Debt Management Do’s and Don’ts
Do: Get Organized
Getting a handle on your debts and working on paying them off will be next to impossible without having a clear picture of who is owed how much and where your account balances are at.
Take inventory of your debt accounts, account numbers, total balances and monthly payment requirements.
Be sure to include smaller bills such as overdue cellphone bills too – these can still create a nuisance for you if left unpaid.
If any accounts have been passed to collection agencies, make a note of which agency is holding the account currently. Overdue accounts can change hands and become difficult to keep track of otherwise.
Check your credit history report to ensure what you think you owe matches what the credit bureaus have reported.
Skip the fees – you can request a hard copy of both your credit bureau history reports for free once a year.
Ensure your tax returns are filed up to date.
Don’t: Keep Using Your Credit
If you want to focus on paying off your debts it’s imperative to stop using your credit cards, overdrafts, payday loans etc.
Often an event has triggered a temporary need to use credit; be sure that this cycle of borrowing has stopped and that your cash-flow has improved as much as possible so you don’t need to continue relying on credit to make ends meet.
If you still have a gap in income that you’re using credit to fill it’s likely that at some point your debts will outpace your ability to keep them serviced – seek help from a Licensed Insolvency Trustee as soon as possible to discuss your situation.
Do: Keep your RRSPs Intact
It can be tempting to use RRSPs or other assets to make lump sum payments towards your debts but think very carefully before doing so! RRSPs are an important asset, so much so that they are actually federally protected in the event you need to file for personal bankruptcy or make a Consumer Proposal.
Income tax is payable on RRSP redemptions which can result in far less coming into your bank account than you would anticipate, and the taxable rate of your redemption can also mean you end up owing more tax when you file your tax return for the year.
Redeeming retirement funds may help you slightly now but can cause bigger issues down the road because there often isn’t enough time to save up again before retirement.
Don’t: Borrow from Friends and Family (or Have Them Co-sign Debts)
Even though it can be tempting to take someone up on a generous offer of financial help, avoid letting friends and family lend you money, or co-sign debts with you.
Family-driven funds are often a temporary fix and can cause friction and emotional distress if they’re not repaid as intended.
Getting a co-signer gives your creditors more pockets to reach into in the event you’re unable to repay the debt in full. Co-signing a debt means that both parties are responsible for 100% of the unpaid debt – not 50/50 each as is commonly believed.
Do: Be Careful Who You Take Advice From
Whether it’s your bank, financial advisor, family or friends – there can be opinions from a variety of places when it comes down to how to solve a debt problem. Unfortunately, many people – even professionals – are well-meaning but misinformed, which can have unintended consequences for you.
The laws and regulations that impact consumer debts are ever-changing and it’s important for you to take your advice from the right professionals. Licensed Insolvency Trustees are the only debt help professionals endorsed and regulated by the federal government to help consumers with debt management solutions.
Remember: It should never cost you money to find out what your financial options are!
If you are asked for payment upfront be aware that you are likely not working with a Licensed Insolvency Trustee. Licensed Insolvency Trustees will connect with you for free to discuss your specific situation, assess your situation and evaluate your options together with you. Being able to make fully-informed decisions about your future is priceless – but it shouldn’t cost you anything!
Don’t be misled by “non-profit” statuses – even not for profit credit counsellors charge a fee for services once you move past a consultation stage, and there are some types of debts they just don’t have the legal authority to help you deal with.
Always do your research before you sign financial agreements and be sure that you fully understand all your rights and responsibilities with contracts (debt management services or otherwise).
Don’t: Mistake Payments for Progress
Making your minimum payments each month will keep your accounts up-to-date and in good standing, but if you’re not able to pay much more than the minimum monthly payments this is a common indicator of a debt problem looming.
If you only make minimum payments most of your payment is going towards interest. Even a reasonably small balance can become unmanageable – and long-term – with interest accumulating.
See for yourself – check your account statement to learn how long it would take you to pay off a credit card if only the minimum payments are made each month. The timeline might shock you!
Do: Value Your Personal Well-Being More Than Your Credit Score
We often hear from people who have delayed seeking debt help because “preserving” their credit score was a top priority for them. Nothing is worth more than your personal well-being and mental health! Debt stress is very real and the anxiety and worry of money problems can greatly impact your life.
Credit ratings are a poor metric of “financial health” – aiming to be debt-free is generally the best goal to strive towards.
A low credit score can change in just a few short years. Even bankruptcy does not impact your credit history permanently!
Don’t: Delay Seeking Help Because You Are Embarrassed
Many people put off seeking debt help because they feel embarrassed, ashamed or are worried about feeling judged. We understand that it can be very difficult to take the first step of talking to someone who is still a stranger about your personal financial matters.
Money management is a lifelong skill and many people need help to get back on track after a few missteps – we are not here to judge you, only to offer solutions.
Money problems can happen to virtually anyone at any time and there are also many events and circumstances outside of our control that cause or aggravate these challenges – we are here to help you and support you towards becoming debt-free.