At LCTaylor and Company, Licensed Insolvency Trustees, we are well versed in helping people find solutions to their debt troubles. Many people find themselves overburdened by debt through no fault of their own, because of things such as illness, job loss, or marital breakdown. However, there are a few debt strategies that we can offer to reduce the chance of someone accumulating unmanageable debt.
1. Don’t Charge More Than You Have the Cash For
Credit cards are useful tools. With a credit card, you can shop online, combine multiple purchases into a single bill, and collect reward points. For people who are able to pay off the full balance of their credit card each month, these benefits come at little to no cost. However, if you aren’t able to pay the credit card bill as it becomes due, there becomes a significant price to pay for this convenience. For this reason, it is best to consider a credit card as a form of payment for the money that you already have, not as a form of financing things that you cannot afford. For instance, if your monthly grocery budget is $250, and you charge the $250 to your credit card, and pay it off with the money you already have allocated to groceries, there is no cost for this convenience. Where problems arise is when you use a credit card to pay for something that you have not yet saved up for. With the interest on unpaid balances being close to 30% on many credit cards, this is not a wise way to finance a purchase.
2. Make Instalment Payments to Canada Revenue Agency
If you are a self-employed individual, make sure that you are submitting regular installments to the Canada Revenue Agency in order to stay on top of your tax obligations. Many self-employed people are very good at what they do in terms of their chosen vocation, but some lack the bookkeeping and budgeting skills that are necessary to properly run a business. These shortcomings usually present themselves in the form of falling behind on remittances owing to the Canada Revenue Agency. Business owners need to keep in mind that not all cash collected from customers is cash available to spend, either on the business or personally. Some amounts collected are due to sales taxes that are charged on behalf of the government, or due to employee source deductions that are taken off of employee pay-cheques on behalf of the government. Canada Revenue Agency and the provincial tax authorities take great offense to this money being charged to customers but used for business or personal purposes. As a result, the interest and penalties levied on the amount owing can be quite hefty, making it very easy to quickly fall behind.
These funds should be accounted for separately and segregated from the revenues of the business, and remitted to Canada Revenue Agency in a timely manner. If this is something that you are finding difficult to do, it is likely worth working with a professional accountant or bookkeeper to avoid debt with the Canada Revenue Agency.
3. Don’t Co-sign Debts
Many people are co-signers or guarantors of debts for other people, but some people don’t understand the ramifications of doing so. When you co-sign a debt, you are taking responsibility for the full amount of the debt in the event that the primary borrower defaults on the loan. So if the primary borrower can’t keep up with the payments, the lender will come calling on the co-signer to pay the outstanding balance on the loan. This will be the whole outstanding balance, not half of it, which is a common misconception among co-signers.
Because of this, careful consideration should be made before agreeing to co-sign or guarantee a debt for anyone. The two main considerations are as follows:
Could this person obtain the loan without the co-signer? Many lenders ask for a co-signer even if the borrower would qualify for the financing by themselves. Having a co-signer guarantee a loan gives extra protection to the lender, because they have someone else to pursue for the debt. This is exactly why you do not want to be a co-signer if you can help it. If a lender asks if you are willing to co-sign, tell them that you do not want to, and ask if the person would qualify on their own. Then wait to see what they say.
Would you face financial hardship or be upset if you were required to repay the full amount being borrowed? As unlikely as this scenario may seem at the time the loan is taken out, it is a very real possibility. We see people come into our offices at L.C. Taylor for various reasons, including illness, unexpected job loss, and marriage breakdowns. These can happen to anyone, so there is no reason to believe that it can’t happen to the person you are co-signing for. If it does and leaves them unable to pay the debt, you will be responsible for it.
Unless the answer to both of these questions is “no”, then we suggest refusing to co-sign the debt.
4. Avoid Supplementary Cards
Many people are unaware that the cardholder agreements of most credit cards contain terms that make supplementary cardholders jointly responsible for the repayment of the card balance. This is why credit card issuers are so eager to push supplementary cards: because it protects the issuer the same way a co-signer protects a lender. Therefore, unless absolutely necessary, we suggest avoiding supplementary cards for the same reasons you should avoid debt by not co-signing a loan, as noted above.
5. Keep Gambling a Game
It is possible to partake in gambling while still managing to avoid debt. Rather than considering gambling as a means of making money (remember that the house always wins), consider it a form of entertainment that costs money, just like sports tickets and movies. Budget an amount for gambling, and stick to it, win or lose. Once your budget is spent, go home. Don’t try and chase your losses and end up spending more than you budgeted for. Also, if you are planning an outing that consists of both a meal and some gambling, a tip is to eat the meal first, so that you won’t be tempted to skip the meal and chase your losses.
6. Talk to a Licensed Insolvency Trustee
This falls more into the category of avoiding bankruptcy rather than a tip to avoid debt, but one of the most important debt strategies is to call a Licensed Insolvency Trustee as soon as you get the feeling that your debt might be more than you can handle. A Licensed Insolvency Trustee can go over different debt strategies with you, discuss the options available, and let you know what to expect going forward. The more proactive you are with this, the less likely that you are to do something that could have been avoidable, such as cashing in RRSPs (which are protected in a bankruptcy) to pay a debt that would have been discharged in a bankruptcy. One of the things we hear most commonly from the people we help is, “I wish I had come to you sooner”, rather than pay minimum payments for years without making any progress paying down the debt, and still having to file for bankruptcy anyway.