The struggle to get out of debt can be a long and unforgiving one. It’s hard enough paying back low-interest loans like student debt, but when you’re dealing with thousands of dollars in high-interest credit card balances or payday loans, it can feel impossible.
While much of the media focus lately has been on pandemic savings, as millions have had fewer outlets to spend, that hasn’t been the story for everyone. In fact, over half of those already carrying a credit card balance got into more debt during the pandemic. They were dealing with unemployment, emergency expenses, and all of the usual reasons that consumers lean on their credit cards.
Even as the world reopens and the economy rebounds, that debt stays with you. If you racked up debt during a period of unemployment, it can be hard to pay off what you borrowed, as you’re still keeping up with essential living expenses, and interest charges keep that debt growing.
There are four common paths out of debt, and only one involves going it alone. Sometimes, you owe too much to ever pay it back on your own. Explore your options and what they mean to your long-term financial plan.
1. Debt Consolidation Programs
A Debt Consolidation Program is a great option to explore if you’re employed and earning an income but struggling to make any progress on your debt or keep up with various payments. If you’ve been carrying debt around for years and feel like you’re never making any progress, a DCP can give you the breathing room you need to finally become debt-free.
The way it works is a certified credit counsellor with a non-profit credit counselling agency negotiates with your creditors to reduce the interest rates you pay or bring them down to zero. This means more of your monthly payment goes toward the principal, not just into your creditors’ pockets.
You then make a consolidated monthly payment which is divided among your various creditors. This way, you’re less likely to forget about payments and let them go into collections. You can find more information on Creditcanada.com about working with a certified credit counsellor and other ways they can help you with debt.
2. Debt Consolidation Loans
A debt consolidation loan is not the same as a Debt Consolidation Program. You don’t have to borrow more money in the latter, whereas you will have to get a loan from somewhere with a consolidation loan. Most reasonable debt consolidation loans come from a bank or credit union, but these sources will be reluctant to lend to anyone with a low credit score.
Unless you’ve been able to keep up with all your payments, you may not qualify for the kind of low-interest loan you need to make it work. Once you start looking at high-interest consolidation loans, it’s no longer worth looking into.
An alarming trend is that now some borrowers are finding ways to transfer their student loans onto balance transfer credit cards. It can seem like a quick way to handle a major debt burden, and if you have a 0% APR credit card, it’s hard to see the problem. However, there is usually a balance transfer fee of around 3% and a limit to how much you can transfer. Many 0% APR deals also expire after 12-18 months, after which you could find yourself paying much higher interest rates than your original student loans.
When your debt would be impossible or impractical to pay back on your own, there’s insolvency, i.e., filing for bankruptcy or a bankruptcy alternative. Bankruptcy will discharge your debts when you have no other way to pay them, but it doesn’t come without consequences.
When you file bankruptcy, several assets or equity in assets will have to be liquidated to pay your unsecured creditors. Investments, second properties, second vehicles, luxury belongings, and even equity in your principal residence or car can be claimed by your creditors. You can also be on the hook for a portion of your income if it exceeds a certain threshold.
Then there’s the impact it can have on your credit history. When you default on a loan by filing bankruptcy, it will stay on your credit report for years. How long depends on where you live, but it will make it harder to secure credit in the future. You may get rejected for credit cards, mortgages, and car loans or have to accept much higher interest rates for the foreseeable future.
Bankruptcy isn’t a “get out of debt free” card. However, when you genuinely have no other options, it is the last resort that resets the clock and gets you out of debt that would be impossible to pay back independently.
In order to be eligible for bankruptcy, you have to owe more than you own in assets.
4. Budget and Save
Finally, there’s the option where you get out of debt on your own by budgeting and saving. It’s possible – depending on how much money you owe – but not always, and it may not be the smartest or fastest way out of debt.
There is a lot of stigma and stubbornness around debt, and a persistent belief is that if you borrowed it, you have to pay it back no matter what it takes. While that’s a good attitude to have when you’re talking about personal loans you’ve borrowed from friends and family, it’s also an attitude that banks and credit card companies find very profitable.
Easy access to high-interest credit can make it very tempting to get into debt, especially when you’re struggling to make ends meet. It can take years to pay it back, even if you stop borrowing more money completely.
Debt relief options exist to help honest debtors get out of debt rather than remaining trapped paying creditors forever. Any of the other three options can get you out of debt sooner while spending less money overall.