How to overcome a debt mountain

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Consumer debt is on the rise and so are 90-day delinquency rates, according to TransUnion's Q3 2016 Industry Insights Report. In provinces where economies rely on the oil and gas industry, such as Alberta or Newfoundland & Labrador, the increases are even more pronounced.

"We see situations every day where people are desperate," says Al Antle, executive director of Credit Counselling Services of Newfoundland & Labrador. "A change in circumstance is typically what brings people to us."

Job loss, illness or other extenuating circumstances can leave you feeling helpless, and like bankruptcy or a consumer proposal are your only options. These solutions may be right for some, but in many cases, taking a few basic steps can help you recover from debt troubles.

Take your time.
Antle cautions against having a knee-jerk reaction to a temporary situation.

"Go slow, look at all the options," he says. "Take the time necessary to make an honest assessment of your financial position as opposed to just the crisis you're dealing with today."

He recommends researching and talking to experts - credit counsellors, people in the financial sector, people you trust - and looking at a variety of opinions and options.

"Try to see yourself three years down the road, as opposed to three weeks down the road," he says. Remember that circumstances change, and not always for the worse. "This slump in oil can't last forever," he says.

Get a clear picture of your finances.
"Make sure that your assessment is a complete financial assessment," says Antle. "That's an examination of all your income, all your assets, all your expenses and all your liabilities."

This gives you a measure  of your financial shape. For example, someone with $50,000 in unsecured debt with a high income or lots of assets is in a very different situation than someone with neither of those things.

Adam Fisher, licensed insolvency trustee at Harris & Partners Inc., suggests taking a good hard look at your budget and asking yourself questions about the expenses: What's fixed? What's variable? How much disposable income do you have, or could you have?

"The most valuable thing you can do is, even if you do it for a short period, is to keep a detailed budget," says Fisher. "Look at where your money is going. Oftentimes, we're not paying attention to where our income goes, and especially if you're using a credit card."

Spend less, but be realistic.
Once you know where your money is going, you can see where you can cut back. Sometimes potential savings are obvious. For example, if you eat out often, have regular movie nights at the theatre or have an expensive hobby, you might be able to easily decrease your spending.

However, Fisher says, "You can't cut all your variable expenses - all the things you enjoy - out of your life."

"This business of being in debt is as much a challenge to your mental health coping skills as it is to your wallet," says Antle. Eliminating all the pleasurable activities in your life might be good for your wallet, but not for your mental health.

Instead, look for ways to replace expensive hobbies with lower-cost alternatives, such as having movie nights at home or reducing the frequency of outings.

You might also be able to find ways to spend less on some essentials, such as gas and groceries.

Fisher suggests not just using cash, but separating the cash for each variable expense. If you've budgeted $200 per month on groceries, for example, put $200 in its own envelope and only take it out when you go to the grocery store. The same goes for entertainment, clothes, work lunches and any other item you pay for with plastic on a regular basis.

"Make sure you really separate each item's budget, and see if you meet or exceed your budget," Fisher says. You can also take some simple but effective steps, such as reducing how often you go to the grocery store.

"People never buy just what's on their list," says Antle. He points out that we all buy "frivolous stuff" when we're in the store, so the less frequently you shop, the less you'll spend on those unnecessary items.

Reconsider wants versus needs.
"One of the issues that has created financial issues for a lot of Canadians is that the cost of everything has gone up, but there are so many more things we can buy and so many more opportunities," says Fisher.

For instance, he points to the number of luxury cars on the road today.

"I remember 25 years ago, it was a big deal to get one of those," he says. That doesn't seem to be the case anymore, especially with longer-term financing and lower interest rates. However, with these vehicles, Fisher says, everything costs more - interest, gas and maintenance.

And Antle points out how many families have not just one but two big vehicles.

"Is that essential in your household?" he asks. "If you need two vehicles, can one be the big one, and one be a little get-to-and-from one?"

While you may not have two pricey cars in your driveway, consider things that you consider needs, such as top-of-the-line smartphones, or fancy entertainment centers, and determine if they are true needs, or if you can downgrade to a less expensive solution.

Earn more.
Growing your income may sound like an obvious, yet impractical piece of advice; earning more isn't always easy. Taking on even a part-time second job might not be a realistic solution if you have children or other obligations. You don't want to overwork yourself by taking on an extra job or two if it takes a toll on your relationships or mental health.

However, with online marketplaces and flexible paying opportunities, such as Uber, there are lots of creative solutions to earn a little extra.

"There are options out there to make more money," Fisher says. You have to keep your work/life balance in harmony, he says.

In addition to Uber, there are other services and apps that allow you to choose the tasks you want to take on, such as InstaBuggy or Kutoto, which allow you to pick up odd jobs when your schedule permits. If working an additional job of any kind doesn't work for you, try holding a yard sale or selling some items on Craigslist. If you have a room or finished basement that you aren't using, you can try renting it out.

Consolidate your debts.
You can ask your financial institution if you can consolidate your debts. "That's a great plan if you can qualify for a consolidation loan at a favourable rate of interest," says Antle, with emphasis on favourable. "You've got to be paying less in costs." 

Fisher agrees. "Having $40,000 in credit cards at 20 percent versus $40,000 of line of credit at 8 per cent - there's a big difference in sustainability," he says.

Banks, though, have tightened up on these types of loans. "If you're looking at unsecured debt, you're looking at a pretty high interest rate," Fisher says. If you have a house or other asset you can use as collateral, you may qualify for a much lower rate.

Another option might be to see if a friend or family member can extend a loan to you at a more favourable interest rate. But you should take this route with caution.

"Friends aren't always the best idea," Fisher says. "That's a good way to ruin a friendship."

Once you consolidate your debt, the next step, Antle says, is to "perform plastic surgery" on your wallet. Cut up and cancel your credit cards. Otherwise, you'll risk racking up the credit cards again, and then you'll be paying off the cards plus the consolidation loan.

Pull out your last resorts.
Financial institutions will settle for less than the full amount owing when you declare bankruptcy or submit a formal consumer proposal, says Fisher. If you're in a serious debt solution, talk to your creditors to see what they're willing to accept.

"The credit cards, depending on the financial situation, and lines of credit once they go into collections, will certainly make deals," Fisher says. "The issue is that they're looking for lump-sum payments."

You definitely need to weigh the pros and cons of doing this as it will impact your credit rating - but so does being in collection. Speak to someone you trust financially.

So what's the best way to avoid going into bankruptcy? Fisher says, "Deal with it before it's way too far." Be aware of the signs that a problem is on the horizon, and get help.

See related: Ways to establish credit after bankruptcy, 5 factors in choosing a debt consolidation plan, 4 common debt consolidation mistakes
Published January 26, 2017

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