What are the solutions to get out of debt?

Nowadays, having debt is common. However, when debt takes up too much of your budget and becomes a source of worry and stress, it’s time to take control and adopt a plan. Indeed, debt can become a serious problem if it is not managed properly.

Fortunately, there are several solutions to help individuals manage and reduce their debts. Here are some of the main strategies and solutions to get out of debt:

5 solutions for debt:

1. Create or review your budget
2. Negotiate with your creditors
3. Consolidate your debts
4. Make a consumer proposal
5. Consider bankruptcy but only as a last resort

1. Create your budget

A budget allows you to calculate your net income, identify and evaluate all your personal expenses, and track payments you need to make on your debts. It’s the best way to identify expenses that can be reduced, or even eliminated. The goal? Generate a surplus each month and use it to pay down your debts.

For more information on how to create a budget, see how to make a simple and effective budget. For personalized, free guidance, contact one of our personal finance professionals.

2. Negotiate with your creditors

Sometimes it’s possible to negotiate lower interest rates or more flexible payment terms with creditors. Be honest with them, stay calm, and remain respectful throughout negotiations because, at the end of the day, they have the final say on any offer you make.

3.Consolidate your debts

Debt consolidation involves obtaining a loan from a financial institution to pay off all your creditors at once, except for your mortgage and auto loan. The loan is usually spread over a maximum period of 5 years. Unfortunately, the interest rate, between 12% and 15%, is higher than a standard loan, which typically ranges from 8% to 10%. Therefore, you should only consolidate debts with interest rates higher than 12%, such as credit cards.

Afterward, you’ll have just one monthly payment, lower interest costs, and a schedule to pay off your debts within a reasonable timeframe.

4. Make a consumer proposal

If you cannot obtain or afford the monthly payments on a consolidation loan, you should consider a consumer proposal. This settlement offer is prepared by a trustee, who will determine with you an amount you can realistically offer, without interest. It includes all your unsecured creditors (credit cards, lines of credit, personal loans).

A consumer proposal has several advantages:

• The repayment amount is based on your financial capacity rather than the total debt.
• There are no interest charges on the repayment amount.
• You won’t have to repay 100% of your debts unless your financial capacity allows it.
• You keep the assets you want and can return those you no longer wish to keep to creditors.
• You are protected from wage garnishments or asset seizures.
• If a majority of creditors accept your offer, the rest are automatically bound to follow.

5. Consider bankruptcy as a last resort

Many fears and misconceptions surround personal bankruptcy. But when your financial situation doesn’t allow for a consumer proposal, it can be a fast and low-cost way to eliminate debts. The Bankruptcy and Insolvency Act also supports financial rehabilitation and protects you:

• RRSPs and pension funds are non-seizable.
• A mortgage creditor or for a car loan is prohibited from taking back the property if you are not in default under the loan.
• Discharge is automatic (for a 1^st and 2^nd bankruptcy) without having to go to court.
• The duration of bankruptcy is shorter if your income is below a certain threshold.

Every debt situation is unique, and the best solution depends on individual circumstances. To explore different strategies suited to your financial reality, you can also review various ways to repay your debts. Working with a personal finance advisor may also help determine the best approach for your situation. Our licensed insolvency trustees and personal finance advisors are available to answer your questions and explain the advantages and disadvantages of each option.

It’s free, confidential, and without obligation.

A well-informed person is worth two!

By Pierre Fortin
Jean Fortin & Associés
Personal Finance Advisor
Licensed Insolvency Trustee