136 – How to Plan Your Debt Relief

Wayne Kay 00:04
Scheduling financial freedom. How do you plan your debt relief? That’s our topic today on the Debt Matters podcast, where we help Canadians find solutions to their debt with Licensed Insolvency Trustees from across Canada.

I’m Wayne Kay. Coming up, we’re going to talk about how times are tight with inflation, interest rate increases. How do you make a plan to deal with cutting your debt to manageable levels? What are some of the free resources that you can access to help with that? Are there some steps you can take yourself to trim your debt? And what kind of professional help can you get if you need it?

This and more with my guest today, David Macdonald with Allan Marshall & Associates Licensed Insolvency Trustee from Victoria, BC, also an office in Dartmouth, Nova Scotia.

Hi, David.

David Macdonald 00:54
Hi, Wayne. How are you doing today?

Wayne Kay 00:55
I’m doing great. Welcome back. Thank you for doing the show again because you always have such great advice for so many people who are going through a tough time. So I appreciate your time.

David Macdonald 01:06
Oh, my pleasure.

Wayne Kay 01:08
I mentioned how we can plan our debt relief, and last time we talked, you were saying that you’re seeing people calling with debt problems –  like you haven’t seen for decades. So people are really hurting.

Today’s show is going to be about how to get out of that situation. So for somebody who hasn’t heard the last episode we did – let’s touch on some of what’s going on with Canadians.

David Macdonald 01:32
Well, it’s a really tough time these days. Interest rates are high. Inflation is off the charts. We are seeing people coming through our door that never would have expected that they’d be talking to a Licensed Insolvency Trustee about possibly needing some help with their debt. It’s just nuts.

I haven’t seen it like this in the two decades that I’ve been working in insolvency. We’re reaching levels that probably we haven’t seen since the 1980s of people in tight financial positions.

Wayne Kay 02:04
And inflation, that’s not making anything easier. Interest rates, okay, maybe they’re coming down a half point, but that’s it. We’re seeing such a big difference with people’s housing. It’s going to be very difficult.

David Macdonald 02:17
It’s unmanageable. Anyone that’s taken on a lot of mortgage debt in the last five years, their mortgages, if it was a fixed one, is resetting at some point in the near future, if it hasn’t already. I’m seeing lots of folks in metro areas that their mortgages have easily doubled or more in a couple of years. It’s frightening.

Wayne Kay 02:37
It is unbelievable. I see the stats of what it takes in some of the major centers, how much money you have to make to even buy a house now.

And it is terrifying. There’s absolutely no way I would ever be able to pull that off. So all of a sudden how do you even start trying to make a plan to cut your debts to manageable levels when we have all this going on?

David Macdonald 03:03
When I get a question like that, the first thing that your listeners are probably going to be expecting me to say is the word budget. And that’s a word that brings up all sorts of negative feelings for a lot of people. It brings up the idea that you’re not going to meet expectations, that you’re going to have to give things up. A lot of people are not happy with the idea of math and going into stuff, so I’m going to try and answer that question without using the word budget as much as possible.

But the reality is getting out of debt just doesn’t happen. I mean, for the lucky people that win the lottery or get an inheritance, maybe it does, but that’s not most Canadians. It really takes a plan to move forward from where you’re at. And base planning starts with identifying what you’ve got to work with.

Wayne Kay 03:49
Okay.

David Macdonald 03:50
So for most people, that comes down to their income. It comes down to identifying what they have for expenses, necessary expenses, and maybe not so necessary expenses. And that includes the cost of carrying the debt that you have. And then if you’re having an issue with debt, you want to try and figure out what your debt actually is and write it down and take a look at it.

Wayne Kay 04:12
Okay, so that’s where we start. Simply got a pen and paper. That’s the best way to do it. Also, I guess it’s important to have your significant other involved. Do you find that one person does the finances and one person maybe is, I don’t know, just out there not paying attention.

One’s good with money or trying to be good with money and one isn’t. I assume to tackle this, you both have to be involved.

David Macdonald 04:39
It certainly helps. And I do find that when I have couples that come in to see us, if I can get both pairs of the couple on the same page, their process is much smoother.

Wayne Kay 04:51
Okay.

David Macdonald 04:52
What happens is that people come in and if I do a session, say, with one person, and I give them all great ideas on that, they’re fully on board with budgeting and money management and maybe cutting some expenses or saving – and their spouse has no idea what they’re talking about when they come home, it can create a lot of aggravation.

And sometimes when you have to start cutting expenses because you thought things were doing okay, but now they have to tighten their belt a little bit. If one person understands why they’re doing that and saying, you know, we’re not going to order takeout this Friday. I know we both worked all week. I know we’re tired, but we got to get off the couch and we’re going to have to cook dinner with what we got in the fridge instead of spending $100 – $200 on going out for a good meal with ourselves and the kids.

If you’re both not on the same page, that is actually a lot bigger ask than it sounds. So, yes, getting both people on board and determining what’s realistic and attainable. I mean, the whole idea of saying, okay, I want to get from a to b, well, how much income do you have to work with? How much debt do you have to tackle? What period of time do you think you’re going to need to get that done?

People that come to me and say, I want to clean up my credit report and I want it to happen tomorrow, and are impatient – it spreads across all demographics. People think that repairing your credit and getting out of debt can just happen. There’s got to be an easy way. It’s not. And sometimes there are unrealistic expectations. So sitting down with a professional sometimes or doing some research can give you an idea of what you might be able to do with what you have to work with.

Wayne Kay 06:30
Are there some free resources that people can start with if they just are like, I want to do this myself before I call David and before I call anybody. I want to see if I can do this myself. What do you recommend?

David Macdonald 06:45
I recommend shoring up whatever level of financial literacy you’re starting with. Everybody starts at a different level. I went to school for a long time to be an accountant and a Licensed Insolvency Trustee. Probably longer than it took to be a doctor, actually. So some stuff that comes easily to me or that I can see very quickly, oh, you might want to try this or try that. Most people don’t have that same level of financial literacy.

Some people have very limited amounts. Some people are lucky enough to have learned along the way or had family and friends who were able to teach them. But a couple of good tools to start with – the Financial Consumer Agency of Canada. They have some great budgeting and debt management plan tools and advice on their website.

And that’s free. It’s available to all Canadians. It’s a great place to get started.

Wayne Kay 07:33
And it’s called the Financial Agency of Canada.

David Macdonald 07:36
The Financial Consumer Agency of Canada.

Wayne Kay 07:39
Okay.

David Macdonald 07:43
Another good thing to look at are the some apps out there. Like everything else, there’s an app for it. MINT was always a great app that I recommended. Over the years that’s been picked up by Intuit, the financial services company that does things like Turbotax, those income tax returns for Canadians. It’s part of the Credit Karma suite of financial tools.

On Credit Karma, people can look at their credit scores. They can look at what they have outstanding for debts. It’s a very consumer friendly way to access your credit reports. But they also encourage people to do their budgeting through the MINT app on the website as well. And you can actually get an idea of where you’re at. Set targets, set goals.

YNAB – ‘you need a budget’ app. That is a great one. It’s free to try, but then you do pay for use going forward. But we found a lot of people, they like the interface on that, and they’re not going to a company like Credit Karma and putting their data out there into the cloud. It’s something that you can use yourself and get some great insights out of.

Wayne Kay 08:43
Okay, perfect. A few places to get started anyway, because we all have to learn. I mean, you have to make it a priority to say, okay, this is my year. I’m going to learn about this, and I’m in this situation, and I need to get out of it.

David Macdonald 08:59
Well, and the great thing is, you don’t have to be in financial difficulty to start looking at these resources. You can go at them at your own pace. You can absorb what you need to know. It’s not like you’re in an online classroom environment that you paid a bunch of money for, and sometimes you don’t have time to take it. You can absorb these things at your own rate as it makes sense for you.

Wayne Kay 09:20
So if somebody’s making a plan now and they’re in a bad financial situation, what are some of the steps they can take to trim that debt? Are there some things they should look at first?

David Macdonald 09:31
The first thing I always talk about when people come into my office is, have you looked at something like a consolidation loan? That’s where you go to a financial institution and you’d say, you know what? I’ve got these miscellaneous debts.

The interest rates are a little high. I mean, we’re talking, credit card rates are in the 25% to 30% rates these days. Bank loans are looking at something in the 8 to 12% range, depending on the product and the repayment term and your credit. So the idea of going to a bank saying, I’ve got three or four credit cards, they’re high interest rates. I’d like just one loan at a reasonable interest rate, and I’d like to pay that off in a three to five year timeline.

That’s a consolidation loan. And that could come in the form of a loan. It could be a line of credit, but going to the bank and seeing what they can do for you is a great first step for a lot of people.

Wayne Kay 10:21
All right, then what?

David Macdonald 10:24
The banks are probably the experts on financial risk. They’re not giving away money recklessly. They’re not like payday loan companies that will lend to basically anybody that walks in. If the bank is telling you, you know what, we’re not really keen to give you a consolidation loan, that’s probably a definite sign. You might want to start talking to some professionals about alternate ways to solve your problem.

Wayne Kay 10:50
That’s a great way of putting it. Because they would know exactly. Then you go, okay, I’m in a situation.

David Macdonald 11:01
Well, and it may be a very manageable situation. It’s just not going to have a quick and easy solution.

Wayne Kay 11:06
Right.

David Macdonald 11:08
So some of the things that you do, you set up a financial plan, you get an idea of what you have to work with, and at the very least, you start doing something like paying more than the minimum payments on your credit cards and your line of credit.

Some people will say, you know, you should tackle a debt that has the highest interest rate first. I’m actually of the mind that you should tackle your lowest debts first, especially if you have a bunch of different debts out there.

Human nature is that we want things to be done quickly. We want to see accomplishment. We want to see results, and it motivates us to do more and more difficult tasks. So if you say, you know what, I have a $500 credit card. I have a $2,000 credit card. I say whatever steps you’re going to take to tackle your debt, pay down the low one first, get that cleaned off, maybe cancel the card, depending on what your credit score looks like and what you’re trying to accomplish there.

But then when you go to tackle the larger debt. You know, the plan is working. Whatever it is that you’re doing, whether it’s paying the minimum payments, whether it’s, you know, cutting some expenses, you’re seeing progress. And that’s really important for a lot of people.

Wayne Kay 12:16
Yeah, absolutely. I love that. Is there something that people shouldn’t do? You find out, okay, they won’t give you a loan. Things are going sideways. You know, things are tough.

You’re getting the phone calls. What should you never do?

David Macdonald 12:31
The things that you should never do. That’s a great question. The number one thing that you should never do is don’t touch your RRSPs or pensions.

Those are protected assets. Even if you go bankrupt, you don’t have to touch an RRSP that’s been sitting there for a few years or a pension. Those things are meant for your retirement.

And the other problem is, if you dip into them, you will get a tax hit the next year. You never get enough tax taken off at source whenever you pull money out of the RRSP, and you’re going to get a tax bill down the road, probably at a much higher tax bracket than you normally pay.

So that’s one of those things that you probably should be talking to a Licensed Insolvency Trustee. If you’re even considering dipping into an RRSP you should stay far, far away from any payday loans or higher interest loans. If you’re looking at loans that are north of 15%, it’s probably not a good idea. The interest rate is going to be brutal and that debt will snowball so fast, it’s not funny.

The worst type of loan to get a loan that’s secured against your home, because even if you file a Bankruptcy, you will not be able to get rid of that loan or compromise it unless you sell your house. If you’re putting your house up as collateral, you better have a very good reason to do it, and you better have a very good plan in place beforehand to pay it off because that doesn’t go anywhere.

Wayne Kay 13:54
Wow. Okay. I’m glad I threw that at you because I was wondering, here’s some things you could do right, but there’s a lot of things that you can do wrong. When’s the right time to reach out to, to a professional, like a Licensed Insolvency Trustee?

David Macdonald 14:08
Well, whenever you’re starting to feel financial pressure, it doesn’t have to be a lot of pressure. I mean, people sometimes think, you know, I don’t want to go talk to a Trustee. I don’t want to go bankrupt, that’s always the first thing that people think about. But a good Trustee will walk you through all of your options. They might be able to give you help with budgeting. They might be able to give you a hand with trimming expenses.

I had a great example a couple of weeks ago. I had a younger person coming in. They were struggling with student loan debt, like a lot of younger folks are. And they said, you know, the first thing I don’t want you to talk to me about is telling me I can’t get a coffee because, I mean, people make the jokes about, you know, those seven dollar lattes are going to build up.

And I said, you know what? I said, what I tell people is, I’m not going to tell you to stop getting your latte. But I said, you already know the principle behind that. Little payments fritter away the limited number of funds that you do have available.

Do it the other way. Do what I call micro payments. When you have an extra $10 in your pocket and you’re thinking you might do something with it, put it on a debt just right there and then everyone can do that with their bank. They can say, you know what? I’m going to make a choice. I’m going to do, I’m going to throw $10 on that debt or I’m going to put $20 on that debt as they go.

And you can do that anytime you have that feeling that you’re having issues with your debt, that you need to do something about it. Put some money on the debt. It doesn’t have to be a lot. It could be a dollar, five, it could be ten. The money has gone where you want it to go and you didn’t have a chance to spend it. So you use impulsiveness to your benefit.

You make those micro payments as you go. That is a surprisingly successful option for people that have online access to their banking, on their phones. I watch people do that. All of a sudden they’re putting hundreds of dollars a month on their debt that they never were before, and it’s happening before the end of the month.

Wayne Kay 16:05
And you feel great when you do it because you see it coming down instead of going the other way.

David Macdonald 16:12
And more importantly, you’re paying it down before you get the interest hit on it at the end of the month.

Wayne Kay 16:15
Exactly. So it’s all exciting either way you do it. Wonderful information. What’s your final words of advice for us?

David Macdonald 16:24
I would say that people that are looking at dealing with planning their debt relief, there are lots of different ways to go out there, but don’t expect that it’s something that’s going to come to you instantly. There are lots of different ways to tackle debt. It depends on what you have for resources. It depends what your family commitments are. It depends on the level of your debt.

Looking at how long it’s going to take to pay down your debt is a key thing. If most people will tell you if you can’t get your debt paid down within five years, it’s time to throw in the towel and talk to a professional. Options like Consumer Proposals will have your debt paid off in a minimum of five years. Some of the more extreme ones, like Bankruptcy, could be as soon as 9 or 21 months to get clear of your debt, and then you rebuild your credit and get a reset.

But another easy way to do it – instead of planning out a budget, instead of going through a debt repayment schedule and trying to calculate the interest on your debt, every credit card statement in Canada now has a little section on it that tells you how long it will take to pay back your debt if you’re only making the minimum payments. And it is a shocker if you are in a position where you’re only making minimum payments on your debt. You’re treading water. You are not treading water.

Take a look at how long it’s going to take to repay your debt. It could be dozens of years. And the banks are not shy about putting that number on there. If you see numbers there that are more than five years for debt repayment and you’re not getting ahead on it, call a professional, talk to someone like a Licensed Insolvency Trustee and see what they can do for you.

Wayne Kay 18:04
Absolutely fantastic advice. Always a pleasure. I hope you come back, David.

David Macdonald 18:08
More than happy to be here anytime that you’ll have me.

Wayne Kay 18:10
Terrific, David, thank you very much for your time.

David Macdonald 18:13
You’re very welcome.

Wayne Kay 18:15
Well, my guest today, David Macdonald. You can learn more or schedule that free consultation with Allan Marshall & Associates Licensed Insolvency Trustee at wecanhelp.ca.

And that’s it for today’s Debt Matters podcast. Make sure you subscribe wherever you get your favorite podcast from. And for more information, you can always check out debtmatters.ca. Thanks for listening.