Confronting your debt can be overwhelming. Perhaps you’ve stopped borrowing, but mounting interest means you still owe more and more each month. Maybe you’re keeping up with minimum payments and have avoided any nasty collections calls. But that’s only stopped things from getting worse. You want to reset your budget and get out of debt for good – but you may not know where to start. Listed below are five ways to get your finances back on track and under control.
1. Regular Monthly Payments
With some credit cards, payday loans and other high interest debts, it can take anywhere from 20 to 75 years to eliminate the balance completely making only the minimum payment each month. If you’re going to make a meaningful impact, you’ll need to make regular monthly payments against the principal value wherever possible. To figure out what you can afford and what you will need to contribute, use the following method:
To figure out what you can afford:
To figure out what you will need to contribute:
In the above example, you would need to contribute $403 per month between both of your credit cards to come close to your goal of paying both off within 36 months. With $550 in disposable income, that would leave you with $147 per month left over for saving or other miscellaneous spending, such as entertainment or dining out. Though interest will still accumulate and you will not be completely debt free at the end of three years, you will be very close and much closer than had you not set up these regular monthly payments.
In the event your required contribution is more than you can afford, adjust the number of months to pay off your debts until you reach a monthly amount that works for your budget. If the contribution amount is at or less than your minimum payments, you may want to proceed directly to the Bankruptcy and Consumer Proposal section of this article.
2. Consolidation Loan
If you qualify for a bank loan sufficient to pay your existing balances in full, a consolidation loan can often be the least costly and most efficient path to becoming debt-free. This is especially true if the bulk of your debt is on high interest devices such as credit cards or payday loans. Instead of worrying about multiple creditors each month, you would only be required to make one payment and could see anywhere from a 50% to 75% reduction in interest costs.
If you do opt for a consolidation loan, however, it is important it be through a bank or credit union. Other lenders may charge you interest rates comparable to – or even higher than – what you are already paying, which will do little to help you get out of debt faster and could even make your situation worse.
3. Increase Your Income
Provided you have the time, energy and existing resources, taking on part-time employment or some form of income generating activity can accelerate your debt repayment goals. Several companies such as Uber and Skip the Dishes allow drivers to set their own hours, allowing you to work as much or as little as you want. Online classifieds such as Craigslist of Kijiji often have help-wanted ads for odd-jobs you may be qualified for. Online marketplaces such as Amazon, E-Bay and Etsy are great places to sell handmade crafts, gently used items you no longer need. Traditional part-time employment opportunities, such as the retail or restaurant industries, may also work for you.
If you do opt to take this route, remember the added costs it will take to get started – including childcare, fuel, tools and other supplies. The promise of added income can be lucrative, but you want to ensure your efforts produce a sufficient benefit. Otherwise, the outcome may not be worth your investment.
4. Liquidating Assets
If you have assets which can easily be sold or liquidated to pay off your debts, this may be a quick and effective solution to significantly reduce your personal debt load. Everything from an old car which is rarely used, to gold or silver jewelry you are willing to part with, GICs that have reached maturity, real estate and other investments you own are potential opportunities for generating cashflow.
With that said – you will want to seek professional advice before liquidating any investments or registered savings plans to ensure the potential tax costs do not outweigh the debt reduction benefits. Withdrawing from your RRSPs, for example, will reduce your future contribution room and may trigger a tax debt you’ll be required to pay in the future.
5. Bankruptcy or Consumer Proposal
For many people, a bankruptcy or consumer proposal is a last resort and one they would rather avoid. However, for those who qualify, it can often be the Life Changing Debt Solution they need – as well as their best and fastest route to a financial fresh start.
Though they differ in process and requirements of the debtor, both bankruptcies and consumer proposals are formal repayment plans which are governed by federal legislation and executed by a Licensed Insolvency Trustee. Each allows creditors to receive full or partial repayment of the funds they are owed while offering honest consumers a clear path to freedom from debt. As long as the debtor fulfills all the requirements they and their creditors have agreed to, they will be able to start over with a clean slate once the term of their bankruptcy or consumer proposal is complete.
If you’re considering a bankruptcy or consumer proposal or are interested in learning how an MNP Licensed Insolvency can help you on your journey to becoming debt-free, call us for a free confidential consultation to learn about your options and which one might be best for you.
Based out of Abbotsford, Linda Paul is a Licensed Insolvency Trustee and Senior Vice President at MNP LTD. To learn more about how Linda can help, contact her directly at 604-870-7445 or firstname.lastname@example.org.