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The financial pressures of recent years—a rising cost of living, pandemic-related setbacks, and changing interest rates—have left many Canadians in crisis. As a result, there is a growing number of millennials declaring personal Bankruptcy. How did it come to this, and what can millennials do to avoid the debt cycle? Let’s explore:
Millennial Debt in Canada
Consumer debt in Canada recently hit a record 2.5 trillion dollars. Millennials (those born between 1981 and 1995) hold about 38%, or $911 billion. As the cohort enters life stages with more financial pressure (children, home buying), borrowing has increased. There are student loans, credit card debt, car loans, personal loans, family loans, home ownership expenses, the costs of raising children, tax debt, and rent payments to consider.
What’s leading to such high average debt levels? Some possible factors include:
- Income not keeping up with inflation.
- Lack of financial awareness.
- Overspending to impress others, or keeping up with the Joneses.
Debt Management for Millennials: Understanding Your Finances
For millennials, proper debt management begins with financial literacy. Here are some steps to get back on track and options to consider if you’re facing a personal insolvency crisis.
Know your debt
Not all debt is the same—learn the details about what you owe to create an effective plan. Key info to discover will include your interest rates, how your creditors calculate your interest, and when you can expect to be debt-free with regular payments.
Track your habits with a budget
Add up your income from all sources and compare that to your monthly expenses and debt. If you have extra money after you pay all your bills, you could apply it to your debt or invest.
If your expenses exceed your income, look for ways to cut back (e.g. unused subscriptions or restaurant purchases). Other ways to reduce costs could involve less car use or living at home with parents.
If you need to increase your income, consider overtime work, skill upgrades, a second job, or a side hustle.
Develop a plan
With affordable payments, the next step is to plan out your financial goals. For example, you may opt to be debt-free as soon as possible, or maybe you focus on credit card debt first.
Your plan should also include how you hope to achieve any set goals. For example, the snowball method focuses on paying as much as possible on the smallest debt. Or, you could use the avalanche method and apply as much money as possible toward the debt with the highest interest rate.
It’s also a good idea to choose how long you want to take to pay off each debt. With a debt-free date, you can use a loan calculator to establish how much you must pay monthly to accomplish your plan.
Lastly, compare your plan to other debt-relief options. For example, you could consolidate your debt for one monthly payment, and with an interest rate that is often lower than your credit card.
When the Numbers Don’t Balance
Financial strain is a widespread issue that can impact all age groups in Canada. Yes, about 35% of millennials believe they won’t be able to pay at least one current bill in full, and yet 22% of all Canadians plan to borrow more or refinance existing debt this year. We can all feel the squeeze.
So what can you do when overwhelmed by unmanageable debt? There are two common options:
Consumer Proposal
A Consumer Proposal is a legally binding agreement between you and your creditors. A Licensed Insolvency Trustee (LIT) must file on your behalf. It allows you to:
● Pay back some or all of your debt with one monthly payment
● Have up to five years to repay
● Possibly Reduce your debt substantially. (Creditors write off the remaining unsecured debt)
● Keep your assets
Once you file a Consumer Proposal, your creditors must stop all collection activity. However, it will hurt your credit rating and can be more costly than filing for Bankruptcy. This insolvency will stay on your credit rating for 3 years after COMPLETION of the Proposal.
Bankruptcy
Your Licensed Insolvency Trustee may recommend filing for Bankruptcy if your financial problems are severe or you need a faster solution. You must be insolvent to file (you owe more than you can repay, including the value of non-exempt assets).
Bankruptcy is similar to a Consumer Proposal: it’s legally binding, stops collection activity, and a LIT must file on your behalf. In addition, filing for Bankruptcy will:
● Eliminate your unsecured debt
● Discharge you of your debt within 9 or 21 months if it’s your first time filing a bankruptcy
● Allow you to keep most assets as legislated by provincial or territorial legislation
● Cost less than a Consumer Proposal in nearly all circumstances
Filing for Bankruptcy significantly impacts your credit rating, but it’ll drop off your credit report six years after your discharge from Bankruptcy.
Where to Get Help
Financial problems can profoundly impact your health, relationships, and job performance. You don’t have to navigate this process alone. Our team of experienced LITs at LC Taylor have assisted individuals in debt management for over 30 years. Contact us today, either online or by calling 204-925-6400, for a free consultation. We’re here to work with you, eliminate your debt burden, and reduce financial stress.
