Get out! (of debt, that is)

Q: Now that I’m in debt, how do I get out of it/fix it/reduce it/ stop the harassing calls/etc. etc.?

A: Getting out of debt literally means reducing your debt to zero, and keeping it there (no surprises there, I’m sure). There are several ways that this can happen. (Note: these methods have analogues all over the place, but the names, rules, etc. are specific to Ontario, Canada… just so you know.)

Method 1: full repayment on your own

If you can afford to repay your debt completely, without changing the terms of your debt, then you just have to grit your teeth and do it. Perhaps the most effective way of doing this is by throwing as much extra money as you can afford to at your debt repayment budget (this is the “debt snowball” that will be the focus of our next discussion). The larger the payment you make, the faster the debt disappears, and the less interest you pay. Provided your payments are on time, this method of repayment will have a positive impact on your credit rating & score. There are literally dozens, if not hundreds, of debt-reduction blogs out there, where you can participate in the journey of individuals and families as they eradicate their debt (and live without incurring additional debt).

Method 2: full repayment with Debt Management Plan (DMP)

If you can afford to repay your debt completely, but you’ve gotten behind or otherwise need some help getting out from under interest charges, a DMP might be the solution. You will need to work with an accredited credit counselor (see the resources page for the Ontario Association of Credit Counsellors, for example) to establish this. You arrange with some or all of your creditors to stop or reduce the interest accumulating on the debt, and to make a single monthly payment to the credit counselor that is then distributed among the creditors. A typical DMP lasts for 3-5 years, depending on your level of debt, and remains on your credit report for 3 years following completion.

Method 3: full or partial repayment through a Consumer Proposal

If you are really in trouble with debt in collections, and/or you are not able to repay the full amount of the debt, a consumer proposal may be the answer. You will require a bankruptcy trustee to create this legally binding agreement between you and your creditors. If the majority of your creditors agree to the proposal (51% by amount owed, not by number of creditors), they’re all deemed to have agreed. Interest will stop accruing, and your payments will go to reducing the principle. If necessary, you can negotiate to pay less than the full amount owing (if you are proposing less that 50% of your total outstanding, you may have to consider Method 4 instead). A CP usually includes only unsecured debt (credit cards, personal loans, income taxes, etc.), not secured debt (mortgage, or car loan, for example).

Method 4: bankruptcy

In some situations, bankruptcy may be the only option to resolve your debt situation. This is, of course, a solution of last resort, as the consequences for your credit rating and your personal finances are significant. On the plus side, it offers you a fresh start. In a bankruptcy, you will pay an “accounting fee” of approximately $150-200/month plus half of your income over the maximum allowable income for your family size. Therefore, the more money you make, the higher the cost of bankruptcy (i.e., the more of your debt gets repaid. Your trustee will file your income tax return(s) that cover the period in which you are bankrupt. Your possessions may or may not be sold to pay off creditors (it depends on what it is, how much its worth, and how much of it you own); a bankruptcy trustee will have to go over your assets and liabilities with you to say for sure what will stay, and under what circumstances.

If overspending bears some resemblances to addictive behaviour; then, for many people, debt reduction is like going cold turkey while simultaneously going on a diet and joining a gym to train for a marathon. It very definitely requires a whole new way about thinking about money we earn, and money we owe. But, it absolutely can be done. If you’re serious about getting out of debt, then you need to do something concrete about it. Here are some good first steps:

- talk to your partner/family members about the financial situation. Think: constructive and cooperative (“what can we do to change this”); not confrontational (“you spend too much money!”)

- make a list of ALL your debts, including the ones you don’t want to think about

- don’t avoid creditor calls, but don’t allow yourself to be pressured into making promises you can’t keep, or payments you can’t afford. (See the resources for information about dealing with collection agencies.)

- start tracking your spending and identifying areas where you can spend less

- make a budget

- set goals for spending and debt reduction

- make another budget

- if you cannot find the solution on your own, make sure you speak to a banker (re: consolidation loan), credit counselor, or bankruptcy trustee as soon as possible to begin working on a solution!

If you need some inspiration, check out blogs like Blogging Away Debt, or No Credit Needed. Heck, start your own blog, documenting your debt-reduction journey — nothing like making your goals public to make you accountable.

There is also a thriving social networking movement to support people getting out of debt. For example, you might want to check out: debtgoal.com, which is a free online debt management plan that provides an opportunity to participate in a community of folks who are also deep in the debt-reduction/elimination trenches.

Most importantly: be honest about your debt – know how much you’ve got, and how you got into debt. If you can get your head around that, you can start to get rid of it. Make a commitment to yourself, your family, to what or whoever you need to be/feel accountable to in order to keep going when it gets tough. Because it will get tough. If it was easy, none of us would be in debt, would we?

At the risk of being cliché, I’ll remind you what Confucius said: “A journey of a thousand miles begins with a single step.”  He never said it wouldn’t be uphill.