Who really needs debt help
Much of the general public assumes that the people who need help sorting out their debt troubles are a bunch of irresponsible shopaholics. It’s easy to make that assumption too, since there is a lot of conspicuous consumption in our society—we are constantly bombarded with advertising messages every day encouraging us to spend, spend, spend. Some days too, it can be difficult to walk through a store without having a salesperson solicit you to sign up for the store’s credit card.
However, the number of people who come to us because of this kind of irresponsible consumerism is really very small.
In fact, most of our clients complain that they ‘don’t have a life’, and can’t enjoy the fruits of their labors the way many Canadians do.
Our average client has $50,000 in credit card debts
So, what’s the truth? Let’s understand some simple numbers first. By the time most people feel they need some debt help or a debt restructuring plan, and make an appointment to see us, the odds are they haven’t been conspicuous consumers for a long time, if they ever were. Consider this, if you have $50,000 in credit card or other consumer debt, which isn’t at all unusual with the clients we see, you are spending somewhere between $1200 and $1500 per month just to stay current with the minimum monthly payments! With this kind of monthly payment, there’s no room at all left in the average monthly budget for fun!
In fact, anyone with this much debt, unless they are making really good money, is really going to be struggling to pay their basic living expenses. Often these folks will be ‘borrowing from Peter to pay Paul’, as the saying goes. Peter, in this case, might be a family member or maybe it’s just juggling between credit cards and a line of credit to try and stay current with everything. Often, whatever savings had been accumulated have also been withdrawn to try and stay on top of the debt.
What type of people use debt restructuring?
It’s hard to really blame people for the assumption that our clients have are really irresponsible with their spending. We see the reality shows which expose the worst offenders—people who make $60,000 a year and spend $100,000. Women who buy clothing daily, most of which they wear once if at all. Guys who have to have the latest gadgets in their ‘man cave’, and couples who vacation several times a year whether they can afford it or not.
Are there irresponsible people out there? Yes, absolutely!
Do these folks make up the bulk of our clients? Not even close!
Reasons why people use debt settlement services
I decided to do a little analysis of our clients recently to see if my gut feeling about this was correct. I did a quick review of a random sample of 30 of the hundreds of clients we’ve helped in the last 4 years we’ve been in Kamloops. The most basic causes of financial difficulty were pretty easy to determine, and they are identified in the chart below.
So what do we take from this? First, out of the 30 files I looked at:
- 6%, was unwise spending as a root cause.
- 10% admitted that drinking or gambling issues had contributed to their debt troubles.
- 15% recognized that they had some issues with a basic lack of skill in managing money.
Overwhelmingly though, the major causes of debt troubles are circumstantial: sickness or disability, losing income because of changes in work circumstances, outright job loss, and issues of one kind or another associated with home ownership.
Of course, along with these circumstances come some other underlying issues: lack of savings for emergencies, and reliance on credit as a backstop without appreciating the impact of compound interest, among others. For people who owned a business, failure to set aside sufficient funds to cover payroll taxes and GST are major issues—this usually relates back to not fully appreciating the initial investment required for business start-up, as well as to pay for living expenses until the business is sufficiently profitable to cover these as well as its operating costs.
Multiple factors lead to debt restructuring
Another observation from my sample is this: I picked out over 60 separate ‘causes’ of the debt troubles from 30 files, so this means an average of two causes for each situation. So it’s usually not just one circumstance that happens for people—it’s generally at least two items and in some cases there are as many as 3 or 4 separate issues that have arisen to contribute to the problem.
You know the saying, “Life Happens”—well, that’s what happens for the majority of our clients, and if we really look at it, how many of us are truly prepared for all that life throws at us?
Reasearch shows that nearly 60% of Canadians are living pay cheque to pay cheque. If that’s the case, then there really aren’t that many of us who have taken all of the steps required to protect ourselves financially from the curves life might throw at us unexpectedly.
How to safely get out of debt
When these kind of circumstances happen, it’s simply not feasible to ask people to “pull up their socks” and pay off their debt on their own. Some form of debt restructuring will be required.
Credit counselling through one of the non-profit credit counseling societies will rarely provide a satisfactory solution—typically, 100% of the debt has to be paid off over a 5 year period. The first reaction, and fear, for many of our clients is that they will have to file for bankruptcy. The reality is that although bankruptcy may be the cheapest solution in the short-term, it is rarely the best solution overall.
Another debt restructuring solution we often help people with in Kamloops and area is the filing of a consumer proposal. Keep in mind that only a Trustee in Bankruptcy can file a consumer proposal but they represent your creditors. Using 4 Pillars to help you with your financial problem ensures that your interests and long term goals are considered as part of any successful debt restructuring plan. We also include credit rebuilding and budgeting and with a 97% success you can feel confident you have made the right choice.
Very simply, a proposal is simply a deal to pay something back to the creditors that is greater than what the creditors would receive in a bankruptcy, but requires paying back much less than 100% of the debt.
The proposals we arrange for people are usually set up to be paid back over 5 years, at 0% interest. It’s a win all the way around—the creditors get more than they would receive in a bankruptcy, our clients get a much more manageable debt repayment plan, and they haven’t had to go bankrupt to do it. Also, and very significantly, they can begin to rebuild their credit even while the proposal payments are being made.
In future articles, I’ll discuss the differences between bankruptcy and a proposal in more detail.
About the Author
Bob Hauck operates the 4 Pillars Kamloops, BC Debt Restructuring office. To contact him directly visit his website or call him directly at 250-434-4505.
