Will you be in debt forever?

in-debt-forever

Trying to pay off debt can leave you feeling defeated. You're making payments on your credit card, line of credit and other loans, but it seems more like a loop than a straight line to the end. Will you be in the red forever?

According to a December 2016 CIBC poll, 30 per cent of Canadians said tackling debt was their highest priority going into the new year, and 76 per cent said their biggest concerns were credit cards and lines of credit. However, only about a quarter (26 per cent) said they would set a budget, and only 12 per cent planned to meet with a financial adviser to get professional advice on how to reduce their debt.

"A high percentage of our clients come here with significant debt loads," says Scott Hannah, president of the Credit Counselling Society. "They feel there's no way out, they don't know what to do. ... Nothing seems to be working."

"You can feel defeated if you're going at it but struggling," says Laurie Campbell, CEO of Credit Canada Debt Solutions.

What is the actual likelihood of getting out of debt, and how can you make changes to start the process?

How likely are you to escape debt?
Hannah says debt repayment plans take about 3.5 years, on average, to complete, and the average person comes into the Credit Counselling Society with about $25,000 of debt.

If clients complete the program, less than 1 per cent return to the society. They've learned what they need to do to manage their money in the long run.

Campbell says CCDS helps more than 2,600 clients carry out debt repayment plans each year. She says about 60 per cent of Canadians complete the three-to-five years-long plan.

That may sound like a daunting task, but, she says, keep in mind that people often accumulate debts for up to a decade before seeking professional help.

Still, getting help is invaluable. Hannah says consumers who take a Band-Aid approach and go for a consumer proposal or file for bankruptcy end up being repeat offenders; 21 per cent end up back in debt again.

Why is it so hard to escape the debt cycle?
There are a handful of reasons why people stay stuck in debt for decades. It starts with burying their heads in the sand, Campbell says.

Credit card statements go unopened, accounts go into overdraft and bills go unpaid. Some consumers go on like this for months before acknowledging that they need help.

"They just don't want to face the music," Campbell says. "They'd rather keep everything status quo even if it's getting them further and further in debt. They just freeze up."

Sometimes consumers try to forge a path on their own: they promise to turn over a new leaf but they don't seek help from a credit counselling agency or their banks and creditors. In that case, consumers are simply in over their heads, Hannah says.

"You don't have the skills and the assistance to help you understand how to get started, but you try for a few weeks and it's too daunting," he says.

In other cases, it's purely psychological. Not everyone completes the debt repayment programs run by credit counselling agencies because they're not ready to make a change.

Sometimes financial emergencies such as a job loss or health concerns crop up that delay your progress, but in some instances, people revert back to their old ways or worse.

A commitment to paying off debt is an admission that your current lifestyle isn't sustainable. It's admitting to your family, friends and peers that you couldn't afford your house, car lease or annual vacations, Hannah says.

This is incredibly hard to concede, and to live according to a new budget takes determination. Some consumers create budgets that add up so that their income covers all of their needs, but they can't adhere to the new way of life.

"It's upsetting, and for some people it's too much," Hannah says.

Campbell says this can be the case for many households - people feel they work hard to earn their keep and want their families to enjoy a prosperous life, even if it's being paid for with money they don't have.

If you can't - or won't - make life changes, you won't get out of debt
Going through the process of paying off debt and then living debt-free comes at a price - you need to make lifestyle changes and manage money in a different way, Campbell says.

One mistake she often sees is people not getting rid of the products that got them in a hole. You have to cut the cord on multiple credit cards, lines of credit and other loans, she says.

"Your goal is to create new habits and keep them with you in the long run," she says.

This is probably the most challenging of the steps.

"It'll be worth it, but it's hard," Hannah says. "You have to go from living off your paycheque plus the artificial income from your credit to living within your means. It's a pretty significant change."

If you can't accept this reality, you will end up in debt again or unable to pay off your debts altogether, he says.

"You didn't just get into $30,000 to $40,000 of debt," Hannah says. "It's important to do some soul searching to figure out how you got on this path to using credit as your income. Until you solve this problem, you're going to be stuck in this cycle of debt."

See related: How to overcome a debt mountain, How to pay off debt without isolating from friends, 5 signs you need to get debt help

Published February 24, 2017

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