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Your 2021 Guide to Getting Your Finances Back Under Control

By Paul Murphy

For millions of Canadians, the pandemic brought economic hardship. The worst is over. Now Canadians face a hard trek back to financial recovery.

As Canada’s largest independent debt restructuring firm with over 60 offices in Canada, we have a unique view of Canadians in financial crises. 

We’ve created this special guide to help you put the pieces back in place. We also share a few of the resources that our clients receive as part of the ongoing education and support provided in the 4 Pillars’ financial rehabilitation program.  

TOGETHER, WE WILL TACKLE:

  • UNDERSTANDING YOUR CASH FLOW
    How do you get finances under control?
  • UNDERSTANDING CREDIT RATINGS
    How do you rebuild credit and use it wisely?
  • UNDERSTANDING YOUR OPTIONS
    How to navigate complex debt reduction options?

UNDERSTANDING YOUR CASH FLOW

Girl jumps over rocks at sunset

Less than 2% of the families we work with who are experiencing a period of financial distress have an emergency fund.

We work with thousands of families. When they come to us, it’s gone past any simple savings hack or finger-wagging about ordering too many meals from DoorDash. But we also know that the warning signs would have been there months before.

And one of the biggest warning signs—and something you can control right now—is ignoring monthly budgeting.

Once debt starts to take control, it’s easy to lose any type of long-term planning.

Begin by watching the video below featuring 4 Pillar’s Managing Partner Troy Tisserand’s workshop on budgeting. This video class is part of the 4 Pillars After Care program that we offer our clients.

As the video above covers, the most important part about budgeting is knowing your monthly burn rate.

How much cash are you bringing in? How much cash is going out? Is there any left at the end of the month?

Even if you’re spending 5% more than you make every month, that’s misery.

On a $50,000 salary, that’s $192 you’d need to make up next month.

If you do it again next month, that’s $384 you need to make up next month.

Fast forward a year, and now adding credit card interest that is kicking in, an unexpected emergency that made you dip into your line of credit further, and you’re now slipping into long-term debt.

The only action that matters: track the cash coming in, the cash going out, and how much you’ve got left at the end of the month.

UNDERSTANDING YOUR CREDIT RATING

woman in the woods

How do you read and understand your credit report? When should you reserve and when does it make sense to sacrifice your credit rating?

We’ve covered this topic on our podcast, Beating the Debt Game. You can listen below.

link to podcast episode

We regularly talk about credit ratings and debt rehabilitation strategies on our podcast, you can subscribe and view all our episodes here.

UNDERSTANDING YOUR OPTIONS

made it to the top of a mountain

Sometimes, your finances can’t be saved with another budget template or simple expense cutting. You’ve fallen deep in debt. And it would take years to climb out.

This is where you need to work with a company like 4 Pillars. You need to navigate more complex and drastic debt reduction options that are available to all Canadians.

Get us to review your debt situation

We specialize in helping Canadian families navigate tough financial times.

Learn more about how we guide you through debt decisions by booking a free meeting with one of our 60+ offices in every Canadian city and town. You can book a time here. 

We’ll help you understand your options including consumer proposals, consolidation loans, the credit system, and navigating insolvency,

Q&A: Common questions we get

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Is debt consolidation a good option?

Debt consolidation is about increasing your leverage with the primary goal of lowering your interest rate and providing a plan to have the debt fully repaid.

The interest rate charged by a financial institution for a consolidation loan is usually lower than the rate charged on credit cards. As a result, you will save money on interest payments.

There are several benefits to debt consolidation:

You can use your assets (such as a home) to secure a lower interest rate. You protect your credit rating.

You will only have to make one monthly payment to your new loan, instead of many different payments to different lenders.

You will pay less of your money in interest, meaning you get out of debt faster.

If you follow your consolidation loan terms and make your payments on time, your credit rating should not be negatively affected.

The most significant benefit to you is paying less interest. You work hard for your money, and paying high-interest rates should be avoided when possible.

Over time, carrying balances on high-interest rate credit products can turn small loans into large debts.

If you have a manageable debt load and good income, a consolidation loan can be a great option.

However, consolidation loans can be hard to qualify for and you should review all options to determine the best solution for you.

Don’t obsess over your credit score. Focus on creating cash flow and improving your financial situation. Over time, and with the right plan your credit score will not be an issue.

Delaying dealing with debt because of the impact on your credit is delaying the ability to build a solid financial future.

What is a consumer proposal?

What you will hear: A consumer proposal is a formal arrangement filed by a licensed insolvency trustee (LIT) under the Bankruptcy and Insolvency Act (BIA). It is a viable alternative to bankruptcy if your debts do not exceed $250,000 (not including debts secured by their principal residence).

What you need to know: A consumer proposal is a process that allows you to make an offer to your creditors to repay your debts on new terms.

The terms will include:

  • The amount you are offering to repay.
  • The number of payments, typically a monthly payment plan is offered over the maximum term of 60 months.
  • The proposal is your offer to the creditors and should suit your needs and your budget.

Here’s a 4 Pillars case study with a client we helped. It gives a good overview of what the consumer process looks like in Canada.

What can I offer the creditors in a consumer proposal?

What you will hear: the proposal will include an estimate of what the creditors would receive if you filed for bankruptcy, this includes payments they would receive through surplus income and the realization of non-exempt assets.

You should offer the creditors a better return than they would receive in a bankruptcy otherwise it is unlikely the LIT will file your proposal or recommend it to your creditors as they are unlikely to accept it.

What you need to know: it’s your proposal to your creditors. The terms of the proposal can be as unique as your situation. Make sure the offer you make is affordable and not stretching you financially.

Remember, if you miss three payments your proposal can be canceled, and you will be back in the same situation you were before filing. So, it is imperative your proposal is offered on your terms and easily fits within your budget.

Who should file a consumer proposal?

If you are facing overwhelming debt that you cannot repay it might be a good option to consider filing a consumer proposal. You should, however, review all options available and compare the pros and the cons of each.

Other options include consolidation loans, refinancing your home, informal debt settlements, and non-profit credit counselors.

What are the benefits of filing a consumer proposal?

A consumer proposal offers the opportunity to relieve financial stress by finding affordable terms to repay the debt. It also stops creditor calls, wage garnishments, and legal action from creditors and usually reduces the principal amount owed with interest-free repayments terms.

The main negative is the impact on your credit rating, reporting as an R7 for the length of time it takes you to pay off the debt plus an additional three years (maximum 6 years).

How do I file a consumer proposal?

What you’ll hear: a licensed insolvency trustee is an Officer of the Court, and as such, is the only professional legally allowed in Canada to administer insolvency procedures regulated under the federal Bankruptcy and Insolvency Act. You must go directly to a LIT to file a consumer proposal.

What you need to know: the dual role of the LIT is to investigate the debtor’s financial situation and to ensure that the debtor’s rights are not abused while also protecting the rights of your creditors.

The LIT’s statutory duties owed to both creditors and the administration of the consumer proposal process prevent them from acting as an advocate for an individual making a consumer proposal to get the best outcome.

Obtaining your own advocate will help identify and review all available options and help you navigate a complex process to help ensure the best outcome. Your advocate will also provide extended financial education and a comprehensive plan to rebuild your credit.

Can I get credit again after a consumer proposal?

What you’ll hear: You will be unable to get approved for any type of credit until the consumer proposal is fully removed from your report (maximum 6 years).

What you need to know: People are surprised to learn that, with a comprehensive credit rebuilding plan, in as little as two years of filing a consumer proposal they can qualify for the best rates. All you need is a plan and the right support to recover and build the financial future that you have always wanted.

It’s important to review your credit reports from both Equifax and TransUnion after your consumer proposal is accepted.

Creditors regularly report inaccurate information to the credit bureaus after a consumer proposal. To maximize your credit rebuilding efforts, you need to identify these errors and correct them as your first step on your journey to recovery and good credit.

Then you will need to consult with financial service providers that will work with you to get positive items reporting on your credit report to begin building a positive payment history.

This will minimize the impact of past financial challenges and show the creditors you are using credit responsibly.

Understand the credit system and how to rebuild credit can be daunting but support is always available to lay out a comprehensive plan and a critical part of your financial rehabilitation.

Bankruptcy
Bankruptcy is available to any person that has lived or done business in Canada within the last year and is insolvent. To be insolvent means you owe at least $1,000 and you aren’t able to pay your debts.

You may be entitled to an automatic discharge from personal bankruptcy in as little as 9 months, provided you have never been bankrupt before and you complete various duties and responsibilities. Some debts are not erased.

Bankruptcy deals with unsecured debts. Examples of unsecured debts include credit cards, personal loans, income taxes, overdrafts, and so on.

A secured debt, such as a car loan or mortgage is not included unless you are willing to give up the asset provided as collateral.

Some unsecured debts are not discharged in bankruptcy, such as – student loans less than 7 years after your date of last study, alimony or child support, and any debt arising from fraud.

Cost of bankruptcy
In addition to potentially losing your assets, bankruptcy may cost you some of your income, depending on how much you earn and the size of your household.

The principle is that, if you earn more than your household needs to survive, you must pay a portion of your income to the trustee- this is called surplus income. Simply put the more you earn, the more you pay.

Bankruptcy is a huge decision and you need to fully understand how filing for bankruptcy will impact you now and in the future.

There are other alternatives available that can be equally as effective without the long-term implications of bankruptcy. Don’t make an emotional decision. Do your homework to understand all your options.

Wow, you made it to the end. You’re a fortress of concentration. If you still got questions, grab a free copy of my book, Beating the Debt Game, for a fast tour of the debt industry and how any Canadian can make the debt system work for them, instead of against them.


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