Credit – An Illusion of Wealth

credit and debt problemsSteve, a teacher, had known for some time that he was in serious financial difficulty.  All of the usual warning signs were there – sleepless nights, collection calls, paying interest only on his credit cards. He tried consolidating his debts into one loan, but the monthly payments were still staggering.  He simply did not see a way to pay his debts in full. Steve also needed to deal with a recent car purchase that he could no longer afford.

After meeting with a trustee to review all of his options for dealing with his debts, Steve decided to file a consumer proposal.  The benefits were obvious:

  • He would be protected from his creditors while eliminating his debts.
  • Steve would be able to keep his home which he might have lost if he had filed personal bankruptcy.
  • He was able to negotiate a repayment of a portion of the total debt he owed with one affordable monthly payment.

Even though a consumer proposal was the right solution for Steve today, debts are often just a symptom of a more serious condition.  He knew that he was in trouble, but he couldn’t figure out why.  He was concerned that he would continue to struggle.

During the consultation phase, it came out that Steve had bought a new house on his own following his separation.  He was currently helping his youngest child through college.  He had recently (and impulsively) bought a new vehicle.

The reality is that Steve was a very poor planner.  He had never made a budget.  He had a good, stable pay cheque.  As long as he was able to make his payments, he thought that everything was fine.  It had taken years, but the bills had finally caught up with him.

For Steve, the availability of credit had created an illusion of wealth.  It’s a worn out saying that we should all live within our means, but that doesn’t mean that it isn’t true.  A credit card or line of credit should not be regarded as “your money” because it isn’t your money.  Once you use credit, it becomes debt.  And debt has to be repaid, often with significant interest charges.

Here’s the statement that showed Steve finally got it – “I have a problem with spending and cannot handle credit, therefore I am filing a consumer proposal to deal with the debts and take away my credit.”

Filing a consumer proposal had the additional benefit of forcing Steve to make a budget.  Without credit available, he had to focus on managing his cash flow to be able to pay his bills and set aside funds for the emergency expenses that invariably come up.

Not everyone is like Steve.  There is a multitude of reasons why people find themselves in financial difficulty.  The general point I am trying to make is that you have to look beyond the debts to understand the reasons for the debts.  If you are to the point where you have to file a consumer proposal or personal bankruptcy to deal with the debts, take advantage of the opportunity for a fresh start.  Make the necessary changes for your long term financial success.

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