How to Get Out of Debt in Canada: A Step-by-Step Guide

Out of nowhere, debt can become a problem. What may seem like manageable debt can suddenly escalate in a short space of time.

Astronomical credit card interest rates, deceptive payday loans or spending more than you can afford can result in missed repayments, collections, damage to your credit and rent arrears.

You take out more loans to repay your mounting debts, leaving you trapped in a vicious cycle of debt. While borrowing more money may buy you some time, it’s only a band-aid on a bullet wound.

It might not be easy, but there is debt help available. Our step-by-step guide shows you how to get out of debt in Canada quickly and what debt help is available.

How to get out of debt in Canada

If you’re in debt, you’re in the right place. Follow these steps to fix your debt problems.

1. Assess your financial situation

Debt can easily spiral out of control. Don’t ignore the problem; it will only get worse. When you get into trouble with debt, the first step is to understand how serious the situation is.

Signs of financial trouble

Recognize the warning signs of debt before the situation gets worse:

• Are you struggling to pay your essential outgoings like mortgage, rent, bills and food?
• Are your debts more than your annual take-home pay (after taxes and deductions)?
• Have you missed or been late with a payment?
• Are you near or over your credit limits?
• Do you rely on credit cards or borrow money to make ends meet?
• Are you receiving collection calls?

If you answered yes to any of the above, you might have a debt problem. Keep reading the guide to find out what you can do to resolve your debts and the types of debt relief available.

How much debt do you have?

Make a list of all your debts and determine exactly how much you owe. If you don’t have a record of the debt, you can request a paper copy from the creditor, download a statement from the creditor’s website or check your credit report.

Make sure you include everyone you owe money to, including:

• Credit cards
• Personal and payday loans
• Lines of credit
• Your mortgage
• Student loans
• Bank overdrafts
• Utility bills
• Tax debts
• Unpaid rent
• Debts owed to friends and family.

Take note of the creditor’s name, interest rate, the minimum monthly payment and the total amount you owe.

2. Make a budget plan

Many of us don’t budget at all, which is one of the reasons we fall into debt. Making a budget lets you take control of your finances, reduce your outgoings and pay off your debt faster.

Your budget should include:

• Your monthly income after taxes.
• Fixed expenses like your mortgage, rent, household bills, and debt repayments.
• Variable expenses such as groceries and travel.

After evaluating your income and expenses, you can calculate how much you have leftover to pay toward your debts at the end of the month.

A good place to start is the 50/30/20 budget rule, which divides your money between needs, wants and savings.

3. Reduce expenses

Once you know how much you are spending, you can make some quick savings by cutting back on your monthly expenses.

• Can you stop subscriptions or services you don’t use or need?
• Can you use store brands or multiple stores to save money on groceries?
• Do you use dollar and bulk food stores?
• Can you spend less on entertainment and eating out?
• Can you reduce your energy usage?

For more ideas, take a look at our guide on how to save money.

Pre-authorized debits, recurring billing and NSF fees

A pre-authorized debit lets a company take any amount of money from your bank account when payment is due. While they’re useful for mortgage, insurance and utility payments, they can drain your account for things you don’t need.

Recurring billing is when you authorize automatic payments from your debit or credit card for a service or subscription.

You might be using pre-authorized debits or recurring billing payments for the following:

• Phone bills
• Streaming services (e.g. Netflix)
• Apps and online tools
• Magazine and newspaper subscriptions
• Gym memberships
• Dating site memberships
• Club memberships
• Charity donations
• Insurance you no longer need.

• You can cancel a pre-authorized debit by notifying the biller in writing.
• Contact the company to stop a recurring payment or log in to your account to cancel.

Avoid non-sufficient funds (NSF) fees by adding overdraft protection to cover transactions when you don’t have enough money in your chequing account. Use balance alerts, so you know when your account balance is below a certain amount.

Alternatively, avoid cash automatically leaving your bank by making payments manually using your debit or credit card (depending on fees).

4. Claim everything you are entitled to

Once you’ve set your budget and reduced your bills and outgoings, see if there are other ways to boost your income.

Check if you are eligible for benefits and grants

Many people don’t realize they are entitled to some government benefits. Spend some time checking whether you are eligible for family, healthcare, and income programs by answering some questions using the Canadian government benefits finder.

If you have a low income and rent your home, you may qualify for the one-time top-up to the Canada Housing Benefit, available until Friday, March 31, 2023.

If you’re a homeowner, the Canada Greener Homes Grant helps homeowners save money by making their homes energy efficient through grants of up to $5,000.

Claiming deductions, credits, and expenses

Find deductions, credits, and expenses you can claim on your tax return to reduce the amount of tax you have to pay. Examples include childcare costs, RRSP contributions and medical expenses.

Use workplace benefits

Investigate whether there are workplace benefits and perks you can take advantage of, such as staff discounts, dental insurance, flexible hours, childcare assistance and wellness programs.

Student loan debt forgiveness

If you want to reduce your student loan debt in Canada, there are government and provincial student loan forgiveness programs. There’s also federal student loan debt forgiveness for medical professionals.

Uncashed cheques from the CRA

Approximately $1 billion in cheques with the Canada Revenue Agency (CRA) have gone uncashed. Check if you are owed money.

5. Increase your income

Find ways to increase your monthly income. Are there opportunities for a wage rise or work commission, or do you need to change jobs? Can you make extra money by working extra shifts, adding a part-time job or selling something online?

Keep looking for ways to create additional income streams that will help you pay off your debts faster. Consider paying yourself first to push yourself to make more money.

6. Reduce your debt

These simple steps can significantly reduce your debt. It’s not rocket science, and with a little time and effort, you can get out of debt faster.

Learn about credit

Check your credit report to make sure there are no mistakes that could affect your credit score. A good credit score qualifies you for lower interest rates on better credit products that could be used to reduce the overall cost of your debt.

You can get a free credit score and report from Equifax. TransUnion also offers a free credit report called a Consumer Disclosure, but it doesn’t include your credit score. Checking your report does not affect your credit score.

If there is a mistake on your credit report, contact the credit bureau to have it corrected, and notify the creditor to ensure it’s not an error on their side.

Speak to your creditors

If you have missed a few payments in a row or cannot make the next bill payment, contact your creditor and explain your situation. Sometimes, they will work with you to reduce your monthly payment, lower the interest rate or give you more time to pay.

Get help with your mortgage

If you’re struggling to make your mortgage repayments, speak to your lender before you miss a payment. Your lender may be able to reduce the amount you need to pay for a while. If you have home equity, consider looking at better mortgage rates.

Balance transfer credit cards

Consider a balance transfer credit card if you have a decent credit score and cannot pay off your credit card debt due to interest charges.

Move your credit card debt to a cheaper, low interest card to pay off your debt faster. Stay disciplined and organized to ensure you pay off the debt before the card’s promotional interest rate ends.

If you’re using a credit card, loan or line of credit to shift your debt, make sure you’re reducing the interest. Otherwise, you might be increasing your debt load.

Debts in collections

Debts in collections damage your credit score and can result in legal action, so try to resolve the situation as quickly as possible.

Arrange a monthly repayment plan that you can afford, but don’t be pressured into an agreement you can’t keep. To find out more, read our guide on debt collection agencies.

7. Choose which debts to pay off first

Many choose to focus on paying down debt with the highest interest rate to save money.

Debt avalanche method

To pay off your debt faster and save money, use the debt avalanche method. Pay off debt with the highest interest rate first. When you’ve paid that debt, move to the next debt with the highest interest rate.

For example, let’s say you have a $5,000 loan and a $5,000 credit card. If the loan has a higher interest rate, you pay more toward that debt while still making the minimum payments for your other debts.

Debt snowball method

An alternative option is the debt snowball method, where you pay down smaller debts first to build momentum before you move on to the more significant debts. You must continue to make the minimum payments toward your other debts.

Paying down some smaller debts can motivate you early on in your debt repayment journey. However, you may pay more interest over time because you are not paying the larger debts.

Debt avalanche vs debt snowball: choosing what debt to pay down first

Although the debt avalanche method can initially feel like an uphill struggle, it’s an efficient way to combat debt because it can save you money that you’d otherwise pay towards the accumulating interest.

But dealing with large debts first can often feel like a never-ending battle.

Some people feel more motivated using the snowball method because it allows for some quick wins immediately. Once you have paid off one debt, no matter how small, you feel a sense of accomplishment, and you’ll start to believe that you can clear your debts.

Make sure your debt is going down

Whether you choose the debt snowball or debt avalanche method, ensure your debts are going down. You don’t have to stick to one method; you can use both.

What type of loan has the highest interest rate?

Payday loans are the most expensive form of credit available and typically charge annual interest rates between 400-500%. It is a form of credit that often traps borrowers in a cycle of debt, requiring them to borrow more again the next month.

If you have a payday loan, you might want to prioritize repaying the debt, so you don’t pay more interest than you need to.

8. Seek debt help

We are bombarded daily with new ways to get into debt, and the same can be said when it comes to getting out of debt.

There are so many debt relief options available in Canada, and the one that’s right for you depends on the type of debt and whether you can afford to make debt repayments or not.

Debt consolidation

Debt consolidation lets you pay off your high-interest debts and make one monthly payment towards a personal loan with a lower interest rate. You can lower your payments and pay your debts faster.

There are a number of debt consolidation options available. Unsecured loans often require a steady income and a good credit score, but secured loans are also available.

Non-profit credit counselling

Your first consultation with a non-profit credit counselling agency is generally free. You get advice on how to manage your debt, and the counsellor may recommend a debt solution based on your needs.

If you decide to proceed with their recommendation, you may pay an initial set-up fee and a monthly fee depending on the debt relief solution. This is particularly common in a debt management plan, where interest is reduced, but you repay your debts in full.

Consumer proposal

A consumer proposal is a popular choice to settle your debts. It’s an ideal choice if you have a reliable income and assets to protect, such as your home.

It’s a legally binding agreement between you and your creditors that lets you repay what you can afford. Your debts are consolidated into one monthly payment, and interest is frozen.

Bankruptcy

If you have low or no income and no assets to protect, bankruptcy is a fast and straightforward way to resolve your debts. However, this is often a last resort.

Debt settlement

Debt settlement companies are the wrong people to go to. Their goal is to make money out of you by charging excessive fees. Creditors aren’t required by law to negotiate with a debt settlement company.

Wrapping up

You need patience and hard work to get out of debt in Canada, and there is no one-fits-all solution.

If you can’t face your debt alone, a good first step is to consult a Licensed Insolvency Trustee. You’ll receive tailored debt advice from a government-regulated debt specialist who can explain your options.

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