Episode 29: When Debt is Too Much with Rebecca Frederick
Welcome back to another episode of Chat with Brandy, a weekly show where we talk personal & business finance, taxes, and how to make money while doing what you love! I’m your host, bookkeeper and tax preparer Brandy Miron, and this is episode 29!
With me today to discuss this topic is Rebecca Frederick from Frederick & Company Ltd in Sherwood Park, though they welcome clients from all over Alberta. She is a Licensed Insolvency Trustee with over 15 years of experience. Motivated by her desire to help clients overcome their financial difficulties with in supportive, education based process she started Frederick & Company to help people move from financial distress to financial success by explaining their options in the clearest terms possible, to examine the options available, and empowering them to make informed decisions about their financial futures.
So when is debt "too much" debt, and what are some of the key indicators that it might be time to talk to a specialist?
There are different debt philosophies and different comfort levels with debt so there is no one size fits all for debt. I think one key indicator that you may have too much debt is when your money conversations focus on almost exclusively on debt management. Debt management is just one piece of healthy finances - savings, retirement savings and protections like insurance are other indicators of financial health. If you are focused on debt management to the exclusion of these other factors that is probably a good indicator that looking deeper into your debt management strategy is an important next step.
Other superficial indicators could be:
making minimum payments on debt;
moving money from one credit line to another to manage payment obligations
falling behind on utilities, rent, mortgage;
accounts payable, accounts receivable over 90 days
you require credit to pay monthly expenses
collapsing RRSPs and selling assets to manage debt payments
So what are some of the options are there for insolvency?
Budgeting and tracking expenses
selling assets, make more, spend less To make payments more manageable
orderly payment of debts
How do each of these options affect your credit?
Options 1 - 4 allow you the opportunity to restructure your debt with no inherent negative impact on your credit rating. As long as you are making your monthly payments your credit rating will not be impacted. It is important that you crunch the numbers to make sure that you will not be in a holding pattern and that you are able to get your debts paid off.
Settlements (options 5-8) will negatively impact your credit. All of these options are an R7 - R9 on your credit rating. This bruising of your credit is the trade off when you settle your debt and do not pay everything off. When looking at settlement options it is important to understand all your options so you can make an informed decision about how you would like to get moving forward.
What are some ways that people try to avoid insolvency and if/why that might hurt them in the long run?
Trying to avoid insolvency is a great idea when you look at the numbers and you make a strategic plan. When you are not being strategic you can put yourself in a worse position financially.
Examples of these are:
Selling protected assets: the law dictates assets such as RRSPs, RESPs and life insurance are protected from creditors. In an effort to pay down creditors some people will sell their RRSPs, RESPs, and cancel life insurance to pay down creditors. In a bankruptcy these assets are totally protected and you would not lose these assets. Selling these protected assets puts you in a significantly worse position during retirement when you may not want or be able to work. Additionally if these assets are collapsed without crunching the numbers it may not even help to avoid an insolvency - do the analysis prior to selling any of these kinds of assets to pay down debt.
Get more debt: this creates another monthly payment that puts more strain on your monthly budget.
Get a second mortgage with a high interest lender: these loans often have burdensome monthly payments and when they are secured to your house you must continue to pay them unless you sell your house. Again getting help to crunch those numbers to see if it is the best option for you is a great idea.
Getting family or friends involved: when the bank asks you for a co-signor for a loan they feel the loan is risky and there is a possibly you won’t be able to pay it back which is why they want someone else responsible for this loan as a back-up. If you are getting a loan and need a co-signor this is a good indicator that the bank is worried about repayment and you should crunch the numbers and make sure that you have a plan for repayment.
Plan for the best case scenario: Bonuses, overtime, and a new job opportunity are all great but a financial plan that is reliant on them is not ideal. When you are crunching your numbers make sure to be conservative about your income and very realistic about all your expenses. When you have an overly optimistic plan then you have a plan where everything must turn out perfect for it to work out. By taking a more conservative approach you increase your chances of success.
Can you share any other tips on the do's and don'ts of money management as it relates to debt and insolvency?
By getting information quickly you are able to do a few things to help yourself;
Retain assets - there are assets that are protected from your creditors and other assets are not. Knowing which is which can help you effectively restructure your debt strategically. You want to be in a position where if doing it yourself doesn’t work out you are not put in position that is worse off than if you were to have filed for bankruptcy/proposal to begin with.
Avoid predatory lenders - you can avoid high interest rates.
Books, podcasts, or course matter.
Total Money Makeover by David Ramsey talks about DIY debt management - I love that he encourages people to go all in on debt elimination
Invisibilia - doesn’t appear to relate directly but the pattern of people and changing those patterns often is directly related to personal finance
Money management apps including YNAB