How to Get Out of Debt in Canada

Plan Jun 4, 2024 6 min read
How to Get Out of Debt in Canada

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So, you’ve decided it’s time to challenge the debt in your life.

It might be because you want to buy a house, plan for retirement, or liberate yourself from the tyranny of student loan payments.

Depending on your situation, this may be an easy solution, or it might call for a more innovative approach.

Solving your debt problem will mean making some changes, but the rewards will pay for themselves.

1. Getting Friendly with Your Money

In 1985, American economist Richard Thaler introduced the world to mental accounting.

He posited that people assign subjective value to money, depending on how it’s earned, spent, and makes us feel.

Even though money is entirely fungible, we assign money mental labels.

For example, you win $250 while playing slot machines at a casino.

While you know cashing in the money would probably be best, you can’t help but want to continue play.

It’s kind of like free money, so it doesn’t hurt if you lose it, right? Reading more about how mental accounting impacts your decisions can help you protect yourself against its effects.

Going through your bank statements will help you understand what is incoming and outgoing from your account regarding your finances.

Learning more about your money means learning more about yourself.

Is there enough money every month to pay your bills? How do you pay for emergency expenses? Do you spend more on your favourite online game when you’re sad?

Do everything you can to ground your budget in the objective.

Make a budget, set specific debt goals, write a payment schedule and base progress on hard numbers – not the stories we tell ourselves.

2. Building a Budget

When you’re looking to make a significant change, it’s good to know what exactly you’re trying to alter.

Commit yourself and build one budget.

If that one fails, go through everything and create a second one.

A budget should be a living document that changes with your situation.

If you need a guiding star for your beginner budget, the 50/30/20 rule is a simple way to start.

If you are comfortable with online tools or apps, there are a few money management options you can check out.

Some are free, while others charge a monthly subscription – the most basic feature is the ability to download banking transactions into your app and categorize them.

Some emphasize a more hands-on approach, while others focus on simplifying.

3. Making Changes

Debt can be simply defined as money owed to others.

So, any auto loan, personal loan, credit card balances, lines of credit, CRA tax debt and money borrowed from friends and family.

Of course, a mortgage is also a debt but doesn’t necessarily fall into the same category as these other examples. 

Alternatively, utility bills, rent, auto insurance, and groceries are considered monthly expenses, but they can quickly turn into debt.

For example, going to the store and using your credit card to buy groceries means there is now that much more you have to pay down your credit card by.

Ramsey argues that we’ve become too comfortable with being in debt and don’t question what these monthly payments mean for our finances.

Dividing your money into “debt” and “monthly expenses” may help you look at your spending a little differently. 

Classifying your payments into “debt” and “monthly expenses” can help you decide where you can trim the budget.

Cutting out a streaming channel, borrowing library books instead of buying, and getting haircuts every twelve weeks instead of ten could be a start. 

4. Choosing a Debt Payment Strategy

Paying down debt is a simple process of ensuring you’re spending less than you’re earning and using the excess to wipe out the debt.

Let’s talk about the snowball method and the avalanche method for debt repayment. 

The snowball method is paying down the smallest loan amount first.

You pay one loan off as fast as possible and shift all payments towards your second loan.

Once that’s done, you roll all payments towards your third loan, and so on.

The genius behind this method is the amount of money put towards each debt “snowballs” and accelerates your payment schedule. 

Comparatively, the avalanche method prioritizes paying down the loan with the highest interest rate first.

Shift to paying down the account with the second-highest interest rate when the first loan is paid.

Like the snowball approach, each payment amount gets combined with the others and goes toward the next highest interest rate loan. 

Both approaches have pros and cons, but the snowball method is likely to feel more satisfying.

Paying off small debts first may give you a sense of accomplishment and keep you motivated to continue.

In all fairness to the avalanche strategy, you could save money by first paying off higher interest accounts. 

Choose the strategy that fits your situation best, or borrow ideas you like and make your own.

Trust your judgment and create something that works best for you.

5. Restructuring Your Debt

Fighting debt can take many forms.

If you have good credit, you will have many opportunities to consolidate debt, saving you time and money. 

One of the lowest interest rate choices is a home equity loan if you own your home.

While it’s time-consuming , you will have funds available to pay out your other accounts.

You can also apply for a personal line of credit (LOC).

This revolving credit account is a helpful option because you only pay interest on the money you use.

The key is to stick to a payment schedule that pays your debts because LOCs only require a minimum payment every month.

A credit card balance transfer may be the way to go if you have a debt to pay off more quickly.

Often, credit card companies offer attractive interest rates like 0% to bring in new customers.

If you read the fine print, you may be able to pay off your debt with zero interest and save some serious cash. 

If you find yourself struggling, you might want to consider a consumer proposal.

These are negotiated by a licensed insolvency trustee, outlining partial payment of the debt within a specific time frame.

This kind of agreement is helpful when you feel like you’re in over your head with debt. 

6. Reviewing Constantly

If your debt payment journey spans months or even years, you’ll likely need to review the state of your finances periodically.

Life changes, budgets shift, and priorities vary – all of these are things you want to manage as they come up. 

Set a regular time to look over what’s changed in your life and budget.

Check your debt payment progress to see if you’re still on track.

If you’re not, find out why and then do what you can to prevent it from happening again – like building an emergency fund to pay for unexpected events.

Frequently Asked Questions

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Is there debt forgiveness in Canada?

A few debt relief options are available to Canadians if you’re in a financial bind. A consumer proposal is a contract negotiated by a licensed insolvency trustee (LIT). You agree to pay a portion of your debt over a set time in this agreement. If you need a fresh start, bankruptcy may be your only option.

Does debt go away after seven years in Canada?

Your debt never truly disappears, but a creditor’s ability to pursue court action on unsecured debt may be subject to a statute of limitations. Depending on your province, this can range from two to six years. However, this doesn’t mean collection agencies can’t continue to harass you after that limitation. The better news is that most creditors don’t usually bother pursuing debtors beyond a certain point because it’s too expensive and time-consuming. However, this doesn’t mean you should wait for the clock to run out; it’s better to try working with your creditors to find a solution that works for both of you.

Contributors

Lindsey Boycott
AUTHOR

Lindsey Boycott

Lindsey specializes in writing about personal finance and business trends. She has a B.A. in psychology and is currently working towards completing her Canadian Securities Course.

When she’s not exploring the relationship between mind and money, Lindsey likes to play vintage video games, read all books, and go skiing.

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