You’ve been struggling with the challenge of meeting your monthly debt payments for a while now and have decided you want to deal with your debt but need a road map. Choosing the right debt relief option is a bit like hitting a traffic circle. Technically all roads will lead somewhere. The question is will you take the exit that gets you to where you want to go quickly and efficiently or will you circle around for a while before reaching your eventual destination of living debt-free?
We’ve talked a lot on this website about your different debt relief options. You might look at the pros and cons of each, compare one alternative to another, but that still may not help you decide where to begin. To help, we suggest you ask yourself three challenging questions about your debt and your budget.
The objective of these three questions is to help you decide just how much debt relief you need. What we are talking about here is unsecured debt like credit cards, payday loans and bank loans. Debt relief programs themselves don’t deal with secured debt like your mortgage since, by their very nature, they are secured and have pre-defined payment terms. However what you will find is that if you can get your unsecured debt under control, you will usually find managing your secured payments like your monthly mortgage and car loan becomes easier.
Choose A Direction To Debt Relief
Let’s look at three personal questions about your ability to pay off your debt:
Question 1: If I make a budget and stick to it, will I be able to pay off my debt in a reasonable amount of time?
If creating a personal budget, focusing on paying down debt, you can pay off your debts on your own in a short period of time (1-3 years) then setting out on your own may be your best solution. Generally this works for small, simple debts.
If your answer is ‘yes’, then make a plan. Our free e-book on how to create a budget that will help you deal with money problems is a great place to start. Make a commitment to cut back on expenses (or increase income) and allocate those resources toward paying off your debt. You can even consider getting a debt consolidation loan to help reduce your interest costs.
If the answer is ‘no’ – let’s look at question #2.
Question 2: If I didn’t have to pay any interest could I pay back all my debts in a reasonable period?
The simple way to answer this question is to calculate what your monthly payment might be if you only had to pay back your current debt, with no new interest. Again, we are focusing on a reasonable period of time here, generally considered to be within five years. So if you owe $20,000 in credit card debt and were to repay that debt over 60 months (five years) your monthly debt payment would be $20,000 ÷ 60 = $333 a month. Can you afford that?
If the answer is ‘yes’ then you should consider talking to your trustee about a consumer proposal. However if your payment would still be more than you can reasonably fit into your family budget, or if you need protection from your creditors while you work to get out of debt, consider the next question.
Question 3: Do I need to lower my payment even more and / or do I need protection from my creditors?
If, even after squeezing your budget by as much as you can, you can’t afford the monthly payments in a Debt Management Plan, or if your creditors will not agree to a Debt Management Plan, you need to consider a more formal option. In this case, contact a Licensed Insolvency Trustee and ask them about a consumer proposal or bankruptcy.
This is a rather simple way to look at debt relief. All options are good alternatives. Which one you need will depend on just how much help you need along the way.