How much debt is too much? If you’re asking yourself that question, it’s a major warning sign that you’re probably already at that point. The best thing you can do for yourself is find a way to reverse course and start paying it all back. Taking the path to financial freedom is a great goal, but what if it’s just not possible?
It’s possible to get into more debt than you can reasonably pay back. But that doesn’t mean you have to spend the rest of your life in debt. Instead, you can explore options such as a consumer proposal or even bankruptcy. A Licensed Insolvency Trustee can help you evaluate your financial situation and identify the best way to move forward. You can visit Debthelpbc.ca to learn more about what Licensed Insolvency Trustees do, and how consumer proposals and bankruptcies work.
But how do you know it’s time to talk to one? You need to be able to recognize when your debts are out of control or too much to pay back without help.
1. Your Balances Keep Getting Higher
It’s easy to “add to the pile” when you don’t keep track of how much you spend each month. Even if you’re trying to make progress by making more than minimum payments, unless you’re paying close attention to your expenditures, it’s easy to wind up covering for shortfalls by leaning on your credit cards.
One step you can take is to stop using credit cards altogether until they’re paid off. Otherwise, the temptation to use them to make ends meet can be too great.
2. You’ve Borrowed Money to Cover a Bill
Borrowing to cover another bill is a sure sign that you’re in a tight spot and that something needs to change. It can put a strain on your relationships when you borrow from friends and family. You want to pay them back as soon as you can, but it’s only a matter of time before you’re hit with another big bill. Meanwhile, other sources of fast credit come with high interest rates that can leave you deeper in the hole.
A sign that you’re in deep trouble is taking out a cash advance on a credit card to make another payment. The interest charges on cash advances are higher than the APR for regular purchases, and while you may scrape by in the short-term, you’ve made the long-term problem worse.
3. You’re Thinking About Draining Your Savings
For some, high debt levels come after they’ve had years to save. When credit card bills start to get out of control, they start looking at their savings and wondering if they should drain it all just to stop paying interest rates.
Before you act, consider your options. In many jurisdictions, registered retirement savings are exempt from bankruptcy proceedings. You could keep your retirement savings and still clear your debts. Alternatively, if you have significant non-exempt assets, such as a secondary property or multiple vehicles, a consumer proposal allows you to settle with your creditors without liquidating any assets.
This is a difficult situation to be in, and the right answer will be different for everyone. Get a credit counselling consultation with a Licensed Insolvency Trustee to talk about the right way forward.
If there’s already nothing left in your savings account, you’re in a precarious situation. Any loss of income could upset the tightrope you’re walking. The sooner you take action, the better off you’ll be.
4. You Can’t Balance Your Budget
One of the problems with the easy accessibility of credit is that lenders may offer you bigger loans and limits if you meet their criteria for it, but they don’t know what your budget is like. Just because your bank has approved you for a higher borrowing limit doesn’t mean you should take advantage of it.
Can your budget balance? The 50/30/20 budget rule is a useful rule of thumb for personal finances. It says that 50% of your after-tax income should go toward needs, 30% on wants, and the remaining 20% should go toward savings (or paying down debt). If more than 20% of your personal budget is going to credit card companies, it might be worth looking into alternative solutions – though changes to your budget may still be enough to conquer debt.
5. You’ve Applied for New Credit and Been Denied
Sometimes you can’t see the problem until someone else points it out to you. If you’ve applied for new credit, such as an auto loan, a mortgage, or a new card, you might be surprised to learn that you’ve been denied. Before you apply somewhere else, take a look at your credit history and score, which you can request from a bureau like Equifax or TransUnion.
There are many reasons you may have been denied. Besides your history with repaying debt, lenders also look at your credit utilization rate: the percentage of your available credit that you’re currently using.
6. You’re Getting Collection Calls
This is one of those big red flags. Once debt collectors start calling you, it’s because you’re considered delinquent on your debts. Though they may begin with annoying phone calls, that also means they can take legal actions such as suing you, which can lead to options like garnishing your wages or levying your bank account.
7. More than Half Your Income Goes to Payments
If, say, 25% of your after-tax income is being siphoned off by creditors, you could be doing better, but you’re not in deep trouble. Once you reach this point, you are very likely in over your head, and you would be a prime candidate for bankruptcy or a consumer proposal.
Bankruptcy can seem like a major life decision and a last resort, but there are times when it is the best course of action to move forward. There are also alternatives, like the consumer proposal. There are situations in which you have to recognize that you just can’t get out of debt on your own. If any of these situations apply to your finances, it may be time to try something different.