Debts

The debt avalanche method requires making minimum payments on all outstanding debts, so you are not declared insolvent by a lender at any stage. However, any surplus amounts after all minimum payments have been made are used to pay debts with the highest interest rate, then the second highest rate, and so on. The debt avalanche method is useful for ensuring that the effects of the most punishing interest rates are mitigated, so you do not end up paying substantial interest costs over the life of the loan.

Similar to the debt avalanche method, the debt snowball method requires that borrowers make all minimum payments on each of their debts to avoid insolvency issues. However, unlike the debt avalanche method, the debt snowball method advocates for using surplus amounts towards the lowest debt balance first, then the second lowest, and so on. This method is a good psychological tool for borrowers that have a lot of debt outstanding. By seeing their debts getting knocked off quickly, they are then motivated to go ahead and knock off the bigger debts too to ultimately become debt-free.

Credit card debt can get expensive considering that they often charge annual rates of interest that are upward of 20%. If you are having trouble paying off credit card debt, there are several ways to go about ensuring that you are positioning yourself for success over the longer term. The first thing to do is to ensure that you are making as large of a payment as possible each month instead of just the minimum payment. You should also curb your spending to focus only on the needs (and not the wants), at least until you can get back on more stable ground with regards to credit card debt. Lastly, you can consider a debt consolidation loan which is a loan that is offered at a lower rate than what you pay on your credit card. You can use the funds from the debt consolidation loan to pay off the credit card debt in full and then pay the lower interest rate on the consolidation loan to save on interest costs, and ultimately pay off your credit cards faster.

In Canada, declaring personal bankruptcy involves working with a Licensed Insolvency Trustee. There is a special ‘Bankruptcy and Insolvency Act’ that stipulates the cost of filing for a personal bankruptcy in Canada. Typically, this cost comes out to around $2300, which is comprised of the filing fee to register the bankruptcy with Canadian courts, the expenses for two financial counseling sessions, fees for the filing of tax returns, and ongoing support costs at each stage of the bankruptcy process.

Once you declare bankruptcy in Canada, a chain of events is set in motion. First, you work with a Licensed Insolvency Trustee (LIT) to complete and submit required bankruptcy forms to the Office of the Superintendent of Bankruptcy (OSB). At this point, you stop paying money to creditors and any wage garnishments or lawsuits against you will be paused. The LIT then starts to sell some your personal assets and may place the money raised in a special trust to distribute to creditors. The creditors of the borrower are then informed of the bankruptcy by the LIT and they may request a meeting with you (which is mandatory to attend). After that, an OSB representative will examine the circumstances of your bankruptcy under oath and you will be required to attend two financial counseling sessions. During each month of the bankruptcy process (which typically lasts between 9 to 21 months), you also have to submit your pay stubs and proof of other income to the LIT, who use the information to determine whether you need to make additional payments to the LIT for creditors. Lastly, you are issued a discharge from bankruptcy which removes the legal obligation to repay the debts that you had outstanding when you filed for bankruptcy (with the exception of a few that are excluded by law).

As the name implies, a low interest credit card comes with a lower rate of interest than traditional credit cards which charge upwards of 20%. Some low interest rate cards even have introductory offers of 0% rates for the initial few months (varies by card). By transferring your balance to these cards and paying off as much as possible in the months that the credit card is still in its promotional period, you are effectively able to pay back only the principal in these months, thereby saving substantial amounts of interest costs.

A balance transfer transaction is when existing credit card debt on a card with a high interest rate is moved over to a credit card with a 0% introductory APR offer. This introductory APR generally lasts for only a few months though. As such, once the balance transfer is initiated, the clock on the promotional period starts to tick down. In this time, it is advisable for the borrower to pay back as much of the outstanding debt as possible before the introductory rate expires and the credit card reverts to a higher rate of interest. By paying down debt in the introductory APR period, the borrower saves on interest costs by having to pay back only principal.

In instances where someone cannot afford to repay their full debt outstanding, a consumer proposal is a legal avenue to reach a debt settlement for less than the total owed amount. The Licensed Insolvency Trustee will work with you to determine the level of debt you can pay back in a manner that will likely be acceptable to your creditors. Thereafter, they will then help you structure a modified repayment plan with creditors or a plan that entails you paying back only a certain percentage of your total owed amount. Your creditors will then elect to either accept or reject this plan. A consumer proposal is the more feasible option when the borrower can afford to make partial repayments on the amounts outstanding. However, in case the borrower is dealing with an event such as a job loss where making any repayments is exceedingly difficult, a bankruptcy may be the better option. However, you should note that a consumer proposal has a lower impact on your credit score as it stays on your credit report for 6 years after filing or 3 years after completion. On the other hand, a bankruptcy remains on your credit report for 6-7 years after completion.

Credit card debt can be a cause for major stress, anxiety and even depression if not managed correctly. To prevent such detriments to your physical or mental health, there are a few proactive steps you can take. The first is to build a budget each year and stick to it. Ensure that you are accounting for all inflows and outflows, and build in a little extra to account for higher debt repayments than the minimum amount if your budget allows. Debt management is often a psychological game – once you see yourself paying down debt faster than expected, you may be motivated to do so again and again until you are debt-free. Alternatively, you can also seek help from a third-party. There are several debt management agencies that help clients with large debt loads on a pro bono basis. You may also want to consult with a therapist if your mental health is suffering as a result of your financial issues. Lastly, if time permits, you may find it rewarding to set up your own side gig which can earn you extra income to tackle your debts while offering you a stimulating activity to pursue in your free time.

There are several ways that you can accelerate your process of paying down credit card debt. You can firstly target your debts incurring the highest rates of interest. By paying off these debts first, you are ensuring that you do not rack up higher interest costs with each passing month. You should also aim to pay back more than your minimum payment where possible and review your spending patterns to see where you can reasonably make cuts to your lifestyle to channel more money towards debt repayment. Lastly, you can use a debt consolidation loan. In a consolidation loan, you receive a lump sum personal loan from a lender that is used to pay back your credit cards that incur debt at a higher rate. The borrower then pays back the consolidation loan like a normal personal loan with a lower interest rate.