Real-life case – Detecting the Warning Signs Before Financial Disaster Strikes

Before becoming significant and uncontrollable, financial problems often start small and discreet. However, they send warning signs that it is better to recognize in order to act before it’s too late.

Benoit and Brigitte have been living together for several years, earning a good salary and living comfortably. Since last spring, Brigitte has been managing the family’s finances, and she notices that, for the first time, the couple is unable to pay off the full balance on their credit cards. With a debt of $5,900 and an interest rate of approximately 18%, keeping this balance will end up costing a lot. Alerted by this sign and fearing that things could worsen, she decides to seek help.

Analyzing the situation

Even if the situation is not critical, it still requires attention. As the old saying goes, «A stitch in time saves nine»! «The first objective of a meeting is to determine the cause of financial difficulties», explains Pierre Fortin, a licensed insolvency trustee and president of Jean Fortin et Associés, whom Brigitte consulted for advice and to set things right.

They wonder if a particular event – such as job loss, for example – caused the financial troubles, or if it is rather a structural problem, meaning insufficient income. In the first case, the issue can often be resolved by revising the budget to rebalance it. However, in the second case, if the income is not enough to cover basic expenses and repay creditors, a more drastic solution will be necessary: debt consolidation, a consumer proposal, or bankruptcy.

Taking matters into their own hands

After discussing with the trustee, Brigitte realized that she and her partner had developed bad habits over the past few months, spending more and using their credit cards as supplementary income. With a debt of $5,900, the minimum payments now amount to $177 per month, a sum they did not have to pay before getting into debt, and it’s eating away at their budget.

«Fortunately, the difficulties are not insurmountable because Brigitte acted quickly. Moreover, their income is sufficient to overcome the problem», emphasizes Pierre Fortin.

He advised them to withdraw $1,200 that they had invested in a Tax-Free Savings Account (TFSA) and apply it to their credit card balance. Since the TFSA only earns a meager 2% interest, it’s better to reduce a debt generating 18% interest. But be careful, this strategy does not apply to Registered Retirement Savings Plans (RRSPs) as cashing them out would result in a tax payment.

By analyzing their budget and reducing certain expenses, the couple was also able to free up $300 in monthly maneuverability. In 18 months, they were able to repay the remaining balance of $4,700, but they also had to bear $700 in interest charges.

You are nearing the point of no return when  you:
  • Don’t know the amount of your debts.
  • Have more than 2 credit cards with unpaid balances.
  • Are afraid to answer the phone because of creditors.
  • Sometimes use cash advances on one card to pay off another.
  • Are unable to reduce the amount of your balances for more than 2 consecutive months without increasing them again.
  • Have been denied a loan, indicating that your credit record is in poor condition or that you are already heavily in debt.
  • When debt payments take up so much of your budget that you can no longer pay for basic expenses without resorting to credit.