniture) are seized and distributed to your creditors, and you must completely re-establish your credit.

Your credit rating will be affected for about seven years after you are discharged from bankruptcy.