Many people need to hit a wall before they can begin to understand that their amount of debt is unsustainable. Some only realize it once they start getting phone calls from collection agencies. Others finally become aware of it when their wages are garnished. No matter how they came to realize it, what’s important is how they are going to get out of debt. The solution they choose will be critical for their personal finances and the management of their debts.
When in panic mode, people desperately look for money to pay off their debts. They often contact their financial institutions to get a loan. Such a loan is called a debt consolidation loan.
People who get a consolidation loan will enjoy a bit of relief. They must however seize this opportunity to get their finances in order and take the necessary steps to prevent such a situation from reoccurring.
On the other hand, when banks won’t grant that loan, people have to envision other alternatives. Unfortunately, numerous last resort solutions that they may consider at that point involve significant financial risks without any guarantee of success. Caution is therefore advisable.
The 5 worst ways to get out of debts
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Getting a new credit card
This solution may be suitable only if some very specific conditions are met. However, based on my experience, this is rarely the case.
First, make sure that you will be able to pay the credit card balance by its due date. Otherwise, you are only delaying the inevitable.
Then, make sure that the new card’s interest rate is lower than the ones on the cards you already have. However, beware of special offers. Some companies have products which seem advantageous at first glance but that are not quite so. For example, the interest rate for transferring your credit card balances might seem advantageous at the beginning, but it might actually go up after a few months.
Finally, almost every credit cards intended for people faced with debt problems require annual fees. We can question whether it’s a good idea for people trying to reduce their expenses and reimburse their debts to get such a card. Absolutely not! -
Cash advances on a credit card
Cash advances on a credit card may be helpful if an unexpected event occurs. However it’s a serious problem if you are relying on this solution to pay back your debts.
The problem lies in the fact that interest charges for cash advances aren’t calculated the same way as regular purchases. Interest on cash advance runs daily from the moment money is withdrawn. Therefore, you do not benefit from the grace period granted for a purchase. Furthermore, given that the interests for this type of a transaction are about 20%, the outstanding amount of your debt will increase very quickly. -
Pawn shops
Nobody will make you a favor if you need money to reimburse debts. Especially not a pawnbroker!
To borrow money in such a business, you will have to pledge collateral. The worth of the collateral required by the pawnbroker will unsurprisingly be much higher than the amount of money lent. Therefore, you’re the one taking all the risk. If you succeed in reimbursing the pawnbroker, you will be required to pay him interests. If you fail, he’ll sell your collateral and make a very lucrative profit in the process. In such circumstances, the reimbursement of your debts will have cost you much more than expected. Not to mention that you may even have lost souvenirs that belonged to your relatives, or your family’s TV set.
At that point, why not choose instead to use local classifieds Web sites like Kijiji or Craigslist? You could sell goods you do not use anymore on your own. You will then be able to keep for yourself all the proceeds of such sales. -
Payday loans
To qualify for a payday loan, you must have a stable source of income. The lender will provide you with money that you will pay back – theoretically – when you receive your pay cheque.
Payday loans are a very costly way to borrow money. The law sets the interest rate limit to 60%. However in some provinces, this limit is even higher for loans under $1,500.
In any event, some lenders do not hesitate to ignore the law and to charge even higher interests. Furthermore, they generally add fixed administration fees and first-time fees, so the total amount to be reimbursed climbs even higher.
Taking out a payday loan to get out of debt is plain and simple risky. The risks of getting trapped in the cycle of chronic indebtedness are very much real. -
Casinos, lotteries and gambling
Blockbuster movies in which characters solve their debt problems by winning a significant amount of money at the casino are very popular. Yet, in real life, no one should ever rely on his or her good fortune or poker skills to make it through.
Ineffective, this “solution” can even result in an entirely different series of problems.
If bankruptcy becomes your last resort to get out of debt, the court could be harsher on you. Upon demonstration of the fact that you gambled in a casino while insolvent, you may, for example, be required to make more payments during the process of your bankruptcy.
The casino must never be seen as a potential source of revenue. It must always remain an entertainment.
The best solution to pay off your debts
At the risk of being accused of blowing my own horn, the best solution to pay off debts is to meet a trustee in bankruptcy*. The trustee will draw up your balance sheet and establish your budget. He will therefore have the possibility to understand your condition and to recommend the best solution to reimburse your debts.
In many cases, it will even be possible to avoid bankruptcy. Furthermore, the first meeting is free, which means that you’ve got nothing to lose.
I you are looking for a solution to get out of debt, get the help you need.
* The term “trustee in bankruptcy” will gradually be replaced by the new designation “licensed trustee in insolvency and restructuring (LTIR)”.