Debt management can be incredibly difficult at the best of times. Even for those who are intimately familiar with personal finance, finding and sticking to the best strategy for eliminating their debt takes a lot of time and effort.
For those who aren’t familiar with the ins and outs of how debt works such as how interest is calculated, what debt collectors are allowed to do in Canada, and their different debt management options, it’s all too easy to fall for one or more myths.
What are some of the myths about debt that seem to have become common? How do they negatively impact those who believe them? What is the truth behind these misconceptions?
Debt Management Myth #1: All Debts Pass on to Your Heirs/Family
One common misconception about debt is that it will be passed on to your heirs or your family if you die (or that you will inherit debt if a loved one passes). This isn’t necessarily true and, in fact, isn’t all that common.
The myth about inheriting debt might have become commonplace because there are some situations where debt can be passed on to others. For example, if you co-sign a loan, credit card, or bank account, then both you and your co-signer are responsible for any debt or money owed on that account.
The truth is that most forms of debt cannot be passed on to others after your death. To be considered responsible for paying back the debt, you must have entered into an agreement with the lender.
Contributing to this myth is that some debt collectors may try to collect on the debts of deceased persons by contacting their families—even if they didn’t co-sign on that debt.
If you start receiving collection calls about a loved one’s debt after their passing and you didn’t co-sign on that account, inform the debt collector that the debt isn’t yours and they should stop. As noted by the Government of Canada website “A debt collector can contact your friends, employer, relatives or neighbours only to get your telephone number or address.” They cannot pursue you for someone else’s debt unless you co-signed that debt and assumed responsibility for it or the debtor gave them specific permission to contact you about the debt.
If they don’t stop, contact the Financial Consumer Agency of Canada right away to report the malicious behavior.
Debt Management Myth #2: Bankruptcy Is an Easy Way Out of Debt
Filing for bankruptcy is a perfectly viable option for getting out of debt. Many people use this tool to get out of uncontrollable debt every year. However, unlike what some may think, it’s not an “easy” way out of debt—nor is it your only option, even if you owe a lot!
The truth is that not everyone who has debt needs to declare bankruptcy. Bankruptcy is better saved as a last resort if other debt management options such as negotiating with your creditors, entering a debt consolidation program (DCP), or applying for a debt consolidation loan fall through.
Why? While bankruptcy is very effective at clearing most forms of debt, it can also have a major impact on your future financial goals.
Also, if you declare bankruptcy, you may be required to surrender some of your property (though some assets are protected) to help pay your creditors. During this process, a licensed insolvency trustee (LIT) will facilitate the sale of your assets and manage the trust used to repay your creditors.
The benefits of bankruptcy are that, once you are declared bankrupt:
- Any garnishments (deductions from your paycheques from legal judgments against you) on your salary will immediately stop.
- Any lawsuits by your creditors will stop as well.
- You can stop making payments directly to your unsecured creditors.
You can leave most things to the LIT once you enter the bankruptcy process since they’ll work directly with your creditors.
Bankruptcy is a strong option for eliminating debt, but it’s important to talk to a financial advisor or a licensed insolvency trustee first to see if it’s your best option or if another debt management strategy would better serve your long-term needs.
Debt Management Myth #3: As Long as You Make Your Monthly Minimum Payments, You Can Keep Spending
There seems to be a misconception that, as long as you can afford to make your monthly minimum payments, it’s okay to keep spending more and even add to the debt. This is a common trap that many people fall into.
One of the major problems that this line of thinking creates is that it can easily lead to more debt. This, in turn, can lead to falling further and further behind—often before you realize you’re in trouble.
Remember this: just because you can comfortably make your monthly minimum payments doesn’t mean that you’re out of the proverbial woods. If you find that you have money left over after taking care of your bills and basic necessities, consider applying that cash toward your debt! This can help you clear your debts faster and minimize the amount you spend on interest—saving you money in the long run.
When paying down debt, you might want to either focus on paying down the largest, highest-interest debts first (the avalanche method) or the smallest, easiest-to-clear debts first (the snowball method). The choice between snowball vs avalanche debt repayment methods is up to you. The avalanche method usually saves the most money by clearing the highest interest rates first, but some people find it easier to stay motivated by clearing the little debts first.
Debt Management Myth #4: All Debt Should Be Avoided
Some might assume that they need to avoid incurring any debt whatsoever. While it would be great if we could all buy everything we need with just the money we have saved up, this isn’t practical for many people. So, accumulating some debt may be virtually unavoidable.
While holding more debt than you can comfortably manage is problematic, it’s important to remember that there are certain cases where debt can provide a benefit.
Some forms of debt can eventually leave you with a high-value asset or increase the value of an asset you own. For example, a mortgage is a form of debt that, at the end of it, leaves you with a home that you have equity in. This gives you a large asset that will likely grow in value over time.
It’s also important to have some history of using a credit product and then making the required payments on time. A good credit score can help you secure financial services at a favorable rate, since banks and other lenders will trust that you can repay them versus someone with no credit history.
However, like with anything, it’s important to exercise moderation with your debt. Don’t use your credit cards than you can comfortably pay off with a paycheque or two and don’t buy more house than you can afford.
Debt Management Myth #5: You Can Just Ignore Debt Collectors and They’ll Go Away
When collection calls start coming in, it’s tempting to just ignore them—especially if you’re getting a lot of calls from different creditors and collection agencies. However, collection agencies and creditors won’t stop just because you don’t pick up the phone.
In fact, it’s often better to work with your creditors to ask questions and make arrangements. Many creditors may be willing to help you formulate an advantageous debt repayment plan rather than risk you filing for bankruptcy. Their goal is to recover as much money as they can and to minimize risk. By working with you, they can ensure that they are able to collect a portion of the money they’re owed.
If you refuse to speak with your creditors, they can decide to take you to court and get a judgment to garnish your wages or make other arrangements to recover their money.
Are you in debt and need help finding a way out? Contact Credit Canada to speak to one of our certified Credit Counsellors. We can help you investigate your debt management and consolidation options.
We’ve helped thousands get (and stay) out of debt—and we want to help you, too!