Financial Consumer Agency of Canada
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Financial Consumer Agency of Canada

www.fcac-acfc.gc.ca

 

Getting Out Of Debt

Getting out of debt is a personal journey. It’s important to choose the right strategy to meet your needs and fit your lifestyle. Here are some things you should consider when preparing your debt repayment plan:

  • Stop using credit and building more debt.  If you continue to spend beyond your means, it will be difficult to realize your goal of being debt-free.
  • Find more money to pay down your debt. Review your budget and list ways you can cut down on your spending. For example, make coffee at home instead of buying it. Consider selling some of your assets or taking on additional work to bring in extra money.
  • Make at least the minimum payment on all your debts by the statement due date. If you do not, you will harm your credit history and score.
  • Contact your creditors. You may be able to negotiate a lower interest rate or a payment plan that works better for you.
  • Try to set a payment time frame that is reasonable, but fast enough to make progress. If your time frame is too long, debt fatigue will set in and you will lose focus. If your time frame is too short or unrealistic, your chance of success decreases and so does your motivation.
  • Once a debt is paid off, close that account. You do not need the temptation of that available credit to pull you back into debt. You will need to keep some credit and loan products in order to rebuild your credit, but only keep what you need and can manage responsibly.
  • If you have a personal loan with family or friends, sit down and commit to a payment schedule that works for both parties. Write post-dated cheques to them in order to keep to the payment plan and to show them you are committed to repaying them.
  • If your debt has gone to collection, read FCAC’s tip sheet Tips for Dealing with a Debt Collector.

Mortgages may be considered a long-term debt, but there are strategies to pay down your mortgage faster.  The type of mortgage agreement you have will determine what you can do to pay down your mortgage faster.

Tackling your debt yourself

Once you have created a list of all your current debts, including the minimum payments required and the interest rate for each loan, there are two ways to try to pay off your debts:

  1. Start with the highest interest rate

    2. By paying off the loans with the highest interest first, you will pay less in interest costs and you will be debt-free sooner.

    List your debts in order from the highest interest rate to the lowest. After you cover any minimum payments required on all your debts, put any extra money for debt repayment against the loan with the highest interest first.

  2. Start with the lowest balance

    3. For some people, it is easier to start with their lowest balance. The feeling of accomplishment of paying off a debt happens sooner, and that can keep you motivated to stay on track with your debt-free goal. However, this option will cost you more in interest over time.

    List your debts in order from the lowest balance to the highest. After you cover any minimum payments required on all your debts, put any money left for debt repayment against the loan with the lowest balance first.

No matter which option you choose, once a debt is paid off, take the money you were applying to regular payments and apply it to the next loan on your list. This is called the snowball approach: your payment toward the next debt on your list grows larger each time you pay off a debt.

Getting help with your debt

You have several options if you decide to get help from a third party to get out of debt. The option you choose will depend on your level of debt and how much money you can manage to put toward debt repayment.

  • Debt consolidation loan

    • A debt consolidation loan is a single loan that allows you to pay off most or all of your creditors at the same time, leaving you with only one outstanding loan. This type of loan may also offer you an interest rate that is lower than what you are currently paying to your creditors, reducing your overall interest costs. Speak to your financial institution to see if this is an option for you.


    Tip: if you set up a debt consolidation loan, be careful not to use the available credit you just freed up. Remember, if you choose to consolidate, your debt is not gone, it is just combined into one larger debt.

  • Credit counselling

    • Credit counselling services are widely available, but may be different from province to province. One of the most common services is help with finding the best strategy to pay off your debt through a debt management program.

    Contact a local family or community counselling office or a credit counselling association to find out how to get in touch with such a service and what fees you may have to pay. For more information, read FCAC’s tip sheet Managing Debt: Getting Help from a Credit Counselling Agency.

  • Consumer proposals

    • A consumer proposal is a formal procedure set out in the Bankruptcy and Insolvency Act. For a consumer proposal to be an option, your total debt cannot exceed $250,000, not including debts secured by your principal residence.

    With a consumer proposal, you work with a trustee in bankruptcy to put together an offer to pay your creditors a percentage of what you owe them over a specific period of time (up to five years). Payments are made through the trustee, and the trustee uses that money to pay each of your creditors. 

    The Office of the Superintendent of Bankruptcy has more information on the process for consumer proposals.

  • Bankruptcy

    • If you have tried everything else, you may have to consider bankruptcy. It is a formal procedure set out in by the Bankruptcy and Insolvency Act . Be aware, bankruptcy can have a long lasting effect on your credit history and credit score.

    With bankruptcy, you sign all of your assets, except those exempt by law, over to a trustee in bankruptcy who will sell or use them (e.g. swap, exchange) in order to pay your creditors. Not all debts are discharged through bankruptcy, including student loans if you graduated less than seven years ago, alimony payments, child support payments, a fine or a penalty imposed by the courts, and debt arising from fraud.

    The Office of the Superintendent of Bankruptcy Canada has additional information on alternatives to bankruptcy and how to file for bankruptcy.

The Office of the Superintendent of Bankruptcy

The Office of the Superintendent of Bankruptcy makes the bankruptcy and insolvency process easier to understand for debtors (those who owe money) and creditors (those who are owed money), and provides them with the information they need to best manage their situations.

The Office of the Superintendent of Bankruptcy has several resources for debtors, including a publication called Dealing with Debt: A Consumer's Guide.

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Date Modified:
2013-03-04