Inflation and high debt never go together

As a firefighter in Montérégie, Mélanie makes a net monthly salary of $3,900. With $14,000 in credit cards and an $8,000 personal loan, his payments are $872 a month, or 22% of his paycheck.

Not surprisingly, Mélanie is struggling to make ends meet.

“In the credit industry, it is recommended that payments on so-called consumer debt, i.e. credit cards and lines of credit and personal loans, do not exceed 10% to 15% of his after-tax income,” recalls Pierre Fortin , qualified insolvency practitioner and President of Jean Fortin & Associés.

At 22%, it’s no wonder Melanie is struggling to keep up with soaring grocery and gas bills! What solutions are available to you?

Balance your budget

Usually, the three largest budget items are, in order: housing, transport and food. In Mélanie’s case, housing costs (rent and heating) are $1,370 per month (35%), transportation costs (car loan payment, gas, registration, driver’s license, and maintenance) are $910 (23%), and groceries are $850 per month (22%). ). . His debt level currently stands at 47% of his income, seven points above what is normally considered the limit.

Of course, in a budget it is always possible to save here and there on certain expenses. Mélanie could, for example, change her travel habits and opt for carpooling. Changing food choices, cooking more, taking advantage of special offers and limiting impulse buying online are other potential solutions.

Unfortunately, very often these small savings are not enough to balance the budget again. In addition, the three budget items – housing, transport and food – have one thing in common: They cannot be cut so quickly, which makes the financial situation of the young woman even more precarious.

If Mélanie maintains the status quo, since her budget is in deficit, she will have to continue drawing on the unused balance on her credit cards and her margin, which will send her into a spiral of debt. The latter will only increase, as will the interest burden, and she will not be able to restore her situation.

Reduce your debt

What changes would lead to effective and rapid results under these conditions? Reduce his debt monopolizing a significant portion of his income.

To achieve this, she must consider more vigorous solutions. Three options are available to her. The first is debt consolidation, which consists of applying for a loan from your financial institution to repay your creditors in one fell swoop.

“However, if it were possible, a debt consolidation would have reduced his monthly payments by only $109, which is still not enough to make ends meet. Due to the high level of debt, this option is not possible in any case,” specifies Pierre Fortin.

Best option: the proposal

It could consider the consumer proposal, which is a negotiated settlement offer with its creditors, or even bankruptcy. The licensed insolvency administrator advised him in view of his financial circumstances and his age to the consumer proposal.

This will allow her to reduce her debt from $22,000 to $15,000, an amount that creditors have accepted in order to save her from bankruptcy and pay them back a much smaller amount. In addition, interest rates are no longer accumulating, which is a clear advantage and prevents the debt from growing any further. The monthly payment is $250 instead of $872 (over 60 months) or 6% of his net income. It will thus eliminate its budget deficit and will be able to cope with inflation.

Her credit will take a hit, but for Melanie, the proposal is the only way out, aside from going broke. Because of his indebtedness, his borrowing was already constrained, and to continue the way he had been would only make his situation worse and, in the long run, hurt his credit report even more.

TIPS

  • Warning: reserve debt consolidation for those whose interest rate is higher than that of the loan (about 12%). When you include debt with lower interest rates, you increase your interest expense instead of reducing it.
  • If you find yourself in a difficult financial situation, do not hesitate to seek advice. If you allow the situation to get worse, you have access to fewer options.
  • Knowing your debt level (ratioindebtedness.com to measure it) can help you know if you are financially healthy enough to deal with unforeseen events that might require access to credit. By checking it every year, you can make sure you don’t get caught in a debt spiral.

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