Who needs a debt plan, and who doesn’t?

The type of credit you have and the reason you use it varies from person to person. You may have taken out a new credit card, a line of credit, or a payday loan to cover rising costs, handle an unexpected medical expense, or for many other reasons. However, the one thing that shouldn’t change is knowing you aren’t going to carry debt forever. 

A debt plan can help you pay off your debts without going into more debt. Let’s discuss who needs a debt plan and who doesn’t — and review two different types of debt plan that can help you achieve a debt-free future. 

Who needs a debt plan?

You don’t need a debt plan if you don’t carry a balance on your debt and ensure the credit you use is paid in full each month. Those who have a loan with a set payment each month that will pay off the loan in full over the terms of the agreement also don’t need a debt plan.

You may need a debt plan to pay off your debts without going into more debt if:

• You carry balances on credit cards and are making minimum payments
• You only pay the minimum on your lines of credit
• You are in a cycle of payday loans

How to create a debt plan

The first step of developing a debt plan is to identify your income and expenses. You can write these down, create a spreadsheet, or find an online tool to help you track what amount is coming into your household each month as income and how much is leaving it through expenses.

• Income — The total amount coming into the house. Use your average monthly income if your income varies from month to month. For example, if your income ranges between $3,000 and $3,750 per month, the average would be $3,375.
• Expenses — Start by listing the basic expenses you have each month. At this point, you don’t want to include the payments you are making on your debts. However, some debts such as your vehicle loan payments and mortgage should be included as basic expenses. Try to determine an average for variable expenses such as groceries, medical bills, and utilities that are not on an equal payment plan.

The second step of creating a debt plan is to know who you owe, the amounts you owe, the interest rate being charged on your debt, and the expected minimum monthly payment. Knowing the interest rates will help you save money over time by allowing you to target higher-interest debts first. It is important to write this information down or put it into a spreadsheet.

Everyone goes into debt for different reasons — and the plan to pay it off will also vary from person to person. Let’s review two different types of debt plan and how they can help you achieve a fresh financial start.

Paying off your debt on your own

Paying off your debts on your own will work if you have enough money left over each month to make more than minimum payments. It is crucial to stop using credit while you are paying off your debts, since this will impact your ability to pay it off successfully.

It is important to develop a debt plan budget (DPB), which is the money left over from your basic monthly budget. Make minimum payments on each of your debts and make a lump sum payment on the debt with the highest interest with the balance of your money from your DPB to save money on interest.

Continue making your payments each month in this manner until the debt with the highest interest rate is paid off. Then change the lump sum payment to the next remaining debt with the highest interest rate and continue in this fashion until all your debts have been paid in full.

Assess your credit needs and cancel the other credit products after your debts are paid. You may realize you don’t want a line of credit, since you are immediately charged interest when you use it. Paying the balance on a credit card each month before the due date will save you interest charges and may be all you need.

It is important to remember that you will need to use credit to maintain or build a good credit rating. Credit bureaus will look at the total credit used when determining your rating and will give you a better score when you don’t miss payments and use less than 50 percent of the credit limit.

Paying off your debt with support

If you don’t have enough money left over each month to make more than minimum payments, you will need support to pay off your debt instead of paying it off alone. Help with debt may involve talking with a financial institution about a consolidation loan or seeking help from a Licensed Insolvency Trustee (LIT).

Consolidation loan

A consolidation loan involves obtaining a loan from a financial institution and using those funds to pay off your debts. You still have debt in the form of this loan. However, this option will work if your DPB is enough for you to make your monthly payment until the loan is paid in full. If you choose this option, you should stop using all other credit until the consolidation loan is paid off and then assess what you need for credit.

Informal plan

This option involves getting help from a credit counsellor. It is an informal process, which means there are no laws governing how the process is carried out, and typically involves paying your debts in full at a reduced interest rate through monthly payments. This option will work if your DPB is enough for you to make these monthly payments until the debt is paid off.

Consumer Proposal

A Consumer Proposal is a federally regulated and legally binding process where you typically pay all or a portion of your debts through monthly payments. An LIT will help you file a Consumer Proposal and guide you through the process of paying off your debts. This option will work if your DPB is enough to make the monthly payments.

Bankruptcy

If none of the above methods will work for you, a Bankruptcy can help you achieve a fresh financial start. Bankruptcy is a legal process that helps provide immediate financial protection to people experiencing overwhelming financial challenges.

A LIT will help you prepare, and file all required documents for Bankruptcy and guide you through the process until your debts are paid in full through monthly payments. However, interest doesn’t accrue after the Bankruptcy is in place.

Take the next steps

A debt plan can help you pay off your debts and achieve a fresh financial start. The MNP Debt Calculator can help you understand your current situation if you need help deciding whether you can pay it off alone or need additional support.

If you need help developing a debt plan, reach out to an MNP LIT for a Free Confidential Consultation. We can help you review all your options and choose the one that works best for your specific needs. Together, we can help you achieve a fresh financial start.