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Credit Coach: What to do when debt becomes a problem

When dealing with debt problems, a common question is "what are my options."

Each day many individuals and families struggle with debt and debt repayment.

Working with BDO First Call Debt Solutions as a Licensed Insolvency Trustee provides me the opportunity to sit and review family budgets and debt problems ranging from the very simple to the complex. One question that continually arises when talking with people about debt is “What are my options?”

This blog is the first in a four-part series that will take you through an overview of the various personal debt management options available. Parts two, three and four of this series will detail the ins and outs of the various options.

Option One: create a budget and try to cut costs to manage debt repayment

Once an individual realizes that their debt loads are causing stress and anxiety the first step to solving the problem is to sit down and create a detailed budget to take control of the household finances.

In an earlier blog I talked about the raw data you need to create that budget. Hopefully you already know how much your household spends each month on items like groceries, clothes and household sundries. If not you should compile this data before you can begin. Try not to overthink the budgeting process — keep it as simple as possible.

A budget does not need to be an elaborate spreadsheet with fancy calculations. It can be as simple as writing out a list of your household costs for a two-week period and matching that against your total household income for the same period.

You are either going to have a surplus or a deficit. If you have a surplus, that’s great — make a plan to apply that surplus to credit card debt (or any other high interest debt). If you have a deficit, it’s time to sharpen the pencil, review your food costs, review your fuel consumption and review your personal expenditures — such as dining out, alcohol consumption and tobacco use. Hopefully by trimming a few of these expenses you can put together a budget that balances, with enough room left to spare for debt repayment,

Option Two: seek help with your debt

So what do you do if you have sharpened that pencil as much as you can and the budget still doesn’t allow for payment of all the household debts and living expenses? It may be time to seek professional help with your debt. In Canada, there are a few different agencies you can consult. Essentially what you are looking for is an opportunity to have a third party work with your creditors to arrange payment terms — most often, the plan involves repaying your debts over an extended period of time.

  • A for-profit debt settlement company offers a debt settlement plan. In short, you will sign a contract with the company to pay them a monthly amount. You stop paying your creditors while the debt settlement company attempts to negotiate with your creditors to repay less than what you owe. 
  • A not-for-profit credit counselling agency will assist you with formulating a family budget. A credit counsellor can also help you design a repayment plan commonly referred to as a Debt Management Plan (DMP). The credit counsellor will communicate with each of your creditors seeking acceptance of repayment of your debt in full at a reduced rate of interest over a 48 month period. You will pay back the total amount of your debt.
  • A Licensed Insolvency Trustee (LIT) will review your finances during a free consultation. The LIT will begin by reviewing options offered by other debt professionals with you. If you choose one of those options, a LIT will provide a referral to a third party if this is appropriate.

Options three: prepare a consumer proposal to your creditors

Once you have taken the step to contact a LIT for a free consultation and assessment of your financial situation, you will be presented with all of your available options.

If you are no longer a candidate for some simple budgeting help and if your financial situation is such that a debt management program won’t be successful, the LIT will explain the two formal legislated credit management processes. 

The first is called a consumer proposal. This process is essentially a plan or proposal you present to your creditors. Depending on your financial situation this process often results in you repaying only a portion of your debt with no additional interest charges over a period of up to 60 months. The consumer proposal offers relief from your debts without having to dispose of or lose control of your property.

Option four: file personal bankruptcy

During your consultation with a LIT, you may be presented with information on filing a personal assignment in bankruptcy. This option is available to individuals without sufficient income or assets to enter into any form of formal debt repayment.

The bankruptcy process is a legislated process governed by the Bankruptcy and Insolvency Act. This process can only be administered by a LIT. Each individual’s bankruptcy experience is unique depending on income levels, dependents and asset ownership.

Unlike some of the myths and legends to be found on the internet, going through a bankruptcy does not mean losing everything. And you can often rebuild your financial life once the process is over.

While this has been a general review of four basic options for resolving your debt and dealing with creditors, most people will need a detailed assessment to pick which option is best. The first step in any process is arming yourself with information. If you have debt worries, please visit the Financial Consumer Agency of Canada website and the Office of the Superintendent of Bankruptcy Canada website. Each site offers valuable information about dealing with debt that will help you make an informed decision. You can also make an appointment for a consultation with a LIT.  Most importantly, before you commit to any debt solution, make sure you feel comfortable with the person and the plan that you have chosen.

Jayson Stoppel is a Licensed Insolvency Trustee and Chartered Accountant with BDO First Call Debt Solutions. With over 15 years in practice, Jayson assists individuals, families and companies with financial difficulties in Thunder Bay and throughout Northwest Ontario. To reach Jayson by email: