Mélanie, an employee of the fire department in Montérégie, earns a net monthly salary of $3,900. With her credit card balances of $14,000 and an $8,000 personal loan, her payments are $872 per month, or 22% of her salary.
Unsurprisingly, Mélanie is struggling to make ends meet.
“In the credit industry, it is recommended that payments on what is called consumer debt, meaning credit cards and lines of credit and personal loans, not exceed 10% to 15% of your income after taxes,” recalls Pierre Fortin. , authorized bankruptcy trustee and president of Jean Fortin & Associés.
At 22%, it’s no wonder Melanie is having trouble keeping up with rising grocery and gas bills! What solutions are available to her?
Rebalance your budget
In general, the three most important budget items are, in order: housing, transportation and food. For Mélanie, housing costs (rent and heat) are $1,370 per month (35%), transportation costs (car loan payment, gas, registration, license, and maintenance) $910 (23%), and food $850 per month (22%). . Her debt level currently stands at 47% of her income, seven points above what is normally considered a limit.
Of course, on a budget, it’s always possible to save here and there on certain expenses. Mélanie could, for example, change her transportation habits and opt for carpooling. Changing her food choices, cooking more, taking advantage of special offers and limiting impulse purchases online are other possible solutions.
But very often, these small savings are unfortunately not enough to rebalance the budget. In addition, the three budget items -housing, transport and food- have one thing in common: they cannot be reduced quickly, which makes the young woman’s economic situation even more delicate.
If Mélanie maintains the status quo, since her budget is in deficit, she will have to continue dipping into unused credit from her credit cards and her margin, which will send her spiraling into debt. The latter will only increase, as will the interest charges, and she will not be able to restore her situation.
Reduce your debts
Under these conditions, what are the changes that would generate effective and rapid results? Reduce your debts, which monopolize an important part of your income.
To achieve this, you will need to consider stronger solutions. Three options are available to her. The first is debt consolidation, which consists of requesting a loan from your financial institution to be able to pay your creditors all at once.
“However, debt consolidation, had it been possible, would have lowered your monthly payments by just $109, which is still not enough to allow you to make ends meet. In any case, this option is not possible due to its excessively high level of indebtedness”, specifies Pierre Fortin.
Best option: the proposal
However, you might consider consumer proposal, which is a negotiated settlement offer with your creditors, or even bankruptcy. Given the circumstances, given his economic situation and his age, the licensed bankruptcy trustee advised him to opt for the consumer proposal.
This will allow you to reduce your debts from $22,000 to $15,000, an amount that creditors have accepted to prevent you from going bankrupt and will pay them back a much smaller amount. In addition, interest rates stop running, which is a clear advantage and prevents the debt from continuing to grow. The monthly payment will be $250 instead of $872 (for 60 months), or 6% of your net income. This eliminates your budget deficit and will be able to deal with inflation.
Her credit will be damaged, but for Melanie, the proposal is the only way, besides bankruptcy, to get out of it. Due to her level of debt, her borrowing capacity was already limited, and continuing on the current path would only have worsened her case and, in the long run, further affected her credit report.
- Warning: debt consolidation reserve for those whose interest rate is higher than the loan (around 12%). If you include debt with lower rates, you will increase your interest costs instead of reducing them.
- If you find yourself in a difficult financial situation, don’t wait to seek advice. If you allow the situation to deteriorate, you will have access to fewer options.
- Knowing your level of indebtedness (ratioindebtedness.com to measure it) allows you to know if you are in good financial health to face unforeseen events that could require access to credit. By reviewing it every year, you can make sure you don’t spiral into debt.
#Inflation #heavy #debt