Carrying debt is a reality for the large majority of Canadians. With the impacts of COVID-19, inflation, the housing crisis, and climbing interest rates, people are tightening their budgets and changing how they spend their money.
Debt happens to all of us and it doesn’t discriminate between high or low-income earners. But, no matter who you are or what your situation is, you can always find a debt solution that works for you.
Getting ahead of the curve and getting a handle on personal debt levels is the best way to avoid trouble. Here are some of the most common causes of debt today:
Let’s face it, the world is going through some challenging times. Interest rates have risen to levels not seen in many years – and are projected to jump again.
As the cost of living and housing increases, people have less disposable income available to service their debt, so they start to get behind on all kinds of payments including interest and principal payments. Due to inflation, essential purchases like gas and food have skyrocketed, putting pressure on everyone, not only those with variable and fixed-rate mortgages but renters as well, to keep the roof over their heads. Oftentimes, many are forced to choose between rent and groceries or gas.
Calgarians are carrying the highest levels of debt in Canada and will face tough decisions when interest rates jump again. Now is the ideal time to reassess your finances and get prepared for the economic changes that are coming.
The pandemic disrupted Canadians’ personal finances in several different ways. Many people collected CERB, CRB, or other assistance to help with personal or business finances, and now that the Canada Revenue Agency (CRA) is asking to be paid back, they find themselves unable to repay the CRA and falling into debt.
Pandemic restrictions pushed many small businesses to close their doors, affecting entrepreneurs. While the CRA provided relief over the last two years, once that assistance was taken away business owners found themselves unable to pay basic expenses, employee wages, and other necessities and now they are being forced to consider business bankruptcy.
Additionally, loss of work, loss of income, and other side effects from COVID-19 have all pushed debt levels higher and landed Albertans in financial turmoil.
Overusing or mismanaging credit cards is a debt dilemma as old as time. While credit card companies entice you by earning points through purchases and building up your credit score, people often outspend their means and are left scrambling trying to make monthly payments that continue to climb.
Many have debt spread across multiple different cards with balances that will take years to correct. If you look at the fine print you may see that it will take decades to pay off your balance without any further purchases.
We won’t go so far as telling you to put your card in the freezer. But, one of the telltale stories of out-of-control debt is overspending on credit.
Unexpected costs arise when a death or illness in the family occurs. These circumstances can often put a strain on finances and, typically, most people feel personally responsible for stepping up to care for their loved ones even if they can’t afford it.
It might mean taking time off work without pay (loss of income). Then there are also costs such as medical expenses, living assistance, and funerals, which can put added strain on anyone’s budget.
Since childhood, we are taught to put money away in the piggy bank and build that rainy-day fund. In the adult world, that can be easier said than done.
For homeowners, flooded basements, a leaking roof, or a burst pipe can impact the budget. Vehicle repairs are another area where people can be caught off guard.
Job loss or income reduction will cause a gap in earnings. At both our Calgary and Edmonton offices, we see many financially capable people unable to find new employment and are living on reduced income for longer than expected.
Periods of unemployment will happen. Keeping your finances in check will help keep you balanced when the situation arises.
Ending a partnership is a common cause of debt in Alberta. We have seen many situations where a good income earner is left paying the debts of the spouse.
Depending on the nature of the settlement, a primary wage earner may need to pay alimony and childcare expenses to an ex, which can prove challenging to manage. Additionally, the legal costs associated with a divorce procedure can be quite high.
Addictions are a painful part of human society. In Canada, roughly 21% of the population will experience a substance abuse disorder in their lifetime. Common addictions can range from gambling to substance abuse.
Not only is the addiction expensive to maintain, but in some cases, it can lead to job loss and marital issues. It is important to not only get the debt under control but to seek qualified help to treat the addiction at the root of the problem.
Another cause of debt occurs when people don’t put enough money away to cover taxes (eg. income tax, withdrawing from RRSPs, corporate tax, or GST). It can happen to full-time workers but is more common among the self-employed who run their own businesses.
Even those with above-average income can be affected if they don’t adequately save. To keep the CRA happy and your finances secure, preplan for your tax payments each year and ensure you make your installments as required to avoid additional interest.
Getting debt under control is possible and you can do it by following some simple steps. When it comes to advice, we always remind customers to follow these same principles:
Additionally, we would advise considering all options before making any rash decisions.
At BNA, we have seen instances where people cancel critical illness policies and life insurance policies, and withhold from buying necessary medications to manage debt. This is not the way to go and a better solution can be found.
Finally, if your debt situation has become unmanageable, our most valuable piece of advice is to speak to a Licensed Insolvency Trustee (LIT).
Licensed Insolvency Trustees are the only professionals in Canada legally able to file all forms of debt relief. This includes consumer proposals, which can reduce your debt by a substantial amount and stop all interest from accruing, and also bankruptcy.
If you are struggling with debt and are unsure of what to do next, you should speak to a reputable LIT and not an unlicensed debt advisor. They will review your financial situation and recommend the best pathway for debt relief.
No one is immune to debt, it impacts us all. But, moving past the problem and seeking a solution as soon as possible is the right way to ensure a better future.