How do I know when to ask for help with my debt?

Most people wait far too long to seek professional help with their debt. There are several common reasons for the hesitation.

Telephone conversation talking about debt solutions

One is fear. What will it cost me? What will other people think? How will this affect my credit rating or impact my lifestyle?

Another is uncertainty. Is my situation bad enough to warrant help? Will I feel pressured into doing something I don’t want to? Who should I talk to?

Quite often, people just become so accustomed to their debt situation they don’t notice the sacrifices or the strain its causing to their life and relationships.

At MNP, we don’t think it’s ever too early to ask for help. The sooner you ask, the more options available to address the situation and begin your recovery. That’s why we offer Free Confidential Consultations to all Canadian residents who want to learn more about their debt and the opportunities for a fresh start.

Maybe you’re not interested in filing a Bankruptcy or Consumer Proposal — or perhaps you don’t even qualify yet. We think that’s great! It means you’re being proactive and might benefit from a less extreme solution. However, if you’re asking the question, that means debt is disrupting your life and you want to do something about it.

Still not sure whether it’s time to pick up the phone and reach out? Look for these six warning signs.

The amount you owe keeps going up

Do you ever feel like you’re taking one step forward and two steps back in trying to reduce your debt?

You start the month off strong, resolving to cut back on costs and reduce the amount you owe. But one thing comes up, then another. By the time your payment deadline comes, your balance has gone up — even after making the largest payment you could afford.

Next month is more of the same. No amount of planning and cost cutting does a thing to help. You can’t keep up with the interest, nor the unexpected costs. It’s almost like you’re fated to be in debt forever.

This is one of the first warning signs of unmanageable debt. It might initially seem like a minor annoyance, especially when you can still afford to pay more than the monthly minimum. But that comfort only lasts so long. The amount you owe will keep going up, and so will the cost to service your debt.

Don’t wait until you begin seeing more of the warning signs below. The earlier you reach out to a Licensed Insolvency Trustee, the more options you’ll have to turn your situation around.

You’re relying on debt to cover basic expenses

Credit is a tool, and a potentially beneficial one in certain circumstances — such as investing in your education or purchasing an appreciating asset like a house. When used responsibly, credit cards offer convenience, discounts, even access to cashback and points rewards that can help make your purchases more cost effective.

Credit is not a savings account or an insurance policy. If you cannot afford your basic costs of living like rent, utilities, groceries, etc. without the help of credit, you cannot afford your basic costs of living. The bank or credit card provider is paying for those expenses, and they’ll expect you to pay them back — with interest.

Step one will be to review your monthly budget for any opportunities to reduce your costs and the need to rely on credit.

If you’ve already reduced all non-essential spending or your budgetary problems are due to unmanageable debt, schedule an appointment with a Licensed Insolvency Trustee.

You’re borrowing from one creditor to repay another

You’ve no doubt heard of a Ponzi scheme: Variations on the notorious investment fraud immortalized by the eponymous Charles Ponzi have duped thousands of people into participating in a so-called investment “opportunity,” chasing the promise of outlandish rewards. Except there is no investment, and the so-called profits are nothing but a mirage. 

Ponzi schemers simply use the funds from new investors to repay original investors at the promised rate of return. There’s only one problem: once the stream of new investors dries up, so does the money — the entire structure collapses in on itself and people lose their life’s savings in the process.

Repaying one creditor by borrowing funds from another is, in many ways, like running a Ponzi scheme against yourself.* Initially, this may seem like an effective solution to a short-term financial difficulty. But there are several ways it can backfire:

  1. You’re paying interest on interest. Not only do you have to repay interest on the balance of Debt 1, but also on the money you borrowed from Debt 2 to pay Debt 1. These charges add up and can quickly become unsustainable.
  2. How do you break the cycle? You cannot reduce the total amount of debt without making a cash payment. The more payments you make, the more you owe, and the less affordable future debt payments become.
  3. What happens when you reach your credit limit? Just like Ponzi running out of new investors, you run out of money to pay your bills. And your creditors are going to expect payment soon.

Contact a Licensed Insolvency Trustee the moment you recognize the only option to afford your monthly debt payments is to borrow from another credit account.

*Note: This comparison does not apply to opportunities such as consolidation loans and credit card balance transfers, which allow you to use a lower interest rate credit tool to pay off other debts. In the right circumstances both are valid and effective solutions to address unmanageable debt.

You’re struggling to pay your bills in full

Depending on the type of debt you have, most will require either a fixed (e.g., personal loan) or minimum monthly payment (e.g., credit card). Your creditors will expect you to make this payment in full by the specified payment due date.

Partial payments are better than nothing because these can prevent you from falling too far behind — but your creditors will still register these as missed or delinquent until you bring the account into good standing.

Aside from unwanted calls from creditors, failing to make your full payment can have costly consequences. Incomplete payments can cause lasting damage to your credit report. Lenders may also charge punitive late fees and increase your interest rate.

If you’re unable to bring your accounts up to date in a reasonable timeframe, they may even sell your file to a collections agency.

If you consistently find you cannot afford your debt payments, the first step is to review and adjust your spending habits to ensure you can afford your debts. If this doesn’t work, reach out to a Licensed Insolvency Trustee about options to address your debt.

You’re struggling to pay your bills on time

Aside from the amount of your payment, the payment due date is another factor your creditors monitor closely. Like missed payments, late payments register as delinquent on your credit file and can result in late fees, higher interest rates, and long-term damage to your credit report.

Generally, you will have 90 days from your payment due date to remedy the issue before your creditor sells your file to a collection agency. However, you should expect to receive numerous phone calls from the creditor in the meantime to request payment arrangements and follow up on any promises you make.

If late payments are the result of forgetfulness, you may consider automating payments in your online banking. If many of your bills tend to come due on the same monthly paycheque, you could time the automated payment to take place during an earlier pay period — or you could negotiate with your lenders for a more favourable due date.

However, you need to be honest with yourself about whether you’re paying late because your timing is off
— or are living paycheque to paycheque and genuinely cannot afford the payments. If it’s the latter, discuss your options with a Licensed Insolvency Trustee.

Debt collectors are calling (or worse)

A clock starts ticking at 12:00 a.m., the day after your payment due date, once you’ve failed to make a required debt payment in full. Generally, you can expect to receive the first phone call from your creditor within five business days to follow up on the payment and when they can expect to receive it.

If you do not provide payment within the revised timeframe, they will likely follow up once more by phone — then in writing.

In most cases, this back and forth with your creditor will continue for a maximum of 90 days. If you do not bring your accounts up to date, creditors will typically take freeze your account privileges before selling your account to a collections agency.

Once the account is turned over to a debt collector, you can expect phone calls and letters to become much more frequent. They will expect you to pay the outstanding balance, plus penalties, plus interest which continues to accrue at the last highest interest rate set by your lender. Pending your response to those requests, debt collectors may petition for a court judgement in the amount you owe, or even request to garnish your wages.

Reach out to a Licensed Insolvency Trustee immediately upon discovering your account has been turned over to collections — and ideally before your situation reaches this disruptive worst-case scenario.

Both Consumer Proposal and Bankruptcy proceedings offer a stay of proceedings which prevents creditors from taking collections action against you. The stay of proceedings also immediately halts any ongoing collections actions, court judgements, and wage garnishments.