While credit card debt is not the only debt that causes financial problems for many people, credit cards are almost always one of the first go-to sources of credit for many Canadians.
What often starts out as a ‘little bit of borrowing’ balloons unexpectedly into massive credit card debt. Next thing you know, you’re making only the minimum payments and perhaps applying for more credit cards or taking out payday loans in order to keep up. When you can no longer make those payments, or repay your debt in a reasonable period of time on your own by tightening your budget, it may be time to consider more formal options for debt relief in order to get out of debt.
What Not To Do
I’m going to start with what most articles end with: actions you should not choose if you are struggling with credit card debt. This is an important place to start because many people turn to these options first when they are too scared or embarrassed to seek the help of a professional. Here are some actions to avoid:
- Do not turn to payday loans or other forms of expensive credit to keep up with your bills. All this does is increase your total debt, increasing your interest costs, which means you are short even more money next month.
- Don’t cash in RRSP’s or other investments without talking to a professional first. You may be afraid that if you talk to someone like a bankruptcy trustee you will lose everything you own, but there are certain assets including RRSPs that are protected in a bankruptcy. There are also programs like a consumer proposal that can allow you to retain other assets like your home and even RESPs for your children.
- Be careful in entering into any program, either formal or informal, that does not take care of all of your debt problems. Taking out a second mortgage that only pays off part of your unsecured debt is not a full solution to the problem.
Debt Relief Options
There are generally four recommended solutions that can help you deal with overwhelming credit card debt:
- A debt consolidation loan combines existing debts into one new debt. This option may make sense under two general conditions. First you can qualify for a lower interest loan—lower than you are paying today—either secured, say through a second mortgage on your own, or unsecured. Next, the loan should take care of all of your outstanding debts, not just some of them. The risks with a debt consolidation loan are that you are not actually eliminating any debt, you are just (hopefully) making repayment a little bit cheaper. You will still have to repay your debts in full, with interest.
- A debt management agency works out a repayment plan. This is a program offered through a not-for-profit credit counselling agency to help budget and create a repayment plan with your creditors. You must be able to afford to repay your debts in full; there is no option to reduce the principle, but there is the potential for interest relief. To see if this plan makes sense for you, take your credit card debt and divide the balance by 60, the maximum number of months over which you can repay your debts through a debt management program. If you can afford this payment, and it takes care of all of your debt problems, it may be a good choice.
- A consumer proposal settles debts. A deal is negotiated with all of your unsecured creditors to repay a portion of what you owe, over a period of up to five years. This deal is legally binding on all unsecured creditors, which means that it deals with all of your debts. In a consumer proposal, your payments are based on what you can afford and what your creditors might receive if you chose the next option: bankruptcy.
- Bankruptcy eliminates debts. Your last option is always bankruptcy. However, if you are being threatened by actions like a wage garnishment and cannot afford a consumer proposal, it may be your best option. Bankruptcy eliminates your debts once you have completed your duties and receive your discharge.
What is important is that you consider all of your alternatives before making a decision. Don’t be afraid to talk to more than one professional. Talk to a credit counsellor, but also talk to a trustee. Both consultations should be free so you should compare your options by talking directly to the experts for each.
Flickr: Chris Potter